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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(Mark One)



|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------



for fiscal year ended December 31, 2005



OR



|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------



for the transition period fromto



Commission file number: 0-30989



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Broadwing Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2041343                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|1122 Capital of Texas Highway Austin, Texas                    |  | 78746                               
|(Address of principal executive offices)                       |  | (Zip code)                          



Registrants telephone number,
including area code: (512) 742-3700



Securities registered
pursuant to Section 12(b) of the Act

None

Securities registered pursuant to Section 12(g) of the Act

Common Stock, $.01 par value per share



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ̈



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



Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈



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



As of December 31, 2005, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was approximately
$447,931,000 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.



As of February 28, 2006, there were 76,165,407 shares of Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Part III of this Report on Form 10-K incorporates by reference information from the registrants definitive Proxy
Statement, which will be furnished to stockholders in connection with the Annual Meeting of Stockholders of the registrant scheduled to be held on May 12, 2006.



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TABLE OF CONTENTS



|           |  |                                                                                                             |  |   
|---------- |  | ----------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  |                                                                                                             |  |   
|           |  |                                                                                                            
|           |  | Glossary                                                                                                    |  | 3 
|           |  |                                                                                                            
|Item 1.    |  | Business                                                                                                    |  | 5 
|           |  |                                                                                                            
|Item 1A.   |  | Risk Factors                                                                                                |  | 16
|           |  |                                                                                                            
|Item 1B.   |  | Unresolved Staff Comment Letters                                                                            |  | 22
|           |  |                                                                                                            
|Item 2.    |  | Properties                                                                                                  |  | 22
|           |  |                                                                                                            
|Item 3.    |  | Legal Proceedings                                                                                           |  | 22
|           |  |                                                                                                            
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                         |  | 24
|           |  |                                                                                                            
|PART II    |  |                                                                                                             |  |   
|           |  |                                                                                                            
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities |  | 25
|           |  |                                                                                                            
|Item 6.    |  | Selected Financial Data                                                                                     |  | 26
|           |  |                                                                                                            
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 27
|           |  |                                                                                                            
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 40
|           |  |                                                                                                            
|Item 8.    |  | Financial Statements and Supplementary Data                                                                 |  | 41
|           |  |                                                                                                            
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                        |  | 72
|           |  |                                                                                                            
|Item 9A.   |  | Controls and Procedures                                                                                     |  | 72
|           |  |                                                                                                            
|Item 9B.   |  | Other Information                                                                                           |  | 72
|           |  |                                                                                                            
|PART III   |  |                                                                                                             |  |   
|           |  |                                                                                                            
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                          |  | 73
|           |  |                                                                                                            
|Item 11.   |  | Executive Compensation                                                                                      |  | 75
|           |  |                                                                                                            
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  | 75
|           |  |                                                                                                            
|Item 13.   |  | Certain Relationships and Related Transactions                                                              |  | 75
|           |  |                                                                                                            
|Item 14.   |  | Principal Accountant Fees and Services                                                                      |  | 75
|           |  |                                                                                                            
|PART IV    |  |                                                                                                             |  |   
|           |  |                                                                                                            
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                  |  | 76
|           | 
|SIGNATURES |  | 77                                                                                                         



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GLOSSARY OF TERMS



Our industry
uses many terms and acronyms that may not be familiar to you. To assist you in reading this document, we have provided below definitions of some of these terms.



Access Lines.Telephone lines reaching from the customers premises to a connection with the public switched
telephone network. When we refer to our access lines we mean all our consumer, wholesale and business access lines, including those used by us and our affiliates.



Asynchronous Transfer Mode (ATM).A broadband, network transport service that provides a fast,
efficient way to move large quantities of information.



Competitive Local Exchange Carriers (CLECs).Telecommunications providers that compete with us in providing local voice services in our local service area.



Customer Premises Equipment
(CPE).Telecommunications equipment sold to a customer, usually in connection with our providing telecommunications services to that customer.



Digital Subscriber Line Access Multiplexer (DSLAM) A device used in a variety of DSL technologies, which
serves as the point of interface between a number of subscriber premises and the carrier network.



Federal Communications Commission (FCC) U.S. federal regulatory agency, established by the Communications Act of 1934, responsible for the
regulation of interstate and international communications by radio, television, wire, satellite, and cable.



Frame Relay.A high speed switching technology, primarily used to interconnect multiple local networks.



Gigabit Ethernet (Gig E) Ethernet running at one thousand
million bits per second.



Incumbent Local Exchange Carrier
(ILEC).A traditional telecommunications provider, that, prior to the Telecommunications Act of 1996, had the exclusive right and responsibility for providing local telecommunications services in its local service area.



Indefeasible Right of Use (IRU) A leased right
to use circuits for a specified bandwidth and period of time.



Interexchange Carriers (IXCs).Telecommunications providers that provide long-distance services to end-users by handling calls that are made from a phone exchange in one local access transport area
(LATA) to an exchange in another LATA or between exchanges within a LATA.



Internet Protocol (IP) a standard describing software that keeps track of the Internets addresses for different nodes, routes outgoing messages, ad recognizes incoming messages, allowing a packet
to traverse multiple networks on the way to its final destination.



Internet Service Providers (ISPs).Businesses that provide Internet access to retail customers.



Private Lines.Direct circuits or channels specifically dedicated to an end-user organization for the purpose of directly
connecting two or more sites.



Public Utility Commission
The state regulatory authority responsible for communications regulations. Also known as Public Service Commission, Corporate Commission and in some states, the Railway Commission.



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Unbundled Network Elements (UNEs) Platform (UNE-P).Discrete elements of
networks that are sold or leased to competitive telecommunications providers and that may be combined to provide their retail telecommunications services.



Virtual Private Network (VPN).A private network that operates securely within a public network (such as the Internet) by
means of encrypting transmissions.



Virtual Private LAN
Services (VPLS) A multipoint virtual private network service from carriers that connects any number of Ethernet local area networks together over an IP core.



VoIP -Technology used to transmit voice conversations over a data network using Internet Protocol.



Web Hosting.The providing of space, power and
bandwidth in data centers for hosting of customers Internet equipment.



Wide Area Network (WAN) A voice or data network that extends beyond the metropolitan area.



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INFORMATION REGARDING FORWARD LOOKING STATEMENTS



The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. Some of the statements contained in this Form 10-K discuss future expectations, contain projections of results of operations or financial condition or state other forward-looking information.
These statements are subject to known and unknown risks, uncertainties and other factors that could cause actual events or results to differ materially from those currently anticipated. The forward-looking information is based on various factors and
was derived using numerous assumptions. In some cases, you can identify these so-called forward-looking statements by our use of words such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, project, intend or potential or the negative of those words and other comparable words. You should be aware that those
statements reflect only our current views with respect to such matters. Actual events or results may differ substantially. Important factors that could cause actual events or results to be materially different from the forward-looking statements
include those discussed under the heading Item 1. BusinessRisk Factors and throughout this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements in connection with new or future
events or otherwise.



Item 1.    Business



Unless otherwise indicated, the information in this Annual Report on Form 10-K gives effect to a 1-for-10 reverse stock split that was declared by our Board of Directors on September 28, 2004 and effective on October 8, 2004. The
stock split was effected through a 1-for-20 reverse stock split, immediately followed by a 1-for-1 stock dividend for all shareholders of record as of October 8, 2004. All share and per share amounts have been restated as if the stock split and
stock dividend had occurred as of the earliest period presented.



Introduction



Broadwing Corporation
(Broadwing or the Company) through certain of its subsidiaries is a provider of data and Internet, broadband transport, and voice communications services to small to large enterprise customers and other communications service
providers over a nationwide facilities-based network connecting 137 cities nationwide. Our all-optical network, capable of transmitting up to 800 Gbs per fiber, gives customers the benefit of high quality, technologically advanced solutions allowing
for rapid provisioning, and highly flexible customized networking. We believe that our network and growth-oriented strategy has enabled us to compete effectively in the markets in which we operate.



History



The Company was incorporated on June 2, 1997 under the laws of the State of Delaware and operated under the name Corvis
Corporation. We began operations as a developer, manufacturer and marketer of telecommunications transport and switching equipment. Starting in 2002, we experienced a significant downturn within the communications equipment market in which demand
for our products and services decreased rapidly. In response, we implemented a series of restructuring initiatives designed to reduce the scope of our operations and reduce the costs associated with our equipment division. In June 2003, we created
our communications services division by purchasing most of the assets and certain liabilities of Broadwing Communications Services, Inc. Broadwing Communications Services, Inc. incurred significant net losses prior to the acquisition. Our strategy
is to leverage operational improvements, strategic investments and complementary acquisitions to bring the company first to cash flow breakeven then toward profitability. We implemented this turnaround plan starting in 2003 and continued through
2005. In October, 2004, we changed our name to Broadwing Corporation reflecting our sole focus on the communications services division. Today, our communications equipment division only supports the expansion and maintenance of our communications
services network.



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Financial Summary



|                                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------- |  | ---------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                    |  | 2003                   |          |   | 2004 |   |          | 2005 | 
|                                                    |  | (dollars in thousands) |         
|Revenue                                             |  | $                      | 314,314  |   |      | $ | 672,280  |      |  | $ | 879,106  |  
|Net loss                                            |  |                        | (260,471 | ) |      |   | (152,181 | )    |  |   | (133,428 | )
|Cash flow:                                          |  |                        |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities               |  |                        | (183,394 | ) |      |   | (112,825 | )    |  |   | (1,251   | )
|                                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities |  |                        | (83,508  | ) |      |   | (140,235 | )    |  |   | 41,906   |  
|                                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities |  |                        | 67,582   |   |      |   | 142,610  |      |  |   | (98,489  | )
|                                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|                                                    |  |                        |         
|Total cash                                          |  |                        | 234,990  |   |      |   | 124,540  |      |  |   | 66,706   |  
|Total investments, including long-term              |  |                        | 61,832   |   |      |   | 149,815  |      |  |   | 42,648   |  
|                                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|Total cash and investments, including long-term     |  |                        | 296,822  |   |      |   | 274,355  |      |  |   | 109,354  |  
|Total debt                                          |  | $                      | 3,110    |   |      | $ | 169,542  |      |  | $ | 53,891   |  



As shown in the table
above, Broadwing has historically incurred significant net losses and has used significant amounts of cash in operating and investing activities. These losses resulted from market declines within our equipment division as well as losses incurred
within our communications division since its acquisition. These losses have been financed through issuances of common stock and borrowings under various facilities. Throughout this time, we have taken steps to improve our financial performance.
These actions included:



| |  |  | In September 2004, we purchased Focal Communications Corporation (Focal), a competitive local exchange carrier with local fiber in twelve cities that provides services
in 23 tier 1 markets. We purchased Focal to increase our customer base, provide cross-selling opportunities and to reduce our cost structure through network integration and the leveraging of our sales and administrative resources.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We made significant investments in our network infrastructure designed to lower our cost structure and allow us to provide new and better products to our customers such as VoIP and
our converged network products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We implemented a series of restructuring efforts designed to rationalize our sales, general and administrative costs. These efforts included staff reductions within our equipment
division and were associated with integration of Focal operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our efforts have resulted in reductions in net loss, as well as, cash used in operating activities and cash used in investing activities. Our efforts are continuing and may include further acquisitions, network cost
reduction strategies and rationalization of our sales, general and administrative expenses. We cannot be sure, however, if any such actions will be taken, and if so, as to the amount and timing of the associated financial impact, if any.



Our Operating Environment



The communications industry continues to evolve providing significant
opportunities and risks to the participants in this market. Factors that have been driving this change include:



| |  |  | a highly competitive environment driven by a proliferation of network capacity that has led to significant declines in price and a large number of corporate consolidations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | technological advances resulting in a proliferation of new services that directly compete with existing products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | continued regulatory and court action.
| | - |  | --------------------------------------



Competition



The communications industry is highly competitive. Broadwings principal competitors include AT&T, Verizon Communications, Inc., Sprint-Nextel
Corporation, Level 3 Communications, Inc., Qwest and XO Communications. Competition is based on price, completeness of product portfolios, customer service, quality, reliability and the relative financial stability of the service providers.



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The Telecommunications Act of 1996 created opportunities for non-incumbent providers to enter the
communications services marketplace. With this new opportunity and enthusiasm over the early evolution of the internet, capital markets made funding available for new and existing competitors to build new network capacity in the marketplace. These
investments within the market have outpaced market demands and have resulted in a general over supply of capacity and intense price competition.



Price declines and the need to offer comprehensive communications services have also promoted industry consolidation. Significant consolidations include
the acquisition of AT&T by SBC, MCI by Verizon and Wiltel by Level 3. In the short-term, these companies face significant obstacles including integration tasks and cultural consolidation. We realize that these resulting competitors will have
greater name recognition, larger customer bases and greater financial, technical and sales and marketing resources and may be able to undertake more aggressive pricing policies. In addition, a significant number of distressed competitors have
entered into bankruptcy and financial restructurings programs. To the extent these companies successfully emerge, restructure, or are acquired out of bankruptcy, they may have lower cost structures and their network capacity will remain in the
overall marketplace. To remain competitive, we must continue to focus on our agility by providing flexible customer solutions while developing our products and customer support organization to address our customers evolving expectations. We
strive to be the alternative service provider that can provide more customized solutions that can be provisioned faster than our competitors.



Technology



The communications industry is rapidly developing new data services. Voice communications have been synonymous with wireline dial tone service and the
switched telephone network. New voice communications products such as VoIP and packet technologies are beginning to erode this dominance. Frame relay, asynchronous transfer mode and private line services are now competing with solutions based on
MPLS technologies. These new products offer customers cost benefits and support new enterprise software applications. During 2005, we released both VoIP and converged services products which we believe position us to take advantage of this trend.



Regulatory Developments



Telecommunications services are subject to regulatory oversight of
varying degrees at the state and federal level. The regulatory environment for telecommunications services is in a great state of flux and there are a number of regulatory proceedings that will have an impact, potentially both positive and negative,
on our ability to successfully execute on our business plans. We cannot predict the outcome of these proceedings or their impact on the telecommunications industry or us.



The following summary of regulatory developments and legislation is not comprehensive. It does not describe all present
and proposed federal, state and local regulation and legislation affecting the telecommunications industry.



Federal Regulation



The Telecommunications Act of 1996 (Telecom Act) became law on February 8, 1996. Among other things, the Telecom Act was designed to
foster competition by establishing a regulatory framework to govern new competitive entry in the local and long distance telecommunications markets and to establish competition against the ILECs, such as AT&T (with SBCs acquisition of
AT&T) and Verizon (with its acquisition of MCI). The Telecom Act entitles Broadwing to certain rights, but as a communications carrier, it also subjects Broadwing to regulation by the FCC and the states. Broadwings designation as a
communications carrier also results in other regulations that may affect Broadwing and the services it offers. The rights and obligations to which communications carriers are entitled and subject to have been and likely will continue to be subject
to litigation in the courts and further review and revision by the FCC and Congress. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have



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on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success
of competition in our markets and pursuit of new opportunities resulting from the Telecom Act and technological advances as well as the timing and outcome of various regulatory proceedings and any appeals.



Under the Telecom Act, any entity may enter a telecommunications market,
subject to reasonable state safety, quality and consumer protection regulations. The Telecom Act makes local markets accessible by requiring ILECs to permit interconnection to its network and establishing ILEC obligations with respect to:



| |  |  | Colocation of equipment    This allows companies like Broadwing to install and maintain its own network equipment, including DSLAMs, ATM switches, and
fiber optic equipment, in ILEC central offices.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interconnection    This requires the ILECs to permit their competitors to interconnect with ILEC facilities at any technically feasible point in the
ILECs networks.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reciprocal compensation    This requires the ILECs and CLECs to compensate each other for local telecommunications traffic that originates on the network
of one carrier and is sent to the network of the other.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resale of service offerings    This requires the ILEC to establish wholesale rates for services it provides to end-users at retail rates to promote resale
by CLECs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Access to unbundled network elements    This requires the ILECs to unbundle and provide access to some components of their local service network to other
local service providers. Unbundled network elements are portions of an ILECs network, such as copper lines or loops, that CLECs can lease in order to create their own facilities networks.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Number portability    This requires the ILECs and CLECs to allow a customer to retain an existing phone number within the same local area even if the
customer changes telecommunications services providers. All telecommunications carriers are required to contribute to the shared industry costs of number portability.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dialing parity    This requires the ILECs and CLECs to establish dialing parity so that all customers must dial the same number of digits to place the
same type of call.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Access to rights-of-way    This requires the ILECs and CLECs to establish non-discriminatory access to telephone poles, ducts, conduits and rights-of-way.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



The extent and scope of network access has been
the subject of constant litigation by ILECs and CLECs since the passage of the Telecom Act. In August 2003, the FCC modified the list of network elements to reduce the number of elements ILECs must offer to competitors. The FCC also initiated a
comprehensive review of its pricing regime for network elements in 2003. In March 2004, the United States Court of Appeals for the District of Columbia (DC Court of Appeals) vacated much of the FCCs August 2003 decision and
remanded the case back to the FCC for further consideration. On December 15, 2004, the FCC announced the issuance of new unbundling rules. These rules became effective on March 11, 2005. These new unbundling rules eliminated the obligation
of the ILECs to provide unbundled switching (following a transition period) and restricted unbundled access to high capacity loops and transport to and between some of the larger ILEC end offices that meet the standard for elimination set out by the
FCC. Broadwing does not rely extensively on network elements purchased from ILECs and instead Broadwing obtains most of its dedicated long distance and local access to customers through special access provided by the ILECs under contracts or
tariffs. The FCC issued a Notice of Proposed Rulemaking to re-examine the special access pricing flexibility accorded ILECS in the larger Metropolitan Statistical Areas. Its impossible to predict what impact, if any, this proceeding will have
on long term special access pricing but we believe that no decision from the FCC is likely to have an impact on Broadwing in 2006 or during the term of Broadwings existing special access contracts with the ILECs.



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Intercarrier Compensation.Telecommunications carriers compensate one
another for traffic carried on each others networks. The entire methodology by which carriers compensate one another for exchanged traffic, whether it be for local, intrastate or interstate traffic is under review by the FCC. The FCC is
expected to issue an order or a series of orders in 2006 that are likely to address in some measure access charges and reciprocal compensation charges as discussed below.



Access Charges.    Interexchange carriers such, as Broadwing, pay access charges to local
telephone companies for long distance calls that originate and terminate on local networks. As a provider of local phone service, Broadwing is a beneficiary of the revenue from such access charges while it is burdened with the expense associated
with these access charges as a provider of long distance services. Access charges for interstate traffic are set by the FCC and each state is responsible for regulating access charges for its respective intrastate traffic. Historically, these access
charges have been set at prices well above cost in order to build in a subsidy for providing telephone service to high cost customers. With the advent of an explicit universal service subsidy mechanism in 1997, the rationale for significantly above
costs access charges has disappeared and rates have steadily decreased. Rates at the state level tend to be higher than at the federal level in some states. Further rate decreases in the future will benefit Broadwing by lowering the cost of routing
long distance calls but will negatively impact its revenue associated with providing local phone services.



Reciprocal Compensation Charges.    Local telephone companies typically charge one another for local and internet-bound traffic
terminating on each others networks. These payments flow in both directions between any two carriers having an interconnection agreement. Because of the nature of its customer base, a CLEC generally terminates many more minutes of traffic than
it originates resulting in substantially more revenue than expense. Many of the information service providers that provide access to the Internet are customers of CLECs and this dial-up access has been a significant source of reciprocal compensation
revenue for Broadwing. In 2001, the FCC, concerned about the imbalance in traffic exchanged between carriers, adopted an interim order designed to limit the amount of compensation carriers could generate from Internet-bound traffic. Under the
decision, if elected by incumbent carriers, traffic above a 3 to 1 ratio is presumed Internet-bound traffic and exchanged at a lower rate. The order also established total minute caps and prohibited Internet-bound traffic from newly entered markets
to be compensated for at all. The FCC indicated that it intended for Internet-bound traffic to eventually be treated as bill and keep. Notwithstanding its stated goal to eliminate compensation for Internet-bound traffic, the FCC, on
October 8, 2004, in response to a forbearance petition brought by Core Communications, lifted the minute caps and new-market prohibitions and permitted the existing rate of $.0007 per minute to remain in place. This order preserves
Broadwings existing compensation stream for Internet-bound traffic for the time being, even as such traffic decreases in the aggregate in favor of broadband internet access



Broadwing is also subject to federal and state regulations that implement universal service support for access to
communications services by rural, high-cost, and low-income markets at reasonable rates; and access to advanced communications services by schools, libraries, and rural health care providers. Currently, the FCC assesses Broadwing for payments and
other subsidies on the basis of a percentage of interstate revenue it receives from certain customers. The FCC adopted new rules regarding the assessment of universal service contributions in December 2002. Instead of assessing universal service
contributions based on revenues accrued six months prior, contributions will now be based on projections of revenue. Also, the FCC placed limits on the mark-up carriers may place on the universal service line items on their customer bills. Several
parties have asked the FCC to reconsider these rules. In addition, the FCC is considering assessing carriers universal service contributions based on a flat-fee charge, such as a per-line or per-number charge. The FCC is also reviewing whether
to impose universal service obligations on additional types of providers, such as broadband and VoIP service providers. States may also assess such payments and subsidies for state universal service programs. Any changes to the assessment and
recovery rules for universal service may affect Broadwings revenues. A decision by the FCC concerning a revised methodology for assessing universal service contributions is expected in 2006.



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The FCC is considering how to regulate broadband services provisioned by ILECs and other wireline
providers of broadband Internet access services. The outcome of broadband proceedings may affect the degree of regulation to which Broadwings Internet access services are subject to in the future as discussed below.



Vonage Petition.    On September 22, 2003,
Vonage Holdings, Inc. (Vonage) filed a petition requesting that the FCC preempt an order of the Minnesota PUC that Vonage accede to PUC jurisdiction as a telecommunication carrier. Vonage claimed that it was an information services
provider and not subject to state regulation. The PUC decision was overturned by a federal court which decision was recently upheld by a federal appeals court and, on November 9, 2004, the FCC ruled on the Vonage petition and held that VoIP
services were interstate in nature and subject only to federal jurisdiction.



AT&T Declaratory Ruling on VoIP and Access Charges.    AT&T sought a declaratory ruling that its VoIP servicing offering was exempt from access charges as an information service. The
AT&T offering originated and terminated on the public switched telephone network and used conventional customer premises equipment. However, a portion of the call transport was provided after the call was converted to Internet Protocol. On
April 21, 2004, the FCC held that the AT&T offering was subject to access charges. The FCC indicated that its ruling was limited to the facts of the AT&T offering and left for a future day what VoIP applications, if any, would be exempt
from access charges.



Pulver.Com
Ruling.    On February 12, 2004, the FCC ruled that the Pulver VoIP offering, which did not transit any portion of the public switched telephone network, would only be lightly regulated.



VoIP Rulemaking.    On February 12, 2004, the
FCC initiated a rulemaking proceeding to address a myriad of regulatory issues associated with VoIP. At this time, it is unclear as to the extent of regulation to which VoIP will be ultimately subject but within the last year the FCC has concluded
that VoIP providers must comply with the Communication Assistance for Law Enforcement Act and are required to provide 911 access to their customers.



Bell- IXC Mergers.    In 2005, the U. S. Department of Justice and the FCC approved mergers of SBC and AT&T and of Verizon
and MCI. The FCC conditioned its approval on the agreement of the merging companies to certain conditions relating to special access and the Internet. Included in the set of conditions are the following:



| |  |  | Before mid-2008, SBC/AT&T and Verizon/MCI will not increase rates paid by existing customers of DS 1 and DS 3 private line services by the former AT&T (with SBCs
acquisition of AT&T) and Verizon in SBC/AT&T and Verizon/MCI territories, respectively.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Before mid-2008, SBC/AT&T and Verizon/MCI will not increase the rates in SBC/AT&Ts and Verizon/MCIs interstate tariffs, including contract tariffs, for special
access services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Before mid-2008, SBC/AT&T and Verizon/MCI will not provide special access offerings to its wireline affiliates that are not available to other similarly situated special access
customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SBC/AT&T and Verizon/MCI will maintain at least as many settlement-free U.S. peering arrangements for Internet backbone services as they did on the merger closing dates until
mid 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



State Regulation



Broadwing is also subject to regulation by the state commissions in each
state in which it provides services. Broadwings regulatory obligations vary from state to state and include some or all of the following requirements: filing tariffs (rates, terms and conditions); filing operational, financial, and customer
service reports; seeking approval to transfer the assets or capital stock of the telephone company; seeking approval to issue stock, bonds, and other forms of indebtedness of the telephone company; reporting customer service and quality of service
requirements; making contributions to state universal service support programs; geographic build-out; and other matters relating to competition.



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Most states regulate entry into the markets for local exchange and other intrastate services, and
states regulation of CLECs vary in their regulatory intensity. The majority of states require that companies seeking to provide local exchange and other intrastate services to apply for and obtain the requisite authorization from a state
regulatory body, such as a state commission. This authorization process generally requires the carrier to demonstrate that it has sufficient financial, technical and managerial capabilities and that granting the authorization will serve the public
interest. As of December 31, 2005, we had obtained local exchange certification or were otherwise authorized to provide local exchange service in:



|                     |  |               |  |            |  |             
|-------------------- |  | ------------- |  | ---------- |  | ------------
|California           |  | Georgia       |  | Michigan   |  | Ohio        
|Connecticut          |  | Illinois      |  | Minnesota  |  | Pennsylvania
|Delaware             |  | Indiana       |  | Missouri   |  | Texas       
|District of Columbia |  | Maryland      |  | New Jersey |  | Virginia    
|Florida              |  | Massachusetts |  | New York   |  | Washington  



States generally
retain the right to sanction a carrier or to revoke certifications if a carrier violates relevant laws and/or regulations. Delays in receiving required regulatory approvals could have a material adverse effect on us. We cannot assure you that
regulators or third parties will not raise material issues with regard to our compliance or non-compliance with applicable laws or regulations.



Local Regulation



Broadwings networks are subject to numerous local regulations such as building code requirements, permits, licenses, franchises and local public
rights of way. Such regulations vary on a city-by-city, county-by-county and state-by-state basis. Termination of, or failure to renew existing franchise or license agreements could have a material adverse effect on Broadwing operations. In
addition, it is uncertain if fees will remain at current levels following the expiration of existing franchises. Broadwing could also be at a competitive disadvantage if its competitors do not pay the same level of fees that Broadwing does. Although
the Telecom Act requires municipalities to manage public rights-of-way in a competitively neutral and non-discriminatory manner and prohibits the imposition of right-of-way fees as a means of raising revenue, the outcome of certain litigation
surrounding this area may affect Broadwings future cost of operations.



Regulation of Rates



Broadwing is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters under the statutory requirements of Title II of the Telecommunications Act of 1934. Broadwing must
offer communications services under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory. It also is subject to the FCCs complaince process, and it must give notice to the FCC and affected customers prior
to discontinuance, reduction or impairment of service.



In
addition, state public utility commissions or similar authorities having regulatory power over intrastate rates, lines and services and other matters, regulate Broadwings intrastate communications services. The system of regulation applied to
Broadwings intrastate communications services varies from state to state and generally includes various forms of pricing flexibility rules.



Our Products and Services



We provide a comprehensive array of data and Internet, broadband transport and voice communications services. We have designed these communications
services to meet the needs of our customers, from small and medium business to multi-location business, large enterprise, carrier and wholesale customers.



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##### Table of Contents

Data and Internet Services



We offer a comprehensive data and Internet product portfolio that provides customized solutions. We believe that our
products are tailored to meet customers needs and provide the scalable, reliable, secure connection to the Internet as well as the data capacity that they seek. Broadwings data and Internet offerings include:



| |  |  | Converged Multi-Service MPLS
| | - |  | ----------------------------



Our Converged product offers the capability to permit customers to deploy virtual dedicated wide area networks that are tuned to the
quality of service requirements of particular applications while also providing the efficiencies afforded a single network.



| |  |  | Dedicated Internet Access
| | - |  | -------------------------



Broadwings Dedicated Internet service provides fixed capacity through a reliable, constant connection to the Internet.



| |  |  | Frame Relay and Asynchronous Transfer Mode
| | - |  | ------------------------------------------



Broadwings Frame Relay and ATM services enable customers to receive data, voice, video and other multimedia traffic requirements
within one network without the cost and inflexibility of a leased line. Frame Relay is ideal for connecting LANs and scalable to meet our customers changing business needs. Broadwings ATM service supports multi-protocol, multi-vendor
data environments. ATM can be integrated with Frame Relay networks allowing customers to have one network for voice, video and data. ATM is targeted for WANs and enterprise networks because of its ability to support real-time, delay-sensitive
applications.



| |  |  | IP VPN
| | - |  | ------



Broadwings Internet Protocol Virtual Private Network enables customers to create their own network by renting a piece of our
network. An IP VPN connects customer offices and/or facilities enabling secure and reliable communication of data and voice in a cost effective manner.



| |  |  | IP Videoconferencing
| | - |  | --------------------



Broadwings IP Videoconferencing is a cost-effective way for businesses to conduct meetings face to face, without the added expense
of traveling personnel.



| |  |  | Colocation
| | - |  | ----------



We provide our customers space and electrical power at our secured locations allowing customers to interconnect their equipment with ours.
Broadwing offers two types of colocation services: Data Colocation and Customer Interface Facilities (CIF) Colocation. CIF Colo primarily supports telecommunications gear that uses DC power in facilities that are rarely visited. Data
Colo primarily supports computer/server gear that uses AC power in facilities that are more frequently visited.



