10-K 1 d16555_10k.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]

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

For the fiscal year ended December 31, 2004
OR

[ ]

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 1-8519

CINCINNATI BELL INC.

Incorporated under the laws of the State of Ohio
I.R.S. Employer Identification Number 31-1056105
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone: (513) 397-9900

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

Securities requested pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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 [ ]

At June 30, 2004, the aggregate market value of the voting shares owned by non-affiliates was $1,088,183,394.

At March 4, 2005, there were 246,538,383 Common Shares outstanding and 155,250 shares of 6-3/4% Convertible Preferred Shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the registrant’s definitive proxy statement dated March 29, 2005 issued in connection with the annual meeting of shareholders to be held on April 29, 2005 are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I
		Page
Item 1.	Business	3
Item 2.	Properties	14
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Schedules	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	111
Item 9A.	Controls and Procedures	111
Item 9B.	Other Information	111


PART III
Item 10.	Directors and Executive Officers of the Registrant	112
Item 11.	Executive Compensation	114
Item 12.	Security Ownership of Certain Beneficial Owners and Management	114
Item 13.	Certain Relationships and Related Transactions	114
Item 14.	Principal Accountant Fees and Services	115

PART IV
Item 15.	Exhibits and Financial Statement Schedules	115
	Signatures	121

This report contains trademarks, service marks and registered marks of Cincinnati Bell Inc., as indicated.

Part I

Item 1. Business

General

Cincinnati Bell Inc. (the “Company”) is a full-service local provider of data and voice communications services and equipment and a regional provider of wireless and long distance communications services. The Company provides telecommunications service on its owned local and wireless networks with a well-regarded brand name and reputation for service. The Company operates in five business segments: Local, Wireless, Hardware and Managed Services, Other and Broadband.

The Company’s primary businesses consist of the Local and Wireless segments, which predominately provide voice and data telecommunications services. For the year ended December 31, 2004, these two segments generated 85% of the Company’s 2004 consolidated revenue and 93% of the Company’s 2004 consolidated operating income. The Hardware and Managed Services segment provides information technology consulting and data collocation services. The Hardware and Managed Services segment also sells equipment typically located on the customer’s premise through which the Company provides its telecommunications and managed services. In its Other segment, the Company operates Cincinnati Bell Any Distance (“CBAD”), which provides long distance services, Cincinnati Bell Complete Protection (“CBCP”), which provides surveillance hardware and monitoring services for consumers and businesses, and Cincinnati Bell Public Communications Inc. (“Public”), which operates public payphones.

The Company realigned its business segments during the first quarter of 2004. Cincinnati Bell Technology Solutions (“CBTS”), a data equipment and managed services subsidiary, was previously reported in the Broadband segment and is now reported in the Hardware and Managed Services segment. Additionally, the sale of telephony equipment and its associated installation and maintenance business by Cincinnati Bell Telephone (“CBT”), previously reported in the Local segment, is now included in the Hardware and Managed Services segment. Accordingly, the historical results of operations of the Local, Hardware and Managed Services and Broadband segments have been recast to reflect the current segment reporting.

During the second and third quarters of 2003, the Company sold substantially all of the assets of its Broadband business, which was reported in the Broadband segment. These assets were held by the Company’s wholly owned subsidiary, BRCOM (f/k/a Broadwing Communications Inc.). Refer to Note 2 of the Notes to the Consolidated Financial Statements for a detailed discussion of the sale.

In addition to the sale of substantially all of the broadband assets, on June 13, 2003 the Company’s subsidiaries entered into agreements with the buyer of the broadband assets whereby the Company will continue to market Broadwing Communications LLC’s (“Broadwing”) (f/k/a C III Communications LLC) broadband products to business customers and purchase capacity on the Broadwing Communications LLC national network in order to sell long distance services, under the CBAD brand, to residential and business customers in the Greater Cincinnati area market.

Although the Company operates in distinct business segments, it offers each of its operating segments’ services through common distribution channels. These channels include the Company’s direct sales force, 21 Company-owned retail stores, independent agents and the Company’s service centers. For its consumers and small business customers, the Company markets the services of its operating segments in a combined package of services. In the first quarter of 2003, the Company introduced its “Super bundle”, Custom Connections^SM, which assembles a customized package of local, long distance, wireless and digital subscriber line (“DSL”) services on a single monthly bill and at a price discount to the purchase of each service on an individual basis. As of December 31, 2004 the Company had approximately 123,000 subscribers to this comprehensive bundling package, which represents 13% of the Company’s primary consumer and business access lines.

The Company in 1983 was initially, and remains presently, incorporated under the laws of Ohio. Its principal executive offices are at 201 East Fourth Street, Cincinnati, Ohio 45202 (telephone number (513) 397-9900 and website address http://www.cincinnatibell.com). The Company makes available on its website at

the investor relations tab its reports on Form 10-K, 10-Q, and 8-K (as well as all amendments to these reports) as soon as practicable after they have been electronically filed.

The Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“the SEC”) under the Exchange Act. These reports and other information filed by the Company may be read and copied at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Information may be obtained about the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy statements and other information about issuers, like the Company, which file electronically with the SEC. The address of this site is http://www.sec.gov.

Local

The Local segment provides local voice, data and other telephone services. Voice services include local service, switched access, information services and value-added services, which include enhanced custom calling features. Data services include dedicated network access, Gigabit Ethernet (“Gig-E”) and Asynchronous Transfer Mode (“ATM”) based data transport, and DSL and dial-up Internet access. Other services consist of inside wire installation, maintenance and other ancillary services. The Local segment provides these services primarily through the operations of CBT to customers located in southwestern Ohio, northern Kentucky and southeastern Indiana. This market consists of primarily 2,400 square miles located within approximately a 25-mile radius of Cincinnati, Ohio. The Company has operated by franchise granted under regulatory authority as the incumbent local exchange carrier (“ILEC”) in the Greater Cincinnati area for approximately the past 130 years.

The Local segment, which launched local voice/data services to medium and large business customers within the 700 square mile market surrounding Dayton, Ohio in 2003, expanded its product suite in 2004 and began offering voice services to mass market residence and small business customers. Beginning in January 2005, CBT moved its operations outside of its ILEC territory to a newly formed Greater Dayton market, Cincinnati Bell Extended Territories (“CBET”). CBET provides services on its own network and by purchasing Unbundled Network Elements (“UNE-L’s or loops”) or UNE-platform (“UNE-P or platform”) from the incumbent local carrier. CBET also operates in communities, which are contiguous to Cincinnati Bell’s ILEC territory. Here, CBET provides service either completely on its own network or through UNE-L to 25% of its Greater Dayton market base and 35% of its overall competitive market base, which resides outside of the traditional ILEC territory. During 2005, CBET expects to migrate the majority of its service offered via UNE-P to UNE-L. The Local segment links its Cincinnati and Dayton geographies through its synchronous optical fiber network and provides this connectivity through multiple diverse routes.

