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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



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



For the transition period
from to



Commission file number 0-12751



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Corvis Corporation

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 52-2041343                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



7015 Albert Einstein
Drive, Columbia, Maryland 21046-9400

(Address of principal executive offices) (Zip Code)



(443) 259-4000

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)



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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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No ̈



Number of shares of Common Stock, $0.01 par value, outstanding at July 31, 2003: 405,539,219.



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##### Table of Contents

|        |  | PART I - FINANCIAL INFORMATION                                                                                               |  |   
|------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | --
|        |  |                                                                                                                             
|Item 1. |  | Financial Statements                                                                                                         |  | 3 
|        |  |                                                                                                                             
|        |  | Unaudited condensed consolidated balance sheets as of December 28, 2002 and June 30, 2003                                    |  | 3 
|        |  |                                                                                                                             
|        |  | Unaudited condensed consolidated statements of operations for the three and six months ended June 29, 2002 and June 30, 2003 |  | 4 
|        |  |                                                                                                                             
|        |  | Unaudited condensed consolidated statements of cash flows for the six months ended June 29, 2002 and June 30, 2003           |  | 5 
|        |  |                                                                                                                             
|        |  | Notes to unaudited condensed consolidated financial statements                                                               |  | 6 
|        |  |                                                                                                                             
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 17
|        |  |                                                                                                                             
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 35
|        |  |                                                                                                                             
|Item 4. |  | Controls and Procedures                                                                                                      |  | 36
|        |  |                                                                                                                             
|        |  | PART II  OTHER INFORMATION                                                                                                  |  |   
|        |  |                                                                                                                             
|Item 1. |  | Legal Proceedings                                                                                                            |  | 37
|        |  |                                                                                                                             
|Item 2. |  | Changes in Securities and Use of Proceeds                                                                                    |  | 39
|        |  |                                                                                                                             
|Item 3. |  | Defaults upon Senior Securities                                                                                              |  | 39
|        |  |                                                                                                                             
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 39
|        |  |                                                                                                                             
|Item 5. |  | Other Information                                                                                                            |  | 39
|        |  |                                                                                                                             
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                             |  | 39



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##### Table of Contents

PART I -FINANCIAL INFORMATION



Item 1. Financial Statements.



CORVIS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                                                                                                                               |  | December 28, 2002 |            |   | June 30, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ---------- | - | ------------- | -
|ASSETS                                                                                                                                                                                                                         |  |                   |            |   |               |  
|Current assets:                                                                                                                                                                                                                |  |                   |            |   |               |  
|Cash and cash equivalents                                                                                                                                                                                                      |  | $                 | 457,833    |   |               | $
|Short-term investments                                                                                                                                                                                                         |  |                   | 24,133     |   |               |  
|Trade accounts receivable                                                                                                                                                                                                      |  |                   | 1,781      |   |               |  
|Inventory, net                                                                                                                                                                                                                 |  |                   | 26,491     |   |               |  
|Other current assets                                                                                                                                                                                                           |  |                   | 14,406     |   |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total current assets                                                                                                                                                                                                           |  |                   | 524,644    |   |               |  
|Restricted cash, long-term                                                                                                                                                                                                     |  |                   | 2,329      |   |               |  
|Long-term investments                                                                                                                                                                                                          |  |                   | 22,450     |   |               |  
|Property and equipment, net                                                                                                                                                                                                    |  |                   | 45,760     |   |               |  
|Goodwill and other intangible assets, net                                                                                                                                                                                      |  |                   | 13,965     |   |               |  
|Other long-term assets, net                                                                                                                                                                                                    |  |                   | 1,170      |   |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total assets                                                                                                                                                                                                                   |  | $                 | 610,318    |   |               | $
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                           |  |                   |            |   |               |  
|Current liabilities:                                                                                                                                                                                                           |  |                   |            |   |               |  
|Notes payable, current portion                                                                                                                                                                                                 |  | $                 | 107        |   |               | $
|Capital lease obligations, current portion                                                                                                                                                                                     |  |                   | 1,982      |   |               |  
|Accounts payable                                                                                                                                                                                                               |  |                   | 14,973     |   |               |  
|Accrued expenses                                                                                                                                                                                                               |  |                   | 46,420     |   |               |  
|Deferred revenue                                                                                                                                                                                                               |  |                   | 1,319      |   |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total current liabilities                                                                                                                                                                                                      |  |                   | 64,801     |   |               |  
|Noncurrent liabilities:                                                                                                                                                                                                        |  |                   |            |   |               |  
|Notes payable, net of current portion                                                                                                                                                                                          |  |                   | 2,672      |   |               |  
|Capital lease obligations, net of current portion                                                                                                                                                                              |  |                   | 74         |   |               |  
|Other long-term liabilities                                                                                                                                                                                                    |  |                   | 2,693      |   |               |  
|Deferred revenue  long-term                                                                                                                                                                                                   |  |                   |           |   |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total liabilities                                                                                                                                                                                                              |  |                   | 70,240     |   |               |  
|Minority interest                                                                                                                                                                                                              |  |                   |           |   |               |  
|Commitments and contingencies                                                                                                                                                                                                  |  |                   |            |   |               |  
|Stockholders equity:                                                                                                                                                                                                          |  |                   |            |   |               |  
|Common stock$0.01 par value; 1,900,000,000 shares authorized; 413,113,503 shares issued and 407,199,203 shares outstanding
as of December 28, 2002; 417,105,116 shares issued and 404,823,216 outstanding as of June 30, 2003 |  |                   | 4,126      |   |               |  
|Shareholder note receivable                                                                                                                                                                                                    |  |                   | (32        | ) |               |  
|Treasury stock, 5,914,300 shares and 12,281,900 shares, at cost                                                                                                                                                                |  |                   | (4,405     | ) |               |  
|Additional paid-in capital                                                                                                                                                                                                     |  |                   | 2,809,267  |   |               |  
|Accumulated other comprehensive loss:                                                                                                                                                                                          |  |                   |            |   |               |  
|Foreign currency translation adjustment                                                                                                                                                                                        |  |                   | (8,215     | ) |               |  
|Unrealized investment gain                                                                                                                                                                                                     |  |                   | 24         |   |               |  
|Accumulated deficit                                                                                                                                                                                                            |  |                   | (2,260,687 | ) |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total stockholders equity                                                                                                                                                                                                     |  |                   | 540,078    |   |               |  
|                                                                                                                                                                                                                               |  |                   |            |   |               |  
|Total liabilities and stockholders equity                                                                                                                                                                                     |  | $                 | 610,318    |   |               | $
|                                                                                                                                                                                                                               |  |                   |            |   |               |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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CORVIS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                                                     |  | Three Months Ended |          |   | Six Months Ended |  
|-------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | -
|                                                                     |  | June 29,2002       |          |   | June 30,2003     |  
|Revenue:                                                             |  |                    |          |   |                  |  
|Equipment sales and service                                          |  | $                  | 3,022    |   |                  | $
|Telecommunications services                                          |  |                    |         |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Total revenue                                                        |  |                    | 3,022    |   |                  |  
|Costs of revenue:                                                    |  |                    |          |   |                  |  
|Equipment sales and service                                          |  |                    | 3,971    |   |                  |  
|Telecommunications services                                          |  |                    |         |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Total costs of revenue                                               |  |                    | 3,971    |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Gross profit (loss)                                                  |  |                    | (949     | ) |                  |  
|Operating expenses:                                                  |  |                    |          |   |                  |  
|Research and development, exclusive of equity-based expense          |  |                    | 25,803   |   |                  |  
|Sales, general and administrative, exclusive of equity-based expense |  |                    | 23,906   |   |                  |  
|Equity-based expense:                                                |  |                    |          |   |                  |  
|Research and development                                             |  |                    | 6,467    |   |                  |  
|Sales, general and administrative                                    |  |                    | 10,555   |   |                  |  
|Depreciation                                                         |  |                    | 8,495    |   |                  |  
|Amortization of intangible assets                                    |  |                    | 4,258    |   |                  |  
|Restructuring, impairment and other charges other charges            |  |                    | 1,792    |   |                  |  
|Purchased research and development                                   |  |                    | 34,580   |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Total operating expenses                                             |  |                    | 115,856  |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Operating loss                                                       |  |                    | (116,805 | ) |                  |  
|Interest income, net                                                 |  |                    | (2,305   | ) |                  |  
|                                                                     |  |                    |          |   |                  |  
|Net loss before minority interest                                    |  |                    | (119,110 | ) |                  |  
|Minority interest                                                    |  |                    |         |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Net loss                                                             |  | $                  | (119,110 | ) |                  | $
|Other comprehensive income (loss):                                   |  |                    |          |   |                  |  
|Foreign currency translation adjustment                              |  |                    | 3,400    |   |                  |  
|Unrealized investment gains                                          |  |                    |         |   |                  |  
|                                                                     |  |                    |          |   |                  |  
|Comprehensive loss                                                   |  | $                  | (115,710 | ) |                  | $
|                                                                     |  |                    |          |   |                  |  
|Basic and diluted net loss per common share                          |  | $                  | (0.31    | ) |                  | $
|                                                                     |  |                    |          |   |                  |  
|Weighted average number of common shares outstanding                 |  |                    | 383,412  |   |                  |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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CORVIS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                            |  | Six Months Ended |         
|--------------------------------------------------------------------------- |  | ---------------- | --------
|                                                                            |  | June 29, 2002    |         
|Cash flows from operating activities:                                       |  |                  |         
|Net loss                                                                    |  | $                | (190,146
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                  |         
|Depreciation and amortization                                               |  |                  | 24,684  
|Equity-based expense                                                        |  |                  | 36,977  
|Restructuring and other charges                                             |  |                  | 10,460  
|Purchased research and development                                          |  |                  | 34,580  
|Minority interest                                                           |  |                  |        
|Changes in operating assets and liabilities, excluding acquisitions:        |  |                  |         
|Decrease in accounts receivable                                             |  |                  | 17,761  
|Decrease (increase) in inventory, net                                       |  |                  | 3,751   
|Decrease (increase) in other assets                                         |  |                  | 5,108   
|Increase (decrease) in accounts payable and accrued expenses                |  |                  | (10,184 
|                                                                            |  |                  |         
|Net cash used in operating activities                                       |  |                  | (67,009 
|                                                                            |  |                  |         
|Cash flows from investing activities:                                       |  |                  |         
|Purchase of property and equipment                                          |  |                  | (13,011 
|(Purchases) sales of investments                                            |  |                  | (21,107 
|Broadwing acquisition                                                       |  |                  |        
|Cash acquired in business combination                                       |  |                  | 6,013   
|                                                                            |  |                  |         
|Net cash used in investing activities                                       |  |                  | (28,105 
|                                                                            |  |                  |         
|Cash flows from financing activities:                                       |  |                  |         
|Repayments of notes payable and capital lease obligations                   |  |                  | (3,062  
|Decrease in deposits and other non-current assets                           |  |                  | 8       
|Purchase of treasury stock                                                  |  |                  |        
|Proceeds from the issuance of stock                                         |  |                  | 896     
|                                                                            |  |                  |         
|Net cash provided by (used in) financing activities                         |  |                  | (2,158  
|                                                                            |  |                  |         
|Effect of exchange rate changes on cash and cash equivalents                |  |                  | (515    
|                                                                            |  |                  |         
|Net decrease in cash and cash equivalents                                   |  |                  | (97,787 
|                                                                            |  |                  |         
|Cash and cash equivalentsbeginning                                         |  |                  | 638,872 
|                                                                            |  |                  |         
|Cash and cash equivalentsending                                            |  | $                | 541,085 
|                                                                            |  |                  |         
|Supplemental disclosure of cash flow information:                           |  |                  |         
|Interest paid                                                               |  | $                | 649     
|                                                                            |  |                  |         
|Purchase business combination consideration paid with common stock          |  | $                | 91,818  
|                                                                            |  |                  |         



See accompanying notes
to unaudited condensed consolidated financial statements.



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CORVIS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(1) Summary of Significant Accounting Policies and Practices



(a) Basis of Presentation



The unaudited condensed consolidated financial statements included herein
for Corvis Corporation and subsidiaries (the Company or Corvis) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management,
the condensed consolidated financial statements included in this report reflect all normal recurring adjustments which the Company considers necessary for the fair presentation of the results of operations for the interim periods. Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to
such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire
year.



On June 13, 2003, the Company invested approximately
$92.9 million, including acquisition costs, for a 96% ownership in Broadwing Communication Services, LLC (Broadwing), which acquired most of the assets and certain of the liabilities of Broadwing Communications Services, Inc. and certain
subsidiaries. Broadwing Communications Services, Inc. was an Austin, Texas based provider of data and voice communication services throughout the United States. The results of Broadwing, have been included in the consolidated financial statements
from the date of acquisition.



