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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

for fiscal year ended December 31, 2004

OR

for the transition period from                                  to                                 

Commission file number: 0-30989

Broadwing Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (443) 259-4000

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

None

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

Common Stock, $.01 par value per share

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 report(s)), and (2) has been subject to such filing requirements for the last 90 days.    Yes  x        No  ¨

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x        No  ¨

As of December 31, 2004, the aggregate market value of the voting stock held by nonaffiliates was approximately $612,153,259.

As of February 28, 2005, there were 73,515,704 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report on Form 10-K incorporates by reference information from the registrant’s definitive Proxy Statement, which will be furnished to stockholders in connection with the Annual Meeting of Stockholders of the registrant scheduled to be held on May 13, 2005.

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GLOSSARY OF TERMS

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

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

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

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

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

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

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

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

Internet Protocol (IP).    A protocol for transferring information across the Internet in packets of data.

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

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

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

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

Voice over Internet Protocol (VoIP).    An application that provides real-time, two-way voice capability originating in the Internet protocol over a broadband connection.

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

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INFORMATION REGARDING FORWARD LOOKING STATEMENTS

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

Item 1.    Business

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

Introduction

Broadwing Corporation and its subsidiaries (“Broadwing” or the “Company”), formerly known as Corvis Corporation, operate two businesses that serve different elements within the telecommunications industry. The communications services business is comprised of Broadwing Communications, LLC. The communications services business is a provider of data and Internet, broadband transport, and voice communications services to large enterprises, mid-market businesses and other communications service providers over a nationwide facilities-based network connecting 137 cities nationwide and is the source of the majority of our revenues. Our communications equipment division designs, manufactures and markets transmission, switching and network management equipment primarily to the U.S. Federal Government.

The Company was incorporated under the laws of the State of Delaware on June 2, 1997. On October 8, 2004, we changed our name to Broadwing Corporation. Our principal executive offices are located at 7015 Albert Einstein Drive, Columbia, Maryland 21046; and our telephone number is (443) 259-4000. Our Internet website address is www.broadwing.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file them with or furnish them to the SEC.

Communications Services

Overview

Our communications services division began operations on June 13, 2003, when we invested approximately $71.1 million, net of purchase adjustments and acquisition costs, for most of the assets and certain of the liabilities of Broadwing Communications Services, Inc. Prior to the acquisition, Broadwing Communications

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Services, Inc. had been one of our largest equipment division customers, representing 61%, 43% and 12% of total communications equipment revenue in 2001, 2002 and 2003, respectively.

We invested approximately $98.6 million, including acquisition costs, and assumed $98.1 million in debt to acquire Focal Communications Corporation (“Focal”) and have commenced integration efforts. Focal was a competitive local exchange carrier that provided voice and data solutions to large and medium enterprises, government entities, universities and other communication service providers. Focal has a local fiber network in nine cities, offers services across the country in 23 Tier 1 markets from Boston to Miami and New York to Los Angeles, and maintains a 4,000 enterprise and wholesale/carrier customer base.

Our business strategy is to be the network supplier of choice for enterprise, strategic service provider, mid-market and government customers. We believe that our network and growth-oriented strategy will enable us to compete in the markets in which we operate. 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. Additionally, with the recent Focal acquisition, we expect to expand our customer base, network reach, and portfolio of voice, data and video network services. As we enter 2005, we will continue to focus on profitably growing our revenue and improving our own network to facilitate improved customer service and profitability. We also plan to continue grooming our network to deliver service in the most effective and efficient manner, while continuing our focus on cost reductions and process improvement.

The Communications Industry

The communications services industry continues to evolve, both domestically and internationally, providing significant opportunities and risks to the participants in these markets. Factors that have been driving this change include:

The communications services industry is rapidly developing new data services. The development of frame relay, ATM and IP networks as modes of transmitting information electronically has dramatically transformed the array and breadth of services offered by communications carriers.

