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FORM 10-Q



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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



For the quarterly period ended September 30, 2005



| ̈ | 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 0-30989



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Broadwing Corporation

(Exact name of registrant as specified in its charter)



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



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 ̈



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



Number of shares of Common Stock, $0.01 par value, outstanding at October 31, 2005: 73,730,441



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##### Table of Contents

|          |  |                                                                                                                                         |  |         
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                                                         |  | Page No.
|Part I -  |  | Financial Information                                                                                                                   |  |         
|          |  |                                                                                                                                        
|Item 1.   |  | Financial Statements                                                                                                                    |  |         
|          |  |                                                                                                                                        
|          |  | Unaudited condensed consolidated balance sheets as of December 31, 2004 and September 30, 2005                                          |  | 3       
|          |  |                                                                                                                                        
|          |  | Unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2004 and September 30, 2005 |  | 4       
|          |  |                                                                                                                                        
|          |  | Unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and September 30, 2005           |  | 5       
|          |  |                                                                                                                                        
|          |  | Notes to unaudited condensed consolidated financial statements                                                                          |  | 6       
|          |  |                                                                                                                                        
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                   |  | 13      
|          |  |                                                                                                                                        
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                                              |  | 22      
|          |  |                                                                                                                                        
|Item 4.   |  | Controls and Procedures                                                                                                                 |  | 23      
|          |  |                                                                                                                                        
|Part II - |  | Other Information                                                                                                                       |  |         
|          |  |                                                                                                                                        
|Item 1.   |  | Legal Proceedings                                                                                                                       |  | 24      
|          |  |                                                                                                                                        
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                             |  | 25      
|          |  |                                                                                                                                        
|Item 3.   |  | Defaults upon Senior Securities                                                                                                         |  | 25      
|          |  |                                                                                                                                        
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                     |  | 25      
|          |  |                                                                                                                                        
|Item 5.   |  | Other Information                                                                                                                       |  | 25      
|          |  |                                                                                                                                        
|Item 6.   |  | Exhibits                                                                                                                                |  | 25      



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##### Table of Contents

PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



BROADWING CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS



(In
thousands, except share and per share amounts)



|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ------------------ | - | ---------- | -
|                                                                                                                                                                                                                                       |  | December 31, 2004 |            |   | September 30, 2005 |  
|                                                                                                                                                                                                                                       |  |                   |            |   | (unaudited)        |  
|ASSETS                                                                                                                                                                                                                                 |  |                   |            |   |                    |   |            |  
|Current assets:                                                                                                                                                                                                                        |  |                   |            |   |                    |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                              |  | $                 | 124,540    |   |                    | $ | 37,731     |  
|Short-term investments                                                                                                                                                                                                                 |  |                   | 100,139    |   |                    |   | 100,187    |  
|Trade accounts receivable, net                                                                                                                                                                                                         |  |                   | 94,731     |   |                    |   | 88,592     |  
|Other current assets, net                                                                                                                                                                                                              |  |                   | 24,027     |   |                    |   | 22,707     |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total current assets                                                                                                                                                                                                                   |  |                   | 343,437    |   |                    |   | 249,217    |  
|                                                                                                                                                                                                                                       |  |                  
|Restricted cash, non-current                                                                                                                                                                                                           |  |                   | 13,911     |   |                    |   | 15,050     |  
|Long-term investments                                                                                                                                                                                                                  |  |                   | 49,676     |   |                    |   |           |  
|Property and equipment, net                                                                                                                                                                                                            |  |                   | 286,038    |   |                    |   | 260,699    |  
|Goodwill                                                                                                                                                                                                                               |  |                   | 48,696     |   |                    |   | 58,354     |  
|Intangible assets, net                                                                                                                                                                                                                 |  |                   | 30,152     |   |                    |   | 26,225     |  
|Other non-current assets                                                                                                                                                                                                               |  |                   | 9,080      |   |                    |   | 12,105     |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total assets                                                                                                                                                                                                                           |  | $                 | 780,990    |   |                    | $ | 621,650    |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                   |  |                   |            |   |                    |   |            |  
|Current liabilities:                                                                                                                                                                                                                   |  |                   |            |   |                    |   |            |  
|Notes payable, net of discounts, and capital lease obligations, current portion                                                                                                                                                        |  | $                 | 117,324    |   |                    | $ | 62,908     |  
|Accounts payable                                                                                                                                                                                                                       |  |                   | 12,452     |   |                    |   | 24,496     |  
|Accrued communication service costs                                                                                                                                                                                                    |  |                   | 41,089     |   |                    |   | 30,991     |  
|Accrued expenses and other liabilities                                                                                                                                                                                                 |  |                   | 53,939     |   |                    |   | 54,200     |  
|Deferred revenue, current portion                                                                                                                                                                                                      |  |                   | 11,752     |   |                    |   | 11,529     |  
|Accrued restructuring and other charges                                                                                                                                                                                                |  |                   | 8,620      |   |                    |   | 4,543      |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total current liabilities                                                                                                                                                                                                              |  |                   | 245,176    |   |                    |   | 188,667    |  
|                                                                                                                                                                                                                                       |  |                  
|Notes payable, net of discounts, and capital lease obligations, net of current portion                                                                                                                                                 |  |                   | 52,218     |   |                    |   | 20,764     |  
|Deferred revenue, net of current portion                                                                                                                                                                                               |  |                   | 13,608     |   |                    |   | 13,953     |  
|Other long-term liabilities                                                                                                                                                                                                            |  |                   | 14,949     |   |                    |   | 14,248     |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total liabilities                                                                                                                                                                                                                      |  |                   | 325,951    |   |                    |   | 237,632    |  
|                                                                                                                                                                                                                                       |  |                  
|Commitments and contingencies                                                                                                                                                                                                          |  |                   |            |   |                    |   |            |  
|Stockholders equity:                                                                                                                                                                                                                  |  |                   |            |   |                    |   |            |  
|Common stock$0.01 par value; 1,900,000,000 shares authorized; 68,424,060 shares issued and 67,195,880 shares outstanding as of
December 31, 2004; 74,946,204 shares issued and 73,718,024 shares outstanding as of September 30, 2005 |  |                   | 679        |   |                    |   | 744        |  
|Treasury stock (1,228,180 shares at December 31, 2004 and September 30, 2005, at cost)                                                                                                                                                 |  |                   | (9,512     | ) |                    |   | (9,512     | )
|Additional paid-in capital                                                                                                                                                                                                             |  |                   | 3,137,928  |   |                    |   | 3,178,900  |  
|Accumulated other comprehensive loss:                                                                                                                                                                                                  |  |                   |            |   |                    |   |            |  
|Unrealized investment losses                                                                                                                                                                                                           |  |                   | (717       | ) |                    |   | (427       | )
|Accumulated deficit                                                                                                                                                                                                                    |  |                   | (2,673,339 | ) |                    |   | (2,785,687 | )
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total stockholders equity                                                                                                                                                                                                             |  |                   | 455,039    |   |                    |   | 384,018    |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                             |  | $                 | 780,990    |   |                    | $ | 621,650    |  
|                                                                                                                                                                                                                                       |  |                   |            |   |                    |   |            |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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##### Table of Contents

BROADWING CORPORATION AND SUBSIDIARIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



(In thousands, except per share amounts)



|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|----------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | ------------------ |  | - | ------------------ | - |  | - | -------- | -
|                                                                  |  | Three Months Ended |         |   | Nine Months Ended  |  
|                                                                  |  | September 30, 2004 |         |   | September 30, 2005 |   |         | September 30, 2004 |  |   | September 30, 2005 |  
|Revenue                                                           |  | $                  | 163,446 |   |                    | $ | 218,659 |                    |  | $ | 452,363            |   |  | $ | 659,137  |  
|                                                                  |  |                    |         |  
|Operating expenses:                                               |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Cost of revenue (excluding depreciation and amortization)         |  |                    | 111,493 |   |                    |   | 143,470 |                    |  |   | 307,782            |   |  |   | 438,428  |  
|                                                                  |  |                    |         |  
|Research and development, excluding equity-based expense          |  |                    | 3,115   |   |                    |   | 679     |                    |  |   | 12,554             |   |  |   | 6,172    |  
|Sales, general and administrative, excluding equity-based expense |  |                    | 64,330  |   |                    |   | 77,386  |                    |  |   | 182,564            |   |  |   | 227,080  |  
|Litigation settlement                                             |  |                    |        |   |                    |   |        |                    |  |   |                   |   |  |   | 2,000    |  
|Depreciation                                                      |  |                    | 10,009  |   |                    |   | 23,403  |                    |  |   | 25,069             |   |  |   | 78,115   |  
|Amortization                                                      |  |                    | 1,158   |   |                    |   | 1,404   |                    |  |   | 3,238              |   |  |   | 4,227    |  
|Equity-based expense:                                             |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Research and development                                          |  |                    | 474     |   |                    |   |        |                    |  |   | 3,393              |   |  |   | 497      |  
|Sales, general and administrative                                 |  |                    | 142     |   |                    |   | 934     |                    |  |   | 4,281              |   |  |   | 2,359    |  
|Restructuring and other charges                                   |  |                    | 2,638   |   |                    |   | 630     |                    |  |   | 3,027              |   |  |   | 1,344    |  
|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Total operating expenses                                          |  |                    | 193,359 |   |                    |   | 247,906 |                    |  |   | 541,908            |   |  |   | 760,222  |  
|                                                                  |  |                    |         |  
|Operating loss                                                    |  |                    | (29,913 | ) |                    |   | (29,247 | )                  |  |   | (89,545            | ) |  |   | (101,085 | )
|                                                                  |  |                    |         |  
|Other income (expense), net                                       |  |                    | 1,756   |   |                    |   | 1,862   |                    |  |   | 7,475              |   |  |   | 5,861    |  
|Interest expense, net of capitalized amounts                      |  |                    | (8,645  | ) |                    |   | (3,150  | )                  |  |   | (26,726            | ) |  |   | (17,124  | )
|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Net loss                                                          |  | $                  | (36,802 | ) |                    | $ | (30,535 | )                  |  | $ | (108,796           | ) |  | $ | (112,348 | )
|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Other comprehensive loss:                                         |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Unrealized investment gains (losses)                              |  |                    | (27     | ) |                    |   | 130     |                    |  |   | (311               | ) |  |   | 290      |  
|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Comprehensive loss                                                |  | $                  | (36,829 | ) |                    | $ | (30,405 | )                  |  | $ | (109,107           | ) |  | $ | (112,058 | )
|                                                                  |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |          |  
|Basic and diluted net loss per common share                       |  | $                  | (0.69   | ) |                    | $ | (0.41   | )                  |  | $ | (2.17              | ) |  | $ | (1.55    | )
|Basic and diluted weighted average common shares                  |  |                    | 53,302  |   |                    |   | 73,711  |                    |  |   | 50,116             |   |  |   | 72,570   |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(In thousands)