Effective June 30, 2003, the
Company changed its fiscal calendar to a calendar quarter and year-end.



These financial statements should be read in conjunction with the Companys December 28, 2002 audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K filed on March 25, 2003
with the Securities and Exchange Commission.



(b) Equipment
and Related Services Revenue and Cost of Revenue



Revenue
from equipment sales is recognized upon execution of a contract and the completion of all delivery obligations provided that there are no uncertainties regarding customer acceptance and collectibility is deemed probable. If uncertainties exist,
revenue is recognized when such uncertainties are resolved.



Revenue from equipment installation services is recognized as the services are performed unless the terms of the supply contract combine product acceptance with installation, in which case revenues for installation services are recognized
when the terms of acceptance are satisfied and installation is completed. To the extent customer contracts include both product sales and installation services, revenues are recognized based on their respective fair values. Revenues from
installation service fixed price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date compared to estimated total costs for each installation contract. Amounts received in excess of
revenue recognized are included as deferred revenue in the accompanying condensed consolidated balance sheets. Revenue from annual maintenance agreements is recognized on a straight-line basis over the service period.



Costs of equipment revenue include the costs of manufacturing the
Companys products, delivering services and other costs associated with warranty and other contractual obligations, inventory obsolescence costs and overhead related to the Companys manufacturing, engineering, finishing and installation
operations. Warranty reserves are determined based upon actual warranty cost experience, estimates of component failure rates and managements industry experience.



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(c) Telecommunications Service Revenue and Cost of Revenue



Broadband transport service revenue is generally billed monthly in advance,
with revenue being recognized when earned. Revenue from long-term term arrangements are recognized ratably over the contract term. Both switched voice and data, and Internet product revenue, are billed monthly in arrears, while the revenue is
recognized as the services are provided. Service activation revenue is deferred and recognized over the appropriate contract life for the associated service.



Indefeasible right-of-use (IRU) agreements represent the lease of network capacity or dark fiber and are recorded as unearned 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 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 unearned revenue is recognized in the period in which the contract is terminated. The Company has recorded the deferred revenue associated with IRUs at its fair value at the date of acquisition, which value was
substantially less than its historical value. As a result, the Company expects that revenues from IRUs will be significantly less than those previously reported by Broadwing Communications Services, Inc.



Telecommunications services cost of revenue primarily reflects access charges
paid to local exchange carries and other providers and transmission lease payments to other carriers.



(d) Property, Plant and Equipment



Property, plant 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 Broadwing network are classified as construction in progress in the accompanying
consolidated balance sheets.



(e) Stock Options and Warrants



The Company applies the intrinsic-value-based method of
accounting prescribed by Accounting Principle Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (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 exceeded the exercise price. Statement of Financial Accounting Standards (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 income (loss) if the fair-value-based method had been applied to all outstanding and vested awards in each period (in
thousands, except per share data).



|                                                                              |  | Three Months Ended |         
|----------------------------------------------------------------------------- |  | ------------------ | --------
|                                                                              |  | June 29, 2002      |         
|Net loss                                                                      |  | $                  | (119,110
|Deduct total stock-based employee compensation expense                        |  |                    | (28,700 
|Add stock-based employee compensation expense included in reported net income |  |                    | 14,608  
|                                                                              |  |                    |         
|Pro forma net loss                                                            |  | $                  | (133,202
|                                                                              |  |                    |         
|Pro forma basic and diluted net loss per share                                |  | $                  | (0.35   
|                                                                              |  |                    |         



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|                                                                              |  | Six Months Ended |         
|----------------------------------------------------------------------------- |  | ---------------- | --------
|                                                                              |  | June 29, 2002    |         
|Net loss                                                                      |  | $                | (190,146
|Deduct total stock-based employee compensation expense                        |  |                  | (51,292 
|Add stock-based employee compensation expense included in reported net income |  |                  | 29,216  
|                                                                              |  |                  |         
|Pro forma net loss                                                            |  | $                | (212,222
|                                                                              |  |                  |         
|Pro forma basic and diluted net loss per share                                |  | $                | (0.57   
|                                                                              |  |                  |         



(f) Uses of
Estimates



The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



(g) Reclassifications



Certain amounts for the three and six months ending June 29, 2002 have been
reclassified to conform to the 2003 presentation. These amounts include the separate presentation of depreciation expense as well as the combination of sales and marketing and general and administrative expenses.



(2) Broadwing Acquisition



On June 13, 2003, the Company invested approximately $92.9 million, including
acquisition costs, for a 96% ownership in Broadwing Communications, LLC (Broadwing), which acquired most of the assets and certain of the liabilities of Broadwing Communications Services Inc. Broadwing Communications Services, Inc. was
an Austin, Texas based provider of data and voice communication services throughout the United States. The purchase price is subject to change upon the resolution of certain events, which will take place at final closing. In addition, as part of the
acquisition, the Company agreed to invest at least an additional $50.0 million in Broadwing by December 31, 2003 to support Broadwings working capital needs.



Corvis holds a 96% ownership interest in the Broadwing investment and appoints 4 of the 6 board members. Cequel III, LLC
contributed approximately $0.9 million for a 1% ownership interest and appoints 2 of the 6 board members. Cincinnati Bell, previously the parent company of Broadwing Communications Services, Inc. retained a 3% non-voting equity interest in the joint
venture. The joint venture will operate under the Broadwing Communications, LLC name. The results of Broadwing have been included in the consolidated financial statements from the date of acquisition.



The purchase price has been allocated to the assets and liabilities acquired
on a preliminary basis based on independent third party valuations and may change as additional information becomes available. The following table summarizes the preliminary purchase price allocation and weighted-average useful life of long-lived
assets.



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|                             |  | Fair Value |         | 
|---------------------------- |  | ---------- | ------- | 
|Current assets               |  | $          | 80,000  | 
|Property plant and equipment |  |            | 92,936  | 
|Intangible assets            |  |            | 27,160  | 
|Other long-term assets       |  |            | 7,400   | 
|                             |  |            |         | 
|Total assets acquired        |  |            | 207,496 | 
|                             |  |           
|Current liabilities          |  |            | 95,695  | 
|Long-term liabilities        |  |            | 21,495  | 
|                             |  |            |         | 
|Total liabilities assumed    |  |            | 117,190 | 
|Minority interest            |  |            | 915     | 
|                             |  |            |         | 
|Purchase price               |  | $          | 89,391  | 
|                             |  |            |         | 



The Broadwing purchase
price is net of the elimination of warranty obligations sold to Broadwing prior to the acquisition.



The following unaudited pro forma data summarizes the results of operations for the period indicated as if the Broadwing acquisition had been completed as
of the beginning of the earliest period presented. The unaudited pro forma data gives effect to actual operating results prior to the acquisition, adjusted to include the pro forma effect of amortization of intangibles and the elimination of
intercompany sales. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the earliest period presented or that may be obtained in the future
(in thousands except per share data):



|                                     |  | Three Months Ended |           
|------------------------------------ |  | ------------------ | ----------
|                                     |  | June 29, 2002      |           
|Revenues                             |  | $                  | 199,901   
|                                     |  |                    |           
|Net loss                             |  | $                  | (205,696  
|                                     |  |                    |           
|Basic and diluted net loss per share |  | $                  | (0.54     
|                                     |  |                    |           
|                                     | 
|                                     |  | Six Months Ended   |           
|                                     |  | June 29, 2002      |           
|Revenues                             |  | $                  | 398,909   
|                                     |  |                    |           
|Net loss                             |  | $                  | (2,386,068
|                                     |  |                    |           
|Basic and diluted net loss per share |  | $                  | (6.39     
|                                     |  |                    |           



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(3) Inventory



Inventories are comprised of the following (in thousands):



|                                                   |  | December 28, 2002 |          |   | June 30, 2003 |  
|-------------------------------------------------- |  | ----------------- | -------- | - | ------------- | -
|Raw materials                                      |  | $                 | 206,026  |   |               | $
|Work-in-process                                    |  |                   | 7,487    |   |               |  
|Finished goods                                     |  |                   | 49,087   |   |               |  
|                                                   |  |                   |          |   |               |  
|                                                   |  |                   | 262,600  |   |               |  
|Less reserve for excess inventory and obsolescence |  |                   | (236,109 | ) |               |  
|                                                   |  |                   |          |   |               |  
|Inventory, net                                     |  | $                 | 26,491   |   |               | $
|                                                   |  |                   |          |   |               |  



(4) Property, Plant and Equipment



Property, plant and equipment (in thousands):



|                                                |  | As of            |          |   | Depreciable Lives (Years)
|----------------------------------------------- |  | ---------------- | -------- | - | -------------------------
|                                                |  | December 28,2002 |          |   | June 30,2003             
|Land                                            |  | $                |         |   |                          
|Buildings and leasehold improvements            |  |                  | 17,038   |   |                          
|Transmission facilities                         |  |                  |         |   |                          
|Furniture, fixtures, vehicles, and other        |  |                  | 24,250   |   |                          
|Fiber usage rights                              |  |                  |         |   |                          
|Test and manufacturing equipment                |  |                  | 108,722  |   |                          
|Construction in process                         |  |                  |         |   |                          
|                                                |  |                  |          |   |                          
|Subtotal                                        |  |                  | 150,010  |   |                          
|Less: Accumulated depreciation and amortization |  |                  | (104,250 | ) |                          
|                                                |  |                  |          |   |                          
|Property plant and equipment, net               |  | $                | 45,760   |   |                          
|                                                |  |                  |          |   |                          



(5) Basic and Diluted Net Loss Per
Share



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



|                                          |  | Three Months Ended |         
|----------------------------------------- |  | ------------------ | --------
|                                          |  | June 29, 2002      |         
|Net loss                                  |  | $                  | (119,110
|Basic and diluted weighted average shares |  |                    | 383,412 
|                                          |  |                    |         
|Basic and diluted net loss per share      |  | $                  | (0.31   
|                                          |  |                    |         



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|                                          |  | Six Months Ended |         
|----------------------------------------- |  | ---------------- | --------
|                                          |  | June 29, 2002    |         
|Net loss                                  |  | $                | (190,146
|Basic and diluted weighted average shares |  |                  | 373,302 
|                                          |  |                  |         
|Basic and diluted net loss per share      |  | $                | (0.51   
|                                          |  |                  |         



Options and warrants
outstanding as of June 30, 2003 to purchase 50,253 and 7,594 shares of common stock, respectively, and 237 unvested shares acquired through the exercise of options were not included in the computation of diluted loss per share for the three and six
month periods ended June 30, 2003 as their inclusion would have been anti-dilutive.



Options and warrants outstanding as of June 29, 2002 to purchase 54,299 and 7,594 shares of common stock, respectively, and 1,772 unvested shares acquired through the exercise of options were not included in the
computation of diluted loss per share for the three and six month periods ended June 29, 2002 as their inclusion would have been anti-dilutive.



(6) Legal Matters



In July 2000, Ciena Corporation (Ciena) informed the Company of its belief that there is significant correspondence between products that the
Company offers and several U.S. patents held by Ciena relating to optical networking systems and related dense wavelength division multiplexing (WDM) communications systems technologies. On July 19, 2000, Ciena filed a lawsuit in the
United States District Court for the District of Delaware alleging that the Company is willfully infringing three of Cienas patents. Ciena is seeking injunctive relief, monetary damages including treble damages, as well as costs of the
lawsuit, including attorneys fees. On September 8, 2000, the Company filed an answer to the complaint, as well as counter-claims alleging, among other things, invalidity and/or unenforceability of the three patents in question. On March 5,
2001, a motion was granted allowing Ciena to amend its complaint to include allegations that the Company is willfully infringing two additional patents. One patent was dropped from the litigation by agreement of the parties prior to trial. In trials
held in February 2003, Corvis all-optical networking products were found by a jury not to infringe two of Cienas WDM patents. The jury did not reach a verdict on a third Ciena WDM patent, which is related to the two non-infringed WDM
patents. Corvis inverse multiplexing transceiver product, which can be used along with its all-optical networking products, was found by the jury to infringe a Ciena patent on bit rate transparent devices. In an April 2003 retrial, the manner
in which certain Corvis transmitters and receivers are operated in a WDM system was found by a jury to infringe the patent, upon which a jury verdict was not reached in the February 2003 trial. The jury verdicts to date are interim verdicts, in so
far as additional trial court proceedings remain before a decision is made by the court and judgment is entered. In May 2003, Corvis filed a motion to certify the record for interlocutory appeal to the U.S. Federal Circuit Court of Appeals and Ciena
filed motions for entry of judgment and for a permanent injunction, all of which are pending.