The Local segment produced $761.7 million, $774.5 million and $781.7 million, or 63%, 50% and 36%, of consolidated Company revenue in 2004, 2003 and 2002, respectively. The Local segment produced consolidated operating income of $279.1 million, $282.7 million and $272.8 million in 2004, 2003 and 2002, respectively.

CBT provides voice services over a circuit switch-based network of 47 host switches and 40 optical remote switch modules serving customers in 56 wire centers. In addition, CBT has successfully leveraged its embedded network investment to provide value-added services and product bundling packages, resulting in additional revenue with minimal incremental costs. Digital switches serve all of CBT’s network access lines and have integrated services digital network (“ISDN”) and Signaling System 7 capability which are necessary to support enhanced features such as Caller ID, Call Waiting and Call Return. The network also includes approximately 2,154 route miles of fiber-optic cable, with synchronous optical network (“SONET”) rings linking Cincinnati’s downtown with other area business centers. These SONET rings offer increased reliability and redundancy to CBT’s major business customers. CBT has deployed DSL capable electronics in over 252 locations throughout its territory, allowing it to offer DSL services to over 89% of its subscriber base. CBT also has an extensive business-oriented data network, offering native speed Ethernet services over an interlaced ATM — Gig-E backbone network.

CBT had approximately 970,000 network access lines in service on December 31, 2004, a 1.6% and 4.2% reduction in comparison to 986,000 and 1,012,000 access lines in service at December 31, 2003 and

2002, respectively. Approximately 68% of CBT’s network access lines serve residential customers and 32% serve business customers. Despite the decline in access lines, the Company has been able to nearly offset the effect of these losses on revenue by increasing DSL penetration.

In March 2004, CBT increased the speed, up to four times faster than its existing DSL service, to compete with and to offer comparable speeds of its main high-speed internet competitors. The Company believes that this and increased marketing efforts helped its subscribers base to increase to 131,000 as of December 31, 2004, a 31% and 75% increase in comparison to 100,000 and 75,000 subscribers at December 31, 2003 and 2002, respectively. As of December 31, 2004, CBT was able to provide DSL service to approximately 89% of its ILEC’s network access lines served by the Company, which the Company refers to as addressable access lines. Of the addressable access lines, CBT’s consumer penetration was 20% at the end of 2004, an increase of five percentage points from 15% at the end of 2003. Business penetration of addressable lines has grown to 8% at the end of 2004, up two percentage points from 6% penetration at the end of 2003. On a combined basis, approximately 131,000 subscribers represent 17% penetration of addressable lines, compared to 13% penetration at the end of 2003.

Wireless

The Wireless segment provides advanced digital, voice and data communications services through the operation of a regional wireless network in a licensed service territory which surrounds Cincinnati and Dayton, Ohio including areas of northern Kentucky and southeastern Indiana. The segment offers service outside of its regional operating territory through wholesale, re-sale arrangements (“roaming agreements”) with other wireless operators. The segment also sells related telecommunications equipment, wireless handset devices and related accessories to support its service business.

Cincinnati Bell Wireless LLC (“CBW”), a joint venture with Cingular Wireless Corporation (“Cingular”), through its recently acquired subsidiary AT&T PCS LLC (“AWE”), operates the Wireless segment. The Company owns 80.1% of CBW while Cingular owns the remaining 19.9%. CBW operates a digital wireless network which is comprised of centralized switching and messaging equipment connected to approximately 330 radio base station locations utilizing 40 MHz of wireless spectrum. CBW owns the license to 20MHz of spectrum in Cincinnati and Dayton, and has the right to use 10MHz owned by the Company in Cincinnati and 10MHz owned by AWE in Dayton, which the lease for the Dayton spectrum expires in April 2007. In addition, the Company also is leasing on a short-term basis incremental spectrum from AWE.

Since October 2003, CBW has deployed service on both Time Division Multiple Access (“TDMA”) and Global System for Mobile Communications and General Packet Radio Service (“GSM/GPRS”) technologies. TDMA is CBW’s legacy technology and provides both voice and short message service (“SMS”) data services. GSM/GPRS technology, to which CBW plans to migrate its subscriber base, provides, in addition to voice communication and SMS, enhanced wireless data communication services, such as mobile web browsing, internet access, email and picture messaging. The GSM/GPRS is enhanced data rates for GSM evolution (“EDGE”) compatible, requiring only software upgrades to deliver higher speeds of data transmission and capacity. Based on current estimates, the Company expects that it will operate its TDMA network at least through early 2006.

CBW’s operating territory includes a licensed population (“licensed pops”) of approximately 3.4 million. As of December 31, 2004, CBW served approximately 481,000 subscribers, which represents 14% of its licensed pops. Of its total subscribers, 306,000 were postpaid subscribers, to which CBW bills monthly in arrears, and 175,000 were prepaid, i-wireless^SM subscribers, who purchase service in advance.

The Wireless segment contributed $261.7 million, $259.5 million and $267.2 million, or 22%, 17% and 12% of consolidated revenue in 2004, 2003 and 2002, respectively. The Wireless segment produced an operating loss of $1.4 million in 2004 and operating income of $60.2 million and $69.1 million in 2003 and 2002, respectively.

Postpaid subscribers generated approximately 72% of total 2004 segment revenue through a variety of rate plans, which typically include a fixed or unlimited number of minutes for a flat monthly rate, with

additional minutes for fixed number of minute plans being charged at a per-minute-of-use rate. Prepaid i-wireless^SM subscribers generated 15% of revenue and subscribers of other wireless carriers roaming on CBW’s network generated 5% of total 2004 revenue.

Sales of handsets and accessories generated the remaining 8% of segment revenue. These sales occur primarily at CBW’s retail locations, which consist of stores and kiosks in high-traffic shopping malls and commercial buildings in the Greater Cincinnati and Dayton, Ohio areas. Sales also take place in the retail stores of major electronic and other retailers pursuant to agency agreements. CBW sells handsets and accessories from a variety of vendors, maintains a supply of equipment and does not envision any shortages that would compromise its ability to service existing or to add new customers. Unlike service revenue (which is a function of wireless handset usage), equipment sales are seasonal in nature, as customers often purchase handsets and accessories as gifts during the holiday season in the Company’s fourth quarter. In order to attract customers, CBW typically sells handsets for less than direct cost, a common practice in the wireless industry.

In response to Cingular’s acquisition of AWE (the “Merger”), which Cingular announced on February 17, 2004 and then consummated on October 26, 2004, the Company entered into an agreement (the “Agreement”) with Cingular on August 4, 2004 and subsequently amended it on February 14, 2005. The Agreement modifies CBW’s operating agreement between the Company and AWE, whereby the Company has agreed to waive AWE’s prohibition against competing with CBW and Cingular has agreed to forego certain minority rights including membership on CBW’s governing member committee. In the Agreement, both parties have agreed to new reciprocal roaming agreements, to the disposition of certain TDMA assets which CBW and AWE had jointly used, and put/call obligations for the sale/purchase of CBW.