Use of the Internet, including intranets and extranets, has grown rapidly in recent years. This growth has been driven by a number of factors, including the large and growing installed base of personal computers, improvements in network architectures, increasing numbers of network-enabled applications, emergence of compelling content and commerce-enabling technologies, and easier, faster and cheaper Internet access. Consequently, the Internet has become an important new global communications and commerce medium. The Internet represents an opportunity for enterprises to interact in new and different ways with both existing and prospective customers, employees, suppliers and partners. Enterprises are responding to this opportunity by substantially increasing their use of Internet connectivity and services to enhance internal voice and data networks.

In the United States, the Telecommunications Act of 1996 has had a significant impact on communications service providers by establishing a statutory framework for opening the local service markets to competition and by allowing regional phone companies to provide in-region long distance services. In addition, prices for long distance minutes and other basic communications services have declined as a result of increased competitive

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pressures, governmental deregulation, introduction of more efficient networks and advanced technologies, and product substitution. Competition in these basic communications services markets has recently been based more on price and less on other differentiating factors that appeal to the larger business market customers, including range of services offered, bundling of products, customer service, and communications quality, reliability and availability.

Furthermore, the introduction and growth of wireless carriers has put additional competitive pressure on traditional voice long distance business services, particularly in the “dial 1” long distance, card and operator services markets.

Telecommunication service providers have experienced intense competitive pressures, resulting in an unprecedented number of bankruptcies and financial restructurings throughout the industry. To the extent distressed companies successfully emerge, restructure, or are acquired out of bankruptcy, they may have lower cost structures and network capacity will remain in the overall marketplace, which may result in continued downward pressure on product pricing.

Applications and Services

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

Data and Internet Services

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

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

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

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

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

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

VoIP is a technology that enables customers to send voice calls using Internet protocol. In 2004, Broadwing introduced its first product offering, PRIorityConnect. PRIorityConnect is a new VoIP aggregation service that allows carriers and enterprises to expand their VoIP offering nationwide without purchasing and deploying additional network infrastructure. The Company expects to roll out additional products during 2005 and continue to perform product trials with Fortune 500 companies nationwide.

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

Broadband Transport Services (BBT)

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

Broadwing’s BBT offerings include:

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

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

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

Voice Services

Broadwing provides end-to-end voice solutions including:

Broadwing offers switched and dedicated long distance voice services within the United States, meaning calls outside of the local calling area. Switched services offer customers long distance service

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based on usage at a contracted price per minute, while dedicated services provide customers a fixed amount of origination or termination capacity. We also provide international long-distance services for voice calls that terminate or originate with our customers in the United States at a contracted price per minute.

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

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

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

Customer Premises Equipment (CPE)

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

Managed Network Services (MNS)

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

Remote Data Protection

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

Integrated Voice and Data Services (IVAD)

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

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The Broadwing Network

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

We believe that Broadwing is the first and only carrier to build and operate a nationwide, all-optical switched backbone network that supports ultra-long distance optical transport. Portions of our all-optical network began carrying commercial traffic in late 2000 and the entire nationwide all-optical network was completed and began commercial operation in the first quarter of 2001.

With Broadwing’s all-optical switched backbone, we are able to remotely provision circuits through the network without the need for field intervention, thereby decreasing provisioning times and improving customer satisfaction. We believe our network infrastructure also reduces operating expenditures, equipment requirements, and conversion-based latency associated with traditional networks.

As part of our core network, we operate an OC48 Internet protocol (IP) backbone. Broadwing’s IP network is divided into eight core regions that allow it to transport signals directly between regions. This technology significantly speeds actual data throughput by minimizing the number of signal hops and allows Broadwing to carry high-quality voice, video and time-critical data for its customers. In addition, Broadwing completed the construction and turn-up of its Television Operations Center in Columbia, Maryland during the year, which serves the high-performance needs of the broadcast television and media markets.

As a result of the Focal acquisition, Broadwing now operates a local access network with switching infrastructure and an associated network operations center, in addition to metropolitan fiber in nine major markets. These local networks utilize Nortel DMS-500 SuperNode digital central office switches and leased local network trunking facilities from the ILECs and metropolitan network providers in each of our local markets.