Broadband Transport Services (BBT)



Broadwing provides dedicated transmission capacity on its networks to customers that desire converged MPLS high-bandwidth links between locations.



Broadwings BBT offerings include:



| |  |  | Private Line
| | - |  | ------------



Private Line is an end-to-end non-switched circuit, allowing customers to create their own data network by renting a piece of our network.
Private Line connects customer offices and/or facilities enabling secure and reliable communication of voice, video and data in a cost effective manner.



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| |  |  | Wavelength (OCX)
| | - |  | ------------------



Broadwings OCX products deliver capacity at the wavelength level, which provides a low cost alternative to lighting new fiber or
buying and deploying equipment on existing fiber to add incremental capacity. Broadwings OCX provides the power of OC-48c (2.5 Gbps) and OC-192c (10 Gbps) circuits to a customer without the limitations of their network infrastructure and
operational time tables.



| |  |  | Media Services
| | - |  | --------------



Broadwing offers both retail and wholesale media transport services to the broadcast television and media producer market. During 2004,
Broadwing completed the construction and turn-up of its Media Services Network, which consists of thirteen nodes in major cities with a Television Operating Center in Columbia, Maryland. The Center provides Broadwing with enhanced network management
and control capabilities for the Media Services Network, which serves the high-performance needs of the broadcast television and media markets.



| |  |  | Multi Connect Private Line
| | - |  | --------------------------



The Broadwing Multi Connect product is a WAN solution that provides the performance, security and flexability of a private line network
with flat rate, distance-insensitive pricing. Multi Connect is targeted for mid-sized businesses that need competitively priced private line services or who seek bandwidth in their current WANs.



Voice Services



Broadwing provides end-to-end voice solutions including:



| |  |  | Long Distance
| | - |  | -------------



Broadwing offers switched and dedicated long distance voice services within the United States, meaning calls outside of the local calling
area. Switched services offer customers long distance service based on usage at a contracted price per minute, while dedicated services provide customers a fixed amount of origination or termination capacity. We also provide international
long-distance services for voice calls that terminate or originate with our customers in the United States at a contracted price per minute.



| |  |  | Local
| | - |  | -----



With the acquisition of Focal, Broadwing provides inbound and outbound local phone service. Basic inbound local service allows for the
completion of calls to a phone number that we supply our customers. Alternatively, local number portability (LNP), allows Broadwing to provide inbound local communications services using a customers existing phone number. LNP
enables Broadwing to provide emergency services to companies that lose their service as a result of man made or natural disasters. LNP has become increasingly competitive in the marketplace. Broadwing markets this service to its customers as both a
primary and backup service. Broadwings basic outbound service allows local and toll calls to be completed within a metropolitan region. This Direct Outward Dial service is utilized by end-users primarily as a replacement for the ILEC in
placing calls to destinations within the region.



Local voice service to other carriers results in Inter-carrier compensation, which is associated with the transmission and termination of traffic between telecommunications carriers and includes switched access and reciprocal compensation
revenue. Reciprocal compensation is the compensation exchanged between carriers for terminating local phone calls on one anothers networks.



| |  |  | Voice over IP (VoIP)
| | - |  | --------------------



VoIP is a technology that enables customers to send voice calls using Internet Protocol. In 2004, Broadwing introduced its first product
offering, PRIorityConnect. PRIorityConnect is a new VoIP aggregation service that allows carriers and enterprises to expand their VoIP offering nationwide without purchasing and deploying additional network infrastructure. The Company expects to
roll out additional products and continue to perform product trials with Fortune 500 companies nationwide.



| |  |  | Other
| | - |  | -----



Other voice products include switched and dedicated 8xx toll-free, operator services including directory assistance, public telephone
service, audio conferencing, calling cards services and broadcast fax.



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Customer Premises Equipment (CPE)



Broadwing offers turnkey CPE solutions to complement its network services,
making it easier for its customers to get what they need from one provider. CPE Services are specific to the hardware and services around supporting that hardware; which include CPE Procurement, CPE Configuration, CPE Implementation (Installation),
and CPE Maintenance.



Managed Network Services
(MNS)



Fiber optic technology enables signals
to be transmitted at different wavelengths on a single fiber allowing for the leasing of one or more dedicated wavelengths to customers. Broadwing MNS allow customers to focus on their core business functions by having Broadwing monitor, maintain,
and manage their business critical network functions. MNS provides customers with proactive network and management solutions that increase network availability, performance, and security.



Remote Data Protection



Broadwing Remote Data Protection is a secure, network-based data protection service via an IP connection. It is a fully automated remote data backup and
recovery service for enterprises and their branch offices.



Integrated Voice
and Data Services (IVAD)



IVAD targets branch
offices of larger corporations as well as medium-sized businesses. IVAD is a scalable and flexible integrated voice and data service, allowing Broadwing to provide local, toll, long-distance and data traffic on a single dedicated circuit.



Our Network



The following diagram depicts the physical components of Broadwings
comprehensive nationwide network.





LOGO



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##### Table of Contents

We believe that Broadwing is the first carrier to build and operate a nationwide, all-optical switched
backbone network that supports ultra-long distance optical transport. With Broadwings all-optical switched backbone, we are able to remotely provision circuits through the network without the need for field intervention, thereby decreasing
provisioning times and improving customer satisfaction. We believe our network infrastructure also reduces operating expenditures, equipment requirements, and conversion-based latency associated with traditional networks.



As part of our core network, we operate an OC-48c Internet Protocol
(IP) backbone. Broadwings IP network is divided into eight core regions that allow it to transport signals directly between regions. This technology significantly speeds actual data throughput by minimizing the number of signal
hops and allows Broadwing to carry high-quality voice, video and time-critical data for its customers.



Broadwing operates a local access network with switching infrastructure in 23 tier 1 markets with metropolitan fiber in twelve major markets. These local
networks utilize Nortel DMS-500 SuperNode digital central office switches.



In 2005, we launched our Converged Services network that spans the US with more than 180 core Broadwing points of presence. By interworking with all of Broadwings legacy network layers, including Frame Relay,
ATM and TDM, and Ethernet, the Converged Network allows customers to migrate to the meshing and quality of service benefits of MPLS/VPLS. Customers may select converged ports ranging in speed from 64K to GigE and may allocate bandwidth in the
increments they require. Going forward, the Converged Network will be the service and transport layer that will bind legacy and emerging Broadwing services into a single customer interface, allowing fixed rate or usage based access to flexible WAN
transport and applications such as VoIP.



Our high-speed
dynamic-synchronous transfer mode (DTM) network is capable of reaching over 41 cities in the U.S. market. Broadwings DTM network was developed specifically to meet the business needs of organizations that need to efficiently and
economically move contribution quality video to disparate geographic locations and use the same network for voice and data transmissions. DTM overcomes the weaknesses of analog video loops and legacy packet networks by using a circuit-switched, time
division multiplexing (TDM) protocol that enables Broadwing to dynamically allocate bandwidth to customers in increments of 512Kbps. In addition, since Broadwings DTM network is secure, and digital content is protected from
possible theft unlike media transmitted on analog video loops.



Our Sales
Channels



Our sales organization includes a direct sales
force and alternative channels. Our direct sales force is organized into two major markets in order to best match product, services and technological expertise with customer needs and expectations. The Enterprise team focuses on providing complex
data and network solutions to medium to large sized businesses. The Carrier Service team focuses on carriers in the communications industry, including ILECs, interexchange carriers, other carriers and wireless providers. As of December 31,
2005, Broadwing had 447 employees associated with sales and customer care.



Direct Sales Force



We
have an experienced direct sales force. Our strategy is to structure our sales efforts to enable our sales personnel to establish direct and personal relationships with our customers. We seek salespeople with strong sales and communications
backgrounds, including salespeople from other communications service providers, and network systems integrators.



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Alternative Sales Channels



We have complemented our direct sales force by developing alternative sales channels to distribute the products and services
available to our broadening customer base. These channels include numerous third party sales agents that generally receive commissions on monthly recurring revenue.



Customer Care



After a customers services have been installed, our customer care operations center supports customer retention and satisfaction. Our goal is to
provide customers with a customer care group that has the ability and resources to respond to and resolve customer questions and issues as they arise, 24 hours a day, seven days a week and provide other services as necessary.



Our Employees



As of December 31, 2005, Broadwing had 1,636 employees. The Company believes that its success and growth depends in
large part on its ability to attract and retain qualified employees.



Item 1A.    Risk Factors



We need to increase the volume of traffic on our network or our network will not generate the necessary profits to achieve positive cash flow from operations.



We must increase the volume of Internet, data, voice and video transmission on our network in order to realize the
anticipated cash flow, operating efficiencies and cost benefits. If we fail to develop new large-volume customer relationships or are unable to maintain our relationships with current customers, we may not be able to achieve the necessary traffic,
which would adversely impact our results of operations and cash flow.



Rapid
technological changes can lead to further competition which could materially, adversely affect our business.



The communications industry is subject to rapid and significant changes in technology. In addition, the introduction of new products or technologies, as
well as further development of existing products and technologies may reduce the cost or increase the supply of certain services similar to what we provide. As a result, our most significant competitors in the future may be new entrants to the
communications industry. The new entrants may not be burdened by an installed base of equipment. Our future success depends, in part, on the ability to anticipate and adapt in a timely manner to technological changes. Technological changes and the
resulting competition could have a material adverse effect on us.



We have
incurred significant losses since inception, and expect to continue to incur losses in the future.



We have incurred significant net losses since inception. As of December 31, 2005, we had an accumulated deficit of approximately $2.8 billion. We
expect to continue to incur significant losses in the near-term in conjunction with restructuring and integration activities related to Focal, among other things. We cannot be certain when or if we will ever achieve profitability.



Our ability to utilize our network may be severely limited if we are not able to maintain
rights-of-way and permits, which would adversely affect revenues and cash flow.



Our network consists of several thousand miles of fiber optic cable located across the United States on property that we do not own. Our ability to utilize this network depends on maintaining rights-of-way and
required permits from railroads, utilities, government authorities and third-party landlords. We cannot guarantee that we will be able to maintain all of our existing rights and permits. Although we expect to maintain and renew



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our existing agreements, the loss of a substantial number of existing rights and permits could have a material adverse impact on our revenue if we were
unable to provide services to our customers or on our profitability and financial condition if we are required to purchase higher priced network alternatives. For portions of our network that we lease or purchase use rights from third parties, we
must rely on such third parties maintenance of all necessary rights-of-way and permits. Some agreements that we may rely on to use portions of other companies networks could be terminated if associated rights-of-way were terminated,
which would adversely affect our ability to serve our customers and negatively affect our revenue and profitability.



Significant capital expenditures will be required to maintain our network, and if we fail or are unable to adequately maintain our network, there could be a material
adverse effect on our revenues and cash flow.



We could
incur significant capital expenditures as a result of unanticipated expenses, regulatory changes and other events that affect our business. If we do not have sufficient cash on hand or the ability to borrow sufficient cash on favorable terms, we may
be unable to make any necessary capital expenditures. If we fail to adequately maintain our network to meet customer needs, there could be a material adverse affect on our revenue and profitability. We could also be subject to lawsuits or regulatory
proceedings for failure to adequately maintain our network.



Regulatory
initiatives could put us at a competitive disadvantage or lower the rates that we are permitted to charge for our services, which would decrease our revenue and profitability.



We are subject to regulatory oversight of varying degrees at the local, state and federal levels. We are regulated primarily
by both the FCC and the state public utility commissions in the states in which we provide services to customers. The FCC provides regulatory oversight for service terms and rates offered by communication carriers. Additionally, state public utility
commissions can issue regulations that affect the types of services that we can provide and the rates we can charge for our services, as well as with respect to certain other consumer-related issues. Regulatory initiatives that would put us at a
competitive disadvantage or mandate lower rates for our services could result in lower profitability and cash flow. The FCC or other federal, state and local governmental authorities having jurisdiction over the communications industry could adopt
regulations or take other actions that could adversely affect our business prospects, profitability and cash flow.



The communications industry has been the subject of legislative initiatives at both the federal and state levels, and we expect these initiatives to
continue. The Telecom Act, provides, among other things, a framework for local competition, but requires the FCC and state governmental agencies to implement rules for this framework. These rules have been the subject of numerous appeals, both in
the courts and to Congress. Legislation has been proposed to amend the Telecom Act in almost every session of Congress since its adoption, and members of Congress use hearings and letters to regulators to influence the rules adopted to implement it.
This Congressional participation in the development of regulatory policy and enforcement has caused the regulatory process relating to the communications industry to become less predictable and increases the risk that we will be adversely affected
by the rules that are ultimately implemented and/or the regulatory process. Similar legislative involvement has occurred in various states. Any regulatory changes could have a material adverse impact on our revenue and profitability.



We rely, in part, on portions of competitors networks to carry communications
signals. If we are not able to maintain these agreements, we may incur additional significant expenses in obtaining alternate agreements with other carriers to carry communications signals, which could adversely affect our profitability and cash
flow.



We use network resources owned by other companies
for portions of our network. We obtain the right to use such network portions through operating leases and IRU agreements in which we pay for the right to use such other companies fiber assets and through agreements in which we exchange the
use of portions of our network



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for the use of portions of such other companies networks. In several of those agreements, the counter party is responsible for network maintenance and
repair. If a counter party to a lease, IRU or an exchange suffers financial distress or bankruptcy, we may not be able to enforce our rights to use such network assets or, even if we could continue to use such network assets, we could incur material
expenses related to maintenance and repair. We could also incur material expenses if we were required to locate alternative network assets. We may not be successful in obtaining reasonable alternative network assets if needed. Failure to obtain
usage of alternative network assets, if necessary, could have a material adverse impact on our ability to carry on business operations.



In an effort to reduce our costs for the use of such third party networks, we have undertaken an initiative to reduce our dependency and diversify our use
of the networks of other carriers. We executed this initiative in a number of ways, including by strategically moving traffic to lower cost third party networks, purchasing our own fiber in areas where access charges are high and/or where warranted
by traffic volumes and renegotiating interconnection agreements as opportunities have allowed. If we are unable to successfully continue to execute this cost reduction strategy, we may incur higher access charges in future periods, which may
adversely impact our profitability and cash flow.



The SBC/AT&T and
Verizon/MCI mergers will create a tendency for the ILEC acquirer to favor their wholly- owned or fully integrated interexchange carrier.



We acquire the vast majority of our access, the connection between our owned network and the customer premises, from the ILEC. With the ILECs acquisitions
of these major interexhange carriers the ILECs now compete directly with our business and may have a tendency to favor themselves and their affiliates to our detriment. It is not yet clear what effect, if any, will result from the constraints agreed
to by the ILECs to protect independent interexchange carriers against this discrimination in the procurement of the bottleneck local access circuits. The ILECs favoring themselves in access could have a material adverse effect on our ability to
obtain and retain customers because access is necessary in most cases to connect enterprise customers and carrier customers to our network. Network access represents a very large portion of our total costs and if we face less favorable pricing and
provisioning, we will be at a competitive disadvantage versus the ILEC.



The
opportunity to obtain access from competitive access providers to the ILECs has been significantly reduced as a result of the SBC/AT&T and Verizon/MCI mergers.



Our primary method of connecting with our customers is through local transport and last mile circuits we purchase from the
ILEC. Our secondary method is purchasing such circuits from competitive access providers like AT&T and MCI. Competitive access providers are the only entities that exert competitive pricing pressure on the ILECs. Now that AT&T and MCI have
been acquired, our number one and number two sources of lower priced competitive access have disappeared. A substantial portion of our ILEC special access circuits are purchased pursuant to contract and the merging companies have agreed to certain
pricing conditions with the FCC. Thus, while the likely result of the merger is higher prices for special access over time, it is not possible to determine at this time how adverse the long term impact on Broadwing will be.



If we are not able to successfully introduce new products and services, our revenue and
profitability could be adversely impacted.



Our success
depends on our ability to anticipate the needs of current and future customers. We seek to meet these needs through new product introductions, service quality and technological superiority. Our failure to anticipate the needs of these customers and
to introduce the new products and services necessary to attract or retain customers could have a material adverse impact on our revenue and profitability.



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We are subject to risk due to a significant amount of revenue being derived from companies that are communications
providers, Internet service providers and cable television companies.



A significant portion of our revenue is derived from communications carriers, many of which have filed for bankruptcy or have been adversely affected financially by the prolonged decrease in the price for
telecommunication services. To the extent these large customers cease to employ our network to deliver their services, or cannot pay outstanding accounts receivable balances, our revenue and cash flow could be materially adversely affected. Most of
our arrangements with large customers do not provide us with guarantees that customer usage will be maintained at current levels. Moreover, industry pressures have caused communications carriers to look aggressively for ways to cut costs, which may
result in reduced demand and reduced prices. In addition, the ability of certain customers and competitors to construct and/or expand their own facilities as well as further consolidation in the communications industry could result in customers
ceasing or reducing their use of Broadwings network.



Revenue from our ten largest customers accounted for approximately 20%, 19% and 18% of total revenue in 2003, 2004 and 2005, respectively. In addition, revenue from communications carriers accounted for 40%, 38% and 42% of total revenue in
2003, 2004 and 2005, respectively.



Our operations depend upon our ability
to internally develop or acquire from third party suppliers, advanced and reliable network equipment on a timely basis. The inability to obtain needed equipment or services could materially adversely affect our revenue and profitability.



Where possible and practical, we utilize commercially
available technologies and products from a variety of vendors. However, suppliers of network equipment may not be able to meet equipment requirements on a timely basis, and equipment may not perform as expected. Our backbone transport network was
built internally and we are the sole manufacturer of this network system including transport and receiving cards necessary for capacity expansion. We depend on key personnel and the availability of key components purchased from third parties to
manufacture these network components. The following factors could disrupt our operations by jeopardizing the service provided to our customers and limiting our ability to introduce new services and obtain and retain customers:



| |  |  | extended interruption in the supply of network equipment;
| | - |  | ---------------------------------------------------------



| |  |  | material increase in prices;
| | - |  | ----------------------------



| |  |  | significant delay by suppliers in their shipment of products, their release of new products or the failure of their products to perform as expected;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | financial failures of key suppliers;
| | - |  | ------------------------------------



| |  |  | extended delay in transitioning to the products of an alternative supplier, if necessary; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | use of key engineering and manufacturing personnel.
| | - |  | ---------------------------------------------------



If we cannot obtain adequate replacement equipment or services, or an acceptable alternate vendor, it could cause a material adverse impact on our revenue
and profitability.



Network failure and transmission delays and errors could
expose us to potential liability or loss of customers which could materially adversely affect our revenue and profitability.



Our network utilizes a variety of communications equipment, software, operating protocols and components for the high-speed transmission of data and voice
traffic among various locations. Such equipment, software and physical locations could malfunction, suffer physical damage or otherwise become impaired. We are held to high quality and delivery standards in our customer contracts. Network failures
resulting in service interruptions or delays in the delivery of services could result in a loss of customers. Furthermore, failures or delays could expose us to claims by our customers that could have a material impact on our profitability and cash
flow.



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Increased competition could adversely affect our revenue, profitability and cash flow.



There is substantial competition in the communications industry. Competition
may continue to intensify due to the efforts of existing competitors to address difficult market conditions through reduced pricing, bundled offerings or otherwise, as well as a result of the consolidation of some of the largest competitors with
substantial market power or the introduction of additional entrants using advanced technologies to introduce new products and services to the market. Price competition has been intense and may further intensify. If we cannot offer reliable,
value-added services on a price competitive basis in markets, we could experience a decline in revenue. In addition, if we do not keep pace with technological advances or fail to respond timely to changes in competitive factors in the industry, we
could lose market share or experience a decline in our revenue and profit margins.



In the long-distance voice services market, we face significant competition from companies such as AT&T (with SBCs acquisition of AT&T Corp.), Verizon (with its acquisition of MCI), Sprint-Nextel
Corporation, Level 3 Communications, Inc., Qwest, Global Crossing Limited and BellSouth Corporation. The significant capacity of these competitors has and may continue to result in decreasing prices even if the demand for higher-bandwidth services
increases. In addition, some competitors are experiencing financial difficulties or are in bankruptcy reorganization. Competitors in financial distress or competitors emerging from bankruptcy with lower cost capital structures and substantial excess
capacity in most markets could exacerbate downward pricing pressure in the communications industry.



There is also substantial competition within the local voice services market. Our primary competitors are the ILECs, including Bell South, Verizon,
Qwest, and AT&T (with SBCs acquisition of AT&T). Typically, the ILECs offer a wider variety of services than Broadwing in a broader geographic area and have much greater resources than Broadwing. Consequently, this may encourage an
ILEC to subsidize the pricing for services with which we compete with the profits of other services in which the ILEC remains the dominant provider. In addition to competition from ILECs, we also face competition from other CLECs. Although CLECs
overall have only captured a relatively small percentage of the U.S. local telecommunications market, we nevertheless compete to some extent with other CLECs. In some instances, these CLECs have greater resources and offer a wider range of services.



Potential regulation of Internet service providers in the United States
could adversely affect our operations.



The FCC has to
date treated Internet service providers as enhanced service providers. Enhanced service providers are currently exempt from federal and state regulations governing common carriers, including the obligation to pay access charges and contribute to the
universal service fund. The FCC is currently examining the status of Internet service providers and the services they provide. If the FCC were to determine that Internet service providers, or the services they provide, are subject to FCC regulation,
including the payment of access charges and contribution to the universal service funds, it could have a material adverse effect on our results of operations and operating cash flow.



Our growth is dependent upon the successful integration of recently acquired businesses.



The integration of acquired businesses involves a number of risks,
including, but not limited to:



| |  |  | the diversion of managements attention from the management of daily operations to the integration of operations;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in the assimilation and retention of employees;
| | - |  | ------------------------------------------------------------



| |  |  | difficulties in the assimilation of different corporate cultures and practices, as well as in the assimilation of broad and geographically dispersed personnel and operations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in the integration of departments, systems, technologies, books and records and procedures, as well as in maintaining uniform standards, policies and procedures and
internal controls.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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If we cannot successfully integrate acquired businesses or operations, our business, financial condition
and results of operations could be materially harmed. Successful integration of these acquired businesses or operations will depend on the Companys ability to manage these operations, realize opportunities for revenue growth presented by
strengthened service offerings and expanded geographic market coverage and, to some degree, to eliminate redundant and excess costs. Because of the difficulties inherent in business integrations, we may not be able to achieve the benefits that we
hope to achieve as a result of the acquisition. In addition, investors should not rely on the historical financial and operating performance of recently acquired businesses as an indication of future performance.



We will need additional capital to fund our existing and future operations. If we are
unable to obtain additional capital, we may be required to reduce the scope of our planned network development, marketing and sales efforts, which would harm our sales and profitability.



Network expansion and marketing and sales of new services require
significant commitment of resources. We may incur significant operating losses or expend significant amounts of capital if, among other things:



| |  |  | We fail to establish market share or generate expected revenue;
| | - |  | ---------------------------------------------------------------



| |  |  | Our network operating cost exceeds expectations;
| | - |  | ------------------------------------------------



| |  |  | Our capital expenditure forecasts change or prove inaccurate; and
| | - |  | -----------------------------------------------------------------



| |  |  | We need to respond to unforeseen challenges or take advantage of unanticipated opportunities.
| | - |  | ---------------------------------------------------------------------------------------------



To the extent that additional capital is raised through the sale of equity securities, the issuance of such securities could
result in dilution to existing stockholders. If we raise additional funds through the issuance of debt securities, the terms of such debt could impose additional restrictions on our operations. Furthermore, additional capital, if required, may not
be available on acceptable terms, if at all. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned network development and marketing and sales efforts, which would harm our revenue and results of
operations.



The unpredictability of our quarterly results may adversely
affect the trading price of our common stock.



Our revenue
and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause the price of our common stock to fluctuate. The primary factors, among other
things, that may affect our quarterly results include the following:



| |  |  | demand for communications services;
| | - |  | -----------------------------------



| |  |  | loss of customers or the ability to attract new customers;
| | - |  | ----------------------------------------------------------



| |  |  | changes in pricing policies or the pricing policies of our competitors;
| | - |  | -----------------------------------------------------------------------



| |  |  | costs related to acquisitions of technology or businesses; and
| | - |  | --------------------------------------------------------------



| |  |  | general economic conditions as well as those specific to the communications and related industries.
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | changes in regulatory rulings
| | - |  | -----------------------------



A delay in generating revenue or the timing of recognizing revenue and expenses could cause significant variations in our operating results from quarter
to quarter. It is possible that in some future quarters our results may be below analysts and investors expectations. In these circumstances, the price of our common stock will likely decrease.



We depend on key personnel to manage our business effectively. If we are unable to retain
key personnel or hire and retain other qualified personnel, our sales and financial condition could be harmed.



In February 2006, Dr. David Huber resigned as our CEO. Dr. Huber will continue to serve as Chairman of the Board. Our Board of Directors has
initiated a nationwide search to the fill the CEO position. In the interim,



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Scott Widham, our President of Sales and Marketing, Lynn Anderson, our CFO and Kim Larsen, our General Counsel, will share equally in the office of the
CEOs responsibilities. In addition, other senior executives have left the Company as part of our integration efforts or to pursue other opportunities.



Our future success will depend in large part on our ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial,
professional and technical personnel. Furthermore, our success is dependant upon the continued services of our corporate officers and other key engineering, manufacturing, operations, sales, marketing and support personnel who have critical industry
experience and relationships that we rely on to execute our business plan. The loss of the services of any key employee could negatively affect our ability to maintain customer relationships, which would harm our sales and financial condition.



The issuance of shares of common stock or options to
management and employees would also result in additional dilution of the prior equity interests of the stockholders, which could adversely affect the market price and value of common stock. There can be no assurance that we will not need to issue
additional equity securities in the future in order to execute our business plan, which would lead to further dilution to stockholders of common stock.



Item 1B.    Unresolved Staff Comments.



None



Item 2.    Properties.



We lease office space in a number of locations, primarily for sales and administrative offices and network equipment. In total, we lease approximately 986,551 square feet of office space in support of sales and
operations. We also own approximately 13 acres of real property in Arlington Heights, Illinois. In early 2006, we relocated our headquarters to Austin, Texas from Columbia, Maryland.



Plant and equipment associated with communication services consists of central office equipment, including switching and
transmission equipment, our long haul fiber optic backbone, and land and buildings. The majority of our fiber optic backbone has been developed through long-term indefeasible rights of use (IRU) agreements, in which we obtained the right
to use specified fibers owned by third parties; or through construction of owned fiber optic facilities placed on third party properties under right-of-way agreements. The original term of these leases generally are 20 years.



We also operate a number of sales offices, customer care centers, and other
facilities, such as research and development laboratories. The majority of these properties are leased.



We continue to manage the deployment and utilization of our assets in order to meet our growth objectives while at the same time ensuring that these
assets are generating value for our shareholders.



Item 3.    Legal Proceedings



Class Action Suit



Between May 7, 2001
and June 15, 2001, nine class action lawsuits were filed in the United States District Court for the Southern District of New York relating to our initial public offering on behalf of all persons who purchased our stock between July 28,
2000 and the filing of the complaints. Each of the complaints named as defendants: us, our directors and officers who signed the registration statement in connection with our initial public offering, and certain of the underwriters that participated
in our initial public offering. Our directors and officers have since been dismissed from the case, without prejudice. The complaints allege that the registration statement and prospectus relating to our initial public offering contained material
misrepresentations and/or omissions in that those documents did not disclose (1) that certain of the underwriters had solicited and received



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undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of our common stock in the initial
public offering and (2) that certain of the underwriters had entered into arrangements with some investors that were designed to distort and/or inflate the market price for our common stock in the aftermarket following the initial public
offering. The complaints ask the court to award to members of the class the right to rescind their purchases of our common stock (or to be awarded rescissory damages if the class member has sold our stock) and prejudgment and post-judgment interest,
reasonable attorneys and experts witness fees and other costs.



On February 15, 2005, the Judge granted preliminary approval of a proposed settlement agreement between the plaintiffs and defendants, including Broadwing. The proposed settlement is a $1 billion dollar
guaranteed settlement. The insurance companies for the defendants agreed to pay up to $1 billion dollars in total to the extent that judgment is rendered for the plaintiffs. If plaintiffs succeed in recovering more than $1 billion from the
underwriters, the companies that went public, such as Broadwing, will not have to pay any additional amounts. The defendants insurance companies will be paying the settlement that is subject to the final approval of the district court.