The Company has a right to purchase Cingular’s 19.9% interest in CBW at a price of $85.0 million if purchased at any time prior to January 31, 2006, plus interest at an annual rate of 5%, compounded monthly, from the date of the Agreement. Thereafter, the Company may purchase the minority interest for $83.0 million, beginning on January 31, 2006 plus interest at an annual rate of 5%, compounded monthly, thereafter. In addition, at any time beginning on January 31, 2006 (or earlier, if the member committee calls for additional capital contributions not previously approved by AWE or Cingular), Cingular has a right to require the Company to purchase its interest in CBW at the purchase price of $83.0 million, plus interest at an annual rate of 5%, compounded monthly, from January 31, 2006.

As the wireless venture is jointly owned with Cingular, income or losses generated by the Wireless segment are shared between the Company and Cingular in accordance with respective ownership percentages of 80.1% and 19.9%. As a result, 19.9% of the net income or loss of the Wireless segment is reflected as minority interest expense or income in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 9 of the Notes to Consolidated Financial Statements for a detailed discussion of Cingular’s minority interest in this venture.

Hardware and Managed Services

The Hardware and Managed Services segment provides data center collocation, IT consulting services, telecommunications and computer equipment in addition to their related installation and maintenance. The Hardware and Managed Services is comprised of the operations within Cincinnati Bell Technology Solutions (“CBTS”). The segment produced revenue of $134.7 million, $162.8 million and $215.4 million in 2004, 2003 and 2002, respectively. The Hardware and Managed Services segment revenue constituted approximately 11% of consolidated revenue in 2004 and 2003, and 10% of consolidated revenue in 2002. The Hardware and Managed Services segment produced operating income of $12.7 million and $17.5 million in 2004 and 2003, respectively, and an operating loss of $9.4 million in 2002.

In March 2004, CBTS sold certain operating assets, which were generally residing outside of the Company’s operating area for approximately $3.2 million in cash. During the second quarter of 2004, CBTS paid $1.3 million to the buyer of the assets in working capital adjustments related to the sale.

Other

The Other segment combines the operations of CBAD, CBCP and Public. CBAD and CBCP market and sell voice long distance service and surveillance hardware and monitoring services to residential and business customers in the Company’s operating area, while Public provides public payphone services in a four state area

in the midwestern and southern United States. In the fourth quarter of 2004, the Company sold its payphone assets located at correctional institutions and those outside of the Company’s operating area for $1.4 million.

The Other segment produced revenue of $78.6 million, $81.1 million and $82.8 million in 2004, 2003 and 2002, respectively. The Other segment revenue constituted approximately 7%, 5% and 4% of consolidated revenue in 2004, 2003 and 2002, respectively. The Other segment produced operating income of $18.0 million, $6.5 million and $1.7 million in 2004, 2003 and 2002, respectively.

Cincinnati Bell Any Distance

CBAD primarily resells long distance services to businesses and residential customers in the Greater Cincinnati and Dayton, Ohio areas. At December 31, 2004, CBAD had approximately 562,000 subscribers compared to 539,000 and 555,000 long distance subscribers at December 31, 2003 and 2002, respectively. With regard to Local segment access lines for which a long distance carrier is chosen, CBAD’s market share within the Greater Cincinnati area increased in 2004, with residential and business market share growing to approximately 76% and 48%, respectively, from 71% and 45%, respectively, at the end of 2003. Of CBT’s 970,000 access lines, approximately 403,000 residential access lines and 118,000 business access lines subscribed to “Any Distance” as of December 31, 2004. In 2004, CBAD produced $62.8 million in revenue for the Other segment, representing approximately 5% of consolidated revenue, compared to $68.2 million or 4% of consolidated revenue in 2003 and $68.8 million or 3% of consolidated revenue in 2002.

Cincinnati Bell Complete Protection Inc.

CBCP provides surveillance hardware and monitoring services to residential and business customers in the Greater Cincinnati and Dayton, Ohio areas. At December 31, 2004, CBCP had approximately 7,000 monitoring subscribers in comparison to 6,000 and 5,000 monitoring subscribers at December 31, 2003 and 2002, respectively. In 2004, CBCP produced $3.9 million in revenue for the Other segment. As of the end of 2004, CBCP has decided to focus its operations on providing monitoring services in which it can leverage operating synergies with the Company’s local operation. CBCP will discontinue sales of surveillance equipment to business customers which do not also have an on-going monitoring service relationship. These sales comprise approximately $2 million of CBCP’s 2004 revenue; however, these sales only contributed modestly to the Other segment’s profitability.

Cincinnati Bell Public Communications Inc.

Public has provided public payphone services to customers in a seven state regional area. Subsequent to the fourth quarter of 2004, when the Company sold substantially all its out-of-territory assets, services are now provided in a four state regional area. Public had approximately 4,600, 8,100 and 7,700 stations in service as of December 2004, 2003 and 2002, respectively, and generated approximately $10.6 million, $12.8 million and $13.7 million in revenue in 2004, 2003 and 2002, respectively, or less than 1% of consolidated revenue in each year. The revenue decrease is a result of reduced calls per line caused by continued penetration of wireless communications and a targeted reduction in unprofitable lines. The out-of-territory assets sold contributed approximately $2.6 million to the Other segment’s total revenue with only marginal contribution to the segment’s operating income.

Broadband

The Broadband segment no longer has any substantive, on-going operations. As discussed above, on February 22, 2003, certain of the Company’s subsidiaries entered into a definitive agreement to sell substantially all of the operating assets of the Broadband segment for up to $129 million in cash and the assumption of certain long-term operating contractual commitments. On June 6, 2003 and June 13, 2003, this agreement was amended to, among other things, reduce the initial purchase price to $108.7 million (an estimated $91.5 million in cash and a $17.2 million preliminary working capital promissory note, which was ultimately reduced to zero based on the final working capital position of the broadband business). The buyer paid the initial cash purchase price of $91.5 million, of which $29.3 million was placed into escrow to support

certain potential purchase price adjustments and the remaining purchase price payable. On June 13, 2003, the Company effectively transferred control of the broadband business to the buyer. In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), the Company ceased depreciating the assets to be sold upon entering into the definitive agreement.

Broadband revenue was $332.4 million and $911.4 million, or 21% and 42% of consolidated revenue in 2003 and 2002, respectively. Broadband generated operating income of $344.5 million in 2003, or 50% of consolidated operating income and operating loss of $2,415.7 million in 2002. In 2003, the Broadband segment operating income included $336.7 million related to the gain on sale of the broadband assets.

Subsequent to the closing of the asset sale, the Broadband segment consists of certain liabilities not assumed by the buyer. Prior to the sale of the broadband assets, revenue for the Broadband segment was generated from broadband transport (which included non-cash revenue from indefeasible right of use agreements (“IRU’s”)), switched voice services, data and Internet services (including data collocation and managed services) and other services. These transport and switched voice services were generally provided over BRCOM’s national optical network, which comprised approximately 18,700 route miles of fiber-optic transmission facilities. Due to the sale of the broadband business, the Company’s Broadband segment revenue was zero in 2004 and is expected to be zero going forward.