|                                                                                    |  |                    |          |   |                    |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ------------------ | - | -------- | -
|                                                                                    |  | Nine Months Ended  |         
|                                                                                    |  | September 30, 2004 |          |   | September 30, 2005 |  
|Cash flows from operating activities:                                               |  |                    |          |   |                    |   |          |  
|Net loss                                                                            |  | $                  | (108,796 | ) |                    | $ | (112,348 | )
|Adjustments to reconcile net loss to net cash used in operating activities:         |  |                    |          |   |                    |   |          |  
|Depreciation and amortization                                                       |  |                    | 28,307   |   |                    |   | 82,342   |  
|Equity-based expense                                                                |  |                    | 7,674    |   |                    |   | 2,856    |  
|Provision for bad debt                                                              |  |                    | 4,397    |   |                    |   | 7,562    |  
|Deferred financing, original issue discount amortization, and accretion of interest |  |                    | 17,748   |   |                    |   | 11,162   |  
|Amortization of deferred revenue                                                    |  |                    |         |   |                    |   | 122      |  
|Non-cash restructuring, inventory write-downs and other net charges                 |  |                    | (949     | ) |                    |   | (889     | )
|Changes in operating assets and liabilities:                                        |  |                    |          |   |                    |   |          |  
|Accounts receivable                                                                 |  |                    | (4,337   | ) |                    |   | 1,602    |  
|Inventory                                                                           |  |                    | (2,895   | ) |                    |   | 868      |  
|Other current assets                                                                |  |                    | 860      |   |                    |   | 160      |  
|Accounts payable and other accrued expenses                                         |  |                    | (24,239  | ) |                    |   | (12,585  | )
|                                                                                    |  |                    |          |   |                    |   |          |  
|Net cash used in operating activities                                               |  |                    | (82,230  | ) |                    |   | (19,148  | )
|                                                                                    |  |                    |          |   |                    |   |          |  
|Cash flows from investing activities:                                               |  |                    |          |   |                    |   |          |  
|Purchase of property and equipment                                                  |  |                    | (46,095  | ) |                    |   | (41,623  | )
|Proceeds from the sale of property and equipment                                    |  |                    | 1,434    |   |                    |   | 753      |  
|Ciena equipment deposit                                                             |  |                    |         |   |                    |   | (11,000  | )
|Purchases and sale of investments, net                                              |  |                    | (73,809  | ) |                    |   | 49,918   |  
|Focal acquisition cash acquired, net of acquisition costs                           |  |                    | 11,381   |   |                    |   |         |  
|                                                                                    |  |                    |          |   |                    |   |          |  
|Net cash used in investing activities                                               |  |                    | (107,089 | ) |                    |   | (1,952   | )
|                                                                                    |  |                    |          |   |                    |   |          |  
|Cash flows from financing activities:                                               |  |                    |          |   |                    |   |          |  
|Proceeds from notes payable and associated warrants                                 |  |                    | 217,750  |   |                    |   |         |  
|Repayments of notes payable and capital lease obligations                           |  |                    | (79,236  | ) |                    |   | (65,865  | )
|Increase in deposits and other non-current assets                                   |  |                    | (4,371   | ) |                    |   | (1,139   | )
|Proceeds from stock options and warrants exercised                                  |  |                    | 6,531    |   |                    |   | 1,295    |  
|                                                                                    |  |                    |          |   |                    |   |          |  
|Net cash provided by (used in) financing activities                                 |  |                    | 140,674  |   |                    |   | (65,709  | )
|                                                                                    |  |                    |          |   |                    |   |          |  
|Net increase (decrease) in cash and cash equivalents                                |  |                    | (48,645  | ) |                    |   | (86,809  | )
|                                                                                    |  |                   
|Cash and cash equivalentsbeginning                                                 |  |                    | 256,490  |   |                    |   | 124,540  |  
|                                                                                    |  |                    |          |   |                    |   |          |  
|Cash and cash equivalentsending                                                    |  | $                  | 207,845  |   |                    | $ | 37,731   |  
|                                                                                    |  |                    |          |   |                    |   |          |  
|Supplemental disclosure of cash flow information:                                   |  |                    |          |   |                    |   |          |  
|Interest paid                                                                       |  | $                  | 3,762    |   |                    | $ | 2,821    |  
|                                                                                    |  |                    |          |   |                    |   |          |  
|Supplemental disclosure of non-cash activities:                                     |  |                    |          |   |                    |   |          |  
|Assets acquired through capital leases                                              |  | $                  |         |   |                    | $ | 1,067    |  
|Inventory installed as fixed assets                                                 |  | $                  | 1,292    |   |                    |   |         |  
|Deposit with Ciena converted to equipment                                           |  | $                  |         |   |                    | $ | 5,450    |  
|Repayment of notes payable and interest with common shares                          |  | $                  | 33,113   |   |                    | $ | 34,168   |  
|Equity issued in conjunction with Focal acquisition                                 |  | $                  | 94,182   |   |                    |   |         |  
|                                                                                    |  |                    |          |   |                    |   |          |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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BROADWING CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(1) Summary of Significant Accounting Policies and Practices



(a) Nature of Business and Basis of Presentation



Broadwing Corporation and subsidiaries (Broadwing or the Company) is an Austin, Texas based provider of data and Internet, broadband transport, and voice communications services throughout the
United States over a nationwide facilities-based network connecting 137 cities.



Until the third quarter of 2005, Broadwing also operated a communications equipment division, which developed and marketed among other products, the Optical Convergence Switch (OCS) which is an
optical-electrical-optical cross-connect switch enabling carriers to deliver SONET/SDH services. Starting April 2005, the Company began implementing a plan for the curtailment of OCS production and the restructuring of the equipment division. These
restructuring initiatives are complete and equipment division assets and personnel still in place are now focused primarily on the expansion and support of our Broadwing internal network infrastructure.



The unaudited condensed consolidated financial statements included herein for
Broadwing Corporation and subsidiaries 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 that 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.



These financial statements should be read in conjunction with the
Companys December 31, 2004 audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K filed on March 16, 2005 with the Securities and Exchange Commission.



(b) Revenue and Cost of Revenue



Service revenue and related reserves are recognized when the services are
provided. Payments received in advance are deferred until the service is provided. Up-front fees received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the
expected customer relationship. Expected customer relationship periods are estimated using historical data of actual customer retention patterns.



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



Indefeasible right-of-use (IRU) agreements represent the lease of network capacity or dark fiber and are recorded as deferred revenue at the
earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash. The buyer of IRU services typically pays cash upon execution of the contract, and the associated IRU revenue is then recognized ratably over
the life of the agreement as the services are provided, beginning on the date of customer acceptance. In the event the buyer of an IRU terminates a contract prior to the contract expiration and releases the Company from the obligation to provide
future services, the remaining unamortized deferred revenue is recognized in the period in which the contract is terminated. At the date of the Broadwing Communication Services, Inc. acquisition, the Company recorded the deferred revenue associated
with IRUs at its fair value, which was substantially less than its historical book value. As a result, revenue from IRUs is significantly less than that previously reported by Broadwing Communications Services, Inc. IRU revenue for the three and
nine months ended September 30, 2005 and 2004 comprised less than 1.5% and 3% respectively of total revenue.