On August 31, 2005 the Judge issued an order clarifying
certain provisions of the proposed settlement and set deadlines for its final approval. The Judge scheduled the fairness hearing on the proposed settlement for April 24, 2006. Should the Judge not grant final approval of the settlement
agreement, we believe that we have meritorious defenses to plaintiffs allegations and will vigorously defend ourselves.



Qwest Investigations



Since approximately 2003, the Denver, Colorado regional office of the SEC has been conducting two investigations titled In the Matter of Qwest
Communications International, Inc. and In the Matter of Issuers Related to Qwest. We believe the first of these investigations does not involve any allegation of wrongful conduct on our part. In connection with the second investigation, the SEC is
examining various transactions and business relationships involving Qwest and eleven companies having a vendor relationship with Qwest, including the Company. This investigation, insofar as it relates to us, appears to focus generally on whether our
transactions and relationships with Qwest and its employees were appropriately disclosed in our public filings and other public statements.



In addition, during the same period, the United States Attorney in Denver has been conducting an investigation involving Qwest, including Qwests
relationships with certain of its vendors, including us. In connection with that investigation, the U.S. Attorney has sought documents and information from us and has sought interviews from persons associated or formerly associated with us,
including certain of our officers. The U.S. Attorney has indicated that neither we nor any of our current or former officers or employees is a target or a subject of the investigation.



We have cooperated fully with the investigation. Both the SEC and U.S. Attorney investigations have resulted in cases
against Qwest and some of its former executives. These cases do not involve or refer to the Company and the Company has received no indication from either the SEC or U.S. Attorney that its present or former personnel will be witnesses in any of
these cases. The Company has not received any communication from the SEC or the U.S. Attorney as to whether there is any ongoing investigation that relates to the Companys business relationship with Qwest. We are not able, at this time, to say
when the SEC and/or U.S. Attorney investigations or cases will be completed and resolved, or what the ultimate outcome with respect to us will be.



Great Northern Insurance Company



On October 5, 2004, we filed an action in the US District Court for the District of Maryland against our property insurance carrier, Great Northern
Insurance Company, for breach of contract under a building and personal property insurance policy sold to us by Great Northern. The claim is for a loss sustained by us due to a fire in a warehouse that occurred in March 2003. The amount of loss
alleged by us exceeds $46.0 million, of



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which Great Northern has paid $4.5 million. We have requested a jury trial for this dispute. On February 9, 2005, Broadwing filed its Second Amended
complaint, which bifurcated its existing breach of contract claim into two claims for relief. Fact discovery closed on January 27, 2006 and expert discovery is underway and expected to be completed on May 19, 2006. No trial date has been set.



Other



We and our subsidiaries are also subject from time to time to pending and threatened legal action and proceedings arising in
the ordinary course of business. Management believes that the outcome of such actions and proceedings will not have a material adverse effect on our business, financial condition or results of operations.



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



No matter was submitted to a vote of shareholders in the fourth quarter of the fiscal year covered by this report.



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##### Table of Contents

PART II



Item 5.    Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.



Our common stock has been traded on the NASDAQ National Market under the symbol BWNG. The following table sets
forth, for the periods indicated, the high and low bid information as reported on the NASDAQ National Market or the NASDAQ Capital Market (formerly known as NASDAQ Small Cap Market) for our common stock. The information presented has been
retroactively adjusted to reflect a 1-for-20 reverse stock split and an immediate subsequent 1-for-1 stock dividend that was effected on October 8, 2004, effectively resulting in a 1-for-10 reverse stock split.



|                                         |  |      |       |     |   |      
|---------------------------------------- |  | ---- | ----- | --- | - | -----
|                                         |  | High |       | Low
|Fiscal 2004                              |  |      |       |     |   |      
|First Quarter (ended March 31, 2004)     |  | $    | 30.00 |     | $ | 18.00
|Second Quarter (ended June 30, 2004)     |  | $    | 20.60 |     | $ | 13.30
|Third Quarter (ended September 30, 2004) |  | $    | 13.60 |     | $ | 8.00 
|Fourth Quarter (ended December 31, 2004) |  | $    | 9.64  |     | $ | 5.23 
|                                         |  |     
|Fiscal 2005                              |  |      |       |     |   |      
|First Quarter (ended March 31, 2005)     |  | $    | 8.76  |     | $ | 4.10 
|Second Quarter (ended June 30, 2005)     |  | $    | 5.38  |     | $ | 3.63 
|Third Quarter (ended September 30, 2005) |  | $    | 5.56  |     | $ | 4.31 
|Fourth Quarter (ended December 31, 2005) |  | $    | 7.19  |     | $ | 4.68 



As of
February 27, 2006, there were 907 holders of record of our common stock. Disclosure regarding our equity compensation plans can be found in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters of this report.



Dividend Policy



We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable future. Under the terms of our revolving credit facility, we are restricted from declaring or paying any dividends subject to the status of the loans under the facility
and our liquidity. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and
such other factors as our Board of Directors may deem relevant.



25



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##### Table of Contents

Item 6.    Selected Financial Data.



You should read the following selected consolidated financial data along with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and the notes to those statements included in Item 8. Financial Statements and Supplementary Data Operating results for historical periods are not necessarily indicative of the results that may be expected for future
periods.



|                                                                    |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---------------- | - | -------- | ---------------- |  | - | ---------------- | - |  | ---------------- | -------- | - |  | - | --------- | -
|                                                                    |  | Year Ended                           |           
|                                                                    |  | December 29,2001                     |            |   | December 28,2002 |   |          | December 31,2003 |  |   | December 31,2004 |   |  | December 31,2005 |         
|                                                                    |  | (in thousands except per share data) |           
|Statement of Operations Data:                                       |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Revenue:                                                            |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Total revenue                                                       |  | $                                    | 188,505    |   |                  | $ | 20,208   |                  |  | $ | 314,314          |   |  | $                | 672,280  |   |  | $ | 879,106   |  
|Operating expenses:                                                 |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Cost of revenue (excluding depreciation and amortization)           |  |                                      | 333,487    |   |                  |   | 84,884   |                  |  |   | 265,019          |   |  |                  | 455,429  |   |  |   | 580,441   |  
|Research and development*                                           |  |                                      | 173,204    |   |                  |   | 122,243  |                  |  |   | 59,461           |   |  |                  | 18,771   |   |  |   | 6,817     |  
|Sales, general and administrative*                                  |  |                                      | 138,216    |   |                  |   | 111,837  |                  |  |   | 159,673          |   |  |                  | 260,640  |   |  |   | 308,882   |  
|Litigation settlement                                               |  |                                      |           |   |                  |   |         |                  |  |   |                 |   |  |                  |         |   |  |   | 2,000     |  
|Depreciation                                                        |  |                                      | 27,615     |   |                  |   | 35,301   |                  |  |   | 34,529           |   |  |                  | 56,928   |   |  |   | 96,075    |  
|Amortization                                                        |  |                                      | 125,940    |   |                  |   | 18,491   |                  |  |   | 6,913            |   |  |                  | 4,632    |   |  |   | 5,631     |  
|Restructuring and other charges                                     |  |                                      | 789,242    |   |                  |   | 124,825  |                  |  |   | 59,381           |   |  |                  | 3,946    |   |  |   | 1,361     |  
|Purchased research and development                                  |  |                                      |           |   |                  |   | 34,580   |                  |  |   |                 |   |  |                  |         |   |  |   |          |  
|                                                                    |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Total operating expenses                                            |  |                                      | 1,587,704  |   |                  |   | 532,161  |                  |  |   | 584,976          |   |  |                  | 800,346  |   |  |   | 1,001,207 |  
|Operating loss                                                      |  |                                      | (1,399,199 | ) |                  |   | (511,953 | )                |  |   | (270,662         | ) |  |                  | (128,066 | ) |  |   | (122,101  | )
|Other income (expense), net                                         |  |                                      | 24,979     |   |                  |   | 5,309    |                  |  |   | 10,308           |   |  |                  | 7,160    |   |  |   | 7,032     |  
|Interest expense, net of capitalized amounts                        |  |                                      | (3,873     | ) |                  |   | (1,116   | )                |  |   | (504             | ) |  |                  | (31,275  | ) |  |   | (18,359   | )
|                                                                    |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Net loss before minority interest                                   |  |                                      | (1,378,093 | ) |                  |   | (507,760 | )                |  |   | (260,858         | ) |  |                  | (152,181 | ) |  |   | (133,428  | )
|Minority interest                                                   |  |                                      |           |   |                  |   |         |                  |  |   | 387              |   |  |                  |         |   |  |   |          |  
|                                                                    |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Net loss                                                            |  | $                                    | (1,378,093 | ) |                  | $ | (507,760 | )                |  | $ | (260,471         | ) |  | $                | (152,181 | ) |  | $ | (133,428  | )
|                                                                    |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Basic and diluted net loss per common shares                        |  | $                                    | (39.41     | ) |                  | $ | (12.95   | )                |  | $ | (6.05            | ) |  | $                | (2.86    | ) |  | $ | (1.83     | )
|Weighted average number of common shares outstanding                |  |                                      | 34,965     |   |                  |   | 39,201   |                  |  |   | 43,060           |   |  |                  | 53,217   |   |  |   | 72,894    |  
|                                                                    | 
|                                                                    |  | As of                                |           
|                                                                    |  | December 29,2001                     |            |   | December 28,2002 |   |          | December 31,2003 |  |   | December 31,2004 |   |  | December 31,2005 |         
|                                                                    |  | (in thousands)                       |           
|Balance Sheet Data:                                                 |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Cash and cash equivalents                                           |  | $                                    | 638,872    |   |                  | $ | 457,833  |                  |  | $ | 256,490          |   |  | $                | 124,540  |   |  | $ | 66,706    |  
|Short-term and long-term investments                                |  |                                      | 21,907     |   |                  |   | 46,583   |                  |  |   | 40,332           |   |  |                  | 149,815  |   |  |   | 42,648    |  
|Working capital                                                     |  |                                      | 726,505    |   |                  |   | 459,843  |                  |  |   | 253,601          |   |  |                  | 102,941  |   |  |   | 47,514    |  
|Total assets                                                        |  |                                      | 978,825    |   |                  |   | 610,318  |                  |  |   | 528,615          |   |  |                  | 780,990  |   |  |   | 573,504   |  
|Notes payable and capital lease obligations, net of current portion |  |                                      | 4,702      |   |                  |   | 2,746    |                  |  |   | 2,500            |   |  |                  | 52,218   |   |  |   | 20,819    |  
|Total stockholders equity                                          |  |                                      | 888,853    |   |                  |   | 540,078  |                  |  |   | 397,669          |   |  |                  | 455,039  |   |  |   | 365,012   |  
|Other Financial Data:                                               |  |                                      |            |   |                  |   |          |                  |  |   |                  |   |  |                  |          |   |  |   |           |  
|Capital expenditures**                                              |  | $                                    | 97,702     |   |                  | $ | 18,740   |                  |  | $ | 12,243           |   |  | $                | 74,724   |   |  | $ | 62,868    |  

---

|* |  | Research and development includes equity based expense of $45,409, $24,871, $12,659, $3,776, and $645 for the years ended December 29, 2001, December 28, 2002, December 31, 2003,
2004 and 2005, respectively.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Sales, general and administrative includes equity based expense of $53,398, $40,529, $7,938, $4,858, and $3,844 for the years ended December 29, 2001, December 28, 2002, December
31, 2003, 2004 and 2005, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | For the year ended December 31, 2005, capital expenditures includes approximately $7.6 million of a Ciena deposit which was converted to equipment purchases. At December 31, 2005,
the remaining deposit was $2.1 million.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations.



Forward-looking Statements



Our prospects are subject to uncertainties and risks. This Annual Report on Form 10-K contains forward-looking statements under the headings Item 1.
Business, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and elsewhere, within the meaning of the federal securities laws, that also involve substantial
uncertainties and risks. Forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance, the industries in which we operate, our beliefs and our managements assumptions.
These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Actual results could differ materially from those currently anticipated as a result of a number of
factors, including, but not limited to, the risks and uncertainties discussed under Risk Factors and MD&A in the Companys filings with the Securities and Exchange Commission.



The following MD&A should be read in conjunction with the consolidated
financial statements and accompanying notes at Item 8. Financial Statements and Supplementary Data.



Overview



Broadwing and its subsidiaries are an Austin, Texas-based provider of data and Internet, broadband transport, and voice communications services to large
enterprises, mid-market businesses and other communications service providers over a facilities-based network connecting 137 cities nationwide. Our all-optical network, capable of transmitting up to 800 Gbs per fiber, gives customers the benefit of
high quality, technologically advanced solutions allowing for rapid provisioning, and highly flexible customized networking. We believe that our network and growth-oriented strategy has enabled us to compete effectively in the markets in which we
operate.



On September 28, 2004, we announced a 1-for-20
reverse stock split, resulting in every twenty shares of common stock to be combined into one share of common stock. Immediately following the reverse stock split, we enacted a one time, 1-for-1 stock dividend for all shareholders of record as of
October 8, 2004, effectively resulting in a 1-for-10 reverse split. The stock split and stock dividend affects all of the Companys stock, stock options and warrants outstanding on the record date. This MD&A has been retroactively
adjusted to reflect both the stock split and stock dividend.



Critical
Accounting Policies



We have identified the following
critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Some of these policies were adopted upon the Broadwing Communication Services, Inc. and Focal
acquisitions. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets
and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable valuation allowances, accrued
service costs, asset retirement obligations and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results
could vary.



Revenue Recognition and Accounts Receivable
Valuation Allowances



Revenue and related reserves are
recognized when the services are provided. Payments received in advance are deferred until the service is provided. Up-front fees received primarily activation fees and installation charges, as well as the associated customer acquisition costs, are
deferred and recognized over the expected customer relationship.



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We record specific reserves to reduce revenue and related trade accounts receivable when significant
uncertainties exist related to service billings. We record reserves associated with routine service credits granted to customers. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. We determine the estimate of the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the customers financial condition and historical experience. If the
financial condition of our customers were to deteriorate or other circumstances occur that result in an impairment of customers ability to make payments, additional allowances may be required.



At December 31, 2005, a significant portion of these reserves relate to
reciprocal compensation and carrier access billings (CABs), some of which is associated with contracts acquired in the Focal acquisition. Certain carriers have disputed these charges as inappropriate or outside the scope of existing
tariffs or contractual agreements. Trade accounts receivable from reciprocal compensation and carrier access billing totaled $31.4 million with associated credit allowances totaling $20.3 million. If the resolution of these disputes differs from our
estimates, our reserves will be adjusted and will result in an increase or decrease in revenue and net loss.



Accrued Service Costs



We perform bill verification procedures to ensure that there are no errors in our access vendors billed invoices. The bill verification procedures
include the examination of bills, comparison of rates between billed rates with rates used by our expense estimation systems, comparison of circuits billed to our database of active circuits, and evaluation of the trend of invoiced amounts by our
vendors, including the types of charges being assessed. If we conclude that we have been billed inaccurately, we will dispute the charge with the vendor and begin resolution procedures. We record a charge to cost of revenue and a corresponding
increase to the accrued communication service costs for the disputed amounts, unless past experience or other corroborating evidence indicates that it is not probable that we will ultimately be required to pay. If we ultimately reach an agreement
with a vendor in which we settle a disputed amount for less than the corresponding accrual, we recognize the resultant settlement gain in the period in which the settlement is reached. Previously unaccrued disputes are tracked and reviewed
periodically to assess whether a loss has become probable and estimable, in which case an accrual is established. At December 31, 2005, we have $35.7 million in access vendor billing disputes for which we have provided $12.9 million in accrued
line costs. If resolution of these disputes differ from our estimates, our reserve will be adjusted resulting in an increase or decrease in cost of revenue and net earnings.



Intangible Assets



We have recorded intangible assets resulting from our acquisitions. We account for goodwill and other intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and other intangible assets with an indefinite life be tested for impairment at least annually. The impairment test is a two-step process that requires
intangibles to be allocated to reporting units. We have one reporting unit. In the first step, the fair value of the reporting unit is compared with the carrying value of the reporting unit. If the fair value of the reporting unit is less than the
carrying value of the reporting unit, an impairment may exist, and the second step of the test is performed. In the second step, the fair value of the intangible asset is compared with the carrying value, and an impairment loss will be recognized to
the extent that the carrying value exceeds the fair value. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.



We are required to review the recoverability of our goodwill and other intangible assets as indicated above. If actual market conditions are less
favorable than those projected by management or if events occur or circumstances change that would reduce the estimated recoverability of these assets, impairment charges may be required.



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During the fourth quarter of 2005, we performed an impairment analysis of the intangible assets acquired
as part of the Broadwing Communication Services, Inc. and Focal acquisitions pursuant to SFAS 142 and SFAS 144. We did not recognize an impairment loss, as the carrying amount of finite-lived intangible assets were determined to be recoverable.



Asset Retirement Obligations



We have network assets located in leased properties such as equipment rooms,
central offices, and network interconnections sites. For certain of these leases, we are legally obligated to remove our equipment when the lease expires. As required by SFAS No. 143, Accounting for Asset Retirement Obligations, we
record a liability for the estimated current fair value of the costs associated with these removal obligations. We estimate our removal liabilities using historical cost information, industry factors, and current engineering estimates. We then
estimate the present value of these costs by discounting the future expected cash payout to current fair value based on an estimated incremental borrowing rate. To the extent there are material differences between our estimated and actual removal
costs, and our estimated and actual discount rates, we could be required to adjust our recorded liabilities.



Litigation



We are involved in several material legal proceedings, as described in more detail in Item 3. Legal Proceedings in this report. We assess
potential losses in relation to these and other pending or threatened legal matters.



If a loss is considered probable and the amount can be estimated, we recognize an expense for the estimated loss. To the extent these estimates turn out to exceed or be less than the actual liability resulting from
the resolution of such matters, our net loss will be increased or decreased accordingly and if the differences are material, our consolidated financial statements could be materially impacted.



New Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment. SFAS No. 123R is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS
No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services
that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R are effective for public entities that do not file as small business
issuers as of the beginning of the annual reporting period that begins after June 15, 2005. We have previously issued employee stock options for which no expense has been recognized, and which will not be fully vested as of the effective date
of SFAS No. 123R. We believe the impact of adopting SFAS No. 123R, based on our unvested options outstanding at December 31, 2005, will be to increase our pre-tax stock-based compensation expense in 2006 between $5.5 million and $7.5
million. The preceding excludes restricted stock based compensation, which is estimated to be $3.8 million based on outstanding units at December 31, 2005.



In November 2004, the FASB issued SFAS No.151, Inventory Costs, amendment to ARB No. 43 Chapter 4, (SFAS No. 151) which clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not expect the impact of SFAS
No. 151 to have a material effect our financial position, results of operations or liquidity.



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In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary AssetsAn
Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of
APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange. We are required to adopt SFAS 153 effective January 1, 2006.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision is effective no later than the end
of the fiscal year ending after December 15, 2005. The adoption of FIN 47 has not had a material impact on our consolidated results of operations and financial condition.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error CorrectionsA Replacement of
APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005 which for us will be as of the beginning of fiscal 2006.



Results of Operations



Year ended December 31, 2005 compared to year ended December 31, 2004



Revenue.    Revenue consists of the sale of data
and Internet, broadband transport, long-distance and local voice communication services. Data and Internet sales consist of high-speed data transport utilizing technology based on IP and ATM/frame relay. Broadband transport services consist of
long-haul transmission of data, voice and Internet traffic over dedicated circuits. Long-distance voice services consist of dedicated and switched billed minutes of use, including the transmission of voice long distance services on behalf of
wholesale and retail customers.



Since the September 1,
2004 acquisition of Focal, we began to provide local voice services. Local voice services consist of dedicated and switched inbound and outbound services. Inbound service allows for the completion of calls to our customers. Our basic outbound
services allow local calls to be completed within a metropolitan region. Local voice services also include Inter-carrier compensation, which is associated with the transmission of traffic between telecommunications carriers and includes switched
access and reciprocal compensation revenue. Reciprocal compensation is the compensation exchanged between carriers for terminating local phone calls on one anothers networks.



Quarterly revenue by product for the year ended December 31, 2005 and 2004 is as follows (in thousands):



|                             |  |                              |         |                              |   |           |  |         |         |       |   |           |  |          |         |          |   |         |  |       |         |  |   |         |  |   |         |  |   |        
|---------------------------- |  | ---------------------------- | ------- | ---------------------------- | - | --------- |  | ------- | ------- | ----- | - | --------- |  | -------- | ------- | -------- | - | ------- |  | ----- | ------- |  | - | ------- |  | - | ------- |  | - | -------
|                             |  | Year ended December 31, 2004 |         | Year ended December 31, 2005
|                             |  | March 31,                    |         | June 30,                     |   | Sept 30,* |  | Dec 31, |         | Total |   | March 31, |  | June 30, |         | Sept 30, |   | Dec 31, |  | Total
|Data and internet services   |  | $                            | 34,300  |                              | $ | 35,964    |  | $       | 38,150  |       | $ | 41,731    |  | $        | 150,145 |          | $ | 41,844  |  | $     | 42,156  |  | $ | 42,684  |  | $ | 44,368  |  | $ | 171,052
|Broadband transport          |  |                              | 57,969  |                              |   | 59,323    |  |         | 62,081  |       |   | 65,289    |  |          | 244,662 |          |   | 67,795  |  |       | 73,069  |  |   | 74,853  |  |   | 78,406  |  |   | 294,123
|Long-distance voice services |  |                              | 49,410  |                              |   | 46,118    |  |         | 45,427  |       |   | 56,213    |  |          | 197,168 |          |   | 55,485  |  |       | 50,867  |  |   | 47,359  |  |   | 45,029  |  |   | 198,740
|Local voice services         |  |                              |        |                              |   |          |  |         | 17,407  |       |   | 48,994    |  |          | 66,401  |          |   | 51,862  |  |       | 55,139  |  |   | 53,171  |  |   | 51,939  |  |   | 212,111
|Equipment Sales              |  |                              | 5,108   |                              |   | 725       |  |         | 381     |       |   | 7,690     |  |          | 13,904  |          |   | 1,268   |  |       | 993     |  |   | 592     |  |   | 227     |  |   | 3,080  
|                             |  |                              |         |                              |   |           |  |         |         |       |   |           |  |          |         |          |   |         |  |       |         |  |   |         |  |   |         |  |   |        
|Total revenue                |  | $                            | 146,787 |                              | $ | 142,130   |  | $       | 163,446 |       | $ | 219,917   |  | $        | 672,280 |          | $ | 218,254 |  | $     | 222,224 |  | $ | 218,659 |  | $ | 219,969 |  | $ | 879,106
|                             |  |                              |         |                              |   |           |  |         |         |       |   |           |  |          |         |          |   |         |  |       |         |  |   |         |  |   |         |  |   |        

---

|* |  | Includes revenue subsequent to the date of the Focal acquisition of September 1, 2004.
|- |  | --------------------------------------------------------------------------------------



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Revenue increased $206.8 million, or 31%, for the year ended December 31, 2005 from $672.3 million
for the year ended December 31, 2004, primarily due to the Focal acquisition. We estimate that we acquired approximately $246.0 million in annualized revenues in the Focal acquisition comprised $1.6 million of broadband transport, $3.2 million
of data and Internet $32.4 million of long-distance voice and $208.8 million of local voice revenue. Excluding revenue acquired in the Focal merger, revenue increased approximately $42.8 million or 6%.



Data and Internet revenues increase to $171.1 million from $150.1 million or
14%. Data and Internet revenues increased throughout 2005 principally through sales of our dedicated IP and converged network product. These revenue increases were off-set in part by decreased revenue from our ATM/Frame products which compete, at
least in part, with our multiconnect and converged solutions. We expect this trend to continue as customers migrate toward these newer technologies, which in some cases, are more cost effective solutions for our customers.



Our broadband transport revenues increased to $294.1 million from $244.7
million or 20% due to increased sales primarily to communications service provides and large enterprise customers. We experienced sales growth across virtually all of our broadband products from DS-1 to OC-192c



Our long-distance voice revenue increased to $198.7 million from $197.2
million or 1%. Excluding approximately $32.4 million and $10.9 million of estimated long-distance voice revenues acquired in the Focal acquisition, these revenues decreased by approximately $20.1 million or 10%. Our long-distance voice revenues have
been substantially impacted by intense competition within traditional voice products and with competition from competing technologies including VoIP, all of which have resulted in an overall decrease in the number of billable minutes of use,
especially in our higher-priced switched based products. We expect long-distance voice revenue to continue to be negatively affected by competition, we are therefore focused on providing appropriate product alternatives to our customers including
VoIP and converged services which we believe provide a more cost effective customer solution.



Our local voice services increased to $212.1 million from $66.4 million. Because our local voice services products were acquired in the Focal merger, annual comparisons of revenue are not meaningful. Compared to the
three-months ended December 31, 2004, quarterly revenues increased $2.9 million or 6% principally through increases in carrier access billing and reciprocal compensation revenue increases associated with agreements reached with carriers after
the acquisition.



Equipment revenue decreased to $3.1 million
from $13.9 million. We have ceased marketing our communications equipment and our equipment division is now solely focused on the support of our communications services network.



Cost of Revenue.    Cost of revenue primarily reflects access charges paid to local exchange
carriers and other providers and transmission lease payments to other carriers. Cost of revenue increased to $580.4 million for the year ended December 31, 2005 from $455.4 million for the year ended December 31, 2004, primarily due to the
inclusion of a full twelve months cost of service associated with Focal operations in the current year as compared to four months for the year ended December 31, 2004. As a percentage of revenue, cost of revenue decreased to 66% from 68%.
This cost improvement is due to a number of factors including:



| |  |  | The impact of integrating the Focal and Broadwing networks which allowed for more cost effective termination of traffic using Focals existing local infrastructure.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued network grooming and architecture improvements that allowed for overall lower cost termination. These activities included increased use of network hubbing points that,
when utilitized optimally, reduce the cost of data transport.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The overall shift in product mix due to the increase in local voice revenues that generally have lower costs of service compared to long-distance voice.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | We entered into new service agreements with access and off-net transport vendors that decreased our overall off-net costs. In the fourth quarter of 2004, we entered into an
agreement with AT&T in which we agreed to increase our minimum contractual commitment to approximately $63.0 million per year for three years in return for reductions in certain rates and the settlement of certain disputed billing issues.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our cost reduction efforts are continuing,
however we cannot be certain that cost savings will continue or will not be offset by future revenue changes. A portion of our voice traffic is terminated with other carriers under contracts with pricing which is subject to adjustment. If pricing
associated with these contracts increase, we will see a corresponding increase in our cost of revenue.



Research and Development Expense.    Research and development expense consists primarily of personnel, laboratory and
facilities, testing and prototype expenses related to the design of our hardware and software equipment products. All costs related to product new service development, both hardware and softwares, are recorded as expenses in the period in which they
are incurred.



Research and development expense decreased to
$6.8 million for the fiscal year ended December 31, 2005 from $18.8 million for the fiscal year ended December 31, 2004. During 2005, we ceased all research and development efforts that were focused in our communications equipment
division. That division is now focused solely on the maintenance of our communications services network. Associated cost are included in sales, general and administrative expense.



Sales, General and Administrative Expense.    Sales, general and administrative expense consists
primarily of costs associated with personnel, travel, information systems support and facilities and power related to our sales, network operations, network engineering and administrative support functions.



Sales, general and administrative expense increased to $308.9 million for the
fiscal year ended December 31, 2005 from $260.6 million for the fiscal year ended December 31, 2004. The increase in expense was primarily attributable to the acquisition of Focal. As a percentage of revenue, sales, general and
administrative expense decreased to 35% from 39%. This decrease in expense as a percentage of revenue reflects consolidation and restructuring efforts we undertook in late 2004 and early 2005 to reduce our overall costs structure. Specifically, our
cost structure benefited from our efforts to integrate the operations of Focal through the consolidation of network assets and the streamlining of management, support and administrative functions. We are continuing our efforts to identify
opportunities to lower our overall cost structure. We do not expect, however, for expense improvements to continue at current levels.



Depreciation Expense.    Depreciation expense increased to $96.1 million for the fiscal year ended December 31, 2005 from
$56.9 million for the fiscal year ended December 31, 2004. The increase in depreciation is primarily due to the impact of a full twelve months of depreciation for the Focal assets during the current year as compared to four months during the
year ended December 31, 2004. Focal depreciable assets have an average estimated life of 3.9 years. This increase has been offset in part by a decrease in depreciation due to certain assets reaching the end of their depreciable lives during the
current year.



Amortization
Expense.Amortization expense increased to $5.6 million for the fiscal year ended December 31, 2005 from $4.6 million for the fiscal year ended December 31, 2004. Amortization expense for the current year
primarily relates to intangible assets associated with in-place contracts and customer relationships acquired as part of the Broadwing and Focal acquisitions, which are being amortized over a period of three to seven years.