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Sales, Marketing and Customer Care

Overview

Our sales organization includes a direct sales force and alternative channels. Our direct sales force is organized into three major markets in order to best match product, services and technological expertise with customer needs and expectations. The Enterprise team focuses on providing complex data and network applications to medium to large sized businesses. The Carrier Service team focuses on carriers in the communications industry, including incumbent local exchange carriers (“ILECs”), interexchange carriers (“IXCs”), other carriers and wireless providers. Our Government Solutions team focuses on providing data and networking applications to the U.S. Federal government. As of December 31, 2004, Broadwing had 447 employees associated with sales and customer care.

Direct Sales Force

We have established an experienced direct sales force. Our strategy is to structure our sales efforts to enable our sales personnel to establish direct and personal relationships with our customers. We seek to recruit salespeople with strong sales and communications backgrounds, including salespeople from other communications service providers, communications equipment manufacturers, and network systems integrators. Salespeople are offered incentives through a commission structure that generally targets 40% to 50% of a salesperson’s total compensation to be based on performance.

Alternative Sales Channels

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

Customer Care

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

Regulatory Developments

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

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

Federal Regulation

The Telecommunications Act of 1996 (“Telecom Act”) became law on February 8, 1996. Among other things, the Telecommunications Act was designed to foster competition by establishing a regulatory framework to govern new competitive entry in the local and long distance telecommunications markets and to establish competition against the ILECs, such as Verizon and SBC. The Telecom Act entitles Broadwing to certain rights,

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but as a communications carrier, it also subjects Broadwing to regulation by the Federal Communications Commission (“FCC”) and the states. Broadwing’s designation as a communications carrier also results in other regulations that may affect Broadwing and the services it offers. The rights and obligations to which communications carriers are entitled and subject to have been and likely will continue to be subject to litigation in the courts and further review and revision by the FCC and Congress. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets and pursuit of new opportunities resulting from the Telecom Act and technological advances as well as the timing and outcome of various regulatory proceedings and any appeals.

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

The extent and scope of network access has been the subject of constant litigation by ILECs and CLECs since the passage of the Telcom Act. In August 2003, the FCC modified the list of network elements to reduce the number of elements ILECs must offer to competitors. The FCC also initiated a comprehensive review of its pricing regime for network elements in 2003. In March 2004, the United States Court of Appeals for the District of Columbia (“DC Court of Appeals”) vacated much of the FCC’s August 2003 decision and remanded the case back to the FCC for further consideration. On December 15, 2004, the FCC announced the issuance of new unbundling rules. These new rules will be effective on March 11, 2005. These new unbundling rules eliminate the obligation of the ILECs to provide unbundled switching (following a transition period) and restrict unbundled access to high capacity loops and transport to and between some of the larger ILEC end offices. An appeal has been filed with the DC court of Appeals on behalf of some of the ILECs who are seeking to apply the relief from the unbundling obligations for loops and transport to a greater percentage of their end offices. Although Broadwing does not rely extensively on network elements purchased from ILECs, the outcome of any

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appeal or any subsequent FCC action could adversely affect Broadwing insofar as it will remove one potential source of access to the ILEC’s networks it requires to provide service to its customers. In addition, any changes to the pricing scheme for network elements to the extent that Broadwing utilizes such network elements may affect Broadwing’s revenues. Broadwing obtains most of its dedicated long distance and local access to customers through the ILEC special access tariffs. The FCC recently issued a Notice of Proposed Rulemaking to re-examine the special access pricing flexibility accorded ILECS in the larger Metropolitan Statistical Areas. It’s impossible to predict what impact, if any, this proceeding will have on long term special access pricing but no decision from the FCC is likely to have an impact on Broadwing in 2005.

Telecommuncations Carriers compensate one another for traffic carried on each other’s networks. The entire methodology by which carriers compensate one another for exchanged traffic is under review by the FCC. The FCC is expected to issue an order or a series of orders this year that are likely to address in some measure access charges and reciprocal compensation charges as discussed below.