Broadband transport services consisted of long-haul transmission of data, voice and Internet traffic over dedicated circuits. Revenue from the broadband transport category was primarily generated by private line monthly recurring revenue. However, approximately 37% and 44% of the broadband transport revenue in 2003 and 2002, respectively, was provided by IRU agreements, which cover a fixed period of time and represent the lease of capacity or network fibers. The buyer of IRU services typically pays cash or other consideration upon execution of the contract. The Company’s policy and practice was to amortize these payments into revenue over the life of the contract. In the event the buyer of an IRU terminated a contract prior to the contract expiration and released the Company from the obligation to provide future services, the remaining unamortized unearned revenue was recognized in the period in which the contract was terminated. Broadband transport services produced 48% and 51% of Broadband segment revenue in 2003 and 2002, respectively.

Switched voice services consisted of billed minutes of use, primarily for the transmission of voice long distance services on behalf of both wholesale and retail customers. Switched voice services provided 34% and 37% of Broadband segment revenue in 2003 and 2002, respectively.

Network construction and other services consisted of large, joint-use network construction projects. The Company typically gained access to rights-of-way or additional fiber routes through its network construction activities. In November 2001, the Company announced its intention to exit the network construction business upon completion of one remaining contract. That contract to build a fiber route system was in dispute before the interested parties reached a final settlement in February 2004.

Risk Factors

The Company’s substantial debt could limit its ability to fund operations, expose it to interest rate volatility, limit its ability to raise additional capital and have a material adverse effect on its ability to fulfill its obligations and on its business and prospects generally.

The Company has a substantial amount of debt and has significant debt service obligations. As of December 31, 2004, the Company had outstanding indebtedness of $2,141.2 million and a total shareowners’ deficit of $624.5 million. In addition, the Company had the ability to borrow additional amounts under its then existing revolving credit facility, subject to compliance with certain conditions. The Company may incur additional debt from time to time, subject to the restrictions contained in its credit facilities and other debt instruments.

The Company’s substantial debt could have important consequences, including the following:

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the Company will be required to use a substantial portion of its cash flow from operations to pay principal and interest on its debt, thereby reducing the availability of cash flow to fund working capital, capital expenditures, strategic acquisitions, investments and alliances and other general corporate requirements;

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the Company’s interest expense could increase if interest rates in general increase because a significant portion of its debt bears interest at floating rates;

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the Company’s substantial debt will increase its vulnerability to general economic downturns and adverse competitive and industry conditions and could place the Company at a competitive disadvantage compared to those of its competitors that are less leveraged;

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the Company’s debt service obligations could limit its flexibility to plan for, or react to, changes in its business and the industry in which it operates;

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the Company’s level of debt may restrict it from raising additional financing on satisfactory terms to fund working capital, capital expenditures, strategic acquisitions, investments and joint ventures and other general corporate requirements;

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a potential failure to comply with the financial and other restrictive covenants in the Company’s debt instruments, which, among other things, require it to maintain specified financial ratios could, if not cured or waived, have a material adverse effect on the Company’s ability to fulfill its obligations and on its business or prospects generally.

The servicing of the Company’s indebtedness requires a significant amount of cash, and its ability to generate cash depends on many factors beyond its control.

The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations, additional sources of debt financing will be available or that future borrowings will be available under its credit facilities, in each case, in amounts sufficient to enable the Company to service its indebtedness, or to fund other liquidity needs. If the Company cannot service its indebtedness, it will have to take actions such as reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, selling assets, restructuring or refinancing indebtedness or seeking additional equity capital, which may adversely affect its customers and affect their willingness to remain customers. The Company cannot provide assurance that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. In addition, the terms of existing or future debt instruments may restrict the Company from adopting any of these alternatives.

The Company depends on the receipt of dividends or other intercompany transfers from its subsidiaries.

Certain of the Company’s material subsidiaries are subject to regulatory issues that potentially restrict their ability to distribute funds or assets to the Company. If the Company’s subsidiaries were to be prohibited from paying dividends or making distributions to the Company, it would have a material adverse effect on the Company and the trading price of the Cincinnati Bell common stock, preferred stock and debt instruments.

The Company’s creditors and preferred stockholders will have claims to the assets and earnings of these subsidiaries that are superior to claims of the holders of Cincinnati Bell common stock. Accordingly, in the event of the Company’s dissolution, bankruptcy, liquidation or reorganization, amounts may not be available for payments to Cincinnati Bell common stock holders until after the payment in full of the claims of creditors of the Company and its subsidiaries, the Company’s creditors and preferred stockholders.

The Company depends upon its credit facilities to provide for its financing requirements in excess of amounts generated by operations.

The Company depends on the credit facilities to provide for temporary financing requirements in excess of amounts generated by operations. In February 2005, the Company entered into a new $250 million revolving credit facility with $127.8 million of available borrowing capacity. The ability to borrow from the credit facilities is predicated on the Company’s and its subsidiaries’ compliance with covenants. Failure to satisfy these covenants could severely constrain its ability to borrow under the credit facilities. As of December 31, 2004, the Company was in compliance with all of the covenants of its credit facilities.

The credit facilities and other indebtedness impose significant restrictions on the Company.

The Company’s debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on the Company. These restrictions affect, and in many respects limit or prohibit, among other things, the Company’s and its subsidiaries’ ability to:

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incur additional indebtedness;

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create liens;

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make investments;

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enter into transactions with affiliates;

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sell assets;

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guarantee indebtedness;

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declare or pay dividends or other distributions to shareholders;

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repurchase equity interests;

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redeem debt that is junior in right of payment to such indebtedness;

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enter into agreements that restrict dividends or other payments from subsidiaries;

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issue or sell capital stock of certain of its subsidiaries; and

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consolidate, merge or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis.

In addition, the Company’s credit facilities and debt instruments include restrictive covenants that may materially limit the Company’s ability to prepay debt and preferred stock. The agreements governing the credit facilities also require the Company to achieve specified financial results and maintain compliance with specified financial ratios.

The restrictions contained in the terms of the credit facilities and its other debt instruments could:

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limit the Company’s ability to plan for or react to market conditions or meet capital needs or otherwise restrict the Company’s activities or business plans; and

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adversely affect the Company’s ability to finance its operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in its interest.

A breach of any of these restrictive covenants or the Company’s inability to comply with the required financial ratios and financial results could result in a default under the credit facilities. During the occurrence and continuance of a default under the credit facilities, the lenders may elect not to provide loans until such default is cured or waived. Additionally, if certain defaults occur, the lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. Additionally, the Company’s debt instruments contain cross-acceleration provisions, which generally cause each instrument to accelerate upon a qualifying acceleration of any other debt instrument.

The Company’s future cash flows could be adversely affected if it is unable to realize fully its deferred tax assets.

As of December 31, 2004, the Company had a net deferred tax asset of $707.8 million, which includes U.S. federal net operating loss carryforwards of approximately $635.6 million and state and local net operating loss carryforwards of approximately $225.0 million. Valuation allowances of approximately $144.2 million have been provided against certain state and local net operating losses and other state deferred taxes due to the uncertainty of the Company’s ability to utilize the assets within statutory expiration period. For more information concerning the Company’s net operating loss carryforwards, deferred tax assets and

valuation allowance, see Note 13 of Notes to Consolidated Financial Statements. If the Company is unable for any reason to fully realize its deferred tax assets, its business and future cash flows could be adversely affected.