Cost of revenue primarily reflects access charges paid to local exchange carriers and other providers as well as transmission lease payments to other
carriers. Cost of revenue excludes depreciation and amortization expense. Additionally, as a result of the Focal acquisition (See Footnote 2, Focal Acquisition), cost of revenue now includes Inter-carrier compensation paid to carriers to terminate
or originate traffic on their networks. Inter-carrier compensation rates are subject to regulatory oversight. There are two primary forms of Inter-carrier compensation: access charges and reciprocal



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##### Table of Contents

compensation. The Company is subject to access charges, which are related to the origination and termination of long
distance calls, and reciprocal compensation, which is related to the termination of local calls. Inter-carrier compensation charges are based on minutes of use and vary based on customer calling patterns.



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



(c) Stock split and stock dividend



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



(d) Stock Options
and Warrants



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



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##### Table of Contents

|                                                                                                               |  |                                 |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                               |  | Three Months EndedSeptember 30, |         
|                                                                                                               |  | 2004                            |          |   | 2005 |  
|Net loss                                                                                                       |  | $                               | (36,802  | ) |      | $ | (30,535  | )
|Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards |  |                                 | (4,886   | ) |      |   | (2,550   | )
|Add stock-based employee compensation expense included in reported net loss                                    |  |                                 | 637      |   |      |   | 934      |  
|                                                                                                               |  |                                 |          |   |      |   |          |  
|Pro forma net loss                                                                                             |  | $                               | (41,051  | ) |      | $ | (32,151  | )
|                                                                                                               |  |                                 |          |   |      |   |          |  
|Pro forma basic and diluted net loss per common share                                                          |  | $                               | (0.77    | ) |      | $ | (0.44    | )
|                                                                                                               |  |                                 |          |   |      |   |          |  
|                                                                                                               | 
|                                                                                                               |  | Nine Months EndedSeptember 30,  |         
|                                                                                                               |  | 2004                            |          |   | 2005 |  
|Net loss                                                                                                       |  | $                               | (108,796 | ) |      | $ | (112,348 | )
|Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards |  |                                 | (30,406  | ) |      |   | (8,241   | )
|Add stock-based employee compensation expense included in reported net loss                                    |  |                                 | 7,345    |   |      |   | 2,856    |  
|                                                                                                               |  |                                 |          |   |      |   |          |  
|Pro forma net loss                                                                                             |  | $                               | (131,857 | ) |      | $ | (117,733 | )
|                                                                                                               |  |                                 |          |   |      |   |          |  
|Pro forma basic and diluted net loss per common share                                                          |  | $                               | (2.63    | ) |      | $ | (1.62    | )
|                                                                                                               |  |                                 |          |   |      |   |          |  



(e) 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.



(f) Reclassifications



Certain prior year amounts have been reclassified to conform to the current year
presentation, including the reclassification of investments in auction rate securities in the amount of $25.4 million to short-term investments as of December 31, 2004. Auction rate securities, because of the short duration of their reset
periods, were previously included in cash and cash equivalents for all periods presented. As a result of this reclassification, the Companys cash flow from investing activities now includes the investments and sales of auction rate securities
for all periods presented. This reclassification had no impact on previously reported total current assets, total assets, equity or net loss and does not affect previously reported cash flows from operating activities.



(2) Focal Acquisition



On September 1, 2004, the Company invested approximately $98.6 million net of purchase price adjustments and
acquisition costs and assumed $98.1 million in debt to acquire 100% of the voting equity interest of Focal Communications Corporation (Focal).



The purchase price has been allocated to the assets and liabilities acquired, based on the estimated fair value that was finalized in the third quarter of
2005. The fair value of accounts receivable, accrued cost of service and other estimates have been contested and are subject to dispute.



For the nine months ended September 30, 2005, goodwill increased by approximately $9.7 million for the reasons set forth below.



The following table provides a purchase price allocation rollforward from the
Companys estimate recorded at December 31, 2004 to September 30, 2005 and weighted-average useful lives of long-lived assets (in thousands):



|                          |  |                   |         |              |   |        |             |  |   |         |  |        
|------------------------- |  | ----------------- | ------- | ------------ | - | ------ | ----------- |  | - | ------- |  | -------
|                          |  | Fair Value        |         | Useful lives
|                          |  | December 31, 2004 |         | Adjustments  |   |        | As Adjusted | 
|Current assets            |  | $                 | 52,152  |              | $ | 3,074  | (a)         |  | $ | 55,226  |  |        
|Property and equipment    |  |                   | 155,865 |              |   |       |             |  |   | 155,865 |  |        
|Customer relationships    |  |                   | 9,900   |              |   | 300    |             |  |   | 10,200  |  | 7 years
|Goodwill                  |  |                   | 48,696  |              |   | 9,658  | (b)         |  |   | 58,354  |  |        
|                          |  |                   |         |              |   |        |             |  |   |         |  |        
|Total assets acquired     |  |                   | 266,613 |              |   | 13,032 |             |  |   | 279,645 |  |        
|Current liabilities       |  |                   | 57,064  |              |   | 13,032 | (c)         |  |   | 70,096  |  |        
|Long-term liabilities     |  |                   | 110,952 |              |   |       |             |  |   | 110,952 |  |        
|                          |  |                   |         |              |   |        |             |  |   |         |  |        
|Total liabilities assumed |  |                   | 168,016 |              |   | 13,032 |             |  |   | 181,048 |  |        
|                          |  |                   |         |              |   |        |             |  |   |         |  |        
|Purchase Price            |  | $                 | 98,597  |              | $ |       |             |  | $ | 98,597  |  |        
|                          |  |                   |         |              |   |        |             |  |   |         |  |        

---

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



|(b) | The increase in goodwill equals the net decrease in the estimated fair value of net assets acquired excluding goodwill of $9.7 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



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



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(3) Basic and Diluted Net Loss Per Common Share



Options and warrants outstanding as of September 30, 2004 to purchase 10,885,400 shares of common stock and 2,500
unvested shares acquired through the exercise of options were not included in the computation of diluted net loss per common share for the three and nine month periods ended September 30, 2004, as their inclusion would have been anti-dilutive.



Options, restricted stock and warrants outstanding as of
September 30, 2005 to purchase 9,153,221 shares of common stock were not included in the computation of diluted net loss per common share for the three and nine month periods ended September 30, 2005, as their inclusion would have been
anti-dilutive.



(4) Commitments and Contingencies



Revolving Line of Credit



On October 18, 2005, Broadwing announced that it had entered into a
revolving credit facility that enables it to borrow up to $75 million commencing 45 days after October 14, 2005 with a final maturity date of October 14, 2008. The facility is secured by a pledge of accounts receivable of Broadwing
Corporation and its subsidiaries. Borrowings will bear an interest rate, at Broadwings option, at either LIBOR plus 3.75% or an alternate base rate, defined as the higher of the prime or federal funds rate, plus 2.5%. If cash, investments, and
undrawn availability under the facility fall below $100.0 million while borrowings are outstanding, Broadwing must deposit $25.0 million into a designated restricted account. Availability under the facility is limited by an amount of eligible
accounts receivable available as collateral. The facility is subject to an unused line fee of one-half of one percent (0.05%), an annual fee of $375,000 and closing costs of $1,489,835 which will be amortized over the life of the facility. Broadwing
intends to use borrowings under the facility for general corporate purposes.



Ciena



On March 31, 2005, Broadwing and
Ciena Corporation (Ciena) entered into a settlement agreement regarding certain patent infringement lawsuits. Under the terms of the settlement agreement, Ciena and Broadwing have agreed to dismiss all claims. In addition, Broadwing will
pay to Ciena a total of $35.0 million in three equal annual installments, of which $33.0 million of the total payment may be used as credits toward the purchase of Ciena equipment and services at market prices over the next three and one-half years.
The Company recorded a charge of $2.0 million associated with the settlement in the first quarter of 2005. During the second quarter of 2005, the Company made the first annual payment of $11.0 million to Ciena. As of September 30, 2005,
approximately $3.4 million related to advance payments made for future equipment purchases is included in other non-current assets on the consolidated balance sheet.



Class Action Suit



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



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



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



Qwest Investigations



The Denver, Colorado regional office of the SEC is conducting two investigations titled In the Matter of Qwest Communications International, Inc. and In
the Matter of Issuers Related to Qwest. The Company believes the first of these investigations does not involve any allegation of wrongful conduct on its part. In October 2004, the SEC announced that it was charging Qwest with securities fraud and
other violations of the federal securities laws and entering into a settlement with Qwest relating to those charges. In connection with the second investigation, the SEC is examining various transactions and business relationships involving Qwest
and eleven companies having a vendor relationship with Qwest, including Broadwing. This investigation, insofar as it relates to Broadwing, appears to focus generally on whether the Companys transactions and relationships with Qwest and its
employees were appropriately disclosed in the Companys public filings and other public statements.



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



The Company is cooperating fully with these investigations. Broadwing is not
able, at this time, to say when the SEC and/or U.S. Attorney investigations will be completed and resolved, or what the ultimate outcome with respect to it will be. These investigations could result in substantial legal costs and a diversion of
managements attention that may have a material adverse effect on its business, financial condition and results operations.



Great Northern Insurance Company



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



Other



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 its business, financial condition or
results of operations.