Restructuring and Other Charges.    During late
2004 and early 2005, we implemented a series of staff reduction and reorganization efforts primarily related to post Focal acquisition integration efforts in which we consolidated much of our network support, administrative and management
activities. These efforts resulted in



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restructuring and other charges totaling $1.4 million and $3.9 million in 2005 and 2004, respectively. Our restructuring activities are ongoing and
additional charges will be recorded during 2006 as we strive to reduce our overall sales, general and administrative costs.



|                                                                         |  |                           |       |                  |   |       |  
|------------------------------------------------------------------------ |  | ------------------------- | ----- | ---------------- | - | ----- | -
|                                                                         |  | Year Ended (in thousands) |      
|                                                                         |  | December 31,2004          |       | December 31,2005 |  
|Communications equipment cost of revenueinventory-write downs and other |  | $                         | 193   |                  | $ |      |  
|                                                                         |  |                           |       |                  |   |       |  
|Restructuring and other charges:                                         |  |                           |       |                  |   |       |  
|Workforce reductions and facilities consolidation                        |  |                           | 3,946 |                  |   | 1,064 |  
|Impairment of long-lived assets                                          |  |                           |      |                  |   | 416   |  
|Contract termination charges                                             |  |                           |      |                  |   | (119  | )
|                                                                         |  |                           |       |                  |   |       |  
|Total restructuring and other charges                                    |  |                           | 3,946 |                  |   | 1,361 |  
|                                                                         |  |                           |       |                  |   |       |  
|Total restructuring and related charges                                  |  | $                         | 4,139 |                  | $ | 1,361 |  
|                                                                         |  |                           |       |                  |   |       |  



Other income and
expense, net.    Other income and expense, net, decreased to $7.0 million for the fiscal year ended December 31, 2005 from $7.2 million for the fiscal year ended December 31, 2004. For the year ended
December 31, 2005, other income and expense, net, was primarily attributable to interest income on investments of $1.0 million and other miscellaneous income totaling $6.1 million. For the year ended December 31, 2004, other income and
expense, net was primarily attributable to interest income on investments of $5.4 million and other miscellaneous income totaling $1.8 million.



Interest expense, net of capitalized amounts.    Interest expense, net of capitalized amounts, decreased to $18.4 million for
the year ended December 31, 2005 as compared to $31.3 million for the year ended December 31, 2004. Interest expense in 2005 and 2004 was primarily attributable to approximately $22.4 million and $29.8 million in interest on the
convertible notes, of which $14.7 million and $24.8 million relate to amortization of original issue discount and related debt issuance costs. Approximately $7.0 million and $4.1 million of interest expense was capitalized into construction in
process related to interest incurred during construction of our network expansion in 2005 and 2004, respectively.



Year ended December 31, 2004 compared to year ended December 31, 2003



Revenue.    Revenue consists of the sale of data
and Internet, broadband transport, long-distance and local voice communication services. Data and Internet sales consist of high-speed data transport utilizing technology based on IP and ATM/frame relay. Broadband transport services consist of
long-haul transmission of data, voice and Internet traffic over dedicated circuits. Long-distance voice services consist of dedicated and billed minutes of use, including the transmission of voice long distance services on behalf of wholesale and
retail customers.



With the September 1, 2004 acquisition
of Focal, we now provide local voice services. Local voice services consist of dedicated and switched inbound and outbound services. Inbound service allows for the completion of calls to our customers. Our basic outbound services allow local calls
to be completed within a metropolitan region. Local voice services also include Inter-carrier compensation, which is associated with the transmission of traffic between telecommunications carriers and includes switched access and reciprocal
compensation revenue. Reciprocal compensation is the compensation exchanged between carriers for terminating local phone calls on one anothers networks.



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Quarterly revenue by product for the year ended December 31, 2003 and 2004 is as follows (in
thousands):



|                             |  |                             |       |                             |   |          |  |         |         |       |   |           |  |          |         |           |   |         |  |       |         |  |   |         |  |   |         |  |   |        
|---------------------------- |  | --------------------------- | ----- | --------------------------- | - | -------- |  | ------- | ------- | ----- | - | --------- |  | -------- | ------- | --------- | - | ------- |  | ----- | ------- |  | - | ------- |  | - | ------- |  | - | -------
|                             |  | Year endedDecember 31, 2003 |       | Year endedDecember 31, 2004
|                             |  | March 31,                   |       | June 30,                    |   | Sept 30, |  | Dec 31, |         | Total |   | March 31, |  | June 30, |         | Sept 30,* |   | Dec 31, |  | Total
|Data and internet services   |  | $                           |      |                             | $ | 6,090    |  | $       | 34,053  |       | $ | 34,037    |  | $        | 74,180  |           | $ | 34,300  |  | $     | 35,964  |  | $ | 38,150  |  | $ | 41,731  |  | $ | 150,145
|Broadband transport          |  |                             |      |                             |   | 10,586   |  |         | 56,272  |       |   | 57,136    |  |          | 123,994 |           |   | 57,969  |  |       | 59,323  |  |   | 62,081  |  |   | 65,289  |  |   | 244,662
|Long-distance voice services |  |                             |      |                             |   | 10,021   |  |         | 52,799  |       |   | 49,181    |  |          | 112,001 |           |   | 49,410  |  |       | 46,118  |  |   | 45,427  |  |   | 56,213  |  |   | 197,168
|Local voice services         |  |                             |      |                             |   |         |  |         |        |       |   |          |  |          |        |           |   |        |  |       |        |  |   | 17,407  |  |   | 48,994  |  |   | 66,401 
|Equipment Sales              |  |                             | 1,517 |                             |   | 320      |  |         | 114     |       |   | 2,188     |  |          | 4,139   |           |   | 5,108   |  |       | 725     |  |   | 381     |  |   | 7,690   |  |   | 13,904 
|                             |  |                             |       |                             |   |          |  |         |         |       |   |           |  |          |         |           |   |         |  |       |         |  |   |         |  |   |         |  |   |        
|Total Revenue                |  | $                           | 1,517 |                             | $ | 27,017   |  | $       | 143,238 |       | $ | 142,542   |  | $        | 314,314 |           | $ | 146,787 |  | $     | 142,130 |  | $ | 163,446 |  | $ | 219,917 |  | $ | 672,280
|                             |  |                             |       |                             |   |          |  |         |         |       |   |           |  |          |         |           |   |         |  |       |         |  |   |         |  |   |         |  |   |        

---

|* |  | Includes revenue subsequent to the date of the Broadwing Communication Services, Inc. and Focal acquisitions of June 13, 2003 and September 1, 2004, respectively.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenue increased to $672.3 million for the year
ended December 31, 2004 from $314.3 million for the year ended December 31, 2003, primarily due to the inclusion of a full twelve months results for the Broadwing acquisition in the current year as compared to six months for the year
ended December 31, 2003. In addition, the 2004 results include revenue from Focal since September 1, 2004 of approximately $81.5 million, comprised of $66.4 million associated with local voice services, $3.7 million of data and Internet
revenue, $10.9 million of long-distance voice services and $0.6 million of broadband transport. Local voice services include reciprocal compensation of $9.4 million and carrier access services of $8.9 million. Equipment revenue increased to $13.9
million for the fiscal year ended December 31, 2004 from $4.1 million for the fiscal year ended December 31, 2003. The increase in revenue reflects significant increases in sales predominately to the U.S. Government.



Our voice services revenue were substantially impacted as a result of intense
price competition. Overall, total voice revenues increased to $263.6 million for the year ended December 31, 2004 from $112.0 million for the year ended December 31, 2003. Excluding the effects of the timing of the Broadwing Communication
Services, Inc. and Focal acquisitions, our long-distance voice services revenue increased primarily through increases in wholesale voice volumes associated with new contract wins, offset in part by a decrease in retail voice volumes as well as a
decrease in overall average rates per minute. Our long-distance wholesale voice revenue can be subject to fluctuations dependent on the volume of traffic our carrier customers choose to place on our network based on available pricing within the
wholesale market.



Excluding the effects of the Broadwing
Communication Services, Inc. and Focal acquisitions, our data and internet and broadband revenues increased throughout 2004 principally through new contract wins.



Cost of Revenue.    Cost of revenue primarily reflects access charges paid to local exchange
carriers and other providers and transmission lease payments to other carriers. Cost of revenue increased to $455.4 million for the year ended December 31, 2004 from $265.0 million for the year ended December 31, 2003, primarily due to the
inclusion of a full twelve months results for the communications services division in 2004 as compared to six months for the year ended December 31, 2003, as well as cost of service associated with Focal operations which have been
included in the results of operations since September 1, 2004.



As a percentage of revenue, cost of revenue decreased to 68% from 74% excluding restructuring and other charges. During 2004, we achieved significant savings in communication services cost of revenue within our voice and data products. The
decrease was primarily due to new vendor agreements and network grooming and hubbing that have allowed us to substantially reduce our access and termination costs. In total, our domestic average voice termination cost per minute decreased 15% from
2003, while average cost per access circuit decreased 9% (without allocation of hubbing costs).



In the fourth quarter of 2004, we entered into a new agreement with AT&T and its affiliated companies. Under the terms of the agreement, we agreed to
increase our annual minimum contractual commitment to approximately $63.0 million per year over three years in return for the settlement of certain outstanding disputes



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totaling approximately $17.6 million and other invoice credits totaling approximately $10.8, million which predominately will be recognized ratably over the
contract life.



Equipment cost of revenue decreased to $2.6
million for the fiscal year ended December 31, 2004 from $33.0 million for the fiscal year ended December 31, 2003. Equipment cost of revenue consists of component costs, direct compensation costs, warranty and other contractual
obligations, inventory obsolescence costs and manufacturing overhead including depreciation. Equipment cost of revenue for the year ended December 31, 2004 and 2003 included charges of approximately $0.2 million and $31.2 million, respectively,
associated with excess inventory impairment charges. Excluding these charges, as a percentage of communications equipment revenue, cost of communications equipment decreased to 19% from 44%. This decrease primarily reflects a change in the mix of
equipment sold during the periods and higher prices required with the low volume purchase commitments associated with our current sales. In addition, the company recorded $0.9 million in communications equipment cost of revenue reductions associated
with changes in estimated warranty obligations during the fourth quarter of 2004.



Research and Development Expense.    Research and development expense consists primarily of personnel, laboratory and facilities, testing and prototype expenses related to the design of our
hardware and software products. All costs related to product development, both hardware and software, are recorded as expenses in the period in which they are incurred.



Research and development expense decreased to $18.8 million for the fiscal year ended December 31, 2004 from $59.5
million for the fiscal year ended December 31, 2003. The decrease in expense was primarily attributable to the effect of the communications equipment division cost saving initiatives, including staff reductions, facilities and equipment
consolidation and the curtailment of discretionary spending.



Sales, General and Administrative Expense.    Sales, general and administrative expense consists primarily of costs associated with personnel, travel, information systems support and facilities related to our
sales, network operations, network engineering and administrative support functions.



Sales, general and administrative expense increased to $260.6 million for the fiscal year ended December 31, 2004 from $159.7 million for the fiscal year ended December 31, 2003. The increase in expense was
primarily attributable to the inclusion of $227.1 million of sales, general and administrative expense associated with our communication services division, which includes a full twelve months results from the Broadwing acquisition and the
results of Focal since September 1, 2004. As a percentage of revenue, sales, general and administrative expense decreased to 39% from 51% reflecting the effect of restructuring efforts designed to reduce overall costs and integration efforts
associated with the Broadwing and Focal acquisitions.



Depreciation Expense.    Depreciation expense increased to $56.9 million for the fiscal year ended December 31, 2004 from $34.5 million for the fiscal year ended December 31, 2003. The increase in
depreciation is primarily due to the Focal acquisition as well as the impact of a full twelve months of depreciation for the Broadwing Communication Services, Inc. assets during 2004 as compared to six months during the year ended December 31,
2003. This increase has been offset in part by a decrease in depreciation due to certain assets reaching the end of their depreciable lives during the current year and a decrease in depreciation related to adjustments to the estimated fair value of
assets acquired in conjunction with the Broadwing Communication Services, Inc. acquisition.



Amortization Expense.Amortization expense decreased to $4.6 million for the fiscal year ended December 31, 2004 from $6.9 million for the fiscal year ended December 31, 2003.
Amortization expense for the current year primarily relates to intangible assets associated with in-place contracts and customer relationships acquired as part of the Broadwing and Focal acquisitions, which are being amortized over a period of three
to seven years. Amortization expense for the year ended December 31, 2003 primarily relates to intangible assets



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associated with intellectual property acquired as part of the acquisition of Dorsál Networks, Inc. (Dorsál), a privately held
provider of next generation transoceanic and regional undersea optical networks solutions. All of Dorsál acquired intangibles were written down through asset impairment charges during the third quarter of 2003, as well as amortization of the
Broadwing intangible assets.



Restructuring and Other
Charges.    Starting in 2001 and continuing through 2004, we developed and implemented restructuring initiatives designed to reduce operating expenses and to address reductions in communications equipment sales. We are also
continually evaluating the recoverability of our long-lived assets in light of these initiatives and the projected economic and operating environment. In addition, during the second half of 2004, we implemented certain staff reduction and
reorganization efforts within our communication services division primarily related to the integration of Focal operations. We recorded the following charges for the twelve months ended December 31, 2003 and December 31, 2004 (in
thousands):



|                                                                         |  |                  |        |                  |   |      
|------------------------------------------------------------------------ |  | ---------------- | ------ | ---------------- | - | -----
|                                                                         |  | Year Ended      
|                                                                         |  | December 31,2003 |        | December 31,2004
|Communications equipment cost of revenueinventory-write downs and other |  | $                | 31,163 |                  | $ | 193  
|                                                                         |  |                  |        |                  |   |      
|Restructuring and other charges:                                         |  |                  |        |                  |   |      
|Workforce reductions and facilities consolidation                        |  |                  | 24,943 |                  |   | 3,946
|Valuation and impairment of long-lived assets, including goodwill        |  |                  | 15,950 |                  |   |     
|Contract termination chargesCommunications Services Division            |  |                  | 18,488 |                  |   |     
|                                                                         |  |                  |        |                  |   |      
|Total restructuring and other charges                                    |  |                  | 59,381 |                  |   | 3,946
|                                                                         |  |                  |        |                  |   |      
|Other income (expense), netimpairment of strategic equity investments   |  |                  | 385    |                  |   |     
|                                                                         |  |                  |        |                  |   |      
|Total restructuring and related charges                                  |  | $                | 90,929 |                  | $ | 4,139
|                                                                         |  |                  |        |                  |   |      



Communications
equipment cost of revenueinventory-write-downs and other.    We write down inventory for estimated obsolete, excess and overvalued inventory based on estimated sales projections and market values. Charges recorded
during the twelve months ended December 31, 2004 of $0.2 million primarily reflect changes to 2003 estimates. Charges recorded during the twelve months ended December 31, 2003 of $31.2 million were primarily the result of inventory
write-downs and accruals for purchase commitments beyond inventory needs.



Workforce reductions and facilities consolidation.    During the twelve-month period ended December 31, 2004 and 2003, we continued with the implementation of our restructuring
initiatives resulting in charges of $2.9 million and $15.6 million, respectively, related to work force reductions, of which $1.6 million relates to the integration of Focal operations during the third and fourth quarter of 2004.



As part of our restructuring activities within our communications equipment
division, we have reduced operating costs through the early termination of real estate and equipment lease agreements. For the twelve months ended December 31, 2004 and 2003, we recorded approximately $1.0 million and $9.3 million,
respectively, related to facility shutdowns and related charges.



Valuation and impairment of long-lived assets.    SFAS No. 142 requires that goodwill and other intangible assets be tested for impairment at least annually, unless events or circumstances indicate that an
earlier test is necessary. During 2003, in light of projected market conditions associated with our communications equipment division, we performed an analysis as to the recoverability of our long-lived assets, using discounted projected cash flows.
As a result, we recorded a write-down of fixed assets totaling $6.7 million and a write-down of intangible assets totaling $9.3 million. No such charges were recorded during 2004.



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Contract termination charges.    At the date of the acquisition of the assets
of Broadwing Communication Services, Inc., we owned a 96% interest and the ability to appoint four of the six board members in a holding company that in turn owned Broadwing Communications, LLC. Cequel contributed approximately $0.9 million for a 1%
ownership interest and the ability to appoint two of the six board members. Cincinnati Bell, previously the parent company of Broadwing Communications Services, Inc., retained a 3% non-voting equity interest. In addition, we entered into a
management services agreement with Cequel under which Cequel would manage Broadwing Communications, LLC.



On November 20, 2003, we acquired Cequels 1% percent equity stake and additional interests and terminated the management services agreement. In
aggregate, we paid $2.9 million in exchange for Cequels initial investment, as final payment for services previously rendered, the termination of the Cequel management services agreement, and in exchange for ongoing consulting services in the
future. As additional consideration, we also issued, and agreed to register with the Securities and Exchange Commission, 275,000 shares of our common stock to Cequel and granted them a warrant to purchase an additional 725,000 shares at prices
ranging from $13.70, the closing price on November 20, to $22.50 per share. As part of this agreement, we also entered into a 15-year network services agreement with Cequel whereby we would provide network services at prices ranging from
incremental cost reimbursement to current market pricing. In addition, Cequel agreed to provide certain consulting services to us over four-years and would act as a non-exclusive sales agent for our products and services, for which they would
receive sales commissions. During the fourth quarter of 2003, we recorded a charge in the amount of $18.5 million equal to the excess of the fair value of the cash, equity and services committed over the fair value of Cequels ownership
interest and services performed.



Impairment of strategic
equity investments.    In prior years, we made strategic equity investments in certain non-public startup companies totaling $17.6 million. These investments were carried at cost as we owned less than 20% of the voting equity
and did not have the ability to exercise significant influence over the companies. During 2003, we recorded charges totaling $0.4 million associated with the other than temporary impairment of these investments resulting from the impact of economic
conditions on certain of these investees. The carrying value of these investments was fully impaired at December 31, 2003.



Other income and expense, net.    Other income and expense, net decreased to $7.2 million for the fiscal year ended
December 31, 2004 from $10.3 million for the fiscal year ended December 31, 2003. For the year ended December 31, 2004, other income and expense, net was primarily attributable to interest income on investments of $5.4 million and
other miscellaneous income totaling $1.8 million. Other income and expense, net for the year ended December 31, 2003 primarily relates to interest income on investments of $5.0 million and $4.9 million from gains or the disposal of fixed
assets, the settlement of certain insurance claims and settlement of certain claims with Qwest.



Interest expense, net of capitalized amounts.    Interest expense, net of capitalized amounts increased to $31.3 million for
the year ended December 31, 2004 as compared to $0.5 million for the year ended December 31, 2003. For the year ended December 31, 2004, interest expense was primarily attributable to approximately $29.8 million in interest on the
convertible notes issued in February 2004, of which $24.8 million relates to amortization of original issue discount and related debt issuance costs. During 2004, approximately $4.1 million of interest expense was capitalized into construction in
process related to interest incurred during construction of our network expansion. Interest expense for the year ended December 31, 2003 primarily relates to capital leases.



Liquidity and Capital Resources



Overview



We have historically incurred significant net losses and have used significant amounts of our cash to fund our operating and investing activities. These
losses resulted from market declines within our equipment division as well as losses incurred within our communications division since its acquisition. Broadwing Communications Services, Inc., the previous owner of the Broadwing business, incurred
significant net losses prior to the



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acquisition. We believe that operational improvements, strategic investments and complementary acquisitions will bring the company first to cash flow
breakeven then toward profitability. We implemented this turnaround plan starting in late 2003 and continued through 2005. Through out this time, we have taken actions to eliminate our net cash burn and reduce our net loss. Progress has been made as
shown in the reductions in net loss, cash used in operating activity and cash used in investing activity. Our efforts are continuing and may include further acquisitions, network cost reduction strategies and rationalization of our sales, general
and administrative expenses. We cannot be sure, however, as to the amount and timing of the associated financial impact. We have financed our net cash outflows primarily through public and private sales of our debt and capital stock and borrowings
under credit and lease facilities. Cash flows for 2004 and 2005 were as follows (in thousands):



|                                                |  |      |          |   |      |   |         |        |  |   |          |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ------ |  | - | -------- | -
|                                                |  | 2004 |          |   | 2005 |   |         | Change | 
|Cash used in operating activities               |  | $    | (112,825 | ) |      | $ | (1,251  | )      |  | $ | 111,574  |  
|Cash provided by (used in) investing activities |  |      | (140,235 | ) |      |   | 41,906  |        |  |   | 182,141  |  
|Cash provided by (used in) finance activities   |  |      | 142,610  |   |      |   | (98,489 | )      |  |   | (241,099 | )
|                                                |  |      |          |   |      |   |         |        |  |   |          |  
|Net cash decrease in cash                       |  | $    | (110,450 | ) |      | $ | (57,834 | )      |  | $ | 52,616   |  
|                                                |  |      |          |   |      |   |         |        |  |   |          |  



Operating Activity



Net cash used in operating activities decreased $111.6
million in 2005 compared to 2004. This improvement in operating cash flows was principally due to the following:



| |  |  | Reductions in net loss.$61.0 million in improvements in net loss excluding non-cash items such as provisions for bad debt, depreciation, amortization,
equity-based expense and other non-cash charges. As discussed above, revenue growth, network cost improvement, Focal integration and the restructuring of our equipment division have been key initiatives that we focused on in 2004 and 2005 all of
which has resulted in reduced operating cash outflows.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved trade accounts receivable collection.$15.3 million in net decreases in the change in trade accounts receivable much of which is due to
improved collections associated with accounts acquired in the Focal acquisition.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reductions in the payment of trade accounts payable and accrued expenses.$29.4 million in an overall decrease in cash used for the payment of accounts
payable and accrued expenses. During 2004, significant payments were required for the settlement of Focal acquired liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Investing Activity



Net cash provided by/(used in) investing activities for the years ended December 31, 2005 and December 31, 2004 was $41.9 million and (140.2)
million, respectively. This change in investing activity was due to the following:



| |  |  | The purchase and sale of invested cash surpluses.During 2004, on a net basis we invested $87.7 million of our cash surpluses in short and long-term
securities to maximize interest income. During 2005, many of these investments matured or were sold to fund working capital and capital expenditure needs for net cash inflows of $107.4 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reductions in the purchases of property and equipment.    During 2005 and 2004, our purchases of property and equipment totaled $62.9 million and $74.7
million, respectively, and were primarily associated with the integration of the Focal network, network improvements and new products and services. Included in the 2005 purchases was approximately $7.6 million of a Ciena deposit which was used for
equipment purchases. At December 31, 2005, the remaining Ciena equipment purchase deposit was $2.1 million. In 2006 and 2007, we are commited to purchase an additional $11.0 million of equipment and services from Ciena in each year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash acquired from the acquisition of Focal and Broadwing.2004 investments were offset, in part, by $10.5 million in cash received in the acquisition
of Focal and $10.0 million of purchase price reductions associated with the Broadwing.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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On September 1, 2004, the Company invested approximately $97.7 million, including acquisition costs,
and assumed $98.1 million in debt to acquire 100% of the voting equity interest of Focal. The Merger Agreement, dated March 3, 2004, provided for a purchase price of $210.0 million, which was reduced by $76.1 million in assumed debt
outstanding, $19.5 million in assumed capitalized lease obligations, and a reduction of $14.2 million due to the stock price trading below the low end of the range at the time of acquisition.



Financing Activity



Net cash provided (used in) by financing activities was $142.6 million and
($98.5) million for the years ended December 31, 2004 and 2005, respectively. Financing activity in 2004 and 2005 principally related to the issuance and subsequent repayment of our unsecured convertible note. On February 19, 2004, we
issued $225.0 million unsecured convertible notes in a private placement to institutional investors for net proceeds of $217.8 million. Borrowings under the unsecured convertible notes accrued interest at a stated rate of 5% payable quarterly, while
principal was scheduled for repayment in seven equal quarterly installments commencing on August 19, 2004. Provided certain conditions were met and at the election of the Company, principal and interest were payable in either cash or common
stock at a conversion price of 95% of the average stock price for the 20 days preceding conversion. The final principal and interest installment of $32.5 million was paid on February 20, 2006 half in cash and half in common stock.



During 2004 and 2005, we paid principal and interest due under the
convertible note as follows (in thousands):



|              |  |         |   |  |          |  
|------------- |  | ------- | - |  | -------- | -
|              |  | 2004    |   |  | 2005     |  
|Payment       |  |         |   |  |          |  
|Cash          |  | (4,670  | ) |  | (100,022 | )
|Common stock* |  | (67,686 | ) |  | (34,168  | )
|              |  |         |   |  |          |  
|Total         |  | (72,356 | ) |  | (134,190 | )
|              |  |         |   |  |          |  

---

|* |  | Shares issued under the plan total 9.6 million and 6.3 million in 2004 and 2005, respectively.
|- |  | ----------------------------------------------------------------------------------------------



In October 2005, we entered into a three-year revolving credit facility that provides borrowing capacity up to $75
million subject to certain limitations. The facility is secured by a pledge of accounts receivable of Broadwing. Borrowings will bear an interest rate, at Broadwings option, at either LIBOR plus 3.75% or an alternate base rate, defined as the
higher of the prime or federal funds rate, plus 2.5%. If cash, investments, and undrawn availability under the facility fall below $100.0 million while borrowings are outstanding, Broadwing must deposit $25.0 million into a designated restricted
account. Borrowing under the facility will be limited by an amount of eligible accounts receivable available as collateral, and the amount of our Liquidity, as defined in the agreement. As the available borrowing under the facility is
limited, the amount available at any point in time may be substantially less than $75.0 million and the facility could be unavailable in certain circumstances. The facility is subject to an unused line fee of one-half of one percent (0.05%), an
annual fee of $0.4 million and closing costs of $1.5 million which will be amortized over the life of the facility. To date, we have not drawn down on the facility.



We believe that our current cash and cash equivalents, short-term investments and expected future cash generated from
operations will satisfy our expected working capital, capital expenditure and investment requirements through the next twelve months. We plan however to raise additional capital through a debt or equity facility for purposes of funding our
operations and capital expenditures. To the extent that we raise additional capital through the sale of equity securities, the issuance of such securities could result in dilution to our existing shareholders. If we raise additional funds through
the issuance of debt securities, the terms of such debt could impose additional restrictions on our operations. Additional capital, if required, may not be available on acceptable terms, if at all. If we are unable to obtain additional financing, we
may be required to reduce the scope of our planned product development and sales and marketing efforts, which could impact our business, financial condition and earnings.



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As of December 31, 2005, long-term restricted cash totaled $14.6 million associated with outstanding
irrevocable letters of credit relating to lease obligations for various business arrangements. These letters of credit are collateralized by funds in our operating account. Various portions of the letters of credit expire at the end of each of the
respective lease agreements.



Contractual Obligations and Commercial
Commitments



The following table provides information
about our contractual obligations and commercial commitments as of December 31, 2005. Additional detail about these items is included in the notes to the consolidated financial statements:



|                                 |  |       |         |                 |         |           |         |           |         |                  |        
|-------------------------------- |  | ----- | ------- | --------------- | ------- | --------- | ------- | --------- | ------- | ---------------- | -------
|Commitments Contingencies        |  | Total |         | Less than1 year |         | 1-3 Years |         | 3-5 Years |         | More than5 Years
|Long-term debt                   |  | $     | 32,369  |                 | 31,659  |           | 710     |           |        |                  |       
|Capital lease obligations        |  |       | 39,828  |                 | 3,459   |           | 6,470   |           | 5,286   |                  | 24,613 
|Operating leases                 |  |       | 215,023 |                 | 34,177  |           | 61,568  |           | 42,459  |                  | 76,819 
|Contractual purchase commitments |  |       | 587,086 |                 | 213,744 |           | 292,660 |           | 80,169  |                  | 513    
|                                 |  |       |         |                 |         |           |         |           |         |                  |        
|Total contractual obligations    |  | $     | 874,306 |                 | 283,039 |           | 361,408 |           | 127,914 |                  | 101,945
|                                 |  |       |         |                 |         |           |         |           |         |                  |        
|                                 |  |       |         |                 |        
|Other Commercial Commitments     |  | Total |         | Less than1 year |         | 1-3 Years |         | 3-5 Years |         | More than5 Years
|Letters of credit                |  | $     | 14,071  |                 | 9,567   |           | 1,024   |           | 1,549   |                  | 1,931  



Contractual purchase
commitments consist primarily of leased circuits from third parties.



Item 7A.    Qualitative and Quantitative Disclosures About Market Risk.



The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements.



Our exposure to
market risk for changes in interest rates relates to our cash equivalents and investments. Our investments are available-for-sale. We do not use derivative financial instruments in our investment portfolio. We attempt to ensure the safety and
preservation of our invested funds by limiting default and market risks. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to
the extent possible within these guidelines. We invest excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality
issuers. We mitigate default risk by investing in only investment-grade securities. The portfolio includes marketable securities with active secondary or resale markets to ensure portfolio liquidity. All investments are carried at market value,
which approximates cost. If market interest rates were to increase by one percent from December 31, 2005, the fair value of our portfolio would decline less than approximately $1.0 million.