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

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

Broadwing is also subject to federal and state regulations that implement universal service support for access to communications services by rural, high-cost, and low-income markets at reasonable rates; and access to advanced communications services by schools, libraries, and rural health care providers. Currently, the FCC assesses Broadwing for payments and other subsidies on the basis of a percentage of interstate revenue it receives from certain customers. The FCC adopted new rules regarding the assessment of universal service contributions in December 2002. Instead of assessing universal service contributions based on revenues accrued six months prior, contributions will now be based on projections of revenue. Also, the FCC placed limits on the mark-up carriers may place on the universal service line items on their customer bills. Several parties have asked the FCC to reconsider these rules. In addition, the FCC is considering assessing carriers’ universal service contributions

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based on a flat-fee charge, such as a per-line or per-number charge. The FCC is also reviewing whether to impose universal service obligations on additional types of providers, such as broadband and VoIP service providers. States may also assess such payments and subsidies for state universal service programs. Any changes to the assessment and recovery rules for universal service may affect Broadwing’s revenues.

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

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

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

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

VoIP Rulemaking.    On February 12, 2004, the FCC initiated a rulemaking proceeding to address a myriad of regulatory issues associated with VoIP. At this time, it is unclear as to the extent of regulation to which VoIP will be ultimately subject to.

State Regulation

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

Most states regulate entry into the markets for local exchange and other intrastate services, and states’ regulation of CLECs vary in their regulatory intensity. The majority of states require that companies seeking to provide local exchange and other intrastate services to apply for and obtain the requisite authorization from a state regulatory body, such as a state commission. This authorization process generally requires the carrier to demonstrate that it has sufficient financial, technical and managerial capabilities and that granting the authorization will serve the public interest. As of December 31, 2004, we had obtained local exchange certification or were otherwise authorized to provide local exchange service in:

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

Local Regulation

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

Regulation of Rates

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

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

Competition

The communications industry is highly competitive. Competition in communications services is based on price, types of services offered, customer service, access to customer premises and communications quality, reliability and availability. Broadwing’s principal competitors in the long distance voice market include AT&T, MCI, Sprint Corporation, Level 3 Communications, Inc., Qwest Communications International, Inc., Wiltel Communications, LLC, and regional phone companies.

Broadwing currently faces significant competition and expects that the level of competition will continue to increase. In addition, the Telecom Act permits regional phone companies to provide in-region interLATA interexchange services after demonstrating to the FCC that providing these services is in the public interest and satisfying the conditions for developing local competition established by the Telecom Act. All Bell Operating Companies (“BOCs”) have obtained authority to offer long distance services. As competitive, regulatory, and technological changes occur, including those occasioned by the Telecom Act, we anticipate that new and different competitors may enter and expand their position in the communications services markets. These will include regional phone company competitors plus entrants from other segments of the communications and information services industry. Many of these new competitors are likely to enter with a strong market presence, well-recognized names, and pre-existing direct customer relationships.

The continuing trend toward business combinations and alliances in the communications industry will also create stronger competition for Broadwing. In addition, a substantial number of customers seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package. Thus, the simultaneous entrance of numerous new competitors for combined service packages is likely to materially adversely affect Broadwing’s future revenue and earnings.

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Our primary competitor in each of our existing local markets is the ILEC, including Bell South, Verizon, Qwest, and SBC. Typically, the ILECs offer a wider variety of services in a broader geographic area and have much greater resources. Consequently, this may encourage an ILEC to subsidize the pricing for services in which we compete with the profits of other services in which the ILEC remains the dominant provider. In addition to competition from ILECs, we also face competition from other CLECs. Although CLECs overall have only captured a relatively small percentage of the U.S. local telecommunications market, we nevertheless compete to some extent with other CLECs in our customer markets. In some instances, these CLECs have greater resources and offer a wider range of services. In addition, communications providers have been facing competition from non-traditional sources such as Internet-based services, high-speed cable Internet service, e-mail, and wireless services.