(5) Concentrations



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



The Company may be subject to credit risk due to
concentrations of receivables from companies that are communications providers, Internet service providers and cable television companies. The Company performs ongoing credit evaluations of customers financial condition and typically does not
require significant collateral. Most of the Companys arrangements with large customers do not provide guarantees that customer usage will be maintained at current levels. To the extent these large customers cease to employ the Companys
network to deliver their services, or cannot pay outstanding accounts receivable balances, the Companys revenue and financial condition could be materially adversely affected. Revenue from the Companys ten largest customers accounted for
approximately 17% of total revenue for both the three and nine months ended September 30, 2005, as compared to 17% and 19% respectively for the three and nine months ended September 30, 2004. Revenue from communications carriers accounted
for 41% and 42% of total revenue for the three and nine months ended September 30, 2005 as compared to 36% for the three and nine months ended September 30, 2004.



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##### Table of Contents

(6) Property and Equipment, net



Property and equipment is recorded at cost or fair value if acquired in a business combination. Depreciation is provided for
using the straight-line method over the estimated useful life. Repairs and maintenance are charged to expense as incurred.



Starting in 2003 and continuing through 2005, the Company implemented a series of capital projects related to its network infrastructure in order to lower
its overall communications service costs, integrate the Focal network, and provide new products and services to its customers. Costs associated directly with improvements to the network, including employee related costs, have been capitalized, and
interest costs incurred during construction were capitalized based on the weighted average accumulated construction expenditures and interest rates related to the Companys current borrowings. During the nine months ended September 30,
2005, $5.4 million of interest expense was capitalized into construction in process.



Property and equipment, net (in thousands):



|                                        |  |                  |          |   |                   |   |          |  
|--------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                        |  | December 31,2004 |          |   | September 30,2005 |  
|Land                                    |  | $                | 7,950    |   |                   | $ | 7,945    |  
|Buildings and leasehold improvements    |  |                  | 68,748   |   |                   |   | 64,460   |  
|Transmission facilities                 |  |                  | 225,059  |   |                   |   | 265,189  |  
|Furniture, fixtures, vehicles and other |  |                  | 24,694   |   |                   |   | 24,772   |  
|Fiber usage rights                      |  |                  | 14,513   |   |                   |   | 16,342   |  
|Testing and manufacturing               |  |                  | 74,226   |   |                   |   | 71,898   |  
|Construction in process                 |  |                  | 32,290   |   |                   |   | 43,513   |  
|                                        |  |                  |          |   |                   |   |          |  
|Total property and equipment            |  |                  | 447,480  |   |                   |   | 494,119  |  
|Less: accumulated depreciation          |  |                  | (161,442 | ) |                   |   | (233,420 | )
|                                        |  |                  |          |   |                   |   |          |  
|Property and equipment, net             |  | $                | 286,038  |   |                   | $ | 260,699  |  
|                                        |  |                  |          |   |                   |   |          |  



Included in
construction in process is approximately $17.6 million and $13.2 million of network spares inventory at September 30, 2005 and December 31, 2004, respectively. Interest is not capitalized on network spares inventory.



(7) Notes Payable and Capital Leases



A summary of notes payable and capital leases outstanding as of the balance
sheet dates is as follows (in thousands):



|                                                                                                                                                                                       |  |                  |          |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                       |  | December 31,2004 |          |   | September 30,2005 |  
|Leasehold improvements loan due May 2009, 10% interest rate                                                                                                                            |  | $                | 691      |   |                   | $ | 594     |  
|Senior unsecured convertible notes, 5% interest rate due February 2006, less unamortized debt discount of $12,837 and $2,787 at
December 31, 2004 and September 30, 2005, respectively |  |                  | 147,877  |   |                   |   | 61,499  |  
|Capital leases                                                                                                                                                                         |  |                  | 20,267   |   |                   |   | 21,076  |  
|Other                                                                                                                                                                                  |  |                  | 707      |   |                   |   | 503     |  
|                                                                                                                                                                                       |  |                  |          |   |                   |   |         |  
|                                                                                                                                                                                       |  |                  | 169,542  |   |                   |   | 83,672  |  
|Less: current portion                                                                                                                                                                  |  |                  | (117,324 | ) |                   |   | (62,908 | )
|                                                                                                                                                                                       |  |                  |          |   |                   |   |         |  
|Notes payable and capital leases, net of discounts and current portion                                                                                                                 |  | $                | 52,218   |   |                   | $ | 20,764  |  
|                                                                                                                                                                                       |  |                  |          |   |                   |   |         |  



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



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



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Under certain conditions, the holders can participate in subsequent rights offerings. Unpaid principal is
redeemable by the holders at 115% upon a change of control. Under the terms of the notes, the Company may incur indebtedness of up to $100.0 million, subject to certain limitations.



The Company has the option, beginning on November 19, 2004 and ending December 19, 2005, to cause the investors to
subscribe to the placement of up to an additional $75.0 million in senior unsecured convertible notes having a final maturity date of two years after their issuance and otherwise having similar terms as the initial senior unsecured convertible
notes. The holders may demand the additional placement of up to an additional $75.0 million in senior unsecured convertible notes if the average stock price exceeds $47.40 for ten trading days.



During the quarter, the Company elected to pay principal and interest due on
August 19, 2005 of $32.1 million and $1.2 million, respectively, in cash. Additionally, the Company has elected to pay principal and interest due on November 19, 2005 of $32.1 million and $0.8 million, respectively, in cash. On an ongoing
basis, the Company will consider the method of payment of principal and interest associated with the convertible notes based on its capital resource needs and market conditions at the time.



Capital leases outstanding as of the balance sheet dates include fiber
capital leases that were assumed in the Focal acquisition in September 2004 as well as vehicle leases previously owned or acquired by Broadwing.



(8) New Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS
No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements at fair value starting the first annual period beginning 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The Company is currently evaluating the impact that SFAS 123R will have on its consolidated results of
operations and financial condition, which in part will be dependent on the transition and amortization methods used to adopt the new rules in 2006.



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



In March 2005, the FASB issued FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can
be reasonably estimated. The provision is effective for no later than the end of the first fiscal year ending after December 15, 2005. The Company is in the process of evaluating the impact of FIN 47 to the consolidated results of operations
and financial condition.



(9) Restructuring and Related Charges



Starting in 2001 and continuing through 2005, the Company
has experienced a decline in the sale of communications equipment, including its OCS product, which has represented materially all of the Companys communications equipment revenue in 2004 and 2005. In response to these declines, the Company
has implemented restructuring efforts including workforce reductions and facility consolidations. In addition, the Company has implemented integration efforts associated with its acquisition of Focal which has resulted in workforce reduction costs.
The Company is also continually evaluating the recoverability of its long-lived assets in light of these initiatives and the projected economic and operating environment.



The Companys restructuring activities are ongoing and additional charges will be recorded in future periods.



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##### Table of Contents

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



|                                                        |  |                    |       |                    |   |                    |  |                    |       |  |   |      
|------------------------------------------------------- |  | ------------------ | ----- | ------------------ | - | ------------------ |  | ------------------ | ----- |  | - | -----
|                                                        |  | Three Months Ended |       | Nine Months Ended 
|                                                        |  | September 30, 2004 |       | September 30, 2005 |   | September 30, 2004 |  | September 30, 2005
|Cost of revenue chargesinventory-write downs and other |  | $                  |      |                    | $ |                   |  | $                  | 193   |  | $ |     
|Restructuring and other charges:                        |  |                    |       |                    |   |                    |  |                    |       |  |   |      
|Facilities consolidation                                |  |                    | 993   |                    |   | 21                 |  |                    | 1,188 |  |   | 296  
|Change in reserve estimate                              |  |                    | 270   |                    |   |                   |  |                    | 464   |  |   | 94   
|Workforce reductions                                    |  |                    | 1,375 |                    |   | 596                |  |                    | 1,375 |  |   | 657  
|Impairment loss - OCS                                   |  |                    |      |                    |   | 13                 |  |                    |      |  |   | 297  
|                                                        |  |                    |       |                    |   |                    |  |                    |       |  |   |      
|Total restructuring and other charges                   |  |                    | 2,638 |                    |   | 630                |  |                    | 3,027 |  |   | 1,344
|                                                        |  |                    |       |                    |   |                    |  |                    |       |  |   |      
|Total restructuring and related charges                 |  | $                  | 2,638 |                    | $ | 630                |  | $                  | 3,220 |  | $ | 1,344
|                                                        |  |                    |       |                    |   |                    |  |                    |       |  |   |      