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##### Table of Contents

Item 8.    Financial Statements and Supplementary Data



Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Broadwing Corporation:



We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting in Item 9A: Controls and Procedures,that Broadwing Corporation (Broadwing or the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.



We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the consolidated
financial statements.



Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Broadwing maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal ControlIntegrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by COSO.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Broadwing Corporation and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 4, 2006
expressed an unqualified opinion on those consolidated financial statements.



/s/: KPMG LLP



Austin, Texas

March 4, 2006



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Broadwing Corporation:



We have audited the accompanying consolidated balance sheets of Broadwing Corporation and subsidiaries (Broadwing) as of December 31, 2005 and 2004,
and the related consolidated statements of operations, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Broadwing Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of
Broadwings internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated March 4, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



/s/: KPMG LLP



Austin, Texas

March 4, 2006



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BROADWING CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                                                                      |  | December 31,2004 |            |   | December 31,2005 |  
|ASSETS                                                                                                                                                                                                                                |  |                  |            |   |                  |   |            |  
|Current assets:                                                                                                                                                                                                                       |  |                  |            |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                             |  | $                | 124,540    |   |                  | $ | 66,706     |  
|Short-term investments                                                                                                                                                                                                                |  |                  | 100,139    |   |                  |   | 42,648     |  
|Trade accounts receivable, net of allowances of $50,136 and $36,977 at December 31, 2004 and 2005, respectively                                                                                                                       |  |                  | 94,731     |   |                  |   | 75,579     |  
|Prepaids and other current assets                                                                                                                                                                                                     |  |                  | 24,027     |   |                  |   | 18,565     |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total current assets                                                                                                                                                                                                                  |  |                  | 343,437    |   |                  |   | 203,498    |  
|Restricted cash, non-current                                                                                                                                                                                                          |  |                  | 13,911     |   |                  |   | 14,606     |  
|Long-term investments                                                                                                                                                                                                                 |  |                  | 49,676     |   |                  |   |           |  
|Property and equipment, net                                                                                                                                                                                                           |  |                  | 286,038    |   |                  |   | 260,681    |  
|Goodwill                                                                                                                                                                                                                              |  |                  | 48,696     |   |                  |   | 58,354     |  
|Intangible assets, net                                                                                                                                                                                                                |  |                  | 30,152     |   |                  |   | 24,820     |  
|Other non-current assets, net                                                                                                                                                                                                         |  |                  | 9,080      |   |                  |   | 11,545     |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total assets                                                                                                                                                                                                                          |  | $                | 780,990    |   |                  | $ | 573,504    |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                  |  |                  |            |   |                  |   |            |  
|Current liabilities:                                                                                                                                                                                                                  |  |                  |            |   |                  |   |            |  
|Notes payable, net of discounts, and capital lease obligations, current portion                                                                                                                                                       |  | $                | 117,324    |   |                  | $ | 33,072     |  
|Accounts payable                                                                                                                                                                                                                      |  |                  | 12,452     |   |                  |   | 32,221     |  
|Accrued expenses and other liabilities                                                                                                                                                                                                |  |                  | 45,882     |   |                  |   | 42,113     |  
|Accrued payroll                                                                                                                                                                                                                       |  |                  | 8,057      |   |                  |   | 12,231     |  
|Accrued communication service costs                                                                                                                                                                                                   |  |                  | 41,089     |   |                  |   | 25,441     |  
|Deferred revenue, current portion                                                                                                                                                                                                     |  |                  | 7,072      |   |                  |   | 6,941      |  
|Accrued restructuring and other charges                                                                                                                                                                                               |  |                  | 8,620      |   |                  |   | 3,965      |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total current liabilities                                                                                                                                                                                                             |  |                  | 240,496    |   |                  |   | 155,984    |  
|Notes payable, net of discounts, and capital lease obligations, net of current portion                                                                                                                                                |  |                  | 52,218     |   |                  |   | 20,819     |  
|Deferred revenue, net of current portion                                                                                                                                                                                              |  |                  | 18,288     |   |                  |   | 17,939     |  
|Other long-term liabilities                                                                                                                                                                                                           |  |                  | 14,949     |   |                  |   | 13,750     |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total liabilities                                                                                                                                                                                                                     |  |                  | 325,951    |   |                  |   | 208,492    |  
|Commitments and contingencies                                                                                                                                                                                                         |  |                  |            |   |                  |   |            |  
|Stockholders equity:                                                                                                                                                                                                                 |  |                  |            |   |                  |   |            |  
|Common stock$0.01 par value; 1,900,000,000 shares authorized; 68,424,060 shares issued and 67,195,880 shares outstanding as of
December 31, 2004; 75,266,437 shares issued and 74,038,257 shares outstanding as of December 31, 2005 |  |                  | 679        |   |                  |   | 747        |  
|Treasury Stock (1,228,180 shares at December 31, 2004 and December 31, 2005, at cost)                                                                                                                                                 |  |                  | (9,512     | ) |                  |   | (9,512     | )
|Additional paid-in capital                                                                                                                                                                                                            |  |                  | 3,137,928  |   |                  |   | 3,180,764  |  
|Accumulated other comprehensive loss:                                                                                                                                                                                                 |  |                  |            |   |                  |   |            |  
|Unrealized investment losses                                                                                                                                                                                                          |  |                  | (717       | ) |                  |   | (220       | )
|Accumulated deficit                                                                                                                                                                                                                   |  |                  | (2,673,339 | ) |                  |   | (2,806,767 | )
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total stockholders equity                                                                                                                                                                                                            |  |                  | 455,039    |   |                  |   | 365,012    |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                            |  | $                | 780,990    |   |                  | $ | 573,504    |  
|                                                                                                                                                                                                                                      |  |                  |            |   |                  |   |            |  



See accompanying notes
to consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | ---------------- |  | - | --------- | -
|                                                                                                                                                                   |  | Year Ended       |         
|                                                                                                                                                                   |  | December 31,2003 |          |   | December 31,2004 |   |          | December 31,2005 | 
|Revenue                                                                                                                                                            |  | $                | 314,314  |   |                  | $ | 672,280  |                  |  | $ | 879,106   |  
|                                                                                                                                                                   |  |                  |         
|Total cost of revenue:                                                                                                                                             |  |                  | 265,019  |   |                  |   | 455,429  |                  |  |   | 580,441   |  
|Research and development (including equity based expense of $12,659, $3,776, and $645 for the year ended December 31, 2003, 2004, and 2005
respectively)           |  |                  | 59,461   |   |                  |   | 18,771   |                  |  |   | 6,817     |  
|Sales, general and administrative (including equity based expense of $7,938, $4,858, and $3,844 for the year ended December 31 2003, 2004, and
2005, respectively) |  |                  | 159,673  |   |                  |   | 260,640  |                  |  |   | 308,882   |  
|Litigation settlement                                                                                                                                              |  |                  |         |   |                  |   |         |                  |  |   | 2,000     |  
|Depreciation                                                                                                                                                       |  |                  | 34,529   |   |                  |   | 56,928   |                  |  |   | 96,075    |  
|Amortization                                                                                                                                                       |  |                  | 6,913    |   |                  |   | 4,632    |                  |  |   | 5,631     |  
|Restructuring and other charges                                                                                                                                    |  |                  | 59,381   |   |                  |   | 3,946    |                  |  |   | 1,361     |  
|                                                                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |           |  
|Total operating expenses                                                                                                                                           |  |                  | 584,976  |   |                  |   | 800,346  |                  |  |   | 1,001,207 |  
|Operating loss                                                                                                                                                     |  |                  | (270,662 | ) |                  |   | (128,066 | )                |  |   | (122,101  | )
|Other income, net                                                                                                                                                  |  |                  | 10,308   |   |                  |   | 7,160    |                  |  |   | 7,032     |  
|Interest expense, net of capitalized amounts                                                                                                                       |  |                  | (504     | ) |                  |   | (31,275  | )                |  |   | (18,359   | )
|                                                                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |           |  
|Net loss before minority interest                                                                                                                                  |  |                  | (260,858 | ) |                  |   | (152,181 | )                |  |   | (133,428  | )
|Minority interest                                                                                                                                                  |  |                  | 387      |   |                  |   |         |                  |  |   |          |  
|                                                                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |           |  
|Net loss                                                                                                                                                           |  | $                | (260,471 | ) |                  | $ | (152,181 | )                |  | $ | (133,428  | )
|                                                                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |           |  
|Basic and diluted net loss per common share                                                                                                                        |  | $                | (6.05    | ) |                  | $ | (2.86    | )                |  | $ | (1.83     | )
|Basic and diluted weighted average common shares                                                                                                                   |  |                  | 43,060   |   |                  |   | 53,217   |                  |  |   | 72,894    |  



See accompanying notes
to consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                                      |  |              |  |                           |     |                           |   |           |               |   |     |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------------ |  | ------------------------- | --- | ------------------------- | - | --------- | ------------- | - | --- | ------------------------------------------ |  | - | ------------------ | - |  | ------------------------ | ------ | - |  | - | ---------- | - |  | - | -------- | -
|                                                                      |  | Common Stock |  | AdditionalPaid-in-Capital |     | StockholderNoteReceivable |   |           | TreasuryStock |   |     | AccumulatedOtherComprehensiveIncome (Loss) |  |   | AccumulatedDeficit |   |  | TotalStockholdersEquity |       
|                                                                      |  | Shares       |  | Amount                    |     |                           |   |           |               |  
|Balance at December 28, 2002                                          |  | 41,311,360   |  | $                         | 414 |                           | $ | 2,812,979 |               | $ | (32 | )                                          |  | $ | (4,405             | ) |  | $                        | (8,191 | ) |  | $ | (2,260,687 | ) |  | $ | 540,078  |  
|Exercise of stock options and employee stock purchase plan            |  | 1,013,435    |  |                           | 10  |                           |   | 4,612     |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 4,622    |  
|Private Placement                                                     |  | 6,727,828    |  |                           | 66  |                           |   | 73,728    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 73,794   |  
|Acquisition of minority interest in Broadwing Communications, LLC     |  | 275,000      |  |                           | 3   |                           |   | 11,914    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 11,917   |  
|Collection of shareholder note                                        |  |             |  |                           |    |                           |   |          |               |   | 32  |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 32       |  
|Equity-based expense                                                  |  |             |  |                           |    |                           |   | 24,604    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 24,604   |  
|Foreign exchange adjustment                                           |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          | 8,215  |   |  |   |           |   |  |   | 8,215    |  
|Unrealized gains on investments                                       |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          | (15    | ) |  |   |           |   |  |   | (15      | )
|Treasury stock purchase, 636,750 shares at cost                       |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   | (5,107             | ) |  |                          |       |   |  |   |           |   |  |   | (5,107   | )
|Net loss                                                              |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   | (260,471   | ) |  |   | (260,471 | )
|                                                                      |  |              |  |                           |     |                           |   |           |               |   |     |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balance at December 31, 2003                                          |  | 49,327,623   |  |                           | 493 |                           |   | 2,927,837 |               |   |    |                                            |  |   | (9,512             | ) |  |                          | 9      |   |  |   | (2,521,158 | ) |  |   | 397,669  |  
|Exercise of stock options, warrants, and employee stock purchase plan |  | 804,680      |  |                           | 8   |                           |   | 6,031     |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 6,039    |  
|Warrants issued with convertible notes                                |  |             |  |                           |    |                           |   | 33,222    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 33,222   |  
|Repayment of convertible notes and accrued interest with common stock |  | 9,649,928    |  |                           | 92  |                           |   | 67,595    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 67,687   |  
|Equity-based expense                                                  |  |             |  |                           |    |                           |   | 9,261     |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 9,261    |  
|Acquisition of Focal                                                  |  | 8,641,829    |  |                           | 86  |                           |   | 93,982    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 94,068   |  
|Unrealized loss on investments                                        |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          | (726   | ) |  |   |           |   |  |   | (726     | )
|Net loss                                                              |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   | (152,181   | ) |  |   | (152,181 | )
|                                                                      |  |              |  |                           |     |                           |   |           |               |   |     |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balance at December 31, 2004                                          |  | 68,424,060   |  |                           | 679 |                           |   | 3,137,928 |               |   |    |                                            |  |   | (9,512             | ) |  |                          | (717   | ) |  |   | (2,673,339 | ) |  |   | 455,039  |  
|Exercise of stock options, warrants, and employee stock purchase plan |  | 542,737      |  |                           | 5   |                           |   | 1,557     |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 1,562    |  
|Repayment of convertible notes and accrued interest with common stock |  | 6,299,640    |  |                           | 63  |                           |   | 36,790    |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 36,853   |  
|Unrealized loss on investments                                        |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          | 497    |   |  |   |           |   |  |   | 497      |  
|Equity-based expense                                                  |  |             |  |                           |    |                           |   | 4,489     |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 4,489    |  
|Net loss                                                              |  |             |  |                           |    |                           |   |          |               |   |    |                                            |  |   |                   |   |  |                          |       |   |  |   | (133,428   | ) |  |   | (133,428 | )
|                                                                      |  |              |  |                           |     |                           |   |           |               |   |     |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balance at December 31, 2005                                          |  | 75,266,437   |  | $                         | 747 |                           | $ | 3,180,764 |               | $ |    |                                            |  | $ | (9,512             | ) |  | $                        | (220   | ) |  | $ | (2,806,767 | ) |  | $ | 365,012  |  
|                                                                      |  |              |  |                           |     |                           |   |           |               |   |     |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  



See accompanying notes
to consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                                                                |  | Year Ended       |         
|                                                                                                |  | December 31,2003 |          |   | December 31,2004 |   |          | December 31,2005 | 
|Cash flows from operating activities:                                                           |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net loss                                                                                        |  | $                | (260,471 | ) |                  | $ | (152,181 | )                |  | $ | (133,428 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                     |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Depreciation and amortization                                                                   |  |                  | 41,442   |   |                  |   | 60,291   |                  |  |   | 101,707  |  
|Equity-based expense                                                                            |  |                  | 20,597   |   |                  |   | 8,634    |                  |  |   | 4,489    |  
|Provision for bad debt and sales allowances                                                     |  |                  | 15,412   |   |                  |   | 22,848   |                  |  |   | 37,794   |  
|Deferred financing, original issue discount amortization, and accretion of interest             |  |                  |         |   |                  |   | 21,477   |                  |  |   | 10,827   |  
|Amortization of deferred revenue and other                                                      |  |                  |         |   |                  |   | (3,016   | )                |  |   | (1,520   | )
|Non-cash restructuring, goodwill and asset impairments, inventory write-downs and other charges |  |                  | 71,455   |   |                  |   |         |                  |  |   | (797     | )
|Minority interest                                                                               |  |                  | (387     | ) |                  |   |         |                  |  |   |         |  
|Changes in operating assets and liabilities, excluding acquired amounts:                        |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Accounts receivable                                                                             |  |                  | 8,467    |   |                  |   | (30,872  | )                |  |   | (15,617  | )
|Inventories                                                                                     |  |                  | (21,921  | ) |                  |   | (228     | )                |  |   | 1,179    |  
|Other current and non-current assets                                                            |  |                  | 8,789    |   |                  |   | (245     | )                |  |   | 4,199    |  
|Accounts payable                                                                                |  |                  | (40,182  | ) |                  |   | (32,376  | )                |  |   | 19,657   |  
|Other accrued expenses and deferred revenue                                                     |  |                  | (26,595  | ) |                  |   | (7,157   | )                |  |   | (29,741  | )
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash used in operating activities                                                           |  |                  | (183,394 | ) |                  |   | (112,825 | )                |  |   | (1,251   | )
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from investing activities:                                                           |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Purchase of property and equipment                                                              |  |                  | (12,243  | ) |                  |   | (74,724  | )                |  |   | (55,255  | )
|Ciena equipment deposit                                                                         |  |                  |         |   |                  |   |         |                  |  |   | (11,000  | )
|Proceeds from the sale of property and equipment                                                |  |                  |         |   |                  |   | 1,720    |                  |  |   | 788      |  
|Purchase of investments                                                                         |  |                  | (86,772  | ) |                  |   | (216,519 | )                |  |   | (512,479 | )
|Sale of investments                                                                             |  |                  | 95,543   |   |                  |   | 128,778  |                  |  |   | 619,852  |  
|Decrease in deposits and other long-term assets                                                 |  |                  | 2,850    |   |                  |   |         |                  |  |   |         |  
|Cash acquired in business combinations, net of acquisition costs                                |  |                  |         |   |                  |   | 10,510   |                  |  |   |         |  
|Broadwing Communication Services, Inc. acquisition                                              |  |                  | (81,097  | ) |                  |   | 10,000   |                  |  |   |         |  
|Purchase of minority interest in Broadwing Communications, LLC                                  |  |                  | (1,789   | ) |                  |   |         |                  |  |   |         |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash provided by (used in) investing activities                                             |  |                  | (83,508  | ) |                  |   | (140,235 | )                |  |   | 41,906   |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from financing activities:                                                           |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Increase in restricted cash and deferred financing costs                                        |  |                  | (4,704   | ) |                  |   | (4,269   | )                |  |   | (2,185   | )
|Proceeds from private placement of common stock                                                 |  |                  | 73,794   |   |                  |   |         |                  |  |   |         |  
|Proceeds from stock options and warrants exercised                                              |  |                  | 4,622    |   |                  |   | 6,016    |                  |  |   | 1,529    |  
|Proceeds from repayment of shareholder note                                                     |  |                  | 32       |   |                  |   |         |                  |  |   |         |  
|Proceeds from the issuance of convertible notes and associated warrants                         |  |                  |         |   |                  |   | 217,750  |                  |  |   |         |  
|Repayment of notes payable and capital lease obligations                                        |  |                  | (1,055   | ) |                  |   | (76,887  | )                |  |   | (97,833  | )
|Purchase of treasury stock                                                                      |  |                  | (5,107   | ) |                  |   |         |                  |  |   |         |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash provided by (used in) financing activities                                             |  |                  | 67,582   |   |                  |   | 142,610  |                  |  |   | (98,489  | )
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash effect of foreign exchange adjustment                                                      |  |                  | 477      |   |                  |   |         |                  |  |   |         |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net decrease in cash and cash equivalents                                                       |  |                  | (198,843 | ) |                  |   | (110,450 | )                |  |   | (57,834  | )
|Cash and cash equivalentsbeginning of period                                                   |  |                  | 433,833  |   |                  |   | 234,990  |                  |  |   | 124,540  |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash and cash equivalentsend of period                                                         |  | $                | 234,990  |   |                  | $ | 124,540  |                  |  | $ | 66,706   |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Supplemental disclosure of cash flow information:                                               |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Interest paid                                                                                   |  | $                | 410      |   |                  | $ | 3,241    |                  |  | $ | 5,890    |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Supplemental disclosure of noncash activities:                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Repayment of convertible notes with common stock                                                |  | $                |         |   |                  | $ | 67,687   |                  |  | $ | 32,080   |  
|Assets acquired through capital lease                                                           |  |                  |         |   |                  |   | 679      |                  |  |   | 2,266    |  
|Deposit with Ciena converted to equipment                                                       |  |                  |         |   |                  |   |         |                  |  |   | 7,613    |  
|Purchase business combination consideration paid with common stock                              |  |                  |         |   |                  |   | 94,068   |                  |  |   |         |  
|Inventory installed as fixed assets                                                             |  | $                | 13,685   |   |                  | $ | 1,000    |                  |  | $ |         |  
|                                                                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  

See accompanying notes to consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|(1) |  | Summary of Significant Accounting Policies
|--- |  | ------------------------------------------



| | (a) |  | Nature of Business and Basis of Presentation
| | --- |  | --------------------------------------------



Broadwing Corporation and subsidiaries (Broadwing or the Company), formerly known as Corvis Corporation, operates within the
communications industry. The consolidated financial statements include Broadwing Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.



The Company is based in Austin, Texas, and it is a provider of data and
Internet, broadband transport, and voice communications services throughout the United States. On June 13, 2003 the Company acquired most of the assets and certain of the liabilities of Broadwing Communication Services, Inc., which had been one
of the Companys largest communications equipment customers. Excluding post-acquisition intercompany sales, Broadwing Communications Services, Inc. represented 43% and 12% of the Companys total annual revenue in 2002 and 2003,
respectively.



In April 2005, we began exploring strategic
alternatives associated with our OCS product in an effort to more closely focus our resources on our communications services operations. During the second quarter of 2005, we committed to a plan to curtail our OCS production and development. In
addition, our remaining equipment division operations will focus solely on supporting our communications services division.



On September 1, 2004, the Company consummated its acquisition of Focal Communications Corporation (Focal). Focal was a Chicago-based
competitive local exchange carrier that provides voice and data solutions to enterprises, carriers and resellers. The results of Broadwing Communication Services, Inc. and Focal have been included in the consolidated financial statements from the
dates of their respective acquisitions.



Effective
June 30, 2003, the Company changed its accounting reporting cycle from a 52- or 53-week fiscal year-end, ending on the Saturday closest to December 31, to a calendar quarter and year-end.



| | (b) |  | Cash and Cash Equivalents
| | --- |  | -------------------------



The Company considers short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. Any such securities
are stated at fair market value and unrealized holding gains and losses are recognized as a component of other comprehensive income (loss).



| | (c) |  | Restricted Cash
| | --- |  | ---------------



Restricted cash primarily relates to escrow accounts established in conjunction with outstanding irrevocable letters of credit associated with lease
obligations for various business arrangements. As of December 31, 2005 and 2004, restricted cash totaled $14.6 million and $13.9 million, respectively.



| | (d) |  | Short-term and Long-term Investment Securities
| | --- |  | ----------------------------------------------



Short-term and long-term investment securities at December 31, 2005 and 2004 consist of U.S. corporate obligations with an original maturity greater
than three months and all auction rates securities. The Company classifies these securities as available-for-sale securities. Available-for-sale securities are recorded at fair market value and unrealized holding gains and losses are excluded from
operations and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A decline in the market value of any available-for-sale security below cost that is deemed to be
other than temporary results in a reduction in the carrying amount to fair market value. The impairment is charged to operations and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of
the related available-for-sale security as an adjustment to yield the effective interest method. Dividend and interest income are recognized when earned.



| | (e) |  | Revenue and Cost of Revenue
| | --- |  | ---------------------------



Revenue and related reserves from services are recognized when the services are provided. Payments received in advance are deferred until the service is
provided. Up-front fees received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship.



The Company records specific reserves to reduce revenue and related trade
accounts receivable when significant uncertainties exist related to the collectibility of service billings. The Company also records reserves associated with routine service credits granted to customers.



At December 31, 2005, a significant portion of these reserves primarily
relate to reciprocal compensation and carrier access billings (CABS), associated with disputed contracts acquired in the Focal purchase. These disputed amounts relate to service periods both before and after the acquisition date. Certain
carriers have disputed certain charges as inappropriate or outside the scope of existing tariffs or contractual agreements. Trade accounts receivable from reciprocal compensation and carrier access billing totaled $31.4 million with associated
credit allowances totaling $20.3 million.



Indefeasible
right-of-use (IRU) agreements represent the lease of network capacity or dark fiber and are recorded as deferred revenue at the earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash.
The buyer of IRU services typically pays cash upon execution of the contract, and the associated IRU revenue is then recognized over the life of the agreement as the services are provided, beginning on the date of customer acceptance. In the event
the buyer of an IRU terminates a contract prior to the contract expiration and releases the Company from the obligation to provide future services, the remaining unamortized deferred revenue is recognized in the period in which the contract is
terminated. Non-cash IRU revenue for the years ended, December 31, 2003, 2004 and 2005 comprised approximately 1%, 3% and 2% of revenue, respectively.



Cost of revenue primarily reflects access charges paid to local exchange carriers and other providers as well as transmission lease payments to other
carriers. Cost of revenue excludes depreciation and amortization expense. Additionally, as a result of the Focal acquisition, communications services cost of revenue now includes inter-carrier compensation paid to carriers to terminate or originate
traffic on their networks. inter-carrier compensation rates are subject to regulatory oversight. There are two primary forms of inter-carrier compensation: access charges and reciprocal compensation. The Company is subject to access charges, which
are related to the origination and termination of long distance calls, and reciprocal compensation, which is related to the termination of local calls. Inter-carrier compensation charges are based on minutes of use and vary based on customer calling
patterns.



The Company performs bill verification procedures to
ensure that there are no errors in access vendors billed invoices. The bill verification procedures include the examination of bills, the comparison of rates between



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billed rates with rates used by the Companys expense estimation systems, the comparison of circuits billed to a database of active circuits, and
evaluating the trend of invoiced amounts by vendors, including the types of charges being assessed. If the Company concludes that it has been billed inaccurately, it will dispute the charge with the vendor and begin resolution procedures. The
Company records a charge to cost of revenue and a corresponding increase to the accrued communication service costs for the disputed amounts, unless past experience or other corroborating evidence indicates that it is not probable that it will
ultimately be required to pay. If an agreement is reached with a vendor in which the Company settles a disputed amount for less than the corresponding accrual, a gain is recognized in the period in which the settlement is reached. Previously
unaccrued disputes are reviewed periodically to assess whether a loss has become probable and estimable, in which case an accrual is established.



| | (f) |  | Accounts Receivable Allowances
| | --- |  | ------------------------------



The Company records specific reserves to reduce revenue and related trade accounts receivable when significant uncertainties exist related to the
recoverability of certain service billings. The Company also records estimates of reserves for routine service credits granted to customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of
customers to make required payments. The Company determines the estimate of the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the customers financial condition and
historical experience. The following is a summary of accounts receivable allowances for activity and balances:



|                             |  |                               |        |       |   |        |            |  |            |        |  |                          |         |   |  |   |       
|---------------------------- |  | ----------------------------- | ------ | ----- | - | ------ | ---------- |  | ---------- | ------ |  | ------------------------ | ------- | - |  | - | ------
|                             |  | Balance atbeginning of Period |        | Other |   |        | Provisions |  | Deductions |        |  | Balance at End of Period
|Year ended December 31, 2003 |  | $                             |       |       | $ | 27,072 | (a)        |  | $          | 15,412 |  | $                        | (22,491 | ) |  | $ | 19,993
|Year ended December 31, 2004 |  | $                             | 19,993 |       | $ | 34,467 | (b)        |  | $          | 22,848 |  | $                        | (27,172 | ) |  | $ | 50,136
|Year ended December 31, 2005 |  | $                             | 50,136 |       | $ |       |            |  | $          | 37,794 |  | $                        | (50,953 | ) |  | $ | 36,977

---

|(a) |  | Amounts acquired in the June 13, 2003 acquisition of Broadwing Communication Services, Inc.
|--- |  | -------------------------------------------------------------------------------------------

|(b) |  | Amounts acquired in the September 1, 2004 acquisition of Focal Communications Corporation
|--- |  | -----------------------------------------------------------------------------------------



| | (g) |  | Property and Equipment
| | --- |  | ----------------------



Property and equipment is recorded at cost, or fair value if acquired in a business combination. Depreciation and amortization is provided for using the
straight-line method over the estimated useful life. Repairs and maintenance are charged to expense as incurred. Costs associated with uncompleted portions of the Companys network, including components inventory awaiting installation, are
classified as construction in process in the accompanying consolidated financial statements.



Leasehold improvements are amortized over the shorter of the useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the
construction phase of network and other internal-use capital projects. Employee-related costs directly related to construction of internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used
internally are carried at average cost, except for significant individual items for which cost is based on specific identification.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | (h) |  | Goodwill and Other Intangible Assets
| | --- |  | ------------------------------------



Intangible assets with finite lives are amortized on a straight-line basis over that life. Where there are no legal, regulatory, contractual or other
factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite lived and such intangible assets are not amortized.



Goodwill and intangible assets not subject to amortization are tested annually in the fourth quarter for impairment, and are
tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value.



| | (i) |  | Recoverability of Long-lived Assets
| | --- |  | -----------------------------------



In accordance with SFAS No. 144, long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The fair value of an asset is estimated by an analysis of discounted projected cash flows to be generated by the asset. Assets to be disposed of are separately presented in the consolidated balance sheets
and reported at the lower of the carrying amount or fair value less selling costs, and are no longer depreciated.



| | (j) |  | Accounting for Asset Retirement Obligations
| | --- |  | -------------------------------------------



SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset retirement costs, generally referred to as asset retirement obligations. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset
retirement obligation required to be settled under law or written or oral contract. If a reasonable estimate of fair value can be made, the fair value of the liability will be recognized in the period it is incurred, otherwise in the period a
reasonable estimate of fair value can be made. This cost is initially capitalized and then amortized over the estimated remaining useful life of the asset. The Company implemented SFAS No. 143 on January 1, 2003.



In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. The provision is effective no later than the end of the fiscal year ending after December 15, 2005. The adoption of FIN 47 has not had a material impact on our consolidated results of operations and financial condition.