The Company has designed its products in an effort to respect the intellectual property rights of others. The Company intends to continue to defend itself vigorously against these claims and pursue post-trial relief
and appellate review of the trial proceedings, as necessary. While the Company believes that it will ultimately prevail in this litigation, there can be no assurance that the Company will be successful in the defense of the litigation.



The Company may consider settlement due to the costs and uncertainties
associated with litigation in general, and patent infringement litigation in particular, and due to the fact that an adverse determination in the litigation could preclude the Company from producing some of its products until it was able to
implement a non-infringing alternative design to any portion of the Companys products to which such a



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determination applied. Even if the Company considers settlement, there can be no assurance that it will be able to reach a settlement with Ciena.



A final adverse determination in, or settlement of, the Ciena litigation
could involve the payment of significant amounts by the Company, or could include terms in addition to payments, such as an injunction preventing the sale of infringing products and/or a redesign of some of the Companys products, which could
have a material adverse effect on the Companys business, financial condition and results of operations. While management believes that the Company will ultimately prevail, the Company cannot be certain that the interim jury verdicts of
infringement will be overturned, or that infringement of other patents in the suit will not be found in later legal proceedings. The Company expects that Ciena will attempt to use the interim jury verdicts and the possibility of an injunction to
disrupt the Companys sales efforts and customer relationships. To the extent it is necessary, a trial to determine damages will be held following any appeals. Such appeals can take up to a year or more before final determination.



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 IPO on behalf of all persons who purchased Company 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 the Companys IPO, and certain of the underwriters that participated in the Companys IPO. 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 IPO 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
IPO 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 the Companys common stock in the aftermarket following the IPO. The complaints ask
the court to award to members of the class the right to rescind their purchases of Corvis common stock (or to be awarded rescissory damages if the class member has sold its Corvis stock) and prejudgment and post-judgment interest, reasonable
attorneys and experts witness fees and other costs.



By order dated October 12, 2001, the court appointed an executive committee of six plaintiffs law firms to coordinate their claims and function as lead counsel. Lead plaintiffs have been appointed in almost all of the IPO allocation
actions including the Corvis action. On October 17, 2001, a group of underwriter defendants moved for the judges recusal. The judge denied that application. On December 13, 2001, the moving underwriter defendants filed a petition for writ of
mandamus seeking the disqualification of the judge in the United States Court of Appeals for the Second Circuit. On April 1, 2002, the Second Circuit denied the moving underwriter defendants application for a writ of mandamus seeking the
judges recusal from this action. On April 19, 2002, plaintiffs filed amended complaints in each of the IPO allocation actions, including the Corvis action. On February 19, 2003, the issuer defendants motion to dismiss was granted with
regard to certain claims and denied with regard to certain other claims. As to the Company, the Section 10(b) and Rule 10b-5 claims, alleging that the Company participated in a scheme to defraud investors by artificially driving up the price of the
securities, were dismissed with prejudice, but the Section 11 claims, alleging that the registration statement contained a material misstatement of, or omitted, a material fact at the time it became effective, survived the motion to dismiss. On June
26, 2003, the plaintiffs executive committee announced a proposed settlement between plaintiffs, on the one hand, and the issuer defendants and their respective officer and director defendants, including the Company and its named officers and
directors, on the other. A memorandum of understanding to settle plaintiffs claims against the issuers and their directors and officers has been approved as to form by counsel for the issuers and the process of obtaining individual approval by
each of the 309 issuer defendants, including the Company, is now underway. The proposed settlement does not resolve plaintiffs claims against the underwriter defendants. The proposed settlement is also subject to approval by the district
court. The principal components of the proposed settlement include (i) a release of all of plaintiffs claims against the issuer defendants and their officers and directors which have, or could have, been asserted in this litigation arising out
of the conduct alleged in the amended complaints to be wrongful, (ii) the assignment by the issuers to the plaintiffs of certain potential claims against the underwriter defendants and the agreement by



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the issuers not to assert certain claims against the underwriter defendants, and (iii) an undertaking by the insurers of the issuer defendants to pay to
plaintiffs the difference (the Recovery Deficit) between $1 billion and any lesser amount recovered from the underwriter defendants in this litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the underwriters, the
insurers of the settling issuer defendants will owe no money to the plaintiffs. We cannot be certain that we will not be subject to additional claims in the future, including claims brought by the underwriter defendants still involved in the
litigation.



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.



(7) Concentrations



Substantially all of the Companys cash and cash
equivalents are held at a small number of 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, are held by highly rated U.S.
financial institutions and, therefore, in the opinion of management, bear minimal risk.



Excluding sales to Broadwing, the Companys equipment segment has made sales to or entered into contracts with five customers: Wiltel Communications Group, Inc., Qwest Communications Corporation, Telefonica de
Espana S.A.U., France Telecom and the U.S. Federal Government. These customers, however, have met or are approaching contractual minimum purchase commitments and have reached the end of their long-term service contracts. The amount of product and
service revenues in 2003 and beyond will depend on the amount and timing of future firm order commitments from existing customers, as well as new contract wins. Given the historical decline in equipment sales and the current state of the
telecommunications industry, the timing and extent of future sales cannot be predicted. As a result, revenues associated with the sale of equipment may remain at or lower than current levels for the next quarter and beyond.



The Companys telecommunication services 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.



Revenue from
Broadwings ten largest customers accounted for approximately 24% of total revenue since the acquisition. One of these ten largest customers representing 2% of Broadwing revenues is in Chapter 11 bankruptcy proceedings. In addition, a
significant portion of Broadwings revenue is derived from telecommunications carriers. Revenue from telecommunications carriers accounted for 41% of total revenue since the acquisition date.



(8) Restructuring and Other Charges



Starting in 2001 and continuing through 2003, the Company developed and
implemented restructuring initiatives designed to reduce operating expenses and to address reductions in sales. In addition, the Company is continually evaluating the recoverability of its inventory and long-lived assets in light of these
initiatives and the projected economic and operating environment. As a result, the Company has recorded the following charges (in thousands):



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|                                                                |  | Three Months Ended |        | Six Months Ended
|--------------------------------------------------------------- |  | ------------------ | ------ | ----------------
|                                                                |  | June 29, 2002      |        |                 
|Product cost of sales charges  inventory-write downs and other |  | $                  | 1,740  |                 
|Restructuring, impairment and other charges:                    |  |                    |        |                 
|Work force reductions                                           |  |                    | 4,232  |                 
|Asset impairments, facilities and other charges                 |  |                    | (2,480 | )               
|                                                                |  |                    |        |                 
|Total restructuring, impairment and other charges               |  | $                  | 1,752  |                 
|Impairment of investments                                       |  |                    | 4,771  |                 
|Total restructuring and related charges                         |  | $                  | 8,263  |                 
|                                                                |  |                    |        |                 



The following table displays the
activity and balances of the restructuring reserve account for the six months ended June 30, 2003 (in thousands):



|                                 |  | InventoryWrite-downs |        |   | WorkforceReductions |   |         | FacilityConsolidation |  |   | Total  |  
|-------------------------------- |  | -------------------- | ------ | - | ------------------- | - | ------- | --------------------- |  | - | ------ | -
|Balance as of December 28, 2002  |  | $                    | (1,657 | ) |                     | $ | (10,017 | )                     |  | $ | (4,456 | )
|Restructuring and other charges  |  |                      |       |   |                     |   | (3,049  | )                     |  |   | (735   | )
|Cash payments                    |  |                      | 904    |   |                     |   | 8,837   |                       |  |   | 764    |  
|Accretion of interest            |  |                      |       |   |                     |   |        |                       |  |   | (45    | )
|Non-cash charges                 |  |                      |       |   |                     |   |        |                       |  |   | 278    |  
|Foreign currency exchange impact |  |                      |       |   |                     |   | (338    | )                     |  |   |       |  
|                                 |  |                      |        |   |                     |   |         |                       |  |   |        |  
|Balance at March 31, 2003        |  | $                    | (753   | ) |                     | $ | (4,567  | )                     |  | $ | (4,194 | )
|                                 |  |                      |        |   |                     |   |         |                       |  |   |        |  
|Restructuring and other charges  |  |                      | (3,337 | ) |                     |   | (7,285  | )                     |  |   | (512   | )
|Cash payments                    |  |                      | 496    |   |                     |   | 4,605   |                       |  |   | 1,262  |  
|Accretion of interest            |  |                      |       |   |                     |   |        |                       |  |   | (23    | )
|Non-cash charges                 |  |                      | 3,337  |   |                     |   | 2,815   |                       |  |   | 868    |  
|Foreign currency exchange impact |  |                      |       |   |                     |   | (306    | )                     |  |   |       |  
|                                 |  |                      |        |   |                     |   |         |                       |  |   |        |  
|Balance at June 30, 2003         |  | $                    | (257   | ) |                     | $ | (4,738  | )                     |  | $ | (2,599 | )
|                                 |  |                      |        |   |                     |   |         |                       |  |   |        |  



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(9) Segment Reporting



The Company has two business segments: equipment sales and services and telecommunications services. The equipment sales and services segment designs,
manufactures and sells high performance all-optical and electrical/optical communications systems. The telecommunications services segment provides data and voice communications services through Broadwing Communications, LLC. These services are
provided over approximately 18,700 route miles of fiber-optic transmission facilities. Telecommunications services revenues are generated by broadband transport through private line and IRU agreements, Internet services utilizing technology based on
Internet protocol (IP), and switched voice services provided to both wholesale and retail customers. The Company evaluates segment performance and allocates resources based on several factors, of which net revenues and net loss are the
primary financial measures. The accounting policies of the segments are the same as those described in footnote (1) to the condensed consolidated financial statements. Intercompany sales include standard profit margins, which are eliminated in
consolidation. Segment results are as follows (in thousands):



|                                   |  | Three Months Ended |          |   | Six Months Ended |  
|---------------------------------- |  | ------------------ | -------- | - | ---------------- | -
|                                   |  | June 30,2002       |          |   | June 29,2003     |  
|Revenue:                           |  |                    |          |   |                  |  
|Equipment sales and services       |  | $                  |         |   |                  | $
|Telecommunications services        |  |                    | 3,022    |   |                  |  
|                                   |  |                    |          |   |                  |  
|Total                              |  | $                  | 3,022    |   |                  | $
|                                   |  |                    |          |   |                  |  
|Inter segment revenues:            |  |                    |          |   |                  |  
|Equipment sales and services       |  | $                  |         |   |                  | $
|Telecommunication Services         |  |                    |         |   |                  |  
|                                   |  |                    |          |   |                  |  
|Total                              |  | $                  |         |   |                  | $
|                                   |  |                    |          |   |                  |  
|Net loss before minority interest: |  |                    |          |   |                  |  
|Equipment                          |  | $                  | (119,110 | ) |                  | $
|Telecommunications services        |  |                    |         |   |                  |  
|                                   |  |                    |          |   |                  |  
|Total                              |  | $                  | (119,110 | ) |                  | $
|                                   |  |                    |          |   |                  |  
|Long-lived assets:                 |  |                    |          |   |                  |  
|Equipment                          |  |                    |          |   |                  | $
|Telecommunications services        |  |                    |          |   |                  |  
|                                   |  |                    |          |   |                  |  
|Total                              |  |                    |          |   |                  | $
|                                   |  |                    |          |   |                  |  



(10) Related Party Transactions



The Company has entered into various transition services
agreements with Cincinnati Bell, a 3% owner of the Broadwing Communications, LLC, in which each party performs services on behalf of the other including certain billing, sales agency, carrier services, collocation, and administrative services. At
June 30, 2003, amounts due between the parties were as follows:



|Accounts receivable due from Cincinnati Bell |  | $ | 3,328
|-------------------------------------------- |  | - | -----
|                                             |  |   |      
|Accounts payable due to Cincinnati Bell      |  | $ | 1,477
|                                             |  |   |      



Cincinnati Bell
represented $1.9 million or 8% of telecommunications services revenue for the three and six months ended June 30, 2003.



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The Company has entered an agreement in which Cequel III, LLC, a St. Louis-based telecommunications and
cable management firm and 1% owner of Broadwing Communications, LLC, will provide certain management services for $2.3 million annually. Management fees incurred to date total $0.1 million.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



You should read the following discussion and analysis along with our unaudited condensed consolidated financial statements and the notes to those
statements included elsewhere in this report and in conjunction with our Annual Report on Form 10-K for the year ended December 28, 2002 filed on March 25, 2003 with the Securities and Exchange Commission.