The following table
displays the activity and balances of the restructuring reserve account for the three and nine months ended September 30, 2005 (in thousands):



|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  
|-------------------------------- |  | -------------------- | --- | - | ------------------------------------------------- | - | ------ | ----- |  | - | ------ | -
|                                 |  | Cost of Revenue      |     |   | Restructuring and Other Charges                   |   |        |       | 
|                                 |  | InventoryWrite-downs |     |   | Workforce, Facilities Consolidation andImpairment |   |        | Total | 
|Balance as of December 31, 2004  |  | $                    | 236 |   |                                                   | $ | 8,384  |       |  | $ | 8,620  |  
|Restructuring and other charges  |  |                      |    |   |                                                   |   | (316   | )     |  |   | (316   | )
|Cash payments                    |  |                      | (50 | ) |                                                   |   | (2,867 | )     |  |   | (2,917 | )
|Accretion of interest            |  |                      |    |   |                                                   |   | 9      |       |  |   | 9      |  
|Non-cash charges                 |  |                      |    |   |                                                   |   | 442    |       |  |   | 442    |  
|Foreign currency exchange impact |  |                      |    |   |                                                   |   | (60    | )     |  |   | (60    | )
|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  
|Balance at March 31, 2005        |  | $                    | 186 |   |                                                   | $ | 5,592  |       |  | $ | 5,778  |  
|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  
|Restructuring and other charges  |  |                      |    |   |                                                   |   | 1,448  |       |  |   | 1,448  |  
|Cash payments                    |  |                      |    |   |                                                   |   | (1,530 | )     |  |   | (1,530 | )
|Change in reserve estimate       |  |                      |    |   |                                                   |   | (29    | )     |  |   | (29    | )
|Foreign currency exchange impact |  |                      |    |   |                                                   |   | (53    | )     |  |   | (53    | )
|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  
|Balance at June 30, 2005         |  | $                    | 186 |   |                                                   | $ | 5,428  |       |  | $ | 5,614  |  
|Restructuring and other charges  |  |                      |    |   |                                                   |   | 630    |       |  |   | 630    |  
|Cash payments                    |  |                      |    |   |                                                   |   | (1,701 | )     |  |   | (1,701 | )
|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  
|Balance at September 30, 2005    |  | $                    | 186 |   |                                                   | $ | 4,357  |       |  | $ | 4,543  |  
|                                 |  |                      |     |   |                                                   |   |        |       |  |   |        |  



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 31, 2004 filed on March 16, 2005 with the Securities and Exchange Commission.



Overview



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



Until the third quarter of 2005, we also operated a
communications equipment division, which developed and marketed among other products, the Optical Convergence Switch (OCS) which is an optical-electrical-optical cross-connect switch enabling carriers to deliver SONET/SDH services.
Starting April 2005, we began implementing a plan for the curtailment of OCS production and the restructuring of the equipment division. These restructuring initiatives are complete and equipment division assets and personnel still in place are now
focused primarily on the expansion and support of our Broadwing internal network infrastructure.



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



On September 1, 2004, we acquired Focal Communications
Corporation (Focal) for $98.6 million, net of purchase price adjustments and acquisition costs. Focal was a Chicago-based competitive local exchange carrier that provided voice and data solutions to large and medium enterprises,
including government entities, universities and other communications service providers. Focal had a local fiber network in nine cities, offered services across the country in 23 Tier 1 markets from Boston to Miami and New York to Los Angeles, and
served over 4,000 enterprise and wholesale/carrier customer base.



Critical
Accounting Policies



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



Revenue and Accounts Receivable Valuation Allowances



Revenue and related reserves from services are recognized when the services are provided. Payments received in advance are
deferred until the service is provided. Up-front fees received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship. Expected
customer relationship periods are estimated using historical data of actual customer retention patterns.



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



At September 30, 2005, a significant portion of these reserves related
to reciprocal compensation and carrier access billings (CABS), associated with contracts acquired in the Focal purchase. These amounts relate to service periods both before and after the acquisition date. Certain carriers have disputed
certain charges as inappropriate or outside the scope of existing tariffs or contractual agreements. At September 30, 2005, trade accounts receivable from reciprocal compensation and CABS totaled $29.9 million, with associated credit allowances
totaling $15.8 million. If the resolution of these disputes differs from our estimates, our reserves will be adjusted resulting in an increase or decrease in revenue and net income.



Accrued Communications Service Costs



We perform bill verification procedures to detect possible errors in our access vendors billed invoices. The bill verification procedures include
the examination of bills, the comparison of rates between billed rates with rates used by our expense estimation systems, the comparison of circuits billed to our database of active circuits, and evaluating the trend of invoiced amounts by our
vendors, including the types of charges being assessed. If we conclude that we have been billed inaccurately, we will dispute the charge with the vendor and begin resolution procedures. We record a charge to cost of revenue and a corresponding
increase to the accrued communications service costs for the disputed amounts, unless past experience or other corroborating evidence indicates that it is not probable that we will ultimately be required to pay. If we ultimately reach an agreement
with a vendor in which we settle a disputed amount for an amount other than the corresponding accrual, we recognize the resultant settlement gain or loss in the period in which the settlement is reached. Previously unaccrued disputes are tracked and
reviewed periodically to assess whether a loss has become probable and estimable, in which case an accrual is established. If resolution of these disputes differ from our estimates, our reserve will be adjusted resulting in an increase or decrease
in cost of revenue and net earnings.



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Intangible Assets



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



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



In accordance with SFAS No. 142 and No. 144, we will perform an
impairment analysis of the intangible assets acquired as part of the Broadwing Communication Services, Inc. and Focal Communications acquisitions during the fourth quarter of 2005, unless other events or circumstances indicate that our assets may be
impaired, at which time an analysis will be performed.



Asset Retirement
Obligations



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



Litigation



We and our subsidiaries are involved in several material legal proceedings as described in more detail in Part II,
Item 1. Legal Proceedings of this report. We assess potential losses in relation to these and other pending or threatened legal matters. If a loss is considered probable and the amount can be estimated, we recognize an expense for the estimated
loss. To the extent these estimates exceed or are less than the actual liability resulting from the resolution of such matters, our earnings will be decreased or increased accordingly, and if the differences are material, our consolidated financial
statements could be materially impacted.



New Accounting Standards



In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements at fair value starting the first annual period beginning after
June 15, 2005. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. We are
currently evaluating the impact that SFAS 123R will have on our consolidated results of operations and financial condition, which in part will be dependent on the transition and amortization methods used to adopt the new rules in 2006.



In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets (SFAS 153)- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29,



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Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We are required to adopt SFAS 153 effective
January 1, 2006. We do not expect the adoption of SFAS 153 will have a material impact on our consolidated results of operations and financial condition.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that
an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision is effective for no later than the end of the first fiscal year ending after
December 15, 2005. The Company is in the process of evaluating the impact of FIN 47 to the consolidated results of operations and financial condition.



Results of Operations



Three months ended September 30, 2005 compared to three months ended September 30, 2004



Revenue. Revenue consists primarily of the sale of data and Internet, broadband transport and voice communications services. Data and
Internet sales consist of high-speed data transport utilizing technology based on Internet protocol (IP) and ATM/frame relay. Broadband transport services consist of long-haul transmission of data, voice and Internet traffic over
dedicated circuits. Voice services consist of long distance and local phone services.



Long-distance voice service includes dedicated and switched minutes of use, primarily for the transmission of long distance services on behalf of wholesale and retail customers. Local voice service consists of
dedicated and switched inbound and outbound services. Inbound service allows for the completion of calls to our customers. Our basic outbound service allows local calls to be completed within a metropolitan region. Local voice services also include
Inter-carrier compensation, which is associated with the transmission of traffic between telecommunications carriers and includes switched access and reciprocal compensation revenue. Reciprocal compensation is the compensation exchanged between
carriers for terminating local phone calls on one anothers networks.



Quarterly revenue by product is as follows (in thousands):



|                             |  |                    |         |                   |   |                |  |               |         |                    |   |         |  |   |        
|---------------------------- |  | ------------------ | ------- | ----------------- | - | -------------- |  | ------------- | ------- | ------------------ | - | ------- |  | - | -------
|                             |  | Three Months Ended
|                             |  | September 30, 2004 |         | December 31, 2004 |   | March 31, 2005 |  | June 30, 2005 |         | September 30, 2005
|Data and Internet services   |  | $                  | 38,150  |                   | $ | 41,731         |  | $             | 41,844  |                    | $ | 42,156  |  | $ | 42,684 
|Broadband transport          |  |                    | 62,081  |                   |   | 65,289         |  |               | 67,795  |                    |   | 73,069  |  |   | 74,853 
|Long-distance voice services |  |                    | 45,427  |                   |   | 56,213         |  |               | 55,485  |                    |   | 50,867  |  |   | 47,359 
|Local voice services         |  |                    | 17,407  |                   |   | 48,994         |  |               | 51,862  |                    |   | 55,139  |  |   | 53,171 
|Equipment sales              |  |                    | 381     |                   |   | 7,690          |  |               | 1,268   |                    |   | 993     |  |   | 592    
|                             |  |                    |         |                   |   |                |  |               |         |                    |   |         |  |   |        
|Total revenue                |  | $                  | 163,446 |                   | $ | 219,917        |  | $             | 218,254 |                    | $ | 222,224 |  | $ | 218,659
|                             |  |                    |         |                   |   |                |  |               |         |                    |   |         |  |   |        



Revenue increased to
$218.7 million for the three months ended September 30, 2005 from $163.4 million for the three months ended September 30, 2004, primarily due to the acquisition of Focal, which contributed approximately $41.0 million to the increase for
the third quarter of 2005. The remaining $14.3 million in revenue growth represents an 9% increase from the third quarter of 2004.