The Company leases various facilities in which communication equipment is
located. Terminating and decommissioning these facilities requires the removal of any assets and restoration of the lease space to its original condition. Accordingly, upon adoption of SFAS No. 143, the Company recorded an estimated asset
retirement obligation of $2.7 million, which was estimated using managements, estimate of the expected future cash expenditures. In addition, the Company recorded an asset retirement obligation related to Focals leased facilities in the
amount of $1.9 million during the third quarter of 2004. During the fourth quarter 2004, the Company downwardly revised prior reserve estimates by $1.6 million as actual closure costs incurred were at rates below the Companys original
estimates. The present value of all asset retirement obligations was



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calculated using a discount rate of 8% over the estimated remaining life of the lease. The following table displays the activity and balance of the liability
account for the periods ended December 31, 2005 (in thousands):



|                             |  |                           |        |  
|---------------------------- |  | ------------------------- | ------ | -
|                             |  | AssetRetirementObligation |       
|Balance at December 31, 2003 |  |                           | 2,857  |  
|Focal acquisition            |  |                           | 1,927  |  
|Accretion of interest        |  |                           | 422    |  
|Liabilities settled          |  |                           | (283   | )
|Additions                    |  |                           | 11     |  
|Change in estimate           |  |                           | (1,586 | )
|                             |  |                           |        |  
|Balance at December 31, 2004 |  | $                         | 3,348  |  
|                             | 
|Accretion of interest        |  |                           | 272    |  
|Liabilities settled          |  |                           |       |  
|Additions                    |  |                           |       |  
|Change in estimate           |  |                           |       |  
|                             |  |                           |        |  
|Balance at December 31, 2005 |  | $                         | 3,620  |  
|                             |  |                           |        |  



| | (k) |  | Research and Development
| | --- |  | ------------------------



Research and development costs are expensed as incurred.



| | (l) |  | Income Taxes
| | --- |  | ------------



The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected
to be recovered.



| | (m) |  | Advertising costs.
| | --- |  | ------------------



Costs related to advertising are expensed as incurred and are included in selling, general and administrative in our consolidated statements of
operations.



| | (n) |  | Net Loss Per Common Share
| | --- |  | -------------------------



The computations of basic and diluted net loss per common share are based on the weighted average number of common shares outstanding during the period.
Dilutive earnings per share give effect to all potentially dilutive common securities. Potentially dilutive securities include stock options warrants and convertible debt.



| | (o) |  | Uses of Estimates
| | --- |  | -----------------



Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions made when



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accounting for items and matters such as customer retention patterns, allowance for bad debts, depreciation, amortization, asset valuations, recoverability
of assets, impairment, reserves and other provisions and contingencies are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as
of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We also assess potential losses in relation to threatened or pending legal and tax matters. If a loss is
considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. Actual results could differ from these estimates.



| | (p) |  | Stock split and stock dividend
| | --- |  | ------------------------------



On October 8, 2004, the Company completed a 1-for-20 reverse stock split, resulting in every twenty shares of common stock to be combined into one
share of common stock. Immediately following the stock split, the Company enacted a one time, 1-for-1 stock dividend for all shareholders of record as of October 8, 2004, effectively resulting in a 1-for-10 reverse stock split. The stock split
and stock dividend affects all of the Companys stock, stock options and warrants outstanding on the record date. The consolidated financial statements have been retroactively adjusted to reflect the stock split and stock dividend for all
periods presented.



| | (q) |  | Stock Options and Warrants
| | --- |  | --------------------------



The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net loss if the fair-value based method had been applied to all
outstanding and unvested awards in each period (in thousands, except per share data).



|                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |          |  
|------------------------------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                                                                                   |  | Year End         |         
|                                                                                                                   |  | December 28,2003 |          |   | December 31,2004 |   |          | December 31,2005 | 
|Net loss                                                                                                           |  | $                | (260,471 | ) |                  | $ | (152,181 | )                |  | $ | (133,428 | )
|Deduct total stock-based employee compensation expense determined under the fair-value based method for all awards |  |                  | (66,201  | ) |                  |   | (32,527  | )                |  |   | (11,272  | )
|Add back stock-based employee compensation expense included in reported net loss                                   |  |                  | 24,604   |   |                  |   | 8,264    |                  |  |   | 4,489    |  
|                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Pro forma net loss                                                                                                 |  | $                | (302,068 | ) |                  | $ | (176,444 | )                |  | $ | (140,211 | )
|                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Pro forma basic and diluted net loss per common share                                                              |  | $                | (7.02    | ) |                  | $ | (3.32    | )                |  | $ | (1.92    | )
|                                                                                                                   |  |                  |          |   |                  |   |          |                  |  |   |          |  



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| | (r) |  | Reclassifications
| | --- |  | -----------------



Certain prior year amounts have been reclassified to conform to the current year presentation, including the reclassification of auction rate securities
in the amount of $21.5 million and $25.4 million to short-term investments at December 31, 2003 and 2004, respectively. Auction rate securities, because of the short duration of their reset periods, were previously included in cash and cash
equivalents for all periods presented. As a result of this reclassification, the Companys cash flow from investing activities now includes the investments and sales of auction rate securities for all periods presented. Additionally, equity
based expense was reclassified in the consolidated statements of operations in accordance with Staff Accounting Bulletin No. 107. These reclassifications had no impact on previously reported total current assets, total assets, or net loss and does
not affect previously reported cash flows from operating activities.



| | (s) |  | New Accounting Standards
| | --- |  | ------------------------



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R is a revision of FASB SFAS No. 123,
Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that
may be settled by the issuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award. The provisions of SFAS No. 123R are effective for public entities that do not file as small business issuers as of the beginning of the annual reporting period that begins after
June 15, 2005. We have previously issued employee stock options for which no expense has been recognized, and which will not be fully vested as of the effective date of SFAS No. 123R. We believe the impact of adopting SFAS No. 123R,
based on our unvested options outstanding at December 31, 2005, will be to increase our pre-tax stock-based compensation expense in 2006 between $5.5 million and $7.5 million. The preceding excludes restricted stock based
compensation, which is estimated to be $3.8 million based on outstanding units at December 31, 2005.



In November 2004, the FASB issued SFAS No.151, Inventory Costs, amendment to ARB No. 43 Chapter 4, (SFAS No. 151) which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not expect the impact of SFAS No. 151
to have a material effect our financial position, results of operations or liquidity.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary AssetsAn Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153
eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We are required to
adopt SFAS 153 effective January 1, 2006.



In May 2005,
the FASB issued SFAS No. 154, Accounting Changes and Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 which for us will be as of the beginning of fiscal
2007.



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|(2) |  | Acquisitions
|--- |  | ------------



| | (a) |  | Broadwing Communication Services, Inc.
| | --- |  | --------------------------------------



On February 23, 2003, the Company entered into an agreement to invest approximately $129.0 million, including acquisition costs, for most of the
assets and certain of the liabilities of Broadwing Communications Services, Inc. This purchase price was subject to a pre-closing reduction of up to $14.3 million if Broadwing Communications Services, Inc. failed to reach certain revenue and EBITDA
targets, as defined in the agreement, and a post-closing reduction of an additional $10.0 million if certain EBITDA targets, as defined in the agreement, were not reached in a one-year period after the closing. The agreement also committed Broadwing
Communications Services, Inc. to make capital expenditures of $3.0 million each month, consistent with its financial plan. On June 6, 2003, the parties agreed to reduce the purchase price by $7.2 million due to failure to meet the revenue
target and by an additional $7.2 million for failure to achieve the targeted financial results. An additional reduction in the purchase price of approximately $23.0 million was negotiated reflecting the sellers desire to forego making
additional required capital expenditures as required under the agreement, such as equipment and network upgrades, and to accelerate the closing of the transaction. These reductions reduced the purchase price to $92.9 million, including acquisition
costs. The Broadwing Communication Services, Inc. acquisition closed on June 13, 2003. Subsequently, in November 2003, the parties agreed on an additional post-closing reduction in the purchase price to $81.1 million, net of purchase
adjustments and acquisitions costs, as negotiated pursuant to working capital and receivable adjustment obligations set forth in the agreement and the Companys release of certain warranties. In addition, during the third quarter of 2004, the
Company adjusted the value of its fixed assets purchased pursuant to the terms of the original purchase agreement whereby the Company would receive an additional $10.0 million reduction in price if certain EBITDA targets were not met for the period
from July 1, 2003 to July 1, 2004. On November 3, 2004, the seller paid the $10.0 million purchase price adjustment in full.



At the date of acquisition, the Company held a 96% ownership interest and appointed four of the six board members of a holding Company that in turn owned
Broadwing Communications, LLC. Cequel III, LLC (Cequel) contributed approximately $0.9 million for a 1% ownership interest and the ability to appoint two of the six board members of the holding Company. Cincinnati Bell, previously the parent company
of Broadwing Communications Services, Inc., retained a 3% non-voting equity interest in the venture. In addition, the Company entered into a management services agreement with Cequel, in which Cequel would manage the day-to-day operations of
Broadwing Communications, LLC.



On November 20, 2003, the
Company acquired Cequels 1% equity stake and additional interests in Broadwing Communications, LLC and terminated its management services agreement in exchange for a combination of cash and equity. In addition, the Company entered into a new
master network services agreement to provide Cequel services over a four-year period at prices ranging from cost reimbursement to current market pricing. As a result of this agreement, the Company recorded restructuring charges of $18.5 million in
the fourth quarter of 2003.



| | (b) |  | Focal
| | --- |  | -----



On September 1, 2004, the Company invested approximately $97.7 million, including acquisition costs, and assumed $98.1 million in debt to acquire
100% of the voting equity interest of Focal. Focal operating results subsequent to September 1, 2004 are included in the consolidated financial statements.



The Merger Agreement, dated March 3, 2004, provided for a purchase price of $210.0 million, which was reduced by $76.1 million in assumed debt
outstanding, $19.5 million in assumed capitalized lease obligations, and a reduction of $14.2 million due to the stock price trading below the low end of the range at the time of acquisition as explained below. The purchase price was also increased
by acquisition costs and an interest factor accruing from the date that Focal satisfied the conditions to closing until the closing occurred.



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At closing, the purchase price was determined to be $97.7 million, comprised of approximately $94.1
million of the Companys common stock issued to Focals equity holders, of which $0.2 million relates to interest, and $4.5 million paid in cash. Per the Merger Agreement, the number of shares of common stock to be issued was determined
based on the average closing price for the 20-day period ending three days before closing not to exceed a range between $12.70 and $29.50 per share. Because the 20-trading day average was less than $12.70 per share, the per share valuation used at
the closing was $12.70, with Focal stockholders receiving a total of 8,641,829 shares of the Companys common stock, of which 18,209 shares were issued at a settlement rate of $10.20 related to interest. The closing price of common stock for
the five day average ended September 3, 2004 equaled $10.90 per share for determination of the purchase price.



The purchase price has been allocated to the assets and liabilities acquired, based on the estimated fair value that was finalized in the third quarter of
2005. Certain accounts receivable, accrued cost of service and other estimates have been contested and are subject to dispute. The following table provides a purchase price allocation rollforward from estimates recorded at September 30, 2004 to
the final purchase price allocation (in thousands):



|                          |  |                    |         |             |   |        |             |  |   |        
|------------------------- |  | ------------------ | ------- | ----------- | - | ------ | ----------- |  | - | -------
|                          |  | Fair Value        
|                          |  | September 30, 2004 |         | Adjustments |   |        | As Adjusted
|Current assets            |  | $                  | 54,112  |             | $ | 1,114  | (a)         |  | $ | 55,226 
|Property and equipment    |  |                    | 155,865 |             |   |       |             |  |   | 155,865
|Customer relationships    |  |                    | 9,900   |             |   | 300    |             |  |   | 10,200 
|Goodwill                  |  |                    | 30,601  |             |   | 27,753 | (b)         |  |   | 58,354 
|                          |  |                    |         |             |   |        |             |  |   |        
|Total assets acquired     |  |                    | 250,478 |             |   | 29,167 |             |  |   | 279,645
|                          |  |                    |        
|Current liabilities       |  |                    | 54,600  |             |   | 15,496 | (c)         |  |   | 70,096 
|Long-term liabilities     |  |                    | 98,130  |             |   | 12,822 | (d)         |  |   | 110,952
|                          |  |                    |         |             |   |        |             |  |   |        
|Total liabilities assumed |  |                    | 152,730 |             |   | 28,318 |             |  |   | 181,048
|                          |  |                    |         |             |   |        |             |  |   |        
|Purchase price            |  | $                  | 97,748  |             | $ | 849    |             |  | $ | 98,597 
|                          |  |                    |         |             |   |        |             |  |   |        

---

|(a) |  | The increase in current assets is attributable to a decrease in provisions for preacquisition receivable disputes.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(b) |  | The increase in goodwill equals the decrease in the estimated fair value of net assets acquired.
|--- |  | ------------------------------------------------------------------------------------------------

|(c) |  | The increase in current liabilities is due to an increase in accrued service costs associated with preacquisition vendor disputes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(d) |  | The increase in long-term liabilities is due to finalization of the determination of the fair values of acquired operating leases.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------



The Focal purchase price is net of the elimination of certain deferred
communications services revenue associated with IRU agreements that were entered into between Focal and Broadwing prior to the acquisition. At execution of the agreement, Focal maintained deferred revenue of $4.2 million associated with IRU sales to
Broadwing and Broadwing maintained deferred revenue of $6.4 million associated with IRU sales to Focal.



|(3) |  | Restructuring and Other Charges
|--- |  | -------------------------------



Starting in 2001 conditions within the general economy and communications sector have resulted in reduced capital expenditures by carriers and a reduced
demand for communications equipment. These declines have had a severe adverse impact on the Companys communications equipment revenue and results of operations.



In response to these conditions, the communications equipment division has been restructured through staff reductions and
other consolidation efforts in an effort to decrease operating expenses and to conserve financial



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resources. These restructuring initiatives have been reflected in the results of operations in 2003, 2004, and 2005, and management will continue to assess
the need for additional restructurings in response to economic changes or strategic initiatives in the future.



During the third quarter of 2004, the Company implemented certain staff reduction and reorganization efforts within its communication services division
primarily related to the integration of Focal operations.



The
Company recorded the following charges for the periods then ended (in thousands):



|                                                                         |  |                  |        |                  |   |                  |  |   |       |  
|------------------------------------------------------------------------ |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ----- | -
|                                                                         |  | Year Ended       |       
|                                                                         |  | December 31,2003 |        | December 31,2004 |   | December 31,2005 | 
|Communications equipment cost of revenueinventory-write downs and other |  | $                | 31,163 |                  | $ | 193              |  | $ |      |  
|                                                                         |  |                  |        |                  |   |                  |  |   |       |  
|Restructuring and other charges:                                         |  |                  |        |                  |   |                  |  |   |       |  
|Workforce reductions and facilities consolidation                        |  |                  | 24,943 |                  |   | 3,946            |  |   | 1,064 |  
|Valuation and impairment of long-lived assets, including goodwill        |  |                  | 15,950 |                  |   |                 |  |   | 416   |  
|Contract termination charges                                             |  |                  | 18,488 |                  |   |                 |  |   | (119  | )
|                                                                         |  |                  |        |                  |   |                  |  |   |       |  
|Total restructuring and other charges                                    |  |                  | 59,381 |                  |   | 3,946            |  |   | 1,361 |  
|                                                                         |  |                  |        |                  |   |                  |  |   |       |  
|Other income (expense), netimpairment of strategic equity investments   |  |                  | 385    |                  |   |                 |  |   |      |  
|                                                                         |  |                  |        |                  |   |                  |  |   |       |  
|Total restructuring and related charges                                  |  | $                | 90,929 |                  | $ | 4,139            |  | $ | 1,361 |  
|                                                                         |  |                  |        |                  |   |                  |  |   |       |  



Communications
equipment cost of revenueinventory-write-downs and other



The Company writes down inventory for estimated obsolete, excess and overvalued inventory based on estimated sales projections and market values. As a result of the decline in spending by communications carriers and the discontinuation of
certain products, the Company recorded $31.2 million and $0.2 million in inventory write-downs during 2003 and 2004, respectively. Charges recorded during 2003 relate to accruals for purchase commitments beyond inventory needs. Charges recorded
during 2004 relate to changes in previous estimates.



Workforce reductions and facilities consolidation



2003.    During 2003, workforce reduction programs continued resulting in the elimination of approximately 600 positions and charges of $15.6 million. In addition the Company recorded approximately $9.3 million
associated with facilities consolidation, including the closure of the Companys French operations and write-off of accumulated translation losses.



2004.    During 2004, the Company incurred approximately $2.9 million related to work force reductions, of which $1.8 million
relates to the integration of Focal operations. In addition, the Company recorded $1.0 million related to lease terminations during the year.



Valuation and impairment of long-lived assets



2003.    During 2003, under the provisions of SFAS No. 142 and SFAS No. 144, the Company performed an analysis as to
the recoverability of its long-lived and intangible assets, primarily due to projected market conditions associated with its communications equipment division. As a result, the Company recorded a write-down of fixed assets totaling $6.7 million and
a write-down of intangible assets totaling $9.3 million.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Contract termination charges



At the date of the Broadwing Communication Services, Inc. acquisition, the Company owned a 96% interest and the ability to
appoint four of the six board members in a holding company that in turn owned Broadwing Communications, LLC. Cequel contributed approximately $0.9 million for a 1% ownership interest and the ability to appoint two of the six board members.
Cincinnati Bell, previously the parent company of Broadwing Communications Services, Inc., retained a 3% non-voting equity interest. In addition, the Company entered into a management services agreement with Cequel under which Cequel would manage
Broadwing Communications, LLC.



On November 20, 2003, the
Company acquired Cequels 1% percent equity stake and additional interests and terminated the management services agreement. In aggregate, the Company paid $2.9 million in exchange for Cequels initial investment, as final payment for
services previously rendered, the termination of the Cequel management services agreement, and in exchange for ongoing consulting services in the future. As additional consideration, the Company also issued, and agreed to register with the
Securities and Exchange Commission, 0.28 million shares of its common stock to Cequel and granted them a warrant to purchase an additional 0.73 million shares at prices ranging from $13.70, the closing price on November 20, to $22.50
per share. As part of this agreement, the Company also entered into a 15-year network services agreement with Cequel whereby it would provide network services at prices ranging from incremental cost reimbursement to current market pricing. In
addition, Cequel agreed to provide certain consulting services to the Company over four-years and would act as a non-exclusive sales agent for its products and services, for which they would receive sales commissions. During the fourth quarter of
2003, the Company recorded a charge in the amount of $18.5 million equal to the excess of the fair value of the cash, equity and services committed over the fair value of Cequels ownership interest and services performed.



The following table displays the activity and balances of the restructuring
accrual account for the periods ended December 31, 2004 and December 31, 2005 (in thousands):



|                                                      |  |                      |        |   |                                      |   |        |                                    |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | -------------------- | ------ | - | ------------------------------------ | - | ------ | ---------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Cost ofRevenue       |        |   | Restructuring and Other Charges      |  
|                                                      |  | InventoryWrite-downs |        |   | Workforceand FacilitiesConsolidation |   |        | TotalRestructuringand OtherCharges |  |   | Total  |  
|Balance as of December 31, 2003                       |  | $                    | 2,534  |   |                                      | $ | 5,954  |                                    |  | $ | 5,954  |   |  | $ | 8,488  |  
|Restructuring and other charges                       |  |                      | 193    |   |                                      |   | 3,946  |                                    |  |   | 3,946  |   |  |   | 4,139  |  
|Cash payments                                         |  |                      | (2,254 | ) |                                      |   | (6,379 | )                                  |  |   | (6,379 | ) |  |   | (8,633 | )
|Accretion of interest                                 |  |                      |       |   |                                      |   | 46     |                                    |  |   | 46     |   |  |   | 46     |  
|Non cash charges and acquired restructuring liability |  |                      | (237   | ) |                                      |   | 4,817  |                                    |  |   | 4,817  |   |  |   | 4,580  |  
|                                                      |  |                      |        |   |                                      |   |        |                                    |  |   |        |   |  |   |        |  
|Balance as of December 31, 2004                       |  |                      | 236    |   |                                      |   | 8,384  |                                    |  |   | 8,384  |   |  |   | 8,620  |  
|Restructuring and other charges                       |  |                      |       |   |                                      |   | 1,361  |                                    |  |   | 1,361  |   |  |   | 1,361  |  
|Cash payments                                         |  |                      | (50    | ) |                                      |   | (6,980 | )                                  |  |   | (6,980 | ) |  |   | (7,030 | )
|Accretion of interest                                 |  |                      |       |   |                                      |   | 29     |                                    |  |   | 29     |   |  |   | 29     |  
|Non cash charges                                      |  |                      |       |   |                                      |   | 985    |                                    |  |   | 985    |   |  |   | 985    |  
|                                                      |  |                      |        |   |                                      |   |        |                                    |  |   |        |   |  |   |        |  
|Balance as of December 31, 2005                       |  | $                    | 186    |   |                                      | $ | 3,779  |                                    |  | $ | 3,779  |   |  | $ | 3,965  |  
|                                                      |  |                      |        |   |                                      |   |        |                                    |  |   |        |   |  |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(4) |  | Financial Instruments
|--- |  | ---------------------



Short-term and long-term investments as of December 31, 2004 are comprised of the following (in thousands):



|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                      |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Corporate bonds                       |  | $             | 116,190 |                      | $ |                      |  | $ | (348                | ) |  | $ | 115,842
|Euro Dollar bonds                     |  |               | 31,817  |                      |   |                      |  |   | (136                | ) |  |   | 31,681 
|U.S. government and agency securities |  |               | 52,181  |                      |   |                      |  |   | (233                | ) |  |   | 51,948 
|Auction rates securities              |  |               | 30,375  |                      |   |                      |  |   |                    |   |  |   | 30,375 
|Money market funds                    |  |               | 44,509  |                      |   |                      |  |   |                    |   |  |   | 44,509 
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                      |  | $             | 275,072 |                      | $ |                      |  | $ | (717                | ) |  | $ | 274,355
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|Included in cash and cash equivalents |  | $             | 124,540 |                      | $ |                      |  | $ |                    |   |  | $ | 124,540
|Included in short-term investments    |  |               | 100,449 |                      |   |                      |  |   | (310                | ) |  |   | 100,139
|Included in long-term investments     |  |               | 50,083  |                      |   |                      |  |   | (407                | ) |  |   | 49,676 
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                      |  | $             | 275,072 |                      | $ |                      |  | $ | (717                | ) |  | $ | 274,355
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        



Short-term and
long-term investments as of December 31, 2005 are comprised of the following (in thousands):



|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                      |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Corporate bonds                       |  | $             | 35,844  |                      | $ |                      |  | $ | (93                 | ) |  | $ | 35,751 
|Commercial paper                      |  |               | 13,227  |                      |   |                      |  |   | (4                  | ) |  |   | 13,223 
|Euro Dollar bonds                     |  |               | 9,536   |                      |   |                      |  |   | (23                 | ) |  |   | 9,513  
|U.S. government and agency securities |  |               | 37,183  |                      |   |                      |  |   | (99                 | ) |  |   | 37,084 
|Auction rates securities              |  |               | 1,000   |                      |   |                      |  |   | (1                  | ) |  |   | 999    
|Money market funds                    |  |               | 12,784  |                      |   |                      |  |   |                    |   |  |   | 12,784 
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                      |  | $             | 109,574 |                      | $ |                      |  | $ | (220                | ) |  | $ | 109,354
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|Included in cash and cash equivalents |  | $             | 66,706  |                      | $ |                      |  | $ |                    |   |  | $ | 66,706 
|Included in short-term investments    |  |               | 42,868  |                      |   |                      |  |   | (220                | ) |  |   | 42,648 
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                      |  | $             | 109,574 |                      | $ |                      |  | $ | (220                | ) |  | $ | 109,354
|                                      |  |               |         |                      |   |                       |  |   |                     |   |  |   |        



Fair value of
financial instruments.    Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The carrying values of cash and cash equivalents, accounts receivable, auction
rate securities, marketable debt securities, accounts payable and short-term borrowings approximate their fair values because of their short-term nature. The fair value of our long-term borrowings approximates carrying value.



|(5) |  | Property and Equipment
|--- |  | ----------------------



Starting in 2003 and continuing through 2005, the Company implemented a series of capital projects to expand and improve its network. Costs associated
directly with expansions and improvements to the network, including employee related costs, have been capitalized, and interest costs incurred during construction were



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



capitalized based on the weighted average accumulated construction expenditures and interest rates related to the Companys borrowings at the time.
During 2004 and 2005, approximately $4.1 and $7.0 million, respectively, of interest was capitalized.



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



|                                        |  |                  |          |   |                  |   |          |                          |  |           
|--------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | ------------------------ |  | ----------
|                                        |  | December 31,2004 |          |   | December 31,2005 |   |          | DepreciableLives (years)
|Land                                    |  | $                | 7,950    |   |                  | $ | 7,950    |                          |  | Indefinite
|Buildings and leasehold improvements    |  |                  | 68,748   |   |                  |   | 63,195   |                          |  | 2-40      
|Transmission facilities                 |  |                  | 184,223  |   |                  |   | 293,049  |                          |  | 3-20      
|Furniture, fixtures, vehicles and other |  |                  | 24,694   |   |                  |   | 24,802   |                          |  | 2-15      
|Fiber usage rights                      |  |                  | 14,513   |   |                  |   | 16,133   |                          |  | 5-20      
|Testing and manufacturing equipment     |  |                  | 74,226   |   |                  |   | 71,892   |                          |  | 3-5       
|Construction in process                 |  |                  | 73,126   |   |                  |   | 32,648   |                          |  |          
|                                        |  |                  |          |   |                  |   |          |                          |  |           
|                                        |  |                  | 447,480  |   |                  |   | 509,669  |                          |  |           
|Less: Accumulated depreciation          |  |                  | (161,442 | ) |                  |   | (248,988 | )                        |  |           
|                                        |  |                  |          |   |                  |   |          |                          |  |           
|Property and equipment, net             |  | $                | 286,038  |   |                  | $ | 260,681  |                          |  |           
|                                        |  |                  |          |   |                  |   |          |                          |  |           



Included in
construction in process is approximately $17.6 million and $13.2 million of network spares inventory at December 31, 2005 and 2004, respectively. Interest is not capitalized on network spares inventory.



During 2004, the Company adjusted the value of its fixed assets purchased as
part of the Broadwing Communication Services, Inc. acquisition pursuant to the terms of the original purchase agreement as discussed in Note 2. This resulted in a decrease to the value of the assets acquired in the amount of $10.7 million and a
corresponding decrease in depreciation expense of $3.5 million for the year.



|(6) |  | Goodwill and Other Intangible Assets
|--- |  | ------------------------------------



Goodwill



The Company recorded $58.4 million of goodwill related to the acquisition of Focal.



Other Intangible Assets



|                                                             |  |                         |        |                         |   |                      |  |                         |        |  |   |       
|------------------------------------------------------------ |  | ----------------------- | ------ | ----------------------- | - | -------------------- |  | ----------------------- | ------ |  | - | ------
|                                                             |  | As of December 31, 2004 |        | As of December 31, 2005
|                                                             |  | Gross CarryingAmount    |        | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|                                                             |  |                         |        |                         |   | (in thousands)       |  |                        
|Amortized intangible assets:                                 |  |                         |        |                         |   |                      |  |                         |        |  |   |       
|Customer relationships and in-place contracts (3 to 7 years) |  | $                       | 34,150 |                         | $ | 6,908                |  | $                       | 34,450 |  | $ | 12,540
|                                                             |  |                         |        |                         |   |                      |  |                         |        |  |   |       
|Unamortized intangible assets:                               |  |                         |        |                         |   |                      |  |                         |        |  |   |       
|Goodwill                                                     |  | $                       | 48,696 |                         |   |                      |  | $                       | 58,354 |  |   |       
|Trademarks                                                   |  |                         | 2,910  |                         |   |                      |  |                         | 2,910  |  |   |       
|                                                             |  |                         |        |                         |   |                      |  |                         |        |  |   |       
|Total                                                        |  | $                       | 51,606 |                         |   |                      |  | $                       | 61,264 |  |   |       
|                                                             |  |                         |        |                         |   |                      |  |                         |        |  |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company recorded $10.2 million in intangible assets related to the Focal acquisition. The
intangible assets relate to customer relationships that will be amortized on a straight line basis over a period of 7 years.



Intangible asset amortization expense was $6.9 million, $4.6 million and $5.6 million for years ended December 31, 2003, 2004, and 2005,
respectively. The Company estimates amortization expense will be $4.6 million in 2006, $3.7 million in 2007, $3.8 million in 2008, $3.3 million in 2009 and $3.3 million in 2010 and $3.6 million thereafter.