Overview



Corvis Corporations operates two distinct business segments within the telecommunications industry. Our equipment division
designs, manufactures and sells high performance all-optical and electrical/optical communications systems that we believe accelerate carrier revenue opportunities and lower the overall cost of network ownership for carriers. Our telecommunications
services division, managed within our Broadwing Communications, LLC subsidiary (Broadwing), provides data and voice communications services nationwide. Broadwings services are generally provided over its national optical network,
which comprises approximately 18,700 route miles of fiber-optic transmission facilities.



Telecommunications Services



On June 13, 2003, Corvis Corporation invested approximately $92.9 million, including acquisition costs for a 96% ownership interest in Broadwing Communication Services, LLC, (Broadwing), which acquired
most of the assets and certain of the liabilities of Broadwing Communications Services, Inc. Broadwing Communications Services, Inc. was an Austin, Texas based provider of data and voice communication services throughout the United States and one of
our largest customers. Our consolidated results of operations include the results of Broadwing for the 17-day period after the acquisition date. The consolidated results of operations therefore are not comparable to prior or future quarters.



In addition, a significant portion of Broadwing Communication
Services, Inc. is historical revenues were generated through indefeasible right-of-use-agreements (IRU), whereby the customer leases network capacity or dark fiber. The buyer of IRU services typically pays cash upon the execution of the
contract and the associated revenue is deferred and then recognized as revenue over the life of the agreement. Prior to the acquisition, Broadwing Communications Services, Inc. revenues had declined as a result of the downturn within the
telecommunications industry.



Broadwing provides both data and
voice communications services to its large enterprise, mid-market and strategic service provider customers. These services consist primarily of long-haul data transmission, voice and Internet traffic over dedicated circuits connecting 137 cities
nationwide over approximately 18,700 route miles of fiber-optic transmission facilities. Broadwings switched voice services are provided to both wholesale and retail customers.



We believe that Broadwings network and growth oriented strategy will enable Broadwing to compete effectively in the
markets in which it operates. Broadwings optical network, capable of transmitting up to 800 Gbs per fiber pair, give customers the benefit of high quality, technologically advanced solutions allowing for rapid provisioning, highly flexible,
and customized network solutions.



Corvis retains a 96%
ownership interest in the Broadwing investment and appoints 4 of the 6 board members. Cequel III, LLC contributed approximately $0.9 million for a 1% ownership interest and appoints 2 of the 6 board members. Cincinnati Bell, previously the parent
company of Broadwing Communications Services, Inc. retained a 3% non-voting equity interest in the joint venture. The joint venture will operate under the Broadwing Communications, LLC (Broadwing) name. The results of Broadwing have been
included in the consolidated financial statements from the date of acquisition and represent our telecommunications services segment.



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The Broadwing purchase price has been allocated to the assets and liabilities acquired on a preliminary
basis using independent third party valuations and may change as additional information becomes available. The following table summarizes the preliminary purchase price allocation.



|Current assets               |  | $ | 80,000 
|---------------------------- |  | - | -------
|Property plant and equipment |  |   | 92,936 
|Intangible assets            |  |   | 27,160 
|Other long-term assets       |  |   | 7,400  
|                             |  |   |        
|Total assets acquired        |  |   | 207,496
|                             | 
|Current liabilities          |  |   | 95,695 
|Long-term liabilities        |  |   | 21,495 
|                             |  |   |        
|Total liabilities assumed    |  |   | 117,190
|Minority interest            |  |   | 915    
|                             |  |   |        
|Purchase price               |  | $ | 89,391 
|                             |  |   |        



As part of the
acquisition, the Company reduced its warranty reserve for that portion associated with Broadwing.



Corvis Equipment



We believe our optical products enable a fundamental shift in network design and efficiency by allowing for the transmission, switching and management of communications traffic entirely in the optical domain. These products include
terrestrial and undersea ultra-long distance optical signal transmission, reception and amplification equipment, all-optical and electrical/optical switching equipment and software that enable the creation of high performance optical backbone
networks. By deploying our products, carriers eliminate the need for expensive and bandwidth-limiting electrical regeneration and switching equipment, significantly reducing costs, increasing network capacity and allowing them to more quickly and
efficiently provide new services. Our products also open new market opportunities for carriers by enabling a flexible, in-service migration path from existing point-to-point and ring electrical/optical networks to all-optical mesh networks. Our
point-to-point regional and repeaterless products (no in-line amplifiers) allow carriers to use their existing networks more efficiently, enabling the transmission of optical signals in greater capacity over longer distances than existing
technology.



Starting in 2001 and continuing through 2003,
conditions within the general economy and telecommunications sector have resulted in reduced capital expenditures by carriers and a reduced demand for telecommunications networking systems. These declines have had a severe adverse impact on our
equipment revenue and results of operations. We cannot predict when or if market conditions will improve.



In response to these conditions, we have implemented a series of restructuring initiatives designed to decrease our business expenses and to conserve our
resources. These actions included staff reductions, facility consolidations and the curtailment of certain discretionary spending. In addition, we entered into a multi-year manufacturing outsourcing agreement with Celestica, a world leader in
electronics manufacturing services. Under the agreement, we have transitioned virtually all of our manufacturing capabilities to Celestica with the exception of final assembly, system integration and testing capabilities. These restructuring plans
have been reflected in our results of operations in 2001, 2002 and the six months ended June 30, 2003. These plans are ongoing and will be reflected in our results of operations in the next quarter and beyond, as necessary.



We continue to focus on further developing our customer relationships. We
have sold our products to the following six customers: Broadwing Communications Services, Inc., Wiltel Communications Group,



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Inc., Qwest Communications Corporation, Telefonica de Espana S.A.U., France Telecom and the U.S. Federal Government.



In 2000, Broadwing agreed to purchase at least $200 million of
our products and services as part of a multi-year purchase agreement. Since successfully completing field trials in July 2000, Broadwing has deployed a wide range of our optically optimized networking products, including our all-optical switch, to
create a national all-optical network that has been in service for over two years. On June 13, 2003, Corvis Corporation purchased most of the assets and certain liabilities of Broadwing. As a result of this transaction, there will be no future
equipment revenues from sales to Broadwing.



In 2001, Wiltel
accepted a field trial system and agreed to purchase up to $300 million of our products and services as part of a multi-year purchase agreement. Firm commitments under the contract are limited to approximately $85.0 million, which must be purchased
prior to December 31, 2003. Wiltel has deployed our switching and transport equipment in their national network, which is currently in service carrying commercial traffic. Purchase commitments totaling approximately $10.0 million remain under the
Wiltel agreement, however, we are in discussions with Wiltel which could result in, among other things, reductions in this amount.



On April 22, 2002, we reached an agreement with Qwest Communications Corporation modifying the terms of our previous purchase agreement. Under the terms
of the new agreement, Qwest agreed to purchase up to $150 million of our products and services over a multi-year period. Firm commitments remaining under the agreement are limited to $5.0 million, which must be purchased in 2003 subject to certain
acceptance criteria.



During the first quarter of 2002, we
completed the first sales of our XF repeaterless link product to Telefonica de Espana, which was deployed between the island of Mallorca and Telefonicas backbone network in Spain. In April 2002, we sold a XF repeaterless link to France Telecom
to upgrade its link between the European mainland and the island of Corsica. Our relationships with Telefonica and France Telecom do not include additional purchase commitments.



In the third quarter of 2002, we created a wholly owned subsidiary, Corvis Government Solutions, Inc., to provide optical
networking solutions and services to the U.S. Federal Government. During the third quarter, Corvis Government Solutions secured its first contract and purchase order from the U.S. Federal Government for a limited field trial, which was accepted in
the first quarter of 2003. A limited number of additional purchase commitments from the U.S. Federal Government have been received and a significant amount of our future sales efforts will be focused on further developing this relationship.



Corvis is actively pursuing the Optical Transport System
portion of the U.S. Governments Defense Information Systems Agencys (DISA) $862 million Global Information Grid-Bandwidth Expansion (GIG-BE) project. The GIG-BE project is a Department of Defense initiative, which involves
the deployment of an all-optical network linking Department of Defense sites around the world using secure and dedicated links. The Optical Transport System portion includes both Ultra-Long Haul transport and integrated all-optical switching. GIG-BE
will connect intelligence, command and operational locations with a secure high-bandwidth capability over a physically diverse, optically meshed network. We cannot predict if we will be selected as a vendor for any portion of this project or when
selection will take place.



We have also entered into lab
trials and discussions regarding laboratory and field trials with other carriers for our Corvis Optical Network and Corvis Optical Convergence Switch. We hope to enter into agreements for commercial deployment with new customers, however there can
be no assurances that we will reach agreements to sell our products to these new customers.



Most of our customers, however, have met or are approaching contractual minimum purchase commitments and have reached the end of long-term service contracts. The amount of product and service revenues in 2003 and
beyond will depend on the ability of existing customers to meet contractual commitments and our ability to meet customer requirements and expectations, as well as new contract wins. Given our historical declines in product sales and the current
state of the telecommunications industry, the timing and extent of these sales cannot be predicted. As a



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result, revenues associated with the sale of equipment may remain at current or lower levels for the next quarter and
beyond.



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 acquisition. The preparation of our 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 inventory obsolescence, asset impairment, revenue recognition, product warranty liabilities, allowance for doubtful accounts, and contingencies and litigation.
We stated these accounting policies in the notes to our 2002 annual consolidated financial statements and at relevant sections in this discussion and analysis. 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 from those estimates under different assumptions or conditions and the variances could be material.



Revenue Recognition



Telecommunications Services. We recognize telecommunications services
revenue as services are provided. Both switched voice and data, and Internet product, revenue are billed monthly in arrears, while the revenue is recognized as the services are provided. While customers are billed in advance for month-to-month
broadband transport services, revenue is recognized as the services are provided. Indefeasible right-of-use, or IRU, agreements represent the lease of network capacity or dark fiber and are recorded as unearned revenue at the earlier of the
acceptance of the applicable portion of the network by the customer or the receipt of cash and accounted for less than one percent of telecommunications services revenue since the acquisition date. 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 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 us from the obligation to provide future services, the remaining unamortized unearned revenue is recognized in the period in which the contract is terminated.



Equipment sales and services. Revenue from equipment sales is
recognized upon execution of a contract and the completion of all delivery obligations provided that there are no uncertainties regarding customer acceptance and collectibility is deemed probable. If uncertainties exist, revenue is recognized when
such uncertainties are resolved. Customer contracts generally include extensive lab and field trial testing and some include other acceptance criteria.



Our equipment products can be installed by our customers, third party service providers or by us. Revenue from installation services is recognized as the
services are performed unless the terms of the supply contract combine product acceptance with installation, in which case revenues for installation services are recognized when the terms of acceptance are satisfied and installation is completed. To
the extent customer contracts include both product sales and installation services, revenues are recognized based on their respective fair values. Revenues from installation service fixed price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to date compared to estimated total costs for each installation contract. Amounts received in excess of revenue recognized are included as deferred revenue in our
condensed consolidated balance sheet. Revenue from annual maintenance agreements is recognized on a straight-line basis over the service period.



Equipment Warranty and Obsolescence Reserves



Warranty reserves are determined based upon actual warranty cost experience, estimates of component failure rates and managements industry
experience. Inventory obsolescence costs are estimated using certain assumptions, including projected sales and sales mix. Actual results may differ from those



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estimates. We continually monitor component failures, technical changes, and levels of on-hand inventory and adjust our estimates accordingly. If, however,
actual results vary significantly from our estimates, we will adjust the assumptions utilized in our methodologies and reduce or provide for additional accruals as appropriate.



The majority of our historical warranty reserves were associated with our sales of equipment to Broadwing. As a result of
our acquisition of most of the assets, certain of the liabilities of Broadwing, including those assets previously sold to Broadwing by us, we have reduced our warranty reserve for the portion associated with Broadwing, and will record the related
cost as maintenance expense as incurred.



Allowance for Bad Debt



Telecommunications Services. 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 financial health of customers, 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.



Equipment
sales and services. We have relied on a small number of customers for all of our equipment revenues. We expect that a significant portion of our future revenue will continue to be generated by a limited number of customers. We monitor the
financial conditions of our customers closely and have concluded that no allowance for bad debt is appropriate.



Asset Impairment and Other Charges



Reflecting continued unfavorable economic conditions and continued lack of expected equipment sales, our Board of Directors approved plans from
2001 through 2003 for the reduction of operations including the consolidation of facilities, reduction in the number of employees and the outsourcing of a majority of our manufacturing capabilities. These decisions, as well as reductions in
projected sales and cash flows, have resulted in various asset impairment charges, which are based on estimated salvage values, recoverability estimates and estimated fair values. 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, additional restructuring and impairment charges may be required.