Excluding the increase in acquired Focal revenue of approximately $2.3 million, our data/Internet and broadband revenues increased by approximately $2.2
million and $12.8 million or 6% and 21%, respectively, as compared to the prior year quarter principally through new customer wins and expansion of existing customer contracts. We believe this sales growth is the result of our ability to establish
customer circuits more rapidly than our competitors and recent capital expenditures, which have increased our access to customer sites and key interconnection points.



Excluding the increase in acquired Focal revenues of approximately $5.4 million, our long-distance voice services revenue
decreased $3.5 million for the three month period ended September 30, 2005 as compared to the three month period ended September 30, 2004. Late in the second quarter of 2005, we implemented increases in certain wholesale long-distance
voice pricing in reaction to increases in associated cost structures. This resulted in a decrease in wholesale long-distance traffic volumes; however, we believe these rate increases are necessary to maintain appropriate overall gross margins. These
volume reductions have been offset in part by sales to new and existing customers. Our long-distance wholesale voice revenue can be subject to fluctuations dependent on the volume of traffic our carrier customers choose to place on our network and
based on available pricing within the wholesale market.



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Local voice services revenue increased to $53.2 million for the three months ended September 30,
2005 from $17.4 million for the three months ended September 30, 2004. The increase in revenue was due to the inclusion of a full quarter of revenue in 2005 as compared to one month in 2004, as the Focal acquisition closed on September 1,
2004. Excluding the effect of the collection of disputed receivables of approximately $2.6 million during the second quarter of 2005, local revenues for the three months ended September 30, 2005 remained consistent with three months ended
June 30, 2005.



We continue to focus our efforts on
selling to medium-to-larger size customers with complex communications needs, developing new products that differentiate us from our competition and reducing our communications service costs to allow us to better compete on the sale of price
sensitive products. Additionally, we believe that as a result of the Focal acquisition, we will be able to offer a broader range of products than currently offered, such as bundled data, long-distance and local voice services.



Cost of Revenue. Cost of revenue primarily reflects
access charges paid to local exchange carriers and other providers and transmission lease payments to other carriers. Cost of revenue totaled $143.5 million and $111.5 million for the three months ended September 30, 2005 and 2004,
respectively. As a percentage of total communications services revenue, cost of service decreased to 66% for the three-month period ended September 30, 2005 as compared to 68% in the same period in the prior year quarter. Beginning in 2004 and
continuing in 2005, we have achieved savings in communication services cost of revenue within our voice and data products. The decrease has been primarily due to new vendor agreements and network grooming and hubbing that have allowed us to reduce
our circuit facilities costs. During the three month period ended September 30, 2005, we favorably settled several significant disputes, which resulted in a reduction in the cost of revenue. Comparing the three month period ending
September 30, 2005 to the three month periods ending September 30, 2004 and June 30, 2005, net gains from dispute settlements increased by $3.0 million and decreased by $0.5 million, respectively. Settlement of vendor disputes is
typical to our industry and may result in fluctuations in cost of revenue (see Critical Accounting Policies, Accrued Communications Cost of Service).



Research and Development, Excluding Equity-Based Expense. Research and development expense, excluding equity-based expense, consists
primarily of salaries and related personnel costs, test and prototype expenses related to the design of our equipment division hardware and software products, laboratory costs and facilities costs. All costs related to product development, both
hardware and software, are recorded as expenses in the period in which they are incurred.



Research and development expense, excluding equity-based expense, decreased to $0.7 million for the three months ended September 30, 2005 from $3.1 million for the three months ended September 30, 2004. The
decrease in expense is primarily attributable to the effect of the curtailment of our OCS production and development in the third quarter of 2005 and classification of certain expenses as general and administrative expenses since such costs are now
principally related to network support costs.



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



Sales, general and administrative expense, excluding equity-based expense, increased to $77.4 million for the three months ended September 30, 2005
from $64.3 million for the three months ended September 30, 2004. The increase in expense is primarily attributable to the inclusion of a full quarter of acquired sales, general and administrative expense associated with Focal during the third
quarter of 2005 which contributed $15.0 million to the increase. Sales, general and administrative expense, as a percentage of total revenue for the three months ended September 30, 2005 and 2004 was 35% and 39%, respectively. The decrease is
primarily attributable to operational efficiencies resulting from the Focal acquisition.



Depreciation expense. Depreciation expense increased to $23.4 million for the three months ended September 30, 2005 from $10.0 million for the three months ended September 30, 2004. The
increase in depreciation is primarily associated with the inclusion of a full quarter of depreciation of Focal assets acquired in September 2004, which contributed $17.4 million of depreciation in the third quarter of 2005. The overall increase in
depreciation has been offset in part by a decrease in depreciation due to certain assets reaching the end of their depreciable lives during the third quarter of 2005. We expect depreciation expense to increase in future periods as we continue to
capitalize and place into service assets related to our network strategic initiatives.



Amortization of Intangible Assets. Amortization of intangible assets increased to $1.4 million for the three months ended September 30, 2005 from $1.2 million for the three months ended
September 30, 2004. The increase in amortization expense is due to customer relationships and in-place contracts acquired as part of the Focal acquisition in the third quarter of 2004.



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Equity-based Expense. Equity-based expense consists primarily of charges associated
with employee options granted at below fair market value and restricted stock. Equity-based expense related to research and development, sales and marketing and general and administrative functions for the three months ended September 30, 2005
increased to $1.0 million from $0.6 million for the three months ended September 30, 2004. The increase in equity-based compensation is primarily attributable to restricted stock grants to employees in late 2004 and early 2005.



Restructuring and other charges.



We recorded the following charges for the three months ended
September 30, 2004 and 2005 (in thousands):



|                                      |  |                                  |       |      |   |    
|------------------------------------- |  | -------------------------------- | ----- | ---- | - | ---
|                                      |  | Three Months Ended September 30,
|                                      |  | 2004                             |       | 2005
|Restructuring and other charges:      |  |                                  |       |      |   |    
|Facilities consolidation and other    |  | $                                | 993   |      | $ | 34 
|Change in reserve estimate            |  |                                  | 270   |      |   |   
|Workforce reductions                  |  |                                  | 1,375 |      |   | 596
|                                      |  |                                  |       |      |   |    
|Total restructuring and other charges |  | $                                | 2,638 |      | $ | 630
|                                      |  |                                  |       |      |   |    



Facilities
consolidation and other. We reduced our operating costs through the early terminations of real estate and equipment lease agreements and other impairment loss, resulting in charges of approximately $0.03 million in the three-month period ended
September 30, 2005. For the three months ended September 30, 2004, we recorded approximately $1.0 million related to lease terminations.



Change in reserve estimate. We periodically review the adequacy of our reserve related to restructuring initiatives and adjust our reserve balance
accordingly. For the three months ended September 30, 2004, we charged to expense approximately $0.3 million related to a change in estimate.



Workforce reductions.During the third quarter of 2005, we recorded $0.6 million in charges associated with workforce reductions as a result of the
Focal acquisition and other severance. For the three months ended September 30, 2004, we incurred approximately $1.4 million related to work force reductions, of which $0.8 million related to the Focal operations.



Interest Expense, net of capitalized amounts. Interest
expense, net of capitalized amounts, decreased to $3.2 million for the three months ended September 30, 2005 from $8.6 million for the three months ended September 30, 2004. The decrease in interest expense was primarily attributable to a
reduction in the amount of outstanding principal related to our convertible notes during 2005 as compared to the same period in the prior year as well as an increase in the amount of interest capitalized into fixed assets.



Other income and expense, net.Other income and expense
increased slightly to $1.9 million for the three months ended September 30, 2005 compared to $1.8 million for the three months ended September 30, 2004.



Nine months ended September 30, 2005 compared to nine months ended September 30, 2004



|                             |  |                                    |         |                                    |   |        
|---------------------------- |  | ---------------------------------- | ------- | ---------------------------------- | - | -------
|                             |  | Nine MonthsEndedSeptember 30, 2004 |         | Nine MonthsEndedSeptember 30, 2005
|Data and Internet services   |  | $                                  | 108,414 |                                    | $ | 126,684
|Broadband transport          |  |                                    | 179,373 |                                    |   | 215,717
|Long-distance voice services |  |                                    | 140,955 |                                    |   | 153,711
|Local voice services         |  |                                    | 17,407  |                                    |   | 160,173
|Equipment sales              |  |                                    | 6,214   |                                    |   | 2,852  
|                             |  |                                    |         |                                    |   |        
|Total revenue                |  | $                                  | 452,363 |                                    | $ | 659,137
|                             |  |                                    |         |                                    |   |        



Revenue. Revenue increased to $659.1 million for the nine months ended September 30, 2005 from $452.4 million for the nine months ended September 30, 2004, primarily due to the acquisition of Focal, which
contributed approximately $164.0 million to the current year increase. The remaining $42.7 million in revenue growth represent a 9% increase for the nine months ended September 30, 2005 as compared to the same period in the prior year.



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Excluding the increase from acquired Focal revenue of approximately $9.3 million, our data and Internet
and broadband revenues increased by approximately $9.0 million and $36.3 million or 8% and 20% during the nine months ended September 30, 2005, respectively, as compared to the prior year, principally through new customer wins and expansion of
existing customer contracts. We believe this sales growth is the result of a competitive advantage gained from our relative speed to provision customers circuits as well as recent capital expenditures which have increased our access to
customer sites and key interconnection points.