During the fourth quarter of 2005, the Company performed an impairment
analysis of the intangible assets acquired as part of the Broadwing Communication Services, Inc. and Focal Communications acquisitions pursuant to SFAS 142 and SFAS 144. The Company did not recognize an impairment loss, as the carrying amount of
finite-lived intangible assets were determined to be recoverable.



|(7) |  | Notes Payable and Credit Facility
|--- |  | ---------------------------------



On February 19, 2004, the Company borrowed $225.0 million under unsecured convertible notes in a private placement to institutional investors. The
loans matured on and were paid in full on February 20, 2006. Borrowings under the loans accrue interest at a stated rate of 5% payable quarterly, while principal is scheduled for repayment in seven equal quarterly installments which commenced
on August 19, 2004. Provided certain conditions are met and at the election of the Company, principal and interest are payable in either cash or common stock at a conversion price of 95% of the average stock price for the 20 days preceding
conversion. If the average stock price exceeds a specified threshold, principal and interest are payable in common stock. Provided certain conditions are met, the notes can be prepaid in cash at any time at a premium of 103% if the Companys
common stock is trading at or above $13.50. Under certain conditions, the Companys election to convert may require the issuance of additional warrants. The holders may convert at any time.



In conjunction with the issuance of the notes, the Company issued warrants to
purchase 2,732,838 shares of common stock. The warrants are immediately exercisable, have a strike price of $23.70 per share, and have a three-year life. The warrants were valued at $33.2 million and were recorded as original issue discount.
Amortization of original issuance discount and debt issuance costs results in an effective annual interest rate of 22%.



Under certain conditions, the holders can participate in subsequent rights offerings. The noteholders have the right to approve the declaration of and
participate in dividends. Unpaid principal is redeemable by the holders at 115% of face value upon a change of control. The Company has determined the early redemption and the change in control option to be embedded derivatives and has determined
the value of embedded derivatives to be immaterial. Under the terms of the notes, the Company may incur additional indebtedness of up to $100.0 million, subject to certain limitations.



In August and November 2004 and February 2005, the Company elected to pay principal and interest due on the unsecured
convertible notes issued in February 2004 primarily in shares of our common stock, resulting in the issuance of 3,212,141, 6,437,787, and 6,299,640 shares of common stock, respectively. All other payments in 2005 of principal and interest were made
in cash.



The Company assumed $76.1 million in Senior Debt in
the acquisition of Focal, which was repaid in cash immediately upon closing.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A summary of notes payable as of December 31, 2005 and December 31, 2004 is as follows (in
thousands):



|                                                                                                                                                                       |  |                  |          |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                       |  | December 31,2004 |          |   | December 31,2005 |  
|Leasehold improvements loan due May 2009, 10% interest rate                                                                                                            |  | $                | 691      |   |                  | $ | 560     |  
|Senior unsecured convertible notes, 5% interest rate due February 2006, less unamortized debt discount of $12,837 and $789 at December 31,
2004 and 2005, respectively |  |                  | 147,877  |   |                  |   | 31,354  |  
|Other                                                                                                                                                                  |  |                  | 707      |   |                  |   | 455     |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |         |  
|                                                                                                                                                                       |  |                  | 149,275  |   |                  |   | 32,369  |  
|Less: current portion                                                                                                                                                  |  |                  | (116,464 | ) |                  |   | (31,659 | )
|                                                                                                                                                                       |  |                  |          |   |                  |   |         |  
|Notes payable, net of discounts and current portion                                                                                                                    |  | $                | 32,811   |   |                  | $ | 710     |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |         |  



On October 18,
2005, Broadwing announced that it had entered into a revolving credit facility that provides borrowing capacity to borrow up to $75 million subject to certain limitations, commencing November 29, 2005 with a final maturity date of October 14,
2008. The facility is secured by a pledge of accounts receivable. Borrowings will bear an interest rate, at Broadwings option, at either LIBOR plus 3.75% or an alternate base rate, defined as the higher of the prime or federal funds rate, plus
2.5%. If cash, investments, and undrawn availability under the facility fall below $100.0 million while borrowings are outstanding, Broadwing must deposit $25.0 million into a designated restricted account. Borrowing under the facility will be
limited by an amount of eligible accounts receivable available as collateral and the amount of our Liquidity, as defined the agreement. As the available borrowing under the facility is limited, the amount available at any point in time
may be substantially less than $75.0 million and the facility could be unavailable in certain circumstances. The facility is subject to an unused line fee of one-half of one percent (0.05%), an annual fee of $0.4 million and closing costs of $1.5
million which will be amortized over the life of the facility. Broadwing intends to use borrowings under the facility for general corporate purposes.



|(8) |  | Leases
|--- |  | ------



The Company leases certain facilities, equipment and vehicles for use in its operations under both capital and operating leases. Most lease terms include
renewal options and/or escalating rents. Total rent expense under operating leases amounted to $21.2 million in 2003, $34.5 million in 2004, and $39.9 in 2005 (excluding restructuring costs associated with facilities consolidation). Amortization
charges applicable to capitalized assets have been included in depreciation expense in the consolidated statements of operations for all periods presented.



During 2004, in conjunction with the Focal acquisition, the Company assumed capital lease obligations related to an agreement Focal entered into during
1999 with certain carriers for the acquisition of IRUs for dark fiber transport capacity. The lease term expires in June 2022.



Capital lease amounts included in property and equipment for the periods ended is as follows (in thousands):



|                                       |  |                  |        |   |                  |   |        |  
|-------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                       |  | December 31,2004 |        |   | December 31,2005 |  
|Fiber                                  |  | $                | 19,383 |   |                  | $ | 18,833 |  
|Vehicles and other equipment           |  |                  | 884    |   |                  |   | 2,690  |  
|                                       |  |                  |        |   |                  |   |        |  
|Total                                  |  |                  | 20,267 |   |                  |   | 21,523 |  
|Less: current portion                  |  |                  | (860   | ) |                  |   | (1,414 | )
|                                       |  |                  |        |   |                  |   |        |  
|Capital leases, net of current portion |  | $                | 19,407 |   |                  | $ | 20,109 |  
|                                       |  |                  |        |   |                  |   |        |  



As of
December 31, 2005, the total cost and associated accumulated depreciation of assets that were acquired under capital lease were $15.0 million and $2.9 million, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The aggregate minimum rental commitments under noncancelable leases for the periods shown at
December 31, 2005, are as follows (in thousands):



|                                           |  |                |        |                  |   |        
|------------------------------------------ |  | -------------- | ------ | ---------------- | - | -------
|Years                                      |  | Capital leases |        | Operating leases
|2006                                       |  | $              | 3,459  |                  | $ | 34,177 
|2007                                       |  |                | 3,308  |                  |   | 32,435 
|2008                                       |  |                | 3,162  |                  |   | 29,133 
|2009                                       |  |                | 2,855  |                  |   | 23,107 
|2010                                       |  |                | 2,431  |                  |   | 19,352 
|Thereafter                                 |  |                | 24,613 |                  |   | 76,819 
|                                           |  |                |        |                  |   |        
|Total minimum rental commitments           |  |                | 39,828 |                  | $ | 215,023
|                                           |  |                |        |                  |   |        
|Less: interest and executory costs         |  |                | 18,305 |                  |   |        
|                                           |  |                |        |                  |   |        
|Present value of minimum lease payments    |  |                | 21,523 |                  |   |        
|Less: current installments                 |  |                | 1,414  |                  |   |        
|                                           |  |                |        |                  |   |        
|Long-term obligations at December 31, 2005 |  | $              | 20,109 |                  |   |        
|                                           |  |                |        |                  |   |        



As of
December 31, 2005, the total minimum sublease rentals to be received in the future under noncancelable operating and capital subleases were $5.0 million.



|(9) |  | Stock-based Compensation
|--- |  | ------------------------



In July 1997, the Company adopted the 1997 Stock Option Plan (the Plan) pursuant to which the Companys Board of Directors may grant
options to purchase common stock to employees, officers, directors and consultants. Under the Plan 347,303 shares of the Companys common stock are reserved for issuance as of December 31, 2005. Generally, stock options are granted with an
exercise price equal to the estimated fair value of the common stock at the date of grant. The stock options have a 10-year term and ownership vests over four years from the date of grant.



In June 2000, the Company adopted the 2000 Long Term Incentive Plan (the
2000 Plan) pursuant to which the Company may grant options to purchase common stock to employees, officers, directors and consultants. Under the 2000 Plan, 1,155,064 shares of the Companys common stock are reserved for issuance as
of December 31, 2005. The number of shares authorized for issuance increases annually on January 1, by the lesser of five percent of outstanding shares on that date or such other number of shares as determined by the Board; however,
incentive stock options issuable under the 2000 Plan are not to exceed 4,000,000 shares. These options generally vest over a four-year period and are exercisable once vested. Under the 2000 Plan, options may be incentive stock options or
non-qualified options, and the exercise price shall not be less than the grant date fair market value for incentive stock options and not less than par value for non-qualified options.



The per share weighted-average fair value of stock options granted during 2003, 2004 and 2005 was $8.70, $10.60, and $5.02
respectively, on the date of grant with the following weighted-average assumptions:



|                        |  |                  |  |                  |  |                 
|----------------------- |  | ---------------- |  | ---------------- |  | ----------------
|                        |  | Year Ended      
|                        |  | December 28,2003 |  | December 31,2004 |  | December 31,2005
|Expected dividend yield |  | 0%               |  | 0%               |  | 0%              
|Risk-free interest rate |  | 2.00%            |  | 3.30%            |  | 3.60%           
|Expected life           |  | 3 years          |  | 4 years          |  | 4 years         
|Volatility              |  | 96%              |  | 90%              |  | 82%             



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is a summary of common stock options granted:



|                  |  |                   |   |  |                                |       |                             |          
|----------------- |  | ----------------- | - |  | ------------------------------ | ----- | --------------------------- | ---------
|                  |  | NumberOutstanding |   |  | Weighted-AverageExercise Price |       | NumberVested andExercisable
|December 28, 2002 |  | 5,778,039         |   |  | $                              | 41.90 |                             | 3,199,905
|Granted           |  | 2,280,332         |   |  |                                | 9.50  |                             |          
|Exercised         |  | (800,123          | ) |  |                                | 7.20  |                             |          
|Canceled          |  | (2,378,424        | ) |  |                                | 53.90 |                             |          
|                  |  |                   |   |  |                                |       |                             |          
|December 31, 2003 |  | 4,879,824         |   |  |                                | 26.60 |                             | 2,593,259
|Granted           |  | 1,958,912         |   |  |                                | 13.44 |                             |          
|Exercised         |  | (482,606          | ) |  |                                | 7.67  |                             |          
|Canceled          |  | (1,575,682        | ) |  |                                | 33.74 |                             |          
|                  |  |                   |   |  |                                |       |                             |          
|December 31, 2004 |  | 4,780,448         |   |  |                                | 20.54 |                             | 2,344,300
|Granted           |  | 7,620             |   |  |                                | 1.24  |                             |          
|Exercised         |  | (76,294           | ) |  |                                | 4.19  |                             |          
|Canceled          |  | (1,020,739        | ) |  |                                | 20.05 |                             |          
|                  |  |                   |   |  |                                |       |                             |          
|December 31, 2005 |  | 3,691,035         |   |  | $                              | 20.95 |                             | 2,586,385
|                  |  |                   |   |  |                                |       |                             |          



The following table
summarizes information about outstanding and exercisable stock options at December 31, 2005:



|                   |  |                     |  |                           |  |                                |        |                   |           |                                |   |       
|------------------ |  | ------------------- |  | ------------------------- |  | ------------------------------ | ------ | ----------------- | --------- | ------------------------------ | - | ------
|                   |  | Options Outstanding |  | Options Exercisable      
|Actual Price Range |  | Outstanding         |  | RemainingContractual Life |  | Weighted-AverageExercise Price |        | NumberExercisable |           | Weighted-AverageExercise Price
|$  0.10-$    3.40  |  | 70,587              |  | 3.81                      |  | $                              | 1.64   |                   | 70,587    |                                | $ | 1.64  
|$  5.33-$    7.50  |  | 662,190             |  | 7.20                      |  |                                | 5.84   |                   | 473,367   |                                |   | 5.90  
|$  8.49-$  12.60   |  | 296,546             |  | 6.70                      |  |                                | 10.80  |                   | 222,608   |                                |   | 10.75 
|$12.90-$  19.20    |  | 1,912,333           |  | 7.60                      |  |                                | 13.97  |                   | 1,099,402 |                                |   | 13.95 
|$19.40-$  33.58    |  | 568,288             |  | 4.97                      |  |                                | 31.22  |                   | 539,330   |                                |   | 31.70 
|$68.50-$910.00     |  | 181,091             |  | 4.59                      |  |                                | 141.84 |                   | 181,091   |                                |   | 141.84
|                   |  |                     |  |                           |  |                                |        |                   |           |                                |   |       
|                   |  | 3,691,035           |  | 6.83                      |  | $                              | 20.95  |                   | 2,586,385 |                                | $ | 24.52 
|                   |  |                     |  |                           |  |                                |        |                   |           |                                |   |       



During 2004, the
Company began issuing restricted stock under its 2000 Plan. Restricted stock generally vests over a four year period, 25% of which, vest after the first year and the remainder vests quarterly thereafter. Outstanding stock is entitled to vote and
receive any declared dividends. As of December 31, 2005 and December 31, 2004, 2,204,960 and 964,600, respectively unvested restricted stock were outstanding and held in escrow.



|(10) |  | Employee Stock Purchase Plan
|---- |  | ----------------------------



During 2000, the Company established the Broadwing Employee Stock Purchase Plan (the Plan). Under the Plan, the Company may issue up to up to
a total of 1,000,000 shares during the life of the Plan. Eligible employees choose to participate in the Plan during offering periods by authorizing payroll deductions of up to 15% of their salaries, subject to limitations imposed by the Internal
Revenue Code. The first offering period began in July 2000, with subsequent periods being six months in duration beginning on January 1, 2001. As of



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the last business day of each offering period, called an exercise date, the participants accumulated payroll deductions are used to
purchase shares of the Companys common stock. The purchase price per share purchased as of this date is the lower of either (1) 85% of the fair market value of a share of common stock on the first business day of the offering period or
(2) 85% of the fair market value of a share of common stock on the exercise date. During fiscal year 2003, 2004 and 2005, 176,178, 133,799, and 329,285 shares were purchased under the Plan, respectively, resulting in aggregate proceeds of $1.0
million, $1.8 million, and $1.3 million respectively.



The per
share weighted average fair value of shares granted under the Plan during 2003, 2004 and 2005 was $3.20, $5.68, and $2.10 respectively, on the date of grant with the following weighted average assumptions:



|                        |  |                  |  |                  |  |                 
|----------------------- |  | ---------------- |  | ---------------- |  | ----------------
|                        |  | Year Ended      
|                        |  | December 31,2003 |  | December 31,2004 |  | December 31,2005
|Expected dividend yield |  | 0%               |  | 0%               |  | 0%              
|Risk-free interest rate |  | 1.18%            |  | 1.25%            |  | 3.04%           
|Expected life           |  | 0.5 years        |  | 0.5 years        |  | 0.5 years       
|Volatility              |  | 84%              |  | 84%              |  | 84%             



|(11) |  | Warrants
|---- |  | --------



During 1999, in connection with certain debt facilities, the Company issued warrants to purchase 869,416 shares of the Companys common stock with an
exercise price of $7.60. During 2003 and 2004, 29,264 and 158,198 warrants were exercised, resulting in proceeds of $0.2 million and $0.6 million, respectively. The remaining unexercised warrants expired as of June 30, 2004.



In November 1999, the Company issued warrants to purchase up to 527,085
shares of common stock at $28.50 per share to a strategic investor. A certain percentage of the warrants were immediately exercisable, while the remaining amount became exercisable after the strategic investor purchased the Companys products.
Of the total 527,085 shares of common stock committed in this warrant, the rights to purchase 263,543 shares expired during the fourth quarter of 2004 and the rights to purchase the remaining 263,543 shares will expire in May 2006. During 1999, the
Company recorded equity-based sales and marketing expense of approximately $1.8 million for the estimated fair value at grant date of the warrants that were immediately exercisable. In June 2000, the Company waived the purchase requirements
associated with the remaining warrants, resulting in an equity-based sales and marketing expense of approximately $19.5 million for the estimated fair value at the date the warrants became exercisable.



In connection with the restructuring of the Cequel agreement the Company
granted immediately exercisable warrants, expiring in November 2010, to purchase an additional 725,000 common shares at a weighted average exercise price of $15.40 per share. As of December 31, 2004, all warrants associated with the agreement
remain outstanding.



In conjunction with the February 2004
issuance of unsecured convertible notes the Company issued warrants to purchase 2,732,838 shares of common stock. The warrants are immediately exercisable, have a strike price of $23.70 per share, and have a three-year life. The warrants were valued
at $33.2 million and were recorded as original issue discount. Warrants were valued using the Black-Scholes valuation model assuming expected dividend yield, risk-free interest rate, expected life and volatility of 0%, 2.2%, three years and 94.4%,
respectively. As of December 31, 2005, all warrants associated with the convertible notes remain outstanding.



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|(12) |  | Private Placement
|---- |  | -----------------



On August 28, 2003, the Company completed a private placement of 6.7 million shares of common stock for proceeds of $73.8 million, net of
offering costs. In addition, the Company granted the investors additional investment rights to purchase up to an additional 1,245,566 shares, net of exercises, of the Companys common stock at $13.00 per share. These additional investment
rights became exercisable on November 26, 2003, and expired on July 16, 2004.



Under the terms of the agreement, the Company was contractually committed to register shares that investors bought in connection with the August 2003 private placement. However, the Company was unable to do so due to
Broadwing Communication Services, Inc. predecessor auditors inability to consent to the Company referencing certain financial statements they audited relating to the Broadwing Communication Services, Inc. business while it was owned by
Cincinnati Bell. During the first quarter of 2004, Cincinnati Bell restated its earnings, their auditors consented to the Company referencing certain financial statements they audited, and the Company was able to register the shares. With the
registration of shares effective on April 19, 2004, contractual interest payments of $0.8 million per month ceased. The Company incurred approximately $3.2 million in interest associated with the delayed registration during 2004.



|(13) |  | Basic and Diluted Net Loss Per Common Share
|---- |  | -------------------------------------------



Basic and diluted net loss per common share are computed as follows (in thousands, except per share data):



|                                                 |  |                  |          |   |                  |   |          |                  |  |   |          |  
|------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                 |  | Year Ended       |         
|                                                 |  | December 31,2003 |          |   | December 31,2004 |   |          | December 31,2005 | 
|Net loss                                         |  | $                | (260,471 | ) |                  | $ | (152,181 | )                |  | $ | (133,428 | )
|Basic and diluted weighted average common shares |  |                  | 43,060   |   |                  |   | 53,217   |                  |  |   | 72,894   |  
|Basic and diluted net loss per common share      |  | $                | (6.05    | ) |                  | $ | (2.86    | )                |  | $ | (1.83    | )



Options and warrants
outstanding as of December 31, 2003 to purchase 4,879,823 and 1,455,104 shares of common stock, respectively, and 8,338 unvested shares acquired through the exercise of options were not included in the computation of diluted net loss per common
share for the year ended December 31, 2003, as their inclusion would be anti-dilutive.



Options unvested restricted stock and warrants outstanding as of December 31, 2004 to purchase 4,780,448, 964,600 and 3,743,108 shares of common stock, respectively, and 133 unvested shares acquired through the
exercise of options were not included in the computations of diluted net loss per common share for the year ended December 31, 2004, as their inclusion would have been anti-dilutive.



Options, unvested restricted stock and warrants outstanding as of December 31, 2005 to purchase 3,691,035, 2,204,960
and 3,721,381 shares of common stock, respectively, were not included in the computations of diluted net loss per common share for the year ended December 31, 2005, as their inclusion would have been anti-dilutive.



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|(14) |  | Income Taxes
|---- |  | ------------



The Company has incurred operating losses since its inception and has recognized no current or deferred tax provision or benefit. The provision (benefit)
for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to net loss before income taxes. The items causing this difference are as follows (in thousands):



|                                                                            |  |                  |          |   |                  |   |         |                  |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                            |  | Year Ended       |         
|                                                                            |  | December 31,2003 |          |   | December 31,2004 |   |         | December 31,2005 | 
|Expected tax benefit at statutory rate                                      |  | $                | 91,165   |   |                  | $ | 53,263  |                  |  | $ | 46,700  |  
|State tax, net of federal benefit                                           |  |                  | 12,694   |   |                  |   | 6,122   |                  |  |   | 6,641   |  
|Non-deductible goodwill amortization and purchased research and development |  |                  | (1,607   | ) |                  |   |        |                  |  |   |        |  
|Research and development tax credits                                        |  |                  |         |   |                  |   |        |                  |  |   |        |  
|Non-deductible interest                                                     |  |                  |         |   |                  |   | (9,959  | )                |  |   |        |  
|Other, net                                                                  |  |                  | (102     | ) |                  |   | (419    | )                |  |   | (198    | )
|Increase in valuation allowance                                             |  |                  | (102,150 | ) |                  |   | (49,007 | )                |  |   | (53,143 | )
|                                                                            |  |                  |          |   |                  |   |         |                  |  |   |         |  
|                                                                            |  | $                |         |   |                  | $ |        |                  |  | $ |        |  
|                                                                            |  |                  |          |   |                  |   |         |                  |  |   |         |  



Temporary differences
and carry forwards that give rise to deferred tax assets and liabilities are as follows (in thousands):



|                                                   |  |                  |          |   |                  |   |          |  
|-------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                   |  | Year Ended       |         
|                                                   |  | December 31,2004 |          |   | December 31,2005 |  
|Deferred tax assets:                               |  |                  |          |   |                  |   |          |  
|Capitalized start-up and organization costs        |  | $                | 8,092    |   |                  | $ | 4,589    |  
|Domestic net operating loss carry forward          |  |                  | 463,628  |   |                  |   | 481,963  |  
|Foreign net operating loss carry forward           |  |                  | 43,964   |   |                  |   | 43,777   |  
|Accrued expenses                                   |  |                  | 123,047  |   |                  |   | 121,046  |  
|Research and development tax credit carry forwards |  |                  | 14,764   |   |                  |   | 14,764   |  
|Non-cash stock compensation                        |  |                  | 105,449  |   |                  |   | 107,244  |  
|Property and equipment                             |  |                  | 64,256   |   |                  |   | 71,109   |  
|Other                                              |  |                  | (1,631   | ) |                  |   |         |  
|                                                   |  |                  |          |   |                  |   |          |  
|Total gross deferred tax assets                    |  |                  | 821,569  |   |                  |   | 844,492  |  
|Valuation allowance                                |  |                  | (821,569 | ) |                  |   | (844,492 | )
|                                                   |  |                  |          |   |                  |   |          |  
|Net deferred tax assets                            |  |                  |         |   |                  |   |         |  
|                                                   |  |                  |          |   |                  |   |          |  



In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or the entire amount of deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon
the generation of future taxable income during the periods in which temporary differences become deductible and credit carry forwards are available. Management considers scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies that can be implemented by the Company in making this assessment. Based upon the lack of historical taxable income, scheduled reversal of deferred tax liabilities, and projections for future taxable income over
the periods in which the temporary differences are deductible and tax credits are available to reduce taxes payable, the Company has established a valuation allowance of $821.6 million and $844.5 million as of December 31, 2004 and 2005,
respectively.



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The $22.9 million increase in the valuation allowance for the year ended December 31, 2005 is net of
a $30.2 million adjustment to acquired deferred tax assets which were fully reserved.



The domestic net operating loss carryforwards of $1,163.0 million will expire commencing in 2012 through 2025. Foreign net operating loss carryforwards of $118.8 million will expire commencing in 2006 through the year
2011. Further, as a result of certain financing and capital transactions, an annual limitation on the future utilization of a portion of the net operating loss carryforward may have occurred or could occur if we raised additional capital. As a
result, the utilization of the net operating loss carryforward could be limited.



The Companys domestic net operating loss carryforward has been increased for tax benefits associated with exercises of stock options and warrants. The Company receives an income tax benefit calculated as the
difference between the fair value of the stock issued at the time of the exercise and the option price, tax effected. These benefits will be credited directly to shareholders equity when the net operating loss carryforwards are utilized
against current tax liabilities. The benefits increasing gross deferred tax assets amount to approximately $39.6 million as of December 31, 2005.



|(15) |  | Related Party Transactions
|---- |  | --------------------------



| | (a) |  | Joint Venture
| | --- |  | -------------



The Company has a 99% economic interest and a 49% voting interest in ACME Grating Ventures, LLC (ACME LLC). The remaining economic interest
and voting interest are owned by ACME Gratings, Inc. (ACME Corp.). A Director of the Company owns 100% of ACME Corp. ACME Corp. has contributed to ACME LLC certain licensed intellectual property and the Company has contracted with ACME
LLC for its use of the Companys facilities, personnel, equipment and certain intellectual property. ACME LLC makes gratings that the Company purchases at a unit cost that is consistent with the requirements of the licensed intellectual
property, which require that the gratings made with the licensed technology be sold for no less than the fair market value of comparable gratings that are available in the commercial marketplace.



According to the operating agreement of ACME LLC, the Company receives 99% of
the profits and losses from the business, and ACME Corp. receives the remaining 1%; however, $0.3 million of ACME LLC-related start up costs incurred by ACME Corp. will be returned to ACME Corp. out of the net profits of ACME LLC before any
distributions of net profits are made to the Company. Further, ACME Corp. is responsible for paying royalties to the licensor of the licensed technology contributed by ACME Corp., which vary in amounts ranging from 0.5% to 2.0% of the net invoice
cost of each grating sold by ACME LLC. In addition to 1% of the profits, ACME LLC is obligated to pay to ACME Corp. an amount sufficient to pay the royalty obligations of ACME Corp. ACME LLC is fully consolidated into the consolidated financial
statements of Broadwing Corporation. To date, no distributions have been made to ACME Corp. beyond those sufficient to pay the associated royalty obligations.



| | (b) |  | Strategic Relationships
| | --- |  | -----------------------



The Company purchased approximately $0.1 million during 2003 from ITF Optical Technologies (ITF). Certain officers and directors of the
Company own a non-controlling interest in ITF.



The Company
purchased approximately $0.9 million, $0.1 million, and $2,400 of components during 2003, 2004, and 2005, respectively, from Lightconnect, Inc. Certain officers and directors own a non-controlling interest in Lightconnect.



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|(16) |  | Concentrations
|---- |  | --------------



Substantially all of the Companys cash and cash equivalents are held at four major U.S. financial institutions. Deposits held with banks exceed the
amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, in the opinion of management, bear minimal risk.



The Company may be subject to credit risk due to concentrations of receivables from companies that are communications
providers, Internet service providers and cable television companies. The Company performs ongoing credit evaluations of customers financial condition and typically does not require significant collateral. Most of the Companys
arrangements with large customers do not provide guarantees that customer usage will be maintained at current levels. To the extent these large customers cease to employ the Companys network to deliver their services, or cannot pay outstanding
accounts receivable balances, the Companys revenue and financial condition could be materially adversely affected.



Revenue from the Companys ten largest customers accounted for approximately 20%, 19%, and 18% of total communications services revenue for the year
ended December 31, 2003, 2004, and 2005 respectively. In addition, revenue from communications carriers accounted for 40%, 38% and 42% of total communications services revenue for the year ended December 31, 2003, 2004, and 2005
respectively.



|(17) |  | Commitments and Contingencies
|---- |  | -----------------------------



| | (a) |  | Summary
| | --- |  | -------



The following table provides information about our contractual obligations and commercial commitments as of December 31, 2005.



|                                 |  |                                                         |         |      |   |         |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|-------------------------------- |  | ------------------------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | ---------- | ------ |  | - | ------ |  | - | -------
|                                 |  | Payments Due by Period(in thousands)                   
|Contractual Obligations          |  | Total                                                   |         | 2006 |   | 2007    |  | 2008 |         | 2009 |   | 2010    |  | Thereafter
|Long-term debt                   |  | $                                                       | 32,369  |      | $ | 31,659  |  | $    | 710     |      | $ |        |  | $          |       |  | $ |       |  | $ |       
|Capital lease obligations        |  |                                                         | 39,828  |      |   | 3,459   |  |      | 3,308   |      |   | 3,162   |  |            | 2,855  |  |   | 2,431  |  |   | 24,613 
|Operating leases                 |  |                                                         | 215,023 |      |   | 34,177  |  |      | 32,435  |      |   | 29,133  |  |            | 23,107 |  |   | 19,352 |  |   | 76,819 
|Contractual purchase commitments |  |                                                         | 587,086 |      |   | 213,744 |  |      | 184,909 |      |   | 107,751 |  |            | 56,683 |  |   | 23,486 |  |   | 513    
|                                 |  |                                                         |         |      |   |         |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Total contractual obligations    |  | $                                                       | 874,306 |      | $ | 283,039 |  | $    | 221,362 |      | $ | 140,046 |  | $          | 82,645 |  | $ | 45,269 |  | $ | 101,945
|                                 |  |                                                         |         |      |   |         |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|                                 | 
|                                 |  | Amount of Commitment Expiration per Year (in thousands)
|Other Commercial Commitments     |  | Total                                                   |         | 2006 |   | 2007    |  | 2008 |         | 2009 |   | 2010    |  | Thereafter
|Letters of credit                |  | $                                                       | 14,071  |      | $ | 9,567   |  | $    | 641     |      | $ | 383     |  | $          | 1,549  |  | $ |       |  | $ | 1,931  



Contractual purchase
commitments consist primarily of leased circuits from third parties.



| | (b) |  | Contingency
| | --- |  | -----------



Excluded from the above at December 31, 2005, we have $35.7 million in contingent access vendor billing disputes for which we have provided $12.9
million in accrued line costs. If resolution of these disputes and allowances differ from our estimates, our reserve will be adjusted resulting in an increase or decrease in cost of revenue and net earnings.



| | (c) |  | Legal Matters
| | --- |  | -------------



Ciena



On March 31, 2005, Broadwing and Ciena Corporation (Ciena) entered into a settlement agreement regarding certain patent infringement
lawsuits. Under the terms of the settlement agreement, Ciena and Broadwing have agreed to dismiss all claims. In addition, Broadwing will pay to Ciena a total of $35.0 million in



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three equal annual installments, of which $33.0 million of the total payment may be used as credits toward the purchase of Ciena equipment and services at
market prices over three and one-half years. The Company recorded a charge of $2.0 million associated with the settlement in the first quarter of 2005. During the second quarter of 2005, the Company made the first annual payment of $11.0 million to
Ciena, while the remaining $22.0 million will be paid half in the second quarter of 2006 and the other half in the second quarter of 2007. As of December 31, 2005, approximately $2.1 million related to advance payments made for future equipment
purchases is included in other non-current assets on the consolidated balance sheet.