The Company operates in a highly competitive industry and its customers may not continue to purchase services, which could result in reduced revenue and loss of market share.

The telecommunications industry is very competitive. Either new entrants, such as cable companies, or existing competitors, attempting to respond to difficult market conditions, may reduce pricing, create new bundled offerings or develop new, potentially disruptive technologies, products and services. If the Company cannot continue to offer reliable, competitively priced, value-added services or if the Company does not keep pace with technological advances, competitive forces could adversely affect it through a loss of market share or a decrease in revenue and profit margins. The Company has lost, and may continue to lose, access lines by virtue of customers moving their local wireline service to competitive wireline or wireless providers. The Company also competes with voice over internet protocol (“VoIP”) providers as well as broadband service providers utilizing cable or powerline access technologies.

CBT faces competition from other local exchange carriers, wireless service providers, interexchange carriers, cable and broadband and Internet service providers. As of December 31, 2004, approximately 49 companies were certified to offer telecommunications services in CBT’s local franchise area and had interconnection agreements with CBT. The Company believes CBT could face greater competition as new facilities-based service providers with existing service relationships with CBT’s customers compete more aggressively and focus greater resources on the Greater Cincinnati operating area. In November 2003, Time Warner Cable filed an application with the Public Utilities Commission of Ohio to provide local and interexchange voice service in several market areas in Ohio, including Cincinnati. In June 2004, Time Warner began offering VoIP and long distance service in both Cincinnati and Dayton. In July 2004, both AT&T and Verizon began offering VoIP and long distance service in Cincinnati and Dayton. Also, in July 2004, the local gas and electric supplier began offering high-speed Internet access over electrical lines to customers in limited neighborhoods of CBT’s operating area.

If the Company is unable to effectively implement strategies to retain access lines, the Company’s traditional telephone businesses will be adversely affected.

CBW is one of seven active wireless service providers in the Cincinnati and/or Dayton, Ohio metropolitan market areas, including Cingular, Sprint PCS, T-Mobile, Verizon, Nextel and Leap, all of which are nationally known and most are well funded. The Company anticipates that continued competition could compress its gross margins for wireless products and services as carriers continue to offer more minutes for equivalent or lower service fees because CBW cannot offer more minutes without incremental costs. CBW’s ability to compete will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the telecommunications industry. Furthermore, as evidenced by Cingular’s recent acquisition of AWE, and the planned merger of Sprint and Nextel, there has been a trend in the wireless communications industry towards consolidation through joint ventures, reorganizations and acquisitions. The Company expects this consolidation to lead to larger competitors with greater resources and more service offerings than CBW. Furthermore, rules adopted by the Federal Communications Commission now permit wireless subscribers to retain their wireless phone numbers when changing to another wireless carrier within the same geographic area. The Company generally does not enter into long-term contracts with its wireless subscribers and, therefore, such rules could have an adverse affect on the Company.

The Company’s other subsidiaries operate in a largely local or regional area, and each of these subsidiaries faces significant competition. CBTS competes against numerous other information technology consulting, web-hosting and computer system integration companies, many of which are larger, national in scope and better financed. CBAD competitors include large national long-distance carriers, such as AT&T, MCI and Sprint, and emerging VoIP providers. CBCP competes against national companies, such as ADT, and against local providers. Public competes with several other public payphone providers, some of which are national in scope and offer lower prices for coin-based local calling services. Public has also continued to be adversely impacted by the growing popularity of wireless communications.

The effect of the foregoing competition on any of the Company’s subsidiaries could have a material adverse impact on its businesses, financial condition and results of operations. This could result in increased reliance on borrowed funds and could impact the Company’s ability to maintain its wireline and wireless networks.

Maintaining the Company’s networks requires significant capital expenditures and its inability or failure to maintain its networks would have a material impact on its market share and ability to generate revenue.

During the year ended December 31, 2004, capital expenditures totaled $133.9 million. The Company expects to spend approximately 12% of future revenue on capital expenditures in future periods excluding any significant expenditures associated with the introduction of new products, services or network expansion. The Company may incur significant additional capital expenditures as a result of unanticipated developments, regulatory changes and other events that impact the business. If the Company is unable or fails to adequately maintain or expand its networks to meet customer needs, there could be a material adverse impact on the Company’s market share and its ability to generate revenue.

Maintenance of CBW’s wireless network, growth in the wireless business or the addition of new wireless products and services may require CBW to obtain additional spectrum, which may not be available or be available only on less than favorable terms.

The TDMA wireless network currently operates on spectrum, which the FCC has licensed to CBW. For its GSM network, CBW uses spectrum licensed to the Company or to Cingular. Introduction of new wireless products and services, as well as maintenance of the existing wireless business, may require CBW to obtain additional spectrum in the Cincinnati or Dayton markets, either to supplement or to replace the existing spectrum. There can be no assurance that such spectrum will be available to CBW or will be available on commercially favorable terms. Failure to obtain any needed new spectrum or to retain existing spectrum could have a materially adverse impact on the wireless business as a whole, the quality of the wireless networks, and the ability to offer new competitive products and services.

The regulation of the Company’s businesses by federal and state authorities may, among other things, place the Company at a competitive disadvantage, restrict its ability to price its products and services and threaten its operating licenses.

Several of the Company’s subsidiaries are subject to regulatory oversight of varying degrees at both the state and federal levels which may differ from the regulatory scrutiny faced by the Company’s competitors. A significant portion of CBT’s revenue is derived from pricing plans that require regulatory overview and approval. Different interpretations by regulatory bodies may result in adjustments to revenue in future periods. In recent years, these regulated pricing plans have resulted in decreasing or fixed rates for some services. In the future, regulatory initiatives that would put CBT at a competitive disadvantage or mandate lower rates for its services could result in lower profitability and cash flow for the Company. In addition, different regulatory interpretations of existing regulations or guidelines may affect the Company’s revenues in future periods.

At the federal level, CBT is subject to the Telecommunications Act of 1996, including the rules subsequently adopted by the FCC to implement the 1996 Act, which has impacted Cincinnati Bell Telephone’s in-territory local exchange operations in the form of greater competition. At the state level, CBT conducts local exchange operations in portions of Ohio, Kentucky and Indiana and, consequently, is subject to regulation by the Public Utilities Commissions in those states. Various regulatory decisions or initiatives at the federal or state level may from time to time have a negative impact on Cincinnati Bell Telephone’s ability to compete in territory or upon its out-of-territory subsidiary’s ability to compete in its markets.

CBW’s FCC licenses to provide wireless services are subject to renewal and revocation. Although the FCC has routinely renewed wireless licenses in the past, the Company cannot be assured that challenges will not be brought against those licenses in the future. Revocation or non-renewal of CBW’s licenses would result in lower operating results and cash flow for the Company.