Goodwill and Other Intangible Assets



We have recorded goodwill and intangibles resulting from our acquisitions. We account for goodwill and other intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill be tested for impairment at least annually. The goodwill impairment test is a two-step process that requires goodwill to be allocated to reporting units. 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, a goodwill impairment may exist, and the
second step of the test is performed. In the second step, the implied fair value of the goodwill is compared with the carrying value of the goodwill, and an impairment loss will be recognized to the extent that the carrying value of the goodwill
exceeds the implied fair value of the goodwill.



We are
required to review the recoverability of our intangible assets, including goodwill, at least annually. 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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Litigation



In July 2000, Ciena Corporation (Ciena) informed us of its belief that there is significant correspondence between products that we offer and
several U.S. patents held by Ciena relating to optical networking systems and related dense wavelength division multiplexing (WDM) communications systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United States District
Court for the District of Delaware alleging that we are willfully infringing three of Cienas patents relating to dense wavelength division multiplexing communications technologies. On March 5, 2001, a motion was granted allowing Ciena to amend
its complaint to include allegations that we are willfully infringing two additional patents. One patent was dropped from the litigation by agreement of the parties prior to trial. In February 2003, jury trials were held on the issues of
infringement and invalidity of the four patents. Our all-optical networking products were found not to infringe two of Cienas WDM patents. The jury did not reach a verdict on a third Ciena WDM patent, which is related to the two non-infringed
WDM patents. Our inverse multiplexing transceiver product, which can be used along with our all-optical networking products, was found by the jury to infringe a Ciena patent on bit rate transparent devices. In an April 2003 retrial, the manner in
which certain our transmitters and receivers are operated in a WDM system was found by a jury to infringe the patent, upon which a verdict was not reached in the February 2003 trial. The jury verdicts to date are interim verdicts, in so far as
additional trial court proceedings remain before a decision is made by the court and judgment is entered. In May 2003, we filed a motion to certify the record for interlocutory appeal to the U.S. Federal Circuit Court of Appeals and Ciena filed
motions for entry of judgment and for a permanent injunction, all of which are pending.



While management believes that we will ultimately prevail, we cannot be certain that the interim jury verdicts of infringement will be overturned, or that infringement of other patents in the suit will not be found in
later legal proceedings. We expect that Ciena will attempt to use the interim jury verdicts and the possibility of an injunction to disrupt our sales efforts and customer relationships. To the extent it is necessary, a trial to determine damages
will be held following any appeals. Such appeals can take up to a year or more before final determination. Based on the current status of the litigation, we cannot reasonably predict the likelihood of any final outcome.



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: Corvis, 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 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 Corvis common stock (or to be awarded rescissory damages if the class member has sold its Corvis stock) and prejudgment and post-judgment interest, reasonable
attorneys and experts witness fees and other costs.



By order October 12, 2001, the court appointed an executive committee of six plaintiffs law firms to coordinate their claims and function as lead counsel. Lead plaintiffs have been appointed in almost all of the IPO allocation
actions, including the Corvis action. On October 17, 2001, a group of underwriter defendants moved for the judges recusal. The judge denied that application. On December 13, 2001, the moving underwriter defendants filed a petition for writ of
mandamus seeking the disqualification of the judge in the United States Court of Appeals for the Second Circuit. On April 1, 2002, the Second Circuit denied the moving underwriter defendants application for a writ of mandamus seeking the
judges recusal from this action. On April 19, 2002, plaintiffs filed amended complaints in each of the IPO allocation actions, including the Corvis action. On May 23, 2002, a conference was held at which the court set a



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briefing schedule for the filing of motions to dismiss the amended complaints. On July 1, 2002, the underwriter defendants filed their motion to dismiss the
amended complaints. On July 15, 2002, the issuer defendants filed their motion to dismiss the amended complaints. The judge heard oral arguments on the motions on November 1, 2002. On February 19, 2003, the issuer defendants motion to dismiss
was granted with regard to certain claims and denied with regard to certain other claims. As to Corvis, the Section 10(b) and Rule 10b-5 claims, alleging that Corvis participated in a scheme to defraud investors by artificially driving up the price
of the securities, were dismissed with prejudice, but the Section 11 claims, alleging that the registration statement contained a material misstatement of, or omitted, a material fact at the time it became effective, survived the motion to dismiss.
On June 26, 2003, the plaintiffs executive committee announced a proposed settlement between plaintiffs, on the one hand, and the issuer defendants and their respective officer and director defendants, including the Company and its named
officers and directors, on the other. A memorandum of understanding to settle plaintiffs claims against the issuers and their directors and officers has been approved as to form by counsel for the issuers and the process of obtaining
individual approval by each of the 309 issuer defendants, including us, is underway. The proposed settlement does not resolve plaintiffs claims against the underwriter defendants. The proposed settlement is also subject to approval by the
district court. The principal components of the proposed settlement include (i) a release of all of plaintiffs claims against the issuer defendants and their officers and directors which have, or could have, been asserted in this litigation
arising out of the conduct alleged in the amended complaints to be wrongful, (ii) the assignment by the issuers to the plaintiffs of certain potential claims against the underwriter defendants and the agreement by the issuers not to assert certain
claims against the underwriter defendants, and (iii) an undertaking by the insurers of the issuer defendants to pay to plaintiffs the difference (the Recovery Deficit) between $1 billion and any lesser amount recovered from the underwriter
defendants in this litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the underwriters, the insurers of the settling issuer defendants will owe no money to the plaintiffs. We cannot be certain that we will not be
subject to additional claims in the future, including claims brought by the underwriter defendants still involved in the litigation.



We and our 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.



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Results of Operations



Three months ended June 30, 2003 compared to three months ended June 29, 2002



Selected financial data (in thousands):



|                             |  | Three Months Ended
|---------------------------- |  | ------------------
|                             |  | June 29,2002      
|Revenues:                    |  |                   
|Telecommunications services  |  | $                 
|Equipment sales and services |  |                   
|                             |  |                   
|Total                        |  |                   
|                             |  |                   
|Cost of revenue:             |  |                   
|Telecommunications services  |  |                   
|Equipment sales and services |  |                   
|Inventory write-downs        |  |                   
|                             |  |                   
|Total                        |  |                   
|                             |  |                   
|Gross profit (loss)          |  | $                 
|                             |  |                   



Revenue.Revenue increased to $27.0 million for the three months ended June 30, 2003 from $3.0 million for the three months ended June 29, 2002 principally due to the inclusion of $26.7 million of Broadwing
telecommunications services revenue earned after the June 13, 2003 acquisition date.



Telecommunications Services Revenue.Telecommunications services revenues totaled $26.7 million for the three months ended June 30, 2003 reflecting 17 days of Broadwing operations. Telecommunications services
revenues were derived from three major markets. The National Accounts market represented revenues of $4.9 million. Sales teams for this market focus on providing complex data and network applications to Fortune 2000, Global 500 and Private 250
companies. The Strategic Service Provider market represented revenue of $11.2 million. Sales teams for this market focus on Top 150 opportunities among the strongest carrier survivors in the industry, including incumbent local exchange carriers
(ILECs), interexchange carriers (IXCs), other carriers and wireless providers. The Mid Market Enterprises market represented $10.6 million. Sales teams in this market focus on geographic markets where Broadwing
can bring compelling offers and value-added services to small to mid-sized businesses as well as consumers.



Equipment Sales and Services Revenues.Equipment revenue decreased to $0.3 million for the three months ended June 30, 2003 from $3.0 million for
the three months ended June 29, 2002 reflecting a continued decrease in the volume of equipment sales. Most of our customers have met or are approaching contractual minimum purchase commitments and have reached the end of long-term service
contracts. A significant portion of our future revenue will therefore depend on the amount and timing of new firm order commitments from existing customers, as well as new contract wins. Given our historical declines in product sales and the current
state of the telecommunications industry, the timing and extent of these revenues cannot be predicted. As a result, revenues associated with the sale of our products and services may remain at current or lower levels for the next quarter and beyond.



Cost of Revenues.Cost of revenues
increased to $21.5 million for the three months ended June 30, 2003 from $4.0 million for the three months ended June 29, 2002 principally due to the inclusion of approximately $18.0 million for Broadwing telecommunications services costs of revenue
incurred after the June 13, 2003 acquisition date.



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Telecommunications Services Cost of Revenue.Telecommunications services cost of revenue primarily
reflects access charges paid to local exchange carriers and other providers and transmission lease payments to other carriers. Telecommunications services cost of revenue totaled $18.0 million for the three months ended June 30, 2003 reflecting 17
days of operations.



Equipment Sales and Services Cost of
Revenue.Equipment costs of revenue decreased to $3.4 million for the three months ended June 30, 2003 from $4.0 million for the three months ended June 29, 2002. Costs of revenue consists of component costs, direct compensation costs,
warranty and other contractual obligations, inventory obsolescence costs and overhead related to our manufacturing and engineering, finishing and installation operations. As a result of discontinued product lines under our restructuring plans and
excess inventories due to reduced capital expenditures by telecommunication carriers, we recorded inventory impairment charges as a cost of revenue totaling $3.3 million during the second quarter of 2003 and $1.7 million during the second quarter of
2002.



Gross Profit (loss).Gross profit (loss)
increased to $5.6 million for the three months ended June 30, 2003 from $(0.9) million for the three months ended June 29, 2002. Changes in Gross profit principally related to the inclusion of telecommunications services revenue and costs of revenue
recorded after the June 13, 2003 Broadwing acquisition date.



Telecommunications Services Gross Profit.Telecommunications services contributed $8.6 million of gross profit or a 32% gross margin for the 17-day period after the acquisition date. We expect gross margin to remain consistent in
future periods.



Equipment Sales and Services Revenue Gross
Profit (loss). Equipment revenue generated gross losses of $3.1 million for the three months ended June 30, 2003 and $0.9 million for the three months ended June 29 2002. Negative gross margins were the result of inventory write-downs and other
charges of approximately $3.3 million for three-month period ended June 30, 2003 and $1.7 million for the three-month period ended June 29, 2002. Excluding inventory write-downs and other charges, gross margin was 72% for the three months ended June
30, 2003 and 26% for the three months ended June 29, 2002. The increase in gross margin is the result of changes in the mix of products sold. Gross margin will likely decrease as the mix of products returns to historical levels. Due to the current
competitive and economic environment, gross margins may decrease even further as we are required to reduce pricing on future products and services sold. In addition, if sales volumes continue at current or lower levels, decreases in production
volumes will result in decreased or negative gross margins as a result of an inability to recover fixed manufacturing costs.



Research and Development Expense, Excluding Equity-Based Expense. Research and development expense, excluding equity-based expense, consists
primarily of personnel, material, laboratory and facilities costs related to the design of our hardware and software equipment products. All costs related to product development, both hardware and software, are recorded as expenses in the period in
which they are incurred. Due to the timing and nature of the expenses associated with research and development, significant quarterly fluctuations may result.



Research and development expenses, excluding equity-based expense, decreased to $12.1 million for the three months ended June 30, 2003 from $25.8
million for the three months ended June 29, 2002. The decrease in expense was primarily attributable to the effect of cost saving initiatives including staff reductions, facilities and equipment consolidation and the curtailment of certain
discretionary spending. We expect research and development expense to continue at or below current levels.



Sales, General & Administrative, Excluding Equity-Based Expense. Sales, general & administrative expense, excluding
equity-based expense, consists primarily of costs associated with personnel, travel, information systems support and facilities related to our sales and administrative support functions. In addition, sales, general and administrative charges include
laboratory trial systems provided to equipment customers and trade shows.



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Sales, general and administrative expense, excluding equity-based expense, decreased to $20.6 million for
the three months ended June 30, 2003 from $23.9 million for the three months ended June 29, 2002. The decrease in expenses was primarily attributable to staff reductions, decreases in promotional and trade show activities and a reduction in
laboratory systems provided to current and potential customers. These reductions were offset by the inclusion of approximately $8.9 million of sales, general and administrative expenses related to Broadwing since the acquisition date. We expect
sales, general and administrative expense to increase as Broadwing expenses are included in the consolidated financial results.



Equity-based Expense. Equity-based expense consists primarily of charges associated with employee options granted at below fair
market value.



Equity-based expense related to research and
development and sales, general and administrative functions for the three months ended June 30, 2003 decreased to $5.4 million from $17.0 million for the three months ended June 29, 2002. The decrease in equity-based compensation resulted from a
decrease in employee headcount. In June 2003, the Company granted a number of employee incentive stock options with exercise prices below fair value. As a result, we expect these expenses to increase in the coming quarters.