Class Action Suit



Between May 7, 2001 and June 15, 2001, nine class action lawsuits were filed in the United States District Court for the Southern District of New York relating to the Companys initial public offering on behalf of all persons
who purchased the Companys stock between July 28, 2000 and the filing of the complaints. Each of the complaints named as defendants: the Company, its directors and officers who signed the registration statement in connection with its
initial public offering, and certain of the underwriters that participated in its initial public offering. The Companys directors and officers have since been dismissed from the case, without prejudice. The complaints allege that the
registration statement and prospectus relating to the Companys initial public offering contained material misrepresentations and/or omissions in that those documents did not disclose (1) that certain of the underwriters had solicited and
received undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of the Companys common stock in the initial public offering and (2) that certain of the underwriters had entered
into arrangements with some investors that were designed to distort and/or inflate the market price for our common stock in the aftermarket following the initial public offering. The complaints ask the court to award to members of the class the
right to rescind their purchases of the Companys common stock (or to be awarded rescissory damages if the class member has sold the Companys stock) and prejudgment and post-judgment interest, reasonable attorneys and experts
witness fees and other costs.



On February 15th,
2005, the Judge granted preliminary approval of a proposed settlement agreement between the plaintiffs and defendants, including Broadwing. The proposed settlement is a $1 billion guaranteed settlement. The insurance companies for the defendants
agreed to pay up to $1 billion dollars in total to the extent that judgment is rendered for the plaintiffs. If plaintiffs succeed in recovering more than $1 billion from the underwriters, the companies that went public, such as the Broadwing, will
not have to pay any additional amounts. The defendants insurance companies will be paying the settlement that is subject to the final approval of the district court. Should the Judge not grant final approval of the settlement agreement, we
believe that we have meritorious defenses to plaintiffs allegations and will vigorously defend ourselves.



On August 31, 2005 the Judge issued an order clarifying certain provisions of the proposed settlement and set deadlines for the final approval of the
proposed settlement. The Judge scheduled the fairness hearing on the proposed settlement for April 24, 2006.



Qwest Investigations



Since approximately 2003, the Denver, Colorado regional office of the SEC has been conducting two investigations titled In the Matter of Qwest
Communications International, Inc. and In the Matter of Issuers Related to Qwest. The Company believes the first of these investigations does not involve any allegation of wrongful conduct on the part of the Company. In connection with the second
investigation, the SEC is examining various transactions and business relationships involving Qwest and eleven companies having a vendor relationship with Qwest, including the Company. This investigation, insofar as it relates to the Company,
appears to focus generally on whether the Companys transactions and relationships with Qwest and its employees were appropriately disclosed in the Companys public filings and other public statements.



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In addition, during the same period, the United States Attorney in Denver has been conducting an
investigation involving Qwest, including Qwests relationships with certain of its vendors, including the Company. In connection with that investigation, the U.S. Attorney has sought documents and information from the Company and has sought
interviews from persons associated or formerly associated with the Company, including certain of the Companys officers. The U.S. Attorney has indicated that neither the Company nor any of its current or former officers or employees is a target
or a subject of the investigation.



The Company has cooperated
fully with these investigations. Both the SEC and U.S. Attorney investigations have resulted in cases against Qwest and some of its former executives. These cases do not involve or refer to the Company and the Company has received no indication from
either the SEC or U.S. Attorney that its present or former personnel will be witnesses in any of these cases. The Company has not received any communication from the SEC or the U.S. Attorney as to whether there is any ongoing investigation that
relates to the Companys business relationship with Qwest. The Company is not able, at this time, to say when the SEC and/or U.S. Attorney investigations or cases will be completed and resolved, or what the ultimate outcome with respect to the
Company will be. These investigations or cases could result in substantial legal costs and a diversion of managements attention that may have a material adverse effect on the Companys business, financial condition and results of
operations.



Great Northern Insurance Company



On October 5, 2004, the Company filed an action in
the US District Court for the District of Maryland against its property insurance carrier, Great Northern Insurance Company, for breach of contract under a building and personal property insurance policy sold to the Company by Great Northern. The
claim is for a loss sustained by the Company due to a fire in a warehouse that occurred in March 2003. The amount of loss alleged by the Company exceeds $46.0 million, of which Great Northern has paid $4.5 million. The Company has requested a jury
trial for this dispute. The parties are conducting discovery in the matter, which is expected to be completed April 2006. No trial date has been set.



The Company and its subsidiaries from time to time are also subject to pending and threatened legal action and proceedings arising in the ordinary course
of business. Management believes that the outcome of such actions and proceedings will not have a material adverse effect on the Companys business, financial condition or results of operations.



| | (d) |  | Letters of Credit
| | --- |  | -----------------



As of December 31, 2005, long-term restricted cash totaled $14.6 million associated with outstanding irrevocable letters of credit relating to lease
obligations for various business arrangements. These letters of credit are collateralized by funds in our operating account. Various portions of the letters of credit expire at the end of each of the respective lease agreements.



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BROADWING CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(18) |  | Quarterly Financial Information (Unaudited):
|---- |  | --------------------------------------------



The following is a summary of the quarterly results of operations of the Company for the years ended December 31, 2004 and December 31, 2005 (in
millions, except per share amounts):



|                                     |  |                |       |   |        |   |       |       |  |   |        |   |  |       |       |   |  |   |        |  
|------------------------------------ |  | -------------- | ----- | - | ------ | - | ----- | ----- |  | - | ------ | - |  | ----- | ----- | - |  | - | ------ | -
|                                     |  | Fiscal Quarter |      
|                                     |  | First          |       |   | Second |   |       | Third |  |   | Fourth |   |  | Total |      
|2004:                                |  |                |       |   |        |   |       |       |  |   |        |   |  |       |       |   |  |   |        |  
|Revenue                              |  | $              | 146.8 |   |        | $ | 142.1 |       |  | $ | 163.4  |   |  | $     | 219.9 |   |  | $ | 672.2  |  
|Net loss                             |  |                | (33.9 | ) |        |   | (38.1 | )     |  |   | (36.8  | ) |  |       | (43.4 | ) |  |   | (152.2 | )
|Basic and diluted net loss per share |  | $              | (0.70 | ) |        | $ | (0.80 | )     |  | $ | (0.69  | ) |  | $     | (0.68 | ) |  | $ | (2.87  | )
|2005:                                |  |                |       |   |        |   |       |       |  |   |        |   |  |       |       |   |  |   |        |  
|Revenue                              |  | $              | 218.3 |   |        | $ | 222.2 |       |  | $ | 218.6  |   |  | $     | 220.0 |   |  | $ | 879.1  |  
|Net loss                             |  |                | (43.5 | ) |        |   | (38.3 | )     |  |   | (30.5  | ) |  |       | (21.1 | ) |  |   | (133.4 | )
|Basic and diluted net loss per share |  | $              | (0.62 | ) |        | $ | (0.52 | )     |  | $ | (0.41  | ) |  | $     | (0.29 | ) |  | $ | (1.83  | )



|(19) |  | Subsequent Events (Unaudited)
|---- |  | -----------------------------



Senior Convertible Note Repayment



On January 17, 2006, the Company provided notice to the holders of its Senior Convertible Notes that in accordance with the terms of the notes and
the Securities Purchase Agreement, dated February 9, 2004, relating to the notes, the Company was electing to pay fifty percent (50%) in cash and fifty percent (50%) in stock each of the interest of $413,894 and the principal
installment of $32,142,857 due on February 21, 2006. The Company issued 1,894,235 shares associated with this final installment of the note.



CEO Resignation



Dr. David Huber transitioned out of his role as Chief Executive Officer (CEO) of the Company subsequent to year end, but he continues as the Chairman
of the Companys Board of Directors. The Board of Directors has named three executives, Lynn Anderson, Chief Financial Officer, Kim Larsen, General Counsel, and Scott Widham, President of Sales, to the office of the CEO that will conduct
day-to-day operations of the Company pending appointment of a new chief executive.



Upon resignation, Dr. Huber received consideration consisting of one years base pay or $400,000, the vesting of all stock options and restricted stock exercisable up to ten years from the date of grant, and
continuation of health benefits for approximately eighteen months. The accelerated vesting of 247,500 restricted stock units and 99,167 stock options will result in non-cash compensation expense of $2.9 million in the first quarter of 2006.



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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



During our two most recent fiscal years, there has been no change in the independent accountant engaged as the principal accountant to audit our
consolidated financial statements and the independent accountant has not expressed reliance on other independent accountants in its reports during such time periods.



Item 9A.    Controls and Procedures.



Evaluation of Disclosure Controls and Procedures



The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Companys financial
reports and to the members of senior management and the Board of Directors. Based on managements evaluation as of December 31, 2005, the principal executive officer and principal financial officer of the Company have concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.



Managements Report on Internal Control Over Financial Reporting



The Companys management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on our evaluation under the framework in Internal ControlIntegrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.
Managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is
included herein.



Changes in Internal Controls



There were no changes to the Companys internal controls over financial
reporting during the fourth quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



Our management, including our Chief Executive Committee and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Broadwing have been detected.



Item 9B.    Other Information.



None.



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PART III



Item 10.    Directors and Executive Officers of the Registrant.



(a) Listed below are our executive officers and directors as of February 27, 2006, their ages as of that date and position with us. Officers are
elected by the Board of Directors to serve for a period ending with the next meeting of the Board of Directors held after the Annual Meeting of Stockholders.



|                                 |  |     |  |                                                                                
|-------------------------------- |  | --- |  | -------------------------------------------------------------------------------
|Name                             |  | Age |  | Title                                                                          
|Lynn D. Anderson                 |  | 46  |  | Co-Chief Executive Office, Senior Vice President and Chief Financial Officer   
|Kim D. Larsen                    |  | 48  |  | Co-Chief Executive Office, Senior Vice President, General Counsel and Secretary
|Scott Widham                     |  | 48  |  | Co-Chief Executive Office and President of Sales and Marketing                 
|David R. Huber, Ph.D.            |  | 56  |  | Chairman of the Board                                                          
|Joseph R. Hardiman               |  | 69  |  | Director                                                                       
|Freeman A. Hrabowski, III, Ph.D. |  | 56  |  | Director                                                                       
|David S. Oros                    |  | 47  |  | Director                                                                       
|Donald R. Walker                 |  | 57  |  | Director                                                                       



Lynn D.
Anderson has been our Senior Vice President and Chief Financial Officer since January 2002 and acting as Co-Chief Executive Officer since January 2006. From May 2001 to December 2001, Mr. Anderson served as Chief Financial Officer of
Optical Capital Group, LLC, a specialized technology investment firm focused on optical equipment related communications technology. From December 2000 to April 2001, Mr. Anderson was self-employed providing financial and strategic consulting
services to companies in the technology, media and energy sectors. From February 2000 to November 2000, Mr. Anderson served as Chief Operating Officer and Chief Financial Officer of Zillacast, an Internet broadcasting company. From 1981 to
2000, Mr. Anderson held several financial positions with various divisions of General Electric Company and GE Capital. Mr. Anderson earned his B.A. from Kansas State University and his M.B.A. from the University of Texas.



Kim D. Larsen has served as our General Counsel and Secretary since
September 1998, a Senior Vice President since June 2000 and acting as Co-Chief Executive Officer since January 2006. From October 1994 through September 1998, Mr. Larsen was a partner with the law firm of Mayer, Brown & Platt (now
Mayer, Brown, Rowe & Maw LLP) and served as partner-in-charge of its Cologne, Germany office, where he specialized in corporate mergers and acquisitions in the international communications sector. Mr. Larsen earned his law degree from
Columbia University and a B.S. in economics and political science from Brigham Young University. Mr. Larsen was a founding director of Ciena Corporation. Mr. Larsen is the brother-in-law of Dr. Huber.



Scott Widhamhas been our President of Sales and Marketing since 2003
and is acting as Co-CEO since January 2006. Mr. Widham has more than twenty-five years of international and domestic experience in the telecommunications industry. From 1988 to 2001. Widham served as founder, owner and operator of Capital Cable,
Inc., a multi-system cable television operator that was subsequently sold to Charter Communications. From 1998 to 2001, Widham served as Vice President Marketing and Creative Services of CoreComm Ltd., a Bermuda based public telecommunications
company (COMM) serving over one million customers with Internet and Telephony services. From 1983 to 1988 Mr. Widham served as a Vice President of Operations for Cencom Cable Associates. From 1979 to 1983, Mr. Widham served as a Director of the
Warner Amex Satellite Entertainment Company where his responsibilities included distribution, sales and marketing for The Movie Channel, Nickelodeon and MTV. Mr. Widham earned his BBA from The University of Texas at Austin in 1979.



David R. Huber, Ph.D.is the founder of
Broadwing and chairman of our Board of Directors. From our inception until February 1, 2006 Dr. Huber served as Chief Executive Officer. Dr. Huber has 20 years of



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experience in the development of optical communications equipment. From 1992 through April 1997, Dr. Huber served first as Chief Technology Officer and
later as Chief Scientist of Ciena Corporation, a company he founded in 1992. From 1989 through 1992, Dr. Huber managed the Lightwave Research and Development Program for General Instrument Corporation. Prior to 1989, Dr. Huber held
positions in optical communications development at Rockwell International Corporation, Optelecom, Inc. and ITT Industries, Inc., formerly International Telephone & Telegraph Corporation. Dr. Huber holds 41 U.S. patents in optics
technology and has numerous additional patents pending. He earned a Ph.D. in electrical engineering from Brigham Young University and a B.S. in physics from Eastern Oregon State University. Dr. Huber is the brother-in-law of Mr. Larsen.



Joseph R. Hardiman has served as a Director since July
2000. Mr. Hardiman served as the President and Chief Executive Officer of the National Association of Securities Dealers, Inc. and its wholly owned subsidiary, The Nasdaq Stock Market, Inc., from September 1987 through January 1997. From 1975
through September 1987, Mr. Hardiman held various positions at Alex, Brown & Sons, including managing director and Chief Operating Officer. Mr. Hardiman earned B.A. and LLB degrees from the University of Maryland.
Mr. Hardiman serves on the boards of the Deutsche Scudder Funds, the ISI Funds, the Nevis Fund, Brown Investment Advisory Trust Company, University of Maryland Foundation, the University of Maryland School of Law and The Nasdaq Stock Market
Education Foundation. Previously, he served on the boards of the Depository Trust Company, the Securities Industry Foundation for Economic Education, the Securities Regulation Institution and the Center for the Study of the Presidency and as a
member of the American Business Conference.



Freeman A.
Hrabowski, III, Ph.D. has served as Director since October 2002. Dr. Hrabowski has been President of the University of Maryland, Baltimore County since May 1992. Dr. Hrabowski joined the University of Maryland in 1987, first serving as
Vice Provost, then as Executive Vice President. Dr. Hrabowski serves as a consultant to the National Science Foundation, the National Institutes of Health, the National Academy of Sciences, the U.S. Department of Education, and various
universities and school systems nationally. He is a member of numerous boards, including the Baltimore Community Foundation, the Baltimore Equitable Society, Constellation Energy Group, McCormick & Company, Inc., the Mercantile Safe
Deposit & Trust Company, the Merrick & France Foundations, the Maryland Technology Council, and the University of Maryland Medical System. Dr. Hrabowski received a B.A. in mathematics from Hampton Institute and an M.A. in
mathematics and a Ph.D. in higher education administration from the University of Illinois at Urbana-Champaign.



David S. Oros has served as a Director since January 2001. Mr. Oros has been Chairman and Chief Executive Officer of Aether Systems, Inc., a
provider of wireless data services, systems and software since he founded Aether in 1996. From 1994 until 1996, Mr. Oros was President of NexGen Technologies, L.L.C., a wireless software development company that contributed all of its assets to
Aether. From 1992 until 1994, he was President of the Wireless Data Group at Westinghouse Electric. From 1982 until 1992, Mr. Oros directed internal research and managed large programs in advanced airborne radar design and development at
Westinghouse Electric. He currently serves on the Board of Directors of Aether Systems, Inc. and Novatel Wireless, Inc. Mr. Oros received a B.S. in mathematics and physics from the University of Maryland.



Donald R. Walker has served as Director since October 2002.
Mr. Walker has served as an independent government consultant on intelligence space systems and missile defense and as a Senior Review Panel member for United States government agencies since November 2001. From April 2000 to November 2001,
Mr. Walker served as President and Chief Executive Officer of Veritect, a computer security firm. From 1995 through 2000, Mr. Walker served as Chief Information Officer of United Services Automobile Association (USAA), a Fortune 200
financial services company and Chief Executive Officer and President of USAAs information technology company. Mr. Walker served in the United States Air Force from 1966 to 1995 and retired with the rank of Brigadier General.
Mr. Walker received a B.S. in Engineering Science from the United States Air Force Academy, an M.S. in Mechanical Engineering from the University of Southern California and an M.B.A. from Auburn University.



(b) The remaining information required by this Item will be contained in the
Companys definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 13, 2005, and is hereby incorporated by reference.



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Item 11.    Executive Compensation.



The information called for by this Item 11 is set forth under the caption Executive Compensation in our definitive Proxy Statement that will be furnished to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 12, 2006, and is hereby incorporated by reference.



Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



The information called for by this Item 11 is set forth under the caption Executive Compensation in our definitive Proxy Statement that
will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 12, 2006, and is hereby incorporated by reference.



Item 13.    Certain Relationships and Related Transactions.



Additional information called for by this Item 13 is set forth under the caption Certain Relationships and Related Transactions in our
definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders scheduled to be held on May 12, 2006, and is hereby incorporated by reference.



Item 14.    Principal Accountant Fees and Services.



The information called for by this Item 14 is set forth under the caption Selection of Independent Auditors in our definitive Proxy
Statement that will be furnished to stockholders in connection with the Annual Meeting of Stockholders scheduled to be held on May 12, 2006, and is hereby incorporated by reference.



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PART IV



Item 15.    Exhibits and Financial Statement Schedules.



(a)(1) Financial Statements



The information required by this Item is included in Item 8 of Part II of this report.



(a)(2) Financial Statement Schedules



The information required by this Item is included in Item 8 of Part II of this report.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2006.



Broadwing CorporationBy:

/s/    LYNN D.
ANDERSONLynn D. Anderson Co-Chief Executive OfficerBy:

/s/    KIM D.
LARSENKim D. Larsen Co-Chief Executive
OfficerBy:

/s/    SCOTT
WIDHAMScott Widham Co-Chief Executive Officer




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                          |  |                                                               |  |              
|--------------------------------------------------------- |  | ------------------------------------------------------------- |  | -------------
|Name                                                      |  | Title                                                         |  | Date         
|                                                          |  |                                                              
|/s/    Lynn D. AndersonLynn D. Anderson                   |  | Senior Vice President and Chief Financial Officer             |  | March 4, 2006
|                                                          |  |                                                              
|/s/    Timothy C. DecTimothy C. Dec                       |  | Senior Vice President, Chief Accounting Officer and Treasurer |  | March 4, 2006
|                                                          |  |                                                              
|/s/    Joseph R. HardimanJoseph R. Hardiman               |  | Director                                                      |  | March 4, 2006
|                                                          |  |                                                              
|/s/    Freeman A. Hrabowski, IIIFreeman A. Hrabowski, III |  | Director                                                      |  | March 4, 2006
|                                                          |  |                                                              
|/s/    David S. OrosDavid S. Oros                         |  | Director                                                      |  | March 4, 2006
|                                                          |  |                                                              
|/s/    Donald R. WalkerDonald R. Walker                   |  | Director                                                      |  | March 4, 2006
|                                                          |  |                                                              
|/s/    David R. HuberDavid R. Huber                       |  | Chairman of the Board                                         |  | March 4, 2006



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                     
|3.1           |  | Amended and Restated Certificate of Incorporation (incorporated by reference herein to Exhibit 3.1 to registrants registration statement on Form S-1, File No.
333-36238)                                                                                                                                                                      
|              | 
|3.2           |  | Certificate of Amendment to Certificate of Incorporation (incorporated by reference herein to Exhibit 3.1 to registrants Current Report on Form 8-K filed October 14,
2004)                                                                                                                                                                    
|              | 
|3.3           |  | Amended and Restated By-laws (incorporated by reference herein to Exhibit 3.1 to registrants Current Report on Form 8-K filed May 6, 2005)                                                                                                                                                                                                     
|              | 
|4.1           |  | Form of Initial Senior Convertible Note (incorporated by reference herein to Exhibit 4.01 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                                                                                  
|              | 
|4.2           |  | Form of Additional Senior Convertible Note (incorporated by reference herein to Exhibit 4.02 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                                                                               
|              | 
|4.3           |  | Form of Initial Warrants (incorporated by reference herein to Exhibit 4.03 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                                                                                                 
|              | 
|4.4           |  | Form of Additional Warrants (incorporated by reference herein to Exhibit 4.04 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                                                                                              
|              | 
|4.5           |  | Stock Purchase Warrant dated November 20, 2003 issued to Cequel III, LLC (incorporated by reference herein to Exhibit 4.1 to registrants Current Report on Form 8-K, filed February 12,
2004)                                                                                                                                                  
|              | 
|10.1          |  | Amended and Restated Loan Agreement, dated as of June 30, 1999, among Corvis Corporation, Venture Lending & Leasing II, Inc., as Agent, and Venture Lending & Leasing II, Inc. and the
other Lenders signatory thereto (incorporated by reference herein to Exhibit 10.1 to registrants registration statement on Form S-1, File No. 333-36238)
|              | 
|10.2          |  | Second Amended 1997 Stock Option Plan (incorporated by reference herein to Exhibit 10.2 to registrants registration statement on Form S-1, File No. 333-36238)                                                                                                                                                                                 
|              | 
|10.3          |  | Form of 2000 Long Term Incentive Plan (incorporated by reference herein to Exhibit 10.3 to registrants registration statement on Form S-1, File No. 333-36238)                                                                                                                                                                                 
|              | 
|10.4          |  | Form of Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.4 to registrants registration statement on Form S-1, File No. 333-36238)                                                                                                                                                                                  
|              | 
|10.5          |  | Form of Restricted Stock Agreement (Directors) (incorporated by reference herein to Exhibit 10.1 to registrants Current Report on Form 8-K filed on April 5, 2005)                                                                                                                                                                             
|              | 
|10.6          |  | Form of Restricted Stock Agreement (Executive Officers) (incorporated by reference herein to Exhibit 10.2 to registrants Current Report on Form 8-K filed on April 5,
2005)                                                                                                                                                                    
|              | 
|10.7          |  | Description of Bonus Plans for Executive Officers for Fiscal Year 2004 and Fiscal Year 2005 (incorporated by reference herein to Exhibit 10.3 to registrants Current Report on Form 8-K
filed on April 5, 2005)                                                                                                                                
|              | 
|10.8         |  | Procurement Agreement, dated March 17, 2000, by and between Broadwing Communication Services, Inc. and Corvis Corporation (incorporated by reference herein to Exhibit 10.7 to
registrants registration statement on Form S-1, File No. 333-36238)                                                                                             
|              | 
|10.9         |  | Amended and Restated Procurement Agreement and Field Trial Agreement, dated June 23, 2000, by and between Williams Communications Inc. and Corvis Corporation (incorporated by reference herein
to Exhibit 10.8 to registrants registration statement on Form S-1, File No. 333-36238)                                                         
|              | 
|10.10        |  | Amendment No. 3 to Procurement Agreement, dated January 9, 2001, by and between Williams Communications Inc. and Corvis Corporation (incorporated by reference herein to Exhibit 10.1 to
registrants Current Report on Form 8-K, dated January 9, 2001, File No. 0-30989)                                                                      



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.11        |  | Amendment No. 4 to Procurement Agreement, dated April 23, 2001, by and between Williams Communications Inc. and Corvis Corporation (incorporated by reference herein to Exhibit 10.9 to
registrants Annual Report on Form 10-K for the year ended December 29, 2001)                                                                                                                                                 
|              | 
|10.12        |  | Amendment No. 6 to Procurement Agreement, dated September 25, 2001, by and between Williams Communications Inc. and Corvis (incorporated by reference herein to Exhibit 10.10 to
registrants Annual Report on Form 10-K for the year ended December 29, 2001)                                                                                                                                                        
|              | 
|10.13        |  | Procurement Agreement, dated June 5, 2000, by and between Qwest Communications Corporation and Corvis Corporation (incorporated by reference herein to Exhibit 10.9 to registrants
registration statement on Form S-1, File No. 333-36238)                                                                                                                                                                           
|              | 
|10.14         |  | Employment Agreement, dated January 4, 2002, as amended, between Corvis Corporation and Lynn D. Anderson (incorporated by reference herein to Exhibit 10.12 to registrants Annual Report
on Form 10-K for the year ended December 28, 2002)                                                                                                                                                                          
|              | 
|10.15         |  | Form of Executive Severance and Noncompetition Agreement (incorporated by reference herein to Exhibit 10.1 to registrants Current Report on Form 8-K filed on May 11,
2005)                                                                                                                                                                                                                                          
|              | 
|10.16         |  | Release and Severance Agreement dated as of January 31, 2006 by and between Broading Corporation and David R. Huber (incorporated by reference herein to Exhibit 10.1 to registrants
Current Report on Form 8-K filed on February 1, 2006)                                                                                                                                                                           
|              | 
|10.17         |  | Agreement for the Purchase and Sale of Assets by and between Broadwing Communications Services, Inc., Broadwing Telecommunications, Inc. and the other Sellers party thereto and
C III Communications, LLC and C III Communications Operations, LLC, dated as of February 22, 2003 (incorporated by reference herein to Exhibit 10.13 to registrants Annual Report on Form 10-K for the year ended December 28,
2002)
|              | 
|10.18         |  | Amendment No. 1 to the Asset Purchase Agreement, dated June 6, 2003 (incorporated by reference herein to Exhibit 2.2 to registrants Current Report on Form 8-K, filed June 30,
2003)                                                                                                                                                                                                                                 
|              | 
|10.19         |  | Agreement and Plan of Merger, dated as March 3, 2004, by and among Corvis Corporation, Corvis Acquisition Company, Inc., and Focal Communications Corporation (incorporated by reference herein
to Annex A to the information statement/prospectus included in registrants registration statement on Form S-4 (File 333-116415) filed on June 11, 2004.                                                              
|              | 
|10.20         |  | Securities Purchase Agreement, dated as of February 9, 2004, by and among Corvis Corporation and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference
herein to Exhibit 10.1 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                               
|              | 
|10.21         |  | Registration Rights Agreement, dated as of February 9, 2004, by and among Corvis Corporation and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference
herein to Exhibit 10.2 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                               
|              | 
|10.22         |  | Form of Voting Agreement by and among Corvis Corporation and the stockholders of Corvis Corporation listed on the signature pages thereto under the heading Stockholders
(incorporated by reference herein to Exhibit 10.3 to registrants Current Report on Form 8-K, filed February 11, 2004)                                                                                                                     
|              | 
|10.23         |  | Registration Rights Agreement, dated November 20, 2003, by and among Corvis Corporation and Cequel III, LLC (incorporated by reference herein to Exhibit 10.1 to registrants Current
Report on Form 8-K, filed February 12, 2004)                                                                                                                                                                                    
|              | 
|21.1*         |  | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                          
|              | 
|23.1*         |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                              
|              | 
|31.1          |  | Certification of Co-Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                        
|              | 
|31.2          |  | Certification of Co-Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|              | 
|31.3          |  | Certification of Co-Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|              | 
|32.1          |  | Certification of Co-Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            
|              | 
|32.3          |  | Certification of Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            

---

| |  | Confidential treatment requested for portions of this exhibit.
|- |  | --------------------------------------------------------------

|* |  | Filed as an exhibit to the registrants Form 10-K filed March 6, 2006.
|- |  | ----------------------------------------------------------------------



80