Excluding the
increase from acquired Focal revenues of approximately $21.6 million, our long-distance voice services revenue decreased $8.8 million during the nine months ended September 30, 2005 as compared to the nine month period ended September 30,
2004, primarily due to a decrease in retail voice volumes and rates as well as a decrease of approximately $11.8 million associated with lower contracted rates with Cincinnati Bell Telecommunications Services, Inc., partially offset by increases in
wholesale voice from new contract wins. Our long-distance wholesale voice revenue can be subject to fluctuations dependent on the volume of traffic our carrier customers choose to place on our network and based on available pricing within the
wholesale market.



We continue to focus our efforts on selling
to medium-to-larger size customers with complex communications needs, developing new products that differentiate us from our competition and reducing our communications service costs to allow us to better compete on the sale of price sensitive
products. Additionally, we believe that as a result of the Focal acquisition, we have been able to offer a broader range of products and are continuously expanding our product offerings.



Cost of Revenue. Cost of revenue primarily reflects access charges paid to local exchange carriers and
other providers and transmission lease payments to other carriers. Cost of revenue totaled $438.4 million and $307.8 million for the nine months ended September 30, 2005 and 2004, respectively. As a percentage of total communications services
revenue, cost of service decreased to 67% for the nine month period ended September 30, 2005 as compared to 68% in the same period in the prior year. Beginning in 2004 and continuing in 2005, we have achieved savings in communication services
cost of revenue within our voice and data products. The decrease has been primarily due to new vendor agreements and network grooming and hubbing that have allowed us to reduce our circuit facilities costs. During the nine month period ended
September 30, 2005, we favorably settled several significant disputes, which resulted in a reduction in cost of revenue. Comparing the nine month period ending September 30, 2005 to the nine month period ending September 30, 2004, the
net gain from dispute settlements increased by approximately $5.4 million. Settlement of vendor disputes is typical to our industry and may result in fluctuations in cost of revenue (see Critical Accounting Policies, Accrued Communications Cost
of Service).



Research and Development, Excluding
Equity-Based Expense. Research and development expense, excluding equity-based expense, consists primarily of salaries and related personnel costs, test and prototype expenses related to the design of our hardware and software
products, laboratory costs and facilities costs. All costs related to product development, both hardware and software, are recorded as expenses in the period in which they are incurred.



Research and development expense, excluding equity-based expense, decreased to $6.2 million for the nine months ended
September 30, 2005 from $12.6 million for the nine months ended September 30, 2004. The decrease in expense was primarily attributable to the effect of the curtailment of our OCS production and development in the third quarter of 2005 and
classification of certain expenses as general and administrative expenses since such costs are now principally related to network support cost.



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



Sales, general and administrative expense, excluding equity-based expense,
increased to $227.1 million for the nine months ended September 30, 2005 from $182.6 million for the nine months ended September 30, 2004. The increase in expenses was primarily attributable to the inclusion of $60.0 million of acquired
sales, general and administrative expense associated with Focal during the current year. Sales, general and administrative expense as a percentage of total revenue for the nine months ended September 30, 2005 and 2004 was 34% and 40%,
respectively. The decrease is primarily attributable to operational efficiencies resulting from the Focal acquisition.



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Litigation Settlement. On March 31, 2005, Broadwing and Ciena Corporation
(Ciena) entered into a settlement agreement regarding certain patent infringement lawsuits. Under the terms of the settlement agreement, Ciena and Broadwing have agreed to dismiss all claims. In addition, we will pay to Ciena a total of
$35.0 million in three equal annual installments, of which $33.0 million of the total payment may be used as credits toward the purchase of Ciena equipment and services at market prices over the next three and one-half years. We recorded a charge of
$2.0 million associated with the settlement in the first quarter of 2005. During the second quarter of 2005, we made the first annual payment of $11.0 million to Ciena. As of September 30, 2005, approximately $3.4 million related to prepaid
equipment purchases is included in other non-current assets on the consolidated balance sheet.



Depreciation expense. Depreciation expense increased to $78.1 million for the nine months ended September 30, 2005 from $25.1 million for the nine months ended September 30, 2004. The
increase in depreciation is primarily associated with the Focal assets acquired in September 2004, which contributed $61.3 million of depreciation during the first nine months of 2005. The overall increase in depreciation has been offset in part by
a decrease in depreciation due to certain assets reaching the end of their depreciable lives during the current year. We expect depreciation expense to increase in future periods as we continue to capitalize and place into service assets related to
our network strategic initiatives.



Amortization of
Intangible Assets. Amortization of intangible assets increased to $4.2 million for the nine months ended September 30, 2005 from $3.2 million for the nine months ended September 30, 2004. The increase in amortization expense
is due to customer relationships and in-place contracts acquired as part of the Focal acquisition in the third quarter of 2004.



Equity-based Expense. Equity-based expense consists primarily of charges associated with employee options granted at below fair
market value and restricted stock. Equity-based expense related to research and development, sales and marketing and general and administrative functions for the nine months ended September 30, 2005 decreased to $2.9 million from $7.7 million
for the nine months ended September 30, 2004. The decrease in equity-based compensation is primarily attributable to fully vested in the money option grants issued prior to our July 2000 initial public offering.



Restructuring and other charges.



We recorded the following charges for the nine months ended
September 30, 2004 and 2005 (in thousands):



|                                                          |  |                                 |       |      |   |      
|--------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                                          |  | Nine Months Ended September 30,
|                                                          |  | 2004                            |       | 2005
|Cost of revenue charges  inventory write downs and other |  | $                               | 193   |      | $ |     
|Restructuring and other charges:                          |  |                                 |       |      |   |      
|Facilities consolidation                                  |  |                                 | 1,188 |      |   | 296  
|Change in reserve estimate                                |  |                                 | 464   |      |   | 94   
|Workforce reductions                                      |  |                                 | 1,375 |      |   | 657  
|Impairment loss  OCS                                     |  |                                 |      |      |   | 297  
|                                                          |  |                                 |       |      |   |      
|Total restructuring and other charges                     |  |                                 | 3,027 |      |   | 1,344
|                                                          |  |                                 |       |      |   |      
|Total restructuring and related charges                   |  | $                               | 3,220 |      | $ | 1,344
|                                                          |  |                                 |       |      |   |      



Cost of
revenue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. Charges recorded in the nine months ended
September 30, 2004 are the result of inventory impairment charges for adjustments made to 2003 estimates. No such charges were recorded in 2005.



Facilities Consolidation. We reduced our operating costs through the early terminations of real estate and equipment lease agreements, resulting in
charges of approximately $0.3 million and $1.2 million in the nine month period ended September 30, 2005 and 2004, respectively.



Change in reserve estimate. We periodically review the adequacy of our reserve related to restructuring initiatives and adjust our reserve balance
accordingly. For the nine months ended September 30, 2005, and September 30, 2004, we made changes to our reserve estimate of charges related to our French operations and our communications equipment division totaling $0.1 million and $0.5
million, respectively.



Workforce reductions. During the
third quarter of 2005, we recorded $0.7 million in charges associated with workforce reductions as a result of the Focal acquisition and other severance. For the nine months ended September 30, 2004, we incurred approximately $1.4 million
related to work force reductions, of which $0.8 million related to the integration of Focal operations.



Impairment loss  OCS.In April 2005, we began the exploration of strategic alternatives associated with our OCS product in an effort to more
closely focus our resources on our communications services operations. During the second quarter of 2005, we committed to a plan to curtail our OCS production and development. These restructuring activities resulted in a charge of approximately $0.3
million related to the write-down of assets to estimated fair value. No such charges were recorded for the nine months ended September 30, 2004.



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Interest Expense, net of capitalized amounts. Interest expense decreased to $17.1 million
for the nine months ended September 30, 2005 from $26.7 million for the nine months ended September 30, 2004. The decrease in interest expense was primarily attributable to a reduction in the amount of outstanding principal related to our
convertible notes during the current year as compared to the same period in the prior year, an increase in the amount of interest capitalized into fixed assets and $3.2 million in interest incurred in the prior year associated with our delayed
registration of shares issued in August 2003.



Other
income and expense, net.Other income and expense, net decreased to $5.9 million for the nine months ended September 30, 2005 from $7.5 million for the nine months ended September 30, 2004. The decrease in other income and expense,
net is attributable to a decrease in income related to the sale of inventory in the current year and a decrease in one time revenue associated with an equipment contract included in the prior year, partially offset by an increase in interest income
due to higher investment yields during 2005 and penalties incurred in the prior year associated with our delayed registration of shares issued in August 2003 that ceased in the prior year.



Liquidity and Capital Resources



Since inception through September 30, 2005, we have financed our
operations, capital expenditures and working capital primarily through public and private sales of our debt and capital stock and borrowings under credit and lease facilities. At September 30, 2005, our cash and cash equivalents and investments
totaled $137.9 million.