Communications Equipment

Overview

Our communications equipment business operates through our subsidiary, Corvis Equipment Corporation which designs, manufactures and sells high performance communications equipment. We also provide installation and professional services that support our product offerings.

Starting in 2001 and continuing through 2004, conditions within the general economy and communications sector have resulted in significantly reduced capital expenditures by carriers and a reduced demand for our communications equipment division product and services. These declines have had a severe impact on our communications equipment revenue and results of operations. We cannot predict when or if market conditions will improve. In response to these conditions, we have implemented a series of restructuring initiatives within our communications equipment division designed to decrease our business expenses and to conserve our financial resources. These actions included staff reductions, facility consolidations and the curtailment of discretionary spending. These restructuring plans have been reflected in our results of operations in 2002, 2003 and 2004. Our communications equipment division is now focused on selective engagements primarily associated with marketing and selling our Optical Convergence Switch (“OCS”) product to the U.S. Federal government. Additionally, the communications equipment division serves a strategic role in the expansion and maintenance of our network. The communications services division is now the major focus of the Company and revenues from the communications services division will account for most of our revenue for the foreseeable future.

Optical Convergence Switch (“OCS”)

Our communications equipment division’s principal product is the OCS or an optical-electrical-optical (“OEO”) cross-connect switch providing standard point-to-point, ring and mesh networking functionality enabling carriers to deliver current SONET/SDH services. We believe the OCS provides the following advantages:

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Competition

We compete in a rapidly evolving and highly competitive communications equipment market. Companies such as Alcatel, Cisco, Lucent, Nortel and Ciena have historically dominated the market for our products. We expect to continue to compete with these and other established and new market entrants. We believe that the principal competitive factors in our market include:

Many of our competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical and sales and marketing resources than we do and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more vendor financing than we can. To remain competitive, we must continue to develop our products and adjust our customer support organization to address customers’ evolving expectations and current market conditions.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We require our employees and consultants to execute non-disclosure and proprietary rights agreements at the beginning of employment or consulting arrangements with us. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individual during the course of his or her work with us and require that all proprietary information disclosed to the individual remain confidential. We intend to enforce vigorously our intellectual property rights if infringement or misappropriation occurs. However, we do not expect that our proprietary rights in our technology will prevent competitors from developing competitive technologies.

Given the technological complexity of our products, we can give no assurance that claims of infringement will not be asserted against us or against our customers in connection with their use of our products, nor can there be any assurance as to the outcome of any such claims. See “ Item 3. Legal Proceedings”

Employees

As of December 31, 2004, Broadwing had approximately 1,661 employees. The Company believes that its success depends in large part on its ability to attract and retain qualified employees.

Risk Factors

Communications Services Business

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

We must increase the volume of Internet, data, voice and video transmission on our network in order to realize the anticipated cash flow, operating efficiencies and cost benefits. If we fail to develop new large-volume

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customer relationships or are unable to maintain our relationships with current customers, we may not be able to achieve the necessary traffic, which would adversely impact our profitability and cash flow.

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

Our network consists of several thousand miles of fiber optic cable located across the United States on property that we do not own. Our ability to utilize this network depends on maintaining rights-of-way and required permits from railroads, utilities, government authorities and third-party landlords on satisfactory terms and conditions. We cannot guarantee that we will be able to maintain all of our existing rights and permits. Although we expect to maintain and renew our existing agreements, the loss of a substantial number of existing rights and permits could have a material adverse impact on our revenue if we were unable to provide services to our customers or on our profitability and financial condition if we are required to purchase higher priced network alternatives. For portions of our network that we lease or purchase use rights from third parties, we must rely on such third parties’ maintenance of all necessary rights-of-way and permits. Some agreements that we may rely on to use portions of other companies’ networks could be terminated if associated rights-of-way were terminated, which would adversely affect our ability to serve our customers and negatively impact our revenue and profitability.

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

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