Depreciation expense.Depreciation expense decreased to $6.5
million for the three-month period ending June 30, 2003 from $8.5 million for the three-month period ending June 29, 2002. This decrease is primarily due to a $107.7 million write-down of Corvis property plant and equipment recorded in the fourth
quarter of 2002. This decrease was offset, in part, by the inclusion of approximately $1.4 million in depreciation related to assets acquired in our Broadwing acquisition. We expect these expenses to increase, as a full quarter of Broadwing expenses
are included in the consolidated financial results.



Amortization of Intangible Assets. Amortization of intangible assets expenses decreased to $2.0 million for the three months ended June 30, 2003 from $4.3 million for the three months ended June 29, 2002. We record
amortization expense associated with certain intangible assets with finite useful lives, such as acquired patent rights and intellectual property licenses. In the fourth quarter of 2002, as required under SFAS 142, Goodwill and Other
Intangible Assets, we recorded a $17.5 million impairment loss associated with related intangible assets resulting in decreased amortization expense beginning in the first quarter of 2003. This decrease was offset, in part, by the
inclusion of approximately $0.2 million in amortization related to intangible assets acquired in our Broadwing acquisition. We expect these expenses to increase, as Broadwing expenses are included in the consolidated financial results.



Restructuring and related charges. Starting in 2001 and
continuing in 2003, we have developed and implemented restructuring initiatives designed to reduce operating expenses and to address reductions in product sales. In addition, we are continually evaluating the recoverability of our inventory and
long-lived assets in light of these initiatives and the projected economic and operating environment. As a result, we recorded the following charges (in thousands):



|                                                              |  | Three Months Ended
|------------------------------------------------------------- |  | ------------------
|                                                              |  | June 29, 2002     
|Product cost of sales chargesinventory-write downs and other |  | $                 
|                                                              |  |                   
|Restructuring, impairment and other charges:                  |  |                   
|Work force reductions                                         |  |                   
|Asset impairment, facilities and other charges                |  |                   
|                                                              |  |                   
|Total restructuring, impairment and other charges             |  |                   
|                                                              |  |                   
|Impairment of investments                                     |  |                   
|                                                              |  |                   
|                                                              |  |                   
|Total restructuring and related charges                       |  | $                 
|                                                              |  |                   



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Product cost of sales chargesInventory-write-downs and other. We write-down our inventory
for estimated obsolete, excess and overvalued inventory based on estimated sales projections and market values. As a result of declines in spending by telecommunications carriers, we recorded inventory write-downs in the three months ended June 30,
2003 and June 29, 2002 of $3.3 million and $1.7 million, respectively.



Work force reductions. During the three months ended June 30, 2003 and June 29, 2002, we implemented certain company-wide work force reduction programs that resulted in charges of $7.3 million for the three-month period ended June
30, 2003 and $4.2 million for the three-month period ended June 29, 2002. These programs included the closure of our French operations. Total headcount as of June 30, 2003 was 1,428, including 1,059 Broadwing employees.



Asset impairment, facilities and other charges. We are continuing to
reduce our operating costs through the shut down of facilities and the early terminations of real estate and equipment lease agreements. In addition, we continue to monitor the recoverability of our long-lived assets based on changes in our
business. Total impairment and facility shutdown charges were approximately $0.5 million in the three-month period ended June 30, 2003 and $(2.5) million in three-month period ended June 29, 2002. Charges in 2002 included $3.0 million in reductions
to prior period accruals. These activities are continuing and will result in additional charges during the third quarter of 2003 and beyond.



Impairment of investments. During the three months ending June 29, 2002,we recorded charges, within interest and other income (expense), net, of
$4.8 million for the permanent impairment in the value of non-controlling equity investments. No similar charges were recorded in the 2003.



Interest Income (Expense), Net. Interest income, net of interest expense, increased to $3.0 million for the three months ended June
30, 2003 from ($2.3) million of net interest income for the three months ended June 29, 2002. During the second quarter of 2002, we recorded charges of approximately $4.8 million related to the write-down of strategic non-controlling equity
investments. No similar charges were taken in 2003. Excluding these charges, interest and other income increased by $0.5 million.



Six months ended June 30, 2003 compared to six months ended June 29, 2002



Selected financial data (in thousands):



|                             |  | Six Months Ended
|---------------------------- |  | ----------------
|                             |  | June 29, 2002   
|Revenues:                    |  |                 
|Telecommunications services  |  | $               
|Equipment sales and services |  |                 
|                             |  |                 
|Total                        |  |                 
|                             |  |                 
|Cost of revenues:            |  |                 
|Telecommunications services  |  |                 
|Equipment sales and services |  |                 
|Inventory write-downs        |  |                 
|                             |  |                 
|Total                        |  |                 
|                             |  |                 
|Gross profit (loss)          |  | $               
|                             |  |                 



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Revenue.Revenue increased to $28.5 million for the six months ended June 30, 2003
from $11.7 million for the six months ended June 29, 2002 principally due to the inclusion of $26.7 million of Broadwing telecommunications services revenue earned after the June 13, 2003 acquisition date.



Telecommunications Services Revenue.Telecommunications services
revenues totaled $26.7 million for the six months ended June 30, 2003 reflecting 17 days of Broadwing operations. Telecommunications services revenues were derived from six major markets. The National Accounts market represented revenues of $4.9
million. Sales teams for this market focus on providing complex data and network applications to Fortune 2000, Global 500 and Private 250 companies. The Strategic Service Provider market represented revenue of $11.2 million. Sales teams for this
market focus on Top 150 opportunities among the strongest carrier survivors in the industry, including ILECs, IXCs, other carriers and wireless providers. The Mid Market Enterprises market represented $10.6 million. Sales teams in this
market focus on geographic markets where Broadwing can bring compelling offers and value-added services to small to mid-sized businesses as well as consumers.



Equipment Sales and Services Revenues.Equipment revenue decreased to $1.9 million for the six months ended June 30, 2003 from $11.7 million for
the six months ended June 29, 2002 reflecting a continued decrease in the volume of equipment sales. Most of our customers have met or are approaching contractual minimum purchase commitments and have reached the end of long-term service contracts.
A significant portion of our future revenue will therefore depend on the amount and timing of new firm order commitments from existing customers, as well as new contract wins. Given our historical declines in product sales and the current state of
the telecommunications industry, the timing and extent of these revenues cannot be predicted. As a result, revenues associated with the sale of our products and services may remain at current or lower levels for the next quarter and beyond.



Cost of Revenues.Cost of Revenues
increased to $22.6 million for the six months ended June 30, 2003 from $14.8 million for the six months ended June 29, 2002 principally due to the inclusion of $18.0 million for Broadwing telecommunications services costs of revenue incurred after
the June 13, 2003 acquisition date.



Telecommunications Services Cost of Revenue.Telecommunications services cost of revenue primarily reflects access charges paid to local exchange carriers and other providers and transmission lease payments to other carriers.
Telecommunications services cost of revenue totaled $18.0 million for the six months ended June 30, 2003 reflecting 17 days of operations.



Equipment Sales and Services Cost of Revenue.Equipment costs of revenue decreased to $4.6 million for the six months ended June 30, 2003 from
$14.8 million for the six months ended June 29, 2002. Equipment cost of revenue consists of component costs, direct compensation costs, warranty and other contractual obligations, inventory obsolescence costs and overhead related to our
manufacturing and engineering, finishing and installation operations. As a result of discontinued product lines under our restructuring plans and excess inventories due to reduced capital expenditures by telecommunication carriers we recorded
inventory impairment charges as a cost of revenue totaling $3.3 million during the first six months of 2003 and $6.0 million during the first six months of 2002.



Gross Profit (loss).Gross profit (loss) increased to $5.9 million for the six months ended June 30, 2003 from
$(3.0) million for the six months ended June 29, 2002. Changes in gross profit principally related to the inclusion of telecommunications services revenue and costs of revenue recorded after the June 13, 2003 Broadwing acquisition date.



Telecommunications Services Gross Profit.Telecommunications
services contributed $8.6 million of gross profit or a 32% gross margin for the 17-day period after the acquisition date. We expect gross margin to remain consistent in future periods.



Equipment Sales and Services Revenue Gross Profit (loss). Equipment revenue generated negative gross profits of $2.7
million for the six months ended June 30, 2003 and $3.0 million for the six months ended June 29 2002. Negative gross margins were the result of inventory write-downs and other charges of approximately $3.3 million for the six-month period ended
June 30, 2003 and $6.0 million for the six-month period ended June 29 2002. Excluding inventory write-downs and other charges, gross margin was 32% for the six months ending June 30, 2003 and 26% for the six months ending June 29, 2002. The increase
in adjusted gross margin is the result of changes in the mix of products sold. Gross margin will likely decrease as the mix of products returns to historical levels. Due to the current competitive and economic environment, gross margins may decrease
even further as we are required to reduce pricing on future products and services sold. In addition, if sales volumes continue at current or lower levels, decreases in production volumes will result in decreased or negative gross margins as a result
of an inability to recover fixed manufacturing costs.



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Research and Development Expense, Excluding Equity-Based Expense. Research and development
expense, excluding equity-based expense, consists primarily of personnel, material, laboratory and facilities costs related to the design of our hardware and software equipment products. All costs related to product development, both hardware and
software, are recorded as expenses in the period in which they are incurred. Due to the timing and nature of the expenses associated with research and development, significant quarterly fluctuations may result.



Research and development expenses, excluding equity-based expense, decreased
to $32.1 million for the six months ended June 30, 2003 from $48.0 million for the six months ended June 29, 2002. The decrease in expense was primarily attributable to the effect of cost saving initiatives including staff reductions, facilities and
equipment consolidation and the curtailment of certain discretionary spending. We expect research and development expense to continue at or below current levels.



Sales, General & Administrative, Excluding Equity-Based Expense. Sales, general &
administrative expense, excluding equity-based expense, consists primarily of costs associated with personnel, travel, information systems support and facilities related to our sales and administrative functions. In addition, sales, general and
administrative charges include laboratory trial systems provided to equipment customers and trade shows.



Sales, general and administrative expense, excluding equity-based expense, decreased to $32.3 million for the six months ended June 30, 2003 from $39.9
million for the six months ended June 29, 2002. The decrease in expenses was primarily attributable to staff reductions, decreases in promotional and trade show activities and a reduction in laboratory systems provided to current and potential
customers. These reductions were offset by the inclusion of approximately $8.9 million of sales, general and administrative expenses related to Broadwing since the acquisition date. We expect sales, general and administrative expense to increase, as
Broadwing expenses are included in the consolidated financial results.



Equity-based Expense. Equity-based expense consists primarily of charges associated with employee options granted at below fair market value.



Equity-based expense related to research and development and sales, general and administrative functions for the six months
ended June 30, 2003 decreased to $10.7 million from $37.0 million for the six months ended June 29, 2002. The decrease in equity-based compensation resulted from a decrease in employee headcount. In June 2003, the Company granted a number of
employee incentive stock options with exercise prices below fair value. As a result, we expect these expenses to increase in the coming quarters.



Depreciation expense.Depreciation expense decreased to $13.1 million for the six-month period ending June 30, 2003 from $16.6 million for
the six-month period ending June 29, 2002. This decrease is primarily due to a $107.7 million write-down of Corvis property plant and equipment recorded in the fourth quarter of 2002. This decrease was offset, in part, by the inclusion of
approximately $1.4 million in depreciation related to assets acquired in our Broadwing acquisition. We expect these expenses to increase, as a full quarter of Broadwing expenses are included in the consolidated financial results.



Amortization of Intangible Assets. Amortization of
intangible assets expenses decreased to $3.8 million for the six months ended June 30, 2003 from $7.2 million for the six months ended June 29, 2002. We record amortization expense associated with certain intangible assets with finite useful lives,
such as acquired patent rights and intellectual property licenses. In the fourth quarter of 2002, as required under SFAS 142, Goodwill and Other Intangible Assets, we recorded a $17.5 million impairment loss associated with
related intangible assets resulting in decreased amortization expense beginning in the first quarter of 2003. This decrease was offset, in part, by the inclusion of approximately $0.2 million in amortization related to intangible assets acquired in
our Broadwing acquisition. We expect these expenses to increase, as a full quarter of Broadwing expenses are included in the consolidated financial results.