Operating Activity



Net cash used in operating activities was $19.1 million and $82.2 million
for the nine months ended September 30, 2005 and September 30, 2004, respectively. Excluding the effects of changes in working capital accounts, which primarily relates to differences in the timing of the receipt and payment of cash, our
cash used in operations decreased to $9.2 million from $51.6 million for the nine months ended September 30, 2005 as compared to the same period in the prior year. This decrease in operating cash outflows is primarily attributable to an
increase in communications services revenue this year as compared to the same period in the prior year, partially offset by an increase in sales, general and administrative expense. The increase in revenue and sales, general and administrative
expense is primarily due to the acquisition of Focal and the general expansion of our business. Net cash flows were also affected by payments of approximately $7.7 million in settlement of certain vendor billing disputes primarily acquired during
the acquisition of Focal.



Investing Activity



Net cash used in investing activities was $2.0 million and $107.1 million
for the nine months ended September 30, 2005 and 2004, respectively. Net cash used in investing activities for the nine months ended September 30, 2005 primarily relates to capital expenditures of $41.6 million and the first annual payment
to Ciena of $11.0 million to be used for future equipment and service purchases, partially offset by the cash from the net sale of investments of $49.9 million. For the nine months ended September 30, 2005, capital expenditures were associated
primarily with continued Focal integration efforts, capacity management, and our new converged, VOIP and media products. Net cash used in investing activities for the nine month period ended September 30, 2004 is attributable to capital
expenditures associated with the Broadwing network expansion of $46.1 million, as well as net purchases of short and long-term investment securities of $73.8 million offset by the $11.4 million in net cash obtained in the Focal acquisition.



Capital expenditures continue to be a primary use of capital
resources. We believe that these investments will facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our network in future periods. Our
capital investments will continue through 2005 as we continue to integrate our network and respond to our customers needs. We believe, however, that our capital expenditures will be at lower levels for the remainder of 2005 as compared to 2004
levels.



Financing Activity



Net cash used by financing activities for the nine months ended
September 30, 2005 was $65.7 million, primarily attributable to the repayment of convertible notes issued February 2004.



Net cash provided by financing activities for the nine months ended September 30, 2004 was $140.7 million, primarily attributable to the February
2004 private placement of $225 million of senior unsecured convertible notes and associated warrants, offset by $79.2 million in repayment of notes payable and capital lease obligations. The maturity date of the unsecured convertible notes is
February 20, 2006. Borrowings under the unsecured convertible notes accrue interest at a stated rate of 5% payable quarterly, while principal is scheduled for repayment in seven equal quarterly installments commencing on August 19, 2004.
Provided certain conditions are met and at the election of the Company, principal and interest are payable in either cash or common stock at a conversion price of 95% of the average stock price for the 20 days



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preceding conversion. The notes are convertible at the investors option at any time into our common stock at a
fixed conversion price of $57.50 per share, subject to anti-dilution adjustments. We have used and intend to continue using the net proceeds for general corporate purposes in support of our service development and new market initiatives.



On October 18, 2005, we entered into a revolving credit facility that
enables us to borrow up to $75 million commencing 45 days after October 14, 2005 with a final maturity date of October 14, 2008. The facility is secured by a pledge of accounts receivable of Broadwing Corporation and its subsidiaries.
Borrowings will bear an interest rate, at Broadwings option, at either LIBOR plus 3.75% or an alternate base rate, defined as the higher of the prime or federal funds rate, plus 2.5%. If cash, investments, and undrawn availability under the
facility fall below $100.0 million, while borrowings are outstanding, we must deposit $25.0 million into a designated restricted account. Availability under the facility is limited by an amount of eligible accounts receivable available as
collateral.



As of September 30, 2005, long-term
restricted cash totaled $15.0 million associated with outstanding irrevocable letters of credit relating to lease obligations for various business arrangements. These letters of credit are collateralized by funds in our operating account. Various
portions of the letters of credit expire at the end of each of the respective agreements.



We believe that our current cash, cash equivalents, and short-term investments will satisfy our expected working capital, capital expenditure, investment requirements and debt service through at least the next twelve
months. Our future debt obligations will primarily include our $61.5 million convertible debt as well as $19.7 million in capital lease obligations which were acquired as part of the Focal acquisition. We elected to pay principal and interest due on
our convertible notes on August 19, 2005 of $32.1 million and $1.2 million, respectively, in cash. Additionally, we have elected to pay principal and interest due on our convertible notes on November 19, 2005 of $32.1 million and $0.8
million, respectively, in cash. On an ongoing basis, we will consider the method of payment of principal and interest associated with the convertible notes based on our capital resource needs and market conditions at the time.



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.



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.



Our exposure to
market risk for changes in interest rates relates to our cash equivalents and investments. Our investments are available-for-sale. We do not use derivative financial instruments in our investment portfolio. We attempt to ensure the safety and
preservation of our invested funds by limiting default and market risks. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to
the extent possible within these guidelines. We invest excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality
issuers. We mitigate default risk by investing in only investment-grade securities. The portfolio includes marketable securities with active secondary or resale markets to ensure portfolio liquidity. All investments are carried at market value,
which approximates cost. We believe that a 1% increase or decline in interest rates would not be material to our investment income or cash flows from consolidated operations.



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During 2004, we issued unsecured convertible notes in a private placement for proceeds of $225.0 million,
excluding debt issuance costs of approximately $7.3 million. The notes accrue interest at a fixed, stated rate of 5%; therefore a fluctuation in market interest rates would not impact either the associated carrying value or interest expense in
reported financial results. In October 2005, we announced that we had entered into a revolving line of credit accruing interest at a floating rate which fluctuates based on market interest rates and will have an impact of interest expenses to the
extent we use the credit facility.



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). 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. 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



Ciena



On March 31, 2005, Broadwing and Ciena Corporation
(Ciena) entered into a settlement agreement regarding certain patent infringement lawsuits. Under the terms of the settlement agreement, Ciena and Broadwing have agreed to dismiss all claims. In addition, we will pay to Ciena a total of
$35.0 million in three equal annual installments, of which $33.0 million of the total payment may be used as credits toward the purchase of Ciena equipment and services at market prices over the next three and one-half years. We recorded a charge of
$2.0 million associated with the settlement in the first quarter of 2005. During the second quarter of 2005, we made the first annual payment of $11.0 million to Ciena. As of September 30, 2005, approximately $3.4 million related to prepaid
equipment purchases is included in other non-current assets on the consolidated balance sheet.



Class Action Suit



Between May 7, 2001 and June 15, 2001, nine class action lawsuits were filed in the United States District Court for the Southern District of New York relating to our initial public offering on behalf of all persons who purchased
our stock between July 28, 2000 and the filing of the complaints. Each of the complaints named as defendants: us, our directors and officers who signed the registration statement in connection with our initial public offering, and certain of
the underwriters that participated in our initial public offering. Our directors and officers have since been dismissed from the case, without prejudice. The complaints allege that the registration statement and prospectus relating to our initial
public offering contained material misrepresentations and/or emissions and 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 our common stock (or to be awarded rescissory damages
if the class member has sold our stock) and prejudgment and post-judgment interest, reasonable attorneys and experts witness fees and other costs.



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



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



Qwest Investigations



The Denver, Colorado regional office of the SEC is conducting two investigations titled In the Matter of Qwest
Communications International, Inc. and In the Matter of Issuers Related to Qwest. We believe the first of these investigations does not involve any allegation of wrongful conduct on our part. In October 2004, the SEC announced that it was charging
Qwest with securities fraud and other violations of the federal securities laws and entering into a settlement with Qwest relating to those charges. In connection with the second investigation, the SEC is examining various transactions and business
relationships involving Qwest and eleven companies having a vendor relationship with Qwest, including Broadwing. This investigation, insofar as it relates to Broadwing, appears to focus generally on whether our transactions and relationships with
Qwest and its employees were appropriately disclosed in our public filings and other public statements.



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



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We are cooperating fully with these investigations. We are not able, at this time, to say when the SEC
and/or U.S. Attorney investigations will be completed and resolved, or what the ultimate outcome with respect to us will be. These investigations could result in substantial legal costs and a diversion of managements attention that may have a
material adverse effect on our business, financial condition and results operations.



Great Northern Insurance Company



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



Other



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 our business, financial condition or results of operations.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



| | (a) | Not applicable.
| | --- | ---------------



| | (b) | Not applicable.
| | --- | ---------------



| | (c) | Not applicable.
| | --- | ---------------



Item 3. Defaults upon Senior Securities



None.



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



None



Item 5. Other Information



| | (a) | None.
| | --- | -----



| | (b) | None.
| | --- | -----



Item 6. Exhibits



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



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.



|                       |  |                                                                             
|---------------------- |  | ----------------------------------------------------------------------------
|Date: November 7, 2005 |  | Broadwing Corporation                                                       
|                       | 
|                       |  | /s/ Lynn D. Anderson                                                        
|                       | 
|                       |  | Lynn D. Anderson Senior Vice President and Chief
Financial Officer          
|                       | 
|Date: November 7, 2005 |  | /s/ Timothy C. Dec                                                          
|                       |  | Timothy C. Dec Senior Vice President, Chief
Accounting Officer and Treasurer





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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 15d-14(a)                                                 
|            | 
|32.1        |  | Certificate of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



26