There are currently many regulatory actions under way and being contemplated by federal and state authorities regarding issues that could result in significant changes to the business conditions in the

telecommunications industry. No assurance can be given that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative, or judicial initiatives relating to the telecommunications industry, will not have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Failure to anticipate the needs for and introduce new products and services may compromise our success in the telecommunications industry.

The Company’s success depends, in part, on being able to anticipate the needs of current and future enterprise, carrier and residential customers. The Company seeks to meet these needs through new product introductions, service quality and technological superiority. For example, in 2003, we began implementing the Global System for Mobile Communications and General Packet Radio Service, or GSM/GPRS, technology. GSM/GPRS technology provides enhanced wireless data and voice communications. We are also investigating the implementation of the next generation of high-speed voice and data communications and entertainment services. New products and services such as these and our ability to anticipate the future needs of our customers are critical to our success.

Terrorist attacks and other acts of violence or war may affect the financial markets and the Company’s business, financial condition, results of operations and cash flows.

Terrorist attacks may negatively affect the Company’s operations and financial condition. There can be no assurance that there will not be further terrorist attacks against the United States of America, U.S. businesses or armed conflict involving the United States of America. Further terrorist attacks or other acts of violence or war may directly impact the Company’s physical facilities or those of its customers and vendors. These events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and world financial markets and economy. They could result in an economic recession in the United States or abroad. Any of these occurrences could have a material adverse impact on the Company’s business, financial condition, results of operations and cash flows.

The Company could incur significant costs resulting from complying with, or potential violations of, environmental and health and human safety laws.

The Company’s operations are subject to laws and regulations relating to the protection of the environment and health and human safety, including those governing the management and disposal of, and exposure to, hazardous materials and the cleanup of contamination, and the emission of radio frequency. While the Company believes its operations are in substantial compliance with environmental and health and human safety laws and regulations, as an owner or operator of property and in connection with the current and historical use of hazardous materials and other operations at our sites, the Company could incur significant costs resulting from complying with or violations of such laws, the imposition of cleanup obligations, and third-party suits. For instance, a number of the Company’s sites formerly contained underground storage tanks for the storage of used oil and fuel for back-up generators and vehicles. In addition, a few sites currently contain underground tanks for back-up generators, and many of the Company’s sites have aboveground tanks for similar purposes.

The Company could incur significant costs as a result of a number of putative class action and derivative lawsuits that were filed against the Company.

During 2004, 2003 and 2002, a number of putative class action and derivative lawsuits were filed against the Company and certain of its current and former officers and directors which allege a number of violations of securities laws. The Company is vigorously contesting these matters, but such litigation could result in substantial costs and have a material impact on the Company’s financial condition, results of operation and cash flow. An adverse decision or settlement in any of these cases could require the Company to pay substantial damages, which would have a material adverse affect on our business and operations.

The Company generates substantially all of its revenue by serving a limited geographic area.

The Company generates substantially all of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas. An economic downturn or natural disaster occurring in this limited operating territory could have a disproportionate effect on the Company’s business, financial condition, results of operations and cash

flow compared to similar companies of a national scope and similar companies operating in different geographic areas. Refer to Note 22 of Notes to Consolidated Financial Statements, included in Item 8 on this Form 10-K.

If the Company fails to extend or renegotiate its collective bargaining contract with its labor unions when it expires, or if its unionized employees were to engage in a strike or other work stoppage, the Company’s business and operating results could be materially harmed.

The Company is a party to a collective bargaining contract with its labor unions, which represent a significant number of its employees. Although the Company believes that its relations with its employees are satisfactory, no assurance can be given that the Company will be able to successfully extend or renegotiate its collective bargaining agreement when it expires on May 7, 2005. If the Company fails to extend or renegotiate its collective bargaining agreement, if disputes with its unions arise, or if its unionized workers engage in a strike or a work stoppage, the Company could experience a significant disruption of operations or incur eventually higher ongoing labor costs, either of which could have a material adverse effect on the Company’s business.

Capital Additions

The capital additions of the Company are primarily for telephone plant in its local service area and development of the infrastructure of its wireless business. Capital additions for 2002, 2001 and 2000 also included significant capital additions for broadband fiber-optic transmission facilities.

The following is a summary of capital additions for the years 2000 through 2004:

(Dollars in millions)	Local Telephone Operations		Fiber-Optic Transmission Facilities		Wireless Infrastructure		Hardware and Managed Services Facilities		Other		Total Capital Additions
2004	$	80.1	$	—	$	32.4	$	15.6	$	5.8	$	133.9
2003	$	81.0	$	3.6	$	40.2	$	0.6	$	1.0	$	126.4
2002	$	80.3	$	59.2	$	29.5	$	5.7	$	1.2	$	175.9
2001	$	121.4	$	472.0	$	52.0	$	—	$	3.1	$	648.5
2000	$	157.4	$	599.9	$	84.2	$	—	$	2.2	$	843.7

Employees

At February 28, 2005, the Company had approximately 3,000 employees. CBT had approximately 1,500 employees covered under a collective bargaining agreement with the Communications Workers of America, which is affiliated with the AFL-CIO. This collective bargaining agreement expires on May 7, 2005.

Business Segment Information

The amount of revenue, intersegment revenue, operating income (loss), assets, capital additions and depreciation and amortization attributable to each of the Company’s business segments for the years ended December 31, 2004, 2003 and 2002 is set forth in Note 18 of the Notes to Consolidated Financial Statements contained in Item 8 of this Report on Form 10-K.

Item 2. Properties

Cincinnati Bell Inc. and its subsidiaries own or maintain telecommunications facilities in primarily three states. Principal office locations are in Cincinnati, Ohio.

The property of the Company is principally comprised of telephone plant in its local telephone franchise area (i.e., Greater Cincinnati), and the infrastructure associated with its wireless business in the Greater Cincinnati and Dayton, Ohio operating areas. Each of the Company’s subsidiaries maintains some investment in furniture and office equipment, computer equipment and associated operating system software, application system software, leasehold improvements and other assets. Facilities equipment and access circuits leased as part of an operating lease arrangement are expensed as equipment or services are used in the business and are not included in the totals below.

With regard to its local telephone operations, substantially all of the central office switching stations are owned and situated on land owned by the Company. Fiber-optic transmission facilities consist largely of fiber-optic cable, conduit, optronics, rights-of-way and structures to house the equipment. Some business and administrative offices are located in rented facilities, some of which are recorded as capitalized leases and included in the “Buildings and leasehold improvements” caption below. In 2003, the Company entered into a lease termination agreement whereby the Company will relocate from its current headquarters offices in Cincinnati, Ohio. Under the terms of the agreement, the Company is required to vacate the facilities by the fourth quarter of 2005. The Company has completed its review of new facilities for its headquarters of which will remain in Cincinnati, Ohio.

The wireless infrastructure consists primarily of switching and messaging equipment, radio transmitters, receivers, and cabinetry as well as towers, and antennae. With regard to its wireless operations, CBW both owns and leases the locations which house its switching and messaging equipment. It owns approximately 50% of the tower structures upon which its radio base stations reside. CBW leases space primarily from other wireless carriers for the remaining 50% of its tower sites. CBW typically leases the land upon which its towers sit. These ground leases are typically renewable at CBW’s option with predetermined rate escalations.