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Restructuring and related charges. Starting in 2001 and continuing in 2003, we have
developed and implemented restructuring initiatives designed to reduce operating expenses and to address reductions in product sales. In addition, we are continually evaluating the recoverability of our inventory and long-lived assets in light of
these initiatives and the projected economic and operating environment. As a result, we recorded the following charges (in thousands):



|                                                              |  | Six Months Ended
|------------------------------------------------------------- |  | ----------------
|                                                              |  | June 29, 2002   
|Product cost of sales chargesinventory-write downs and other |  | $               
|                                                              |  |                 
|Restructuring, impairment and other charges:                  |  |                 
|Work force reductions                                         |  |                 
|Asset impairment, facilities and other charges                |  |                 
|                                                              |  |                 
|Total restructuring, impairment and other charges             |  |                 
|                                                              |  |                 
|Impairment of investments                                     |  |                 
|                                                              |  |                 
|Total restructuring and related charges                       |  | $               
|                                                              |  |                 



Product cost of
sales chargesInventory-write-downs and other. We write-down our inventory for estimated obsolete, excess and overvalued inventory based on estimated sales projections and market values. As a result of declines in spending by
telecommunications carriers, we recorded inventory write-downs in the six months ended June 30, 2003 of $3.3 million and in the six months ended June 29, 2002 of $6.0 million.



Work force reductions. During the six months ended June 30, 2003 and June 29, 2002, we implemented certain
company-wide work force reduction programs that resulted in charges of $10.3 million in the six month period ended June 30, 2003 and $6.8 million in six-month period ended June 29, 2002. These programs included the closure of our French operations.
Total headcount as of June 30, 2003 was 1,428, including 1,059 Broadwing employees.



Asset impairment, facilities and other charges. We are continuing to reduce our operating costs through the shut down of facilities and the early terminations of real estate and equipment lease agreements. In
addition, we continue to monitor the recoverability of our long-lived assets based on changes in our business. Total impairment and facility shutdown charges were approximately $1.2 million in the six-month period ended June 30, 2003 and $(2.5)
million in six-month period ended June 29, 2002. Charges in 2002 included $3.0 million in reductions to prior period restructuring accruals. These activities are continuing and will result in additional charges during the third quarter of 2003 and
beyond.



Impairment of investments. During the
three-months ending June 29, 2002, we recorded charges, within interest and other income, net, of $4.8 million for the permanent impairment in the value of non-controlling equity investments. No similar charges were recorded in the 2003.



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Interest Income (Expense), Net. Interest income, net of interest expense, increased
to $4.8 million for the six months ended June 30, 2003 from $0.5 million of net interest income for the six months ended June 29, 2002. During 2002, we recorded charges of approximately $4.8 million related to the write-down of strategic
non-controlling equity investments. No similar charges were taken in 2003. Excluding these charges, interest and other income, net decreased by $0.5 million.



Liquidity and Capital Resources



Since inception through June 30, 2003, we have financed our operations, capital expenditures and working capital primarily through public and private
sales of our capital stock and borrowings under credit and lease facilities. At June 30, 2003, our cash and cash equivalents and investments totaled $323.6 million. In June 2003, we invested approximately $92.9 million, including acquisition costs,
for a 96% ownership in Broadwing, which acquired most of the assets and certain of the liabilities of Broadwing Communications Services, Inc. In addition, as part of the acquisition, we have agreed to invest at least an additional $50.0 million in
Broadwing by December 31, 2003 to support Broadwing working capital needs. Any additional working capital needs will depend on the financial performance of Broadwing subsequent to the acquisition.



Net cash used in operating activities was $80.6 million for the six months
ended June 30, 2003 and $67.0 million for the six months ended June 29, 2002. Cash used in operating activities for the six months ended June 30, 2003 was primarily attributable to a net loss of $92.8 million and changes in operating assets and
liabilities of $20.3 million, offset in part by non-cash charges including depreciation and amortization of $16.8 million, equity-based expense of $10.7 million, and certain non-cash restructuring charges of $4.9 million.



Cash used in operating activities for the six months ended June 29, 2002 was
primarily attributable to a net loss of $190.1 million, offset in part by non-cash charges including depreciation and amortization of $24.7 million, equity-based expense of $37.0 million and purchased research, expense of $34.6 million associated
with our acquisition of Dorsal Networks in May 2002 and certain non-cash restructuring charges of $10.5 million. Cash flows from operating activities were offset by changes in operating assets of $16.4 million.



Net cash used in investing activities for the six months ended June 30, 2003
was $84.2 million and net cash used in investing activity for the six months ended June 29, 2002 was $28.1 million. The increase in net cash used in investing activities was for the six months ended June 30, 2003 primarily attributable to the $92.9
million acquisition of most of the assets and certain liabilities of Broadwing Communications, Inc., offset in part by net sales of short and long-term investments.



Net cash used in financing activities for the six months ended June 30, 2003 was $7.3 million, primarily attributable to
treasury stock purchases and the repayment of certain capital leases, offset in part by proceeds from the exercise of employee stock options. Net cash used in financing activities for the six months ended June 29, 2002 was $2.2 million, primarily
attributable to the repayment of principal on notes and capital leases.



As of June 30, 2003, long-term restricted cash totaled $3.1 million associated with outstanding irrevocable letters of credit relating to lease obligations for various manufacturing and office facilities and other 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 respective lease term or agreement term.



On October 24, 2002, we announced that our Board of Directors had authorized a share repurchase program under which we can
acquire up to $25.0 million of our common stock in the open market. At June 30, 2003, 12,281,900 shares had been purchased under the plan for a total of $9.5 million. The purchases will be executed at times and prices considered appropriate by us
during the next two years. The share repurchase program may be suspended at any time and from time-to-time without prior notice. The repurchase program will be funded using our existing cash balances and the repurchased shares may be used for
corporate purposes in compliance with applicable law.



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We believe that our current cash and cash equivalents, investments and cash generated from operations
will satisfy our expected working capital, capital expenditure and investment requirements beyond at least the next twelve months.



If cash on hand and cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt
securities. To the extent that we raise additional capital through the sale of equity or debt securities, the issuance of such securities could result in dilution to our existing shareholders. If additional funds are raised 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, or 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 harm our business, financial condition and operating results. Increasingly, as a result of the financial demands of major network deployments,
carriers are looking to their suppliers for financing assistance. From time to time, we may provide or commit to extend credit or credit support to our customers, as we consider appropriate in the course of our business.



In addition to the risks identified in our annual report on Form 10-K for the
year ended December 28, 2002, our results of operations and financial position in future periods may be affected by the following factors.



Risks Related to Broadwings Business and the Broadwing Acquisition



Network Utilization is Dependent on Maintaining Rights-of-Way and Permits



The utilization of Broadwings network depends on maintaining rights-of-way and required permits from railroads,
utilities, government authorities and third-party landlords on satisfactory terms and conditions. Broadwing cannot guarantee that it will be able to maintain all of the existing rights and permits. Although Broadwing expects to maintain and renew
its existing agreements, the loss of a substantial number of existing rights and permits could have a material adverse impact on our business, financial condition and results of operations. For portions of Broadwings network that it leases or
purchases use rights from third parties, Broadwing must rely on such third parties maintenance of all necessary rights-of-way and permits. Some agreements that Broadwing may rely on to use portions of other companies networks could be
terminated if associated rights-of-way were terminated.



Significant Capital Expenditures Will be Required to Maintain Broadwings Network



Broadwing could incur significant capital expenditures as a result of unanticipated expenses, regulatory changes and other events that impact its
business. If Broadwing fails to adequately maintain its networks to meet customer needs there could be a material adverse impact on our business, financial condition and results of operations.



Regulatory Initiatives May Impact Broadwings Profitability



Broadwing is subject to regulatory oversight of varying
degrees at the state and federal levels. Regulatory initiatives that would put Broadwing at a competitive disadvantage or mandate lower rates for its services could result in lower profitability and cash flow. This could compromise Broadwings
ability to maintain its national optical network, which could have a material adverse effect on our business, financial condition and results of operations.



Broadwing Relies, in Part, on Portions of Competitors Networks



Broadwing uses network resources owned by other companies for portions of its network. Broadwing obtains the right to use
such network portions through operating leases and IRU agreements in which Broadwing pays for the right to use such other companies fiber assets and through agreements in which Broadwing exchanges the use of portions of its network for the use
of portions of such other



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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, Broadwing may not be able to enforce its rights to use such network assets or, even if Broadwing could continue to use such network assets, it could incur material expenses related to
their maintenance and repair. Broadwing also could incur material expenses if it were required to locate alternative network assets. Broadwing 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 business, financial condition and results of operations.



Broadwings Success Depends on the Introduction of New Products and Services



Broadwings success depends on being able to anticipate the needs of current and future enterprise and carrier
customers. Broadwing seeks to meet these needs through new product introductions, service quality and technological superiority. Failure of Broadwing to anticipate the needs of these customers and to introduce the new products and services necessary
to attract or retain these customers could have a material adverse impact on our business, financial condition and results of operations.



Continuing Softness in the Economy is Having a Disproportionate Effect in the Telecommunications Industry



Beginning in 2001, the business environment for the telecommunications
industry deteriorated significantly and rapidly and remains weak. This was primarily due to: the general weakness of the U.S. economy, which was exacerbated by the events of September 11, 2001, and concerns regarding terrorism; pressure on prices
for broadband services due to substantial excess fiber capacity in most markets; and forecasted demand for broadband services not being realized as a result of the state of the economy, the bankruptcy or liquidation of a substantial number of
Internet companies and financial difficulties experienced by many telecommunications customers. Broadwing expects these trends to continue, including reduced business from financially troubled customers and downward pressure on prices due to reduced
demand and overcapacity. If these trends continue, there could be a material adverse impact on our business, financial condition and results of operations.



A Significant Portion of Broadwings Revenue is Derived From Telecommunications Carriers



Revenue from Broadwings ten largest customers accounted for
approximately 24% of total revenue since the acquisition. One of these ten largest customers representing 2% of Broadwing revenues are in Chapter 11 bankruptcy proceedings. In addition, a significant portion of Broadbands revenue is derived
from telecommunications carriers. Revenue from telecommunications carriers accounted for 41% of total revenue since the acquisition date. Most of Broadwings arrangements with large customers do not provide Broadwing with guarantees that
customer usage will be maintained at current levels. Industry pressures have caused telecommunications carriers to look aggressively for ways to cut costs which has resulted in reduced demand and reduced prices. In addition, construction of their
own facilities by certain Broadwings customers, construction of additional facilities by competitors or further consolidation in the telecommunications industry involving Broadwings customers could lead such customers to reduce or cease
their use of Broadwings network. To the extent these large customers cease to employ Broadwings network to deliver their services, or cannot pay outstanding accounts receivable balances, we could experience a material adverse impact on
our business, financial condition and results of operations.



Broadwing is Dependent on Limited Sources of Supply for Certain Key Network Components



Where possible and practical, Broadwing utilizes commercially available technologies and products from a variety of vendors. There can be no assurance
that Broadwing will be able to obtain such equipment from these vendors in the future. If Broadwing cannot obtain adequate replacement equipment or service, or an acceptable alternate vendor, we could experience a material adverse impact on its
business, financial condition and results of operations.



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Network Failure and Transmission Delays and Errors Could Expose Broadwing to Potential Liability



Broadwings network utilizes a variety of
communication equipment, software, operating protocols and components of others networks 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. Broadwing is held to high quality and delivery standards in its customer contracts. Network failures or delays in data delivery could cause service interruptions resulting in losses to
Broadwings customers. Failures or delays could expose Broadwing to claims by its customers that could have a material impact on our financial condition and operating results.



Increased Competition Could Affect Profitability and Cash Flow



There is substantial competition in the telecommunications industry.
Competition may 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 entrance of new competitors and the development of new
technologies, products and services. Price competition has been intense and may further intensify. If Broadwing cannot offer reliable, value-added services on a price competitive basis in any of its markets, it could be adversely impacted by
competitive forces. In addition, if Broadwing does not keep pace with technological advances or fails to respond timely to changes in competitive factors in the industry, it could lose market share or experience a decline in its revenue and profit
margins.



Broadwing faces significant competition from
companies such as AT&T Corp., MCI, Sprint Corporation, Level 3 Communications, Inc., Qwest Communications International Inc., and several emerging and recapitalized competitors. The significant capacity of these competitors could 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 fiber capacity in most markets, and forecasted demand for broadband services not being realized as a result of the state of the economic and financial difficulties experienced by
many telecommunications carriers could exacerbate downward pricing pressure in the telecommunications industry.



The effect of the foregoing competition could have a material adverse impact on our businesses, financial condition and results of operations. This could
result in increased reliance on borrowed funds and could adversely impact Broadwings ability to maintain its optical network.