The gross investment in property, plant and equipment, at December 31, 2004 and 2003 is comprised of the following (dollars in millions):

	2004		2003
Land and rights-of-way	$	5.7	$	5.7
Buildings and leasehold improvements		195.6		189.2
Telephone plant		2,169.4		2,099.9
Transmission facilities		72.7		75.3
Furniture, fixtures, vehicles and other		118.3		137.1
Construction in process		21.7		17.8
Total	$	2,583.4	$	2,525.0

The gross investment in property, plant, and equipment includes $28.4 million and $34.7 million of assets accounted for as capital leases in 2004 and 2003, respectively. These assets are included in the captions “Buildings and leasehold improvements,” “Telephone plant,” “Transmission facilities” and “Furniture, fixtures, vehicles and other.”

Properties of the Company are divided between operating segments as follows:


Local	82.8	%	84.1	%
Wireless	15.8	%	15.1	%
Hardware and Managed Services	0.7	%	0.1	%
Other	0.7	%	0.7	%
Total	100.0	%	100.0	%

Item 3. Legal Proceedings

The information required by this Item is included in Note 10 of the Notes to Consolidated Financial Statements that are contained in Item 8 of this Report on Form 10-K.

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

None.

PART II

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

Market Information

The Company’s common shares (symbol: CBB) are listed on the New York Stock Exchange and on the National Stock Exchange. As of March 4, 2005, there were approximately 78,000 holders of record of the 246,538,383 outstanding common shares of the Company. The high and low daily closing prices during each quarter for the last two fiscal years are listed below:

Quarter	1st		2nd		3rd		4th
2004 High	$	5.89	$	4.49	$	4.35	$	4.30
Low	$	4.00	$	3.85	$	3.46	$	3.26
2003 High	$	4.95	$	6.80	$	7.25	$	5.79
Low	$	3.51	$	3.71	$	5.09	$	4.84

Dividends

The Company does not currently intend to pay dividends on its common shares and is furthermore restricted in its ability to pay dividends pursuant to certain covenants contained in its various debt agreements. Refer to Note 7 of the Notes to Consolidated Financial Statements.

Issuer Purchases of Equity Securities

None.

Item 6. Selected Financial Data

The Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this document. The information contained in the table below has been recast to give effect to the sale of substantially all of the assets of Cincinnati Bell Directory in 2002. Refer to Note 16 of the Notes to Consolidated Financial Statements for a detailed discussion of the reporting of discontinued operations.

(dollars in millions, except per share amounts)	2004			2003			2002			2001			2000
Operating Data
Revenue	$	1,207.1		$	1,557.8		$	2,178.6		$	2,252.3		$	1,970.2
Cost of services and products, selling, general, and administrative, depreciation and amortization		896.7			1,204.3			2,034.1			2,273.7			1,979.4
Restructuring, asset impairments and other charges (a)		14.8			6.2			2,238.0			245.4			(0.8	)
Gain on sale of broadband assets (b)		(3.7	)		(336.7	)		—			—			—
Operating income (loss)		299.3			684.0			(2,093.5	)		(266.8	)		(8.4	)
Minority interest expense (income) (c)		(0.5	)		42.2			57.6			51.3			44.1
Interest expense and other financing costs (d)		203.3			234.2			164.2			168.1			163.6
Loss (gain) on investments (e)		—			—			10.7			(11.8	)		356.3
Income (loss) from continuing operations before discontinued operations, extraordinary items and cumulative effect of change in accounting principle		64.2			1,246.0			(2,449.2	)		(345.2	)		(406.3	)
Net income (loss)	$	64.2		$	1,331.9		$	(4,240.3	)	$	(315.6	)	$	(380.2	)
Earnings (loss) from continuing operations per common share (f)
Basic	$	0.22		$	5.44		$	(11.27	)	$	(1.64	)	$	(1.96	)
Diluted	$	0.21		$	5.02		$	(11.27	)	$	(1.64	)	$	(1.96	)
Dividends declared per common share	$	—		$	—		$	—		$	—		$	—
Weighted average common shares outstanding (millions)
Basic		245.1			226.9			218.4			217.4			211.7
Diluted		250.5			253.3			218.4			217.4			211.7

Financial Position
Property, plant and equipment, net	$	851.1		$	898.8		$	867.9		$	3,059.3		$	2,978.6
Total assets (g)		1,958.7			2,073.5			1,452.6			6,279.4			6,478.6
Long-term debt (d)		2,111.1			2,274.5			2,354.7			2,702.0			2,507.0
Total debt (d)		2,141.2			2,287.8			2,558.4			2,852.0			2,521.0
Total long-term obligations(h)		2,237.7			2,406.0			2,966.3			3,264.5			3,105.0
Minority interest (c)		39.2			39.7			443.9			435.7			433.8
Shareowners’ equity (deficit) (g)		(624.5	)		(679.4	)		(2,598.8	)		1,645.9			2,018.4

Other Data
Cash flow provided by operating activities	$	300.7		$	310.6		$	192.6		$	259.5		$	328.4
Cash flow provided by (used in) investing activities		(124.3	)		(42.8	)		192.4			(534.6	)		(851.9	)
Cash flow provided by (used in) financing activities		(177.5	)		(286.7	)		(370.1	)		267.2			480.6
Capital expenditures		(133.9	)		(126.4	)		(175.9	)		(648.5	)		(843.7	)

(a)

See Notes 1, 4, and 5 of Notes to Consolidated Financial Statements.

(b)

See Note 2 of Notes to Consolidated Financial Statements.

(c)

See Note 9 of Notes to Consolidated Financial Statements.

(d)

See Note 7 of Notes to Consolidated Financial Statements.

(e)

See Note 6 of Notes to Consolidated Financial Statements.

(f)

See Note 12 of Notes to Consolidated Financial Statements.

(g)

See Notes 1 and 4 of Notes to Consolidated Financial Statements.

(h)

Total long-term obligations comprise long-term debt, other noncurrent liabilities that will be settled in cash and the BRCOM Preferred Stock, which prior to its exchange in 2003 was classified as minority interest in the consolidated financial statements.

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

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” which follows should be read in conjunction with the “Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement”, “Risk Factors,” and Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements.

Cincinnati Bell Inc. (the “Company”) provides diversified telecommunications services through businesses in five segments: Local, Wireless, Hardware and Managed Services, Other and Broadband. A further discussion of these segments and their operating results is discussed in Item 1, “Business”, and in the individual segment discussions which begin on page 30 of this Report on Form 10-K.

Executive Summary

Cincinnati Bell Inc. is a full-service local provider of data and voice communications services and equipment and a regional provider of wireless and long distance communications services. The Company provides telecommunications service on its owned local network with a well-regarded brand name and reputation for service. The Company operates in five business segments: Local, Wireless, Hardware and Managed Services, Other and Broadband.