Risk Related to the Broadwing Transaction



We may not realize any benefits from the transaction



We entered into the asset purchase agreement with the expectation that the acquisition will result in certain benefits to us, including:



| |  |  | significantly broadening our business opportunities;
| | - |  | ----------------------------------------------------



| |  |  | positioning us as an integrated provider of next-generation optical networking solutions and communications services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | leveraging both companies resources to provide opportunities to increase market penetration and revenue growth;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | taking advantage of an attractive market opportunity in light of the current competitive landscape; and
| | - |  | -------------------------------------------------------------------------------------------------------



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| |  |  | having greater capacity to respond to competition, market demands and technological change.
| | - |  | -------------------------------------------------------------------------------------------



Achieving the benefits of the transaction will depend in part on the successful management of our and Broadwings
operations in a timely and efficient manner. To the extent that certain business functions will be integrated, such integration will be a complex and time-consuming process. In addition, the transaction is likely to divert the attention of
management and could negatively affect each business ability to operate and retain key employees. We cannot assure you that the operations of the companies can be, or will be, successfully integrated or that any of the anticipated benefits
will be realized, and the failure to do so could have a material adverse effect on our business and common stock price.



Acquisition related accounting charges may delay and reduce our profitability.



We will account for the acquisition under the purchase method of accounting. Under the purchase method, the
purchase price of the assets of the Broadwing business will be allocated to identifiable assets and liabilities acquired with any excess being treated as goodwill. As a result, the transaction will generate certain intangible assets of approximately
$27.2 million, which will be amortized over varying periods of time.



The market price of our common stock may decline as a result of the transaction



The market price of our common stock may decline as a result of the transaction if:



| |  |  | the integration of Corvis and Broadwing, to the extent that such integration occurs, is unsuccessful or takes longer than expected;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the perceived benefits of the transaction are not achieved as rapidly or to the extent anticipated by financial analysts or investors; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of the transaction on our financial results is not consistent with the expectations of financial analysts or investors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Item 3. Quantitative and Qualitative 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. We maintain instruments subject to interest rate and foreign currency exchange rate risk. We categorize all of our market risk sensitive instruments as non-trading or other instruments.



Interest Rate Sensitivity



We maintain a portfolio of cash, cash equivalents and short and long-term
investments in a variety of securities including: commercial paper, certificates of deposit, money market funds and government and non-government debt securities. Substantially all amounts are in money market funds as well as high grade, short-term
commercial paper and certificates of deposit, the value of which is generally not subject to interest rate changes. We believe that a 10% increase or decline in interest rates would not be material to our investment income or cash flows. Our
long-term debt obligations bear fixed interest rates. However, our long-term debt and capital lease obligations total only $5.4 million, and, therefore, we do not consider the impact of any general interest rate changes to be significant.



Foreign Rate Sensitivity



We primarily operate in the United States; however, we have expanded
operations to include research and development and sales offices in various European countries. As a result, we may have sales in foreign currencies exposing us to foreign currency rate fluctuations. For the six months ended June 30, 2003, we
recorded limited sales in a foreign currency. We are exposed to the impact of foreign currency



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changes, associated with the Euro, for our European subsidiaries financial instruments, which are limited to cash and cash equivalents and trade
receivables. At June 30, 2003, our European subsidiaries maintained cash and cash equivalents of approximately 6.1 million Euros primarily reserved for our overseas restructuring obligations. We believe that a 10% increase or decline in the Euro
exchange ratio would not be material to cash and cash equivalent balances, interest income, or cash flows from consolidated operations.



Item 4. Controls and Procedures



Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a15 of the Securities Exchange Act of 1934 (Exchange Act) promulgated thereunder, our chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the Evaluation Date) with the Securities and Exchange Commission. Based on such evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures were effective as of the Evaluation Date to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms. There have been no changes in our internal controls over financial reporting during the period covered by this report that were identified in connection
with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



Item 1. Legal Proceedings



By
letter dated July 10, 2000, Ciena Corporation (Ciena) informed us of its belief that there is significant correspondence between products that we offer and several U.S. patents held by Ciena relating to optical networking systems and
related dense wavelength division multiplexing (WDM) communications systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United States District Court for the District of Delaware alleging that we are willfully infringing
three of Cienas patents. Ciena is seeking injunctive relief, monetary damages including treble damages, as well as costs of the lawsuit, including attorneys fees. On September 8, 2000, we filed an answer to the complaint, as well as
counter-claims alleging, among other things, invalidity and/or unenforceability of the three patents in question. On March 5, 2001, a motion was granted allowing Ciena to amend its complaint to include allegations that we are willfully infringing
two additional patents. One patent was dropped from the litigation by agreement of the parties prior to trial. In February 2003, jury trials were held on the issues of infringement and invalidity of the remaining four patents. Ours all-optical
networking products were found by a jury not to infringe two of Cienas WDM patents. The jury did not reach a verdict on a third Ciena WDM patent, which is related to the two non-infringed WDM patents. Our inverse multiplexing transceiver
product, which can be used along with our all-optical networking products, was found by the jury to infringe a Ciena patent on bit rate transparent devices. In an April 2003 retrial, the manner in which certain of our transmitters and receivers are
operated in a WDM system was found by a jury to infringe the patent, upon which a verdict was not reached in the February 2003 trial. The jury verdicts to date are interim verdicts, in so far as additional trial court proceedings remain before a
decision is made by the court and judgment is entered. In May 2003, we filed a motion to certify the record for interlocutory appeal to the U.S. Federal Circuit Court of Appeals and Ciena filed motions for entry of judgment and for a permanent
injunction, all of which are pending.



We have designed our
products in an effort to respect the intellectual property rights of others. We intend to continue to defend ourselves vigorously against these claims and pursue post-trial relief and appellate review of the trial proceedings, as necessary. While we
believe that we will ultimately prevail in this litigation, there can be no assurance that we will be successful in the defense of the litigation.



We may consider settlement due to the costs and uncertainties associated with litigation in general, and patent infringement litigation in particular, and
due to the fact that an adverse determination in the litigation could preclude us from producing some of our products until we were able to implement a non-infringing alternative design to any portion of our products to which such a determination
applied. Even if we consider settlement, there can be no assurance that we will be able to reach a settlement with Ciena.



A final adverse determination in, or settlement of, the Ciena litigation could involve the payment of significant amounts by us, or could include terms in
addition to payments, such as an injunction preventing the sale of infringing products and/or a redesign of some of our products, which could have a material adverse effect on our business, financial condition or results of operations. While
management believes that we will ultimately prevail, we cannot be certain that the interim jury verdicts of infringement will be overturned, or that infringement of other patents in the suit will not be found in later legal proceedings. We expect
that Ciena will attempt to use the interim jury verdicts and the possibility of an injunction to disrupt our sales efforts and customer relationships. To the extent it is necessary, a trial to determine damages will be held following any appeals.
Such appeals can take up to a year or more before final determination.



We believe that the continuing defense of the lawsuit may be costly and may divert the time and attention of some members of our management. Further, Ciena and other competitors may use the continuing existence of the Ciena lawsuit to raise
questions in customers and potential customers minds as to our ability to manufacture and deliver our products. There can be no assurance that questions raised by Ciena and others will not disrupt our existing and prospective customer
relationships.



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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: Corvis,
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 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 Corvis common stock (or to be awarded rescissory damages if the class member has sold its Corvis stock) and prejudgment and post-judgment interest, reasonable attorneys and experts
witness fees and other costs.



By order dated October 12,
2001, the court appointed an executive committee of six plaintiffs law firms to coordinate their claims and function as lead counsel. Lead plaintiffs have been appointed in almost all of the IPO allocation actions, including the Corvis action.
On October 17, 2001, a group of underwriter defendants moved for Judge Scheindlins recusal. Judge Scheindlin denied that application. On December 13, 2001, the moving underwriter defendants filed a petition for writ of mandamus seeking the
disqualification of Judge Scheindlin in the United States Court of Appeals for the Second Circuit. On April 1, 2002, the Second Circuit denied the moving underwriter defendants application for a writ of mandamus seeking Judge Scheindlins
recusal from this action. On April 19, 2002, plaintiffs filed amended complaints in each of the actions, including the Corvis action. On May 23, 2002, a conference was held at which the court set a briefing schedule for the filing of motions to
dismiss the amended complaints. On July 1, 2002, the underwriter defendants filed their motion to dismiss the amended complaints. On July 15, 2002, the issuer defendants filed their motion to dismiss the amended complaints. The judge heard oral
arguments on the motions on November 1, 2002. On February 19, 2003, the issuer defendants motion to dismiss was granted with regard to certain claims and denied with regard to certain other claims. As to Corvis, the Section 10(b) and Rule
10b-5 claims, alleging that Corvis participated in a scheme to defraud investors by artificially driving up the price of the securities, were dismissed with prejudice, but the Section 11 claims, alleging that the registration statement contained a
material misstatement of, or omitted, a material fact at the time it became effective, survived the motion to dismiss. On June 26, 2003, the plaintiffs executive committee announced a proposed settlement between plaintiffs, on the one hand,
and the issuer defendants and their respective officer and director defendants, including the Company and its named officers and directors, on the other. A memorandum of understanding to settle plaintiffs claims against the issuers and their
directors and officers has been approved as to form by counsel for the issuers and the process of obtaining individual approval by each of the 309 issuer defendants, including the Company, is now underway. The proposed settlement does not resolve
plaintiffs claims against the underwriter defendants. The proposed settlement is also subject to approval by the district court. The principal components of the proposed settlement include (i) a release of all of plaintiffs claims
against the issuer defendants and their officers and directors which have, or could have, been asserted in this litigation arising out of the conduct alleged in the amended complaints to be wrongful, (ii) the assignment by the issuers to the
plaintiffs of certain potential claims against the underwriter defendants and the agreement by the issuers not to assert certain claims against the underwriter defendants, and (iii) an undertaking by the insurers of the issuer defendants to pay to
plaintiffs the difference (the Recovery Deficit) between $1 billion and any lesser amount recovered from the underwriter defendants in this litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the underwriters, the
insurers of the settling issuer defendants will owe no money to the plaintiffs. We cannot be certain that we will not be subject to additional claims in the future, including claims brought by the underwriter defendants still involved in the
litigation.



We and our 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



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actions and proceedings will not have a material adverse effect on the Companys business, financial condition or results of operations.



Item 2. Changes in Securities and Use of Proceeds



(a) None.



(b) None.



(c) None



(d) Not applicable.



Item 3. Defaults upon Senior Securities.



None.



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



(a) We held our annual meeting of stockholders on May 9, 2003.



(b) David R. Huber was elected as a Class III Director, with a term expiring at the annual meeting of stockholders to be held in 2006. Our Directors whose terms of office continued after the meeting are: David S.
Oros, Freeman A. Hrabowski, III, Joseph R. Hardiman and Donald R. Walker.



(c)
Following is a tabulation of the number of votes cast for, the number of votes cast against, the number of votes withheld and the number of broker non-votes for each item upon which stockholders voted at our annual meeting:



|Item                                                                                |  | For         |  | Against   |  | Abstain/ Withheld
|----------------------------------------------------------------------------------- |  | ----------- |  | --------- |  | -----------------
|Approval of amendments to Corvis Amended and Restated Certificate of Incorporation |  | 358,525,628 |  | 9,053,944 |  | 1,164,610        
|Election of David R. Huber as a Class III Director                                  |  | 350,797,390 |  | N/A       |  | 17,946,792       
|Approval of the appointment of KPMG LLP as our auditors for Fiscal 2003             |  | 362,882,277 |  | 4,892,270 |  | 969,635          



(d) not applicable



Item 5. Other Information.



None.



Item 6. Exhibits and Reports on Form 8-K.



(a) A list of exhibits filed herewith is contained on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.



(b) We filed the following Current Reports on Form 8-K during the period covered by this report:



| | (i) |  | On April 30, 2003, we filed a Current Report on Form 8-K dated April 29, 2003, attaching a press release announcing our first quarter 2003 operating results.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (ii) |  | On June 30, 2003, we filed a Current Report on Form 8-K dated June 13, 2003, announcing that C III Communications, LLC, our joint venture with Cequel III, LLC had closed on the
purchase of Broadwing Communications, subject to certain remaining state and local regulatory requirements.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements 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.



|                      |  | CORVIS CORPORATION                                          
|--------------------- |  | ------------------------------------------------------------
|                      | 
|Date: August 13, 2003 |  |                                                             
|                      |  | /s/ LYNN D. ANDERSON                                        
|                      |  | Lynn D. Anderson                                            
|                      |  | Senior Vice President, Chief Financial Officer and Treasurer
|                      | 
|                      |  | /s/ TIMOTHY C. DEC                                          
|                      |  | Timothy C. Dec                                              
|                      |  | Vice President, Chief Accounting Officer                    



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CORVIS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|31.1        |  | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                    
|            | 
|31.2        |  | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)                                                                  
|            | 
|32.1        |  | Certificate of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code