In 2004, the Company’s primary objectives were to: 1) reduce indebtedness, 2) defend the Company’s core franchise against increasing competition, and 3) add to the Company’s growth businesses. Measurements of the Company’s performance against these objectives are as follows:

•

Reduced total indebtedness by 7%, from $2,287.8 million to $2,141.2 million, primarily with operating cash flows.

•

Defended its core franchise through bundling, adding 52,000 net subscribers to its Custom Connections^SM “Super Bundle” which offers local, long distance, wireless, DSL and the Company’s value-added service package, Complete Connections®, on a single bill at a price lower than that for which the customer could buy all of the services individually. The Company finished the year with 123,000 super bundle subscribers, or 73% more than at the end of 2003. In addition, total access lines declined by 1.6% versus 2003, a full percentage point improvement over the 2.6% annual decline reported in the prior year as the company experienced little impact from cable telephony competition.

•

Increased internet revenues by $11.0 million by adding 31,000 Digital Subscriber Line (DSL) subscribers, or 26% more than were added in 2003. The Company finished the year with 131,000 DSL subscribers, or 31% more than at the end of 2003. Penetration of its DSL product increased by 4%, to 14% of total owned facilities access lines.

For 2005, the Company expects to continue execution against the same objectives. In early 2005, as discussed in Note 23 to the Consolidated Financial Statements, the Company completed the first stage of its refinancing plan, the primary objective of which is to increase cash flows by providing the flexibility with regard to the future extinguishment of its 16% Senior Subordinated Discount notes Due 2009 (the “16% notes”). These notes mature in January 2009 and are callable at 108% of their accreted value in March 2006.

Regarding defense of its core franchise, the Company expects continued growth of its super bundle. To build on the success of its bundled solutions over the past several years, the Company plans to invest in enhanced billing and customer care platforms that will further automate operations and enable the Company to provide better service at lower cost. As a result of this planned investment in customer service, the Company announced a restructuring plan in the fourth quarter of 2004, continuing through 2006 to better align its cost structure with the future bundling opportunity. The Company believes this strategy will maintain its reputation for quality service and reduce annual operating expenses by $20 to $25 million by 2006.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. The Company continually evaluates its estimates, including, but not limited to, those related to revenue recognition, costs of

providing service, bad debts, inventories and any related reserves, income taxes, fixed assets, goodwill, intangible assets, depreciation, restructuring, pensions, other postretirement benefits and contingencies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies impact the more significant judgments and estimates used in the preparation of its consolidated financial statements. Additionally, the Company’s senior management has discussed the critical accounting policies and estimates with the Audit and Finance Committee. For a more detailed discussion of the application of these and other accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements.

Revenue Recognition — The Company recognizes revenue as services are provided. Local access fees are billed monthly, in advance, while revenue is recognized as the services are provided. Postpaid wireless, long distance, switched access, reciprocal compensation and data and Internet product services are billed monthly in arrears, while the revenue is recognized as the services are provided.

The Company bills service revenue in regular monthly cycles, which are dispersed throughout the days of the month. Because the day of each billing cycle rarely coincides with the end of the Company’s reporting period for usage-based services such as postpaid wireless, long distance and switched access, the Company must estimate service revenues earned but not yet billed. The Company bases its estimates upon historical usage and adjusts these estimates during the period in which the Company can determine actual usage, typically in the following reporting period. These adjustments may have a material impact upon operating results of the Company during the period of the adjustment.

The Company recognizes equipment revenue generally upon customer receipt or if contractually specified upon the performance of contractual obligations, such as shipment, delivery, installation or customer acceptance.

Prior to the sale of the broadband assets in the second and third quarter of 2003, broadband transport services were billed monthly, in advance, while revenue was recognized as the services were provided. In addition, the Company had entered into indefeasible right-of-use (“IRU”) agreements, which represent the lease of network capacity or dark fiber, recording unearned revenue at the earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash. The buyer of IRU services typically paid cash or other consideration upon execution of the contract, and the associated IRU revenue was recognized over the life of the agreement as services were provided, beginning on the date of customer acceptance. In the event the buyer of an IRU terminated a contract prior to the contract expiration and released the Company from the obligation to provide future services, the remaining unamortized unearned revenue was recognized in the period in which the contract was terminated. Concurrent with the broadband asset sale, substantially all of the remaining IRU obligations were assumed by the buyer of the broadband assets.

Income Taxes — The income tax provision consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods. As of December 31, 2004, the Company had $707.8 million in net deferred tax assets. The ultimate realization of the deferred income tax assets depends upon the Company’s ability to generate future taxable income during the periods in which basis differences and other deductions become deductible and prior to the expiration of the net operating loss carryforwards.

As of December 31, 2004, the Company had $1.8 billion in federal tax net operating loss carryforwards, with a deferred tax asset value of $635.6 million. The tax loss carryforwards are available to the Company to offset taxable income in current and future periods. The Company expects to utilize approximately $121 million of gross federal tax net operating loss carryforwards during 2005. The tax loss carryforwards will generally expire between 2011 and 2023 and are not currently limited under U. S. tax laws. Based on current income levels and anticipated future reversal of existing temporary differences, the Company will utilize its federal net operating loss carryforwards within their expiration periods.

In addition, the Company has state and local deferred tax assets of $247.6 million, $225.0 million of which relates to tax operating loss carryforwards. The Company has a $144.2 million valuation allowance related to these state and local tax assets. This allowance was provided due to uncertainties about the ultimate realization of certain state and local tax loss carryforwards prior to their expiration.

The Company determines its effective tax rate by dividing its income tax expense by its net income before taxes as reported in its statement of operations. For reporting periods prior to the end of the Company’s fiscal year, the Company records income tax expense based upon an estimated annual effective tax rate. This rate is computed using the statutory tax rate and an estimate of annual net income adjusted for an estimate of non-deductible expenses.

The Company has certain non-deductible expenses, including interest expense related to securities issued to acquire its broadband business. During 2004 these non-deductible expenses were offset by benefits recorded to reduce the state deferred tax valuation allowance due to changes in utilization estimates of state net operating loss carryforwards. Excluding the effects of the reduction in the state valuation allowance, the Company’s effective tax rate would exceed statutory rates and the effective rate will vary inversely with the amount of its income before tax.

Allowances for Uncollectible Accounts Receivable — The Company estimates the allowances for uncollectible accounts using both percentages of aged accounts receivable balances to reflect the historical average of credit losses and specific provisions for certain large, potentially uncollectible balances. The Company believes its allowance for uncollectible accounts is adequate based on the methods previously described. However, if one or more of the Company’s larger customers were to default on its accounts receivable obligations or general economic conditions in the Company’s operating area deteriorated, the Company could be exposed to potentially significant losses in excess of the provisions established. Substantially all of the Company’s outstanding accounts receivable balances are with entities located within its geographic operating areas. Regional and national telecommunications companies account for the remainder of the Company’s accounts receivable balances. No one entity or collection of legally affiliated entities represents 10% of the outstanding accounts receivable balances.

Estimated Useful Lives and Depreciation of Property, Plant and Equipment — The Company’s provision for depreciation of telephone plant is determined on a straight-line basis using the whole life and remaining life methods. Provision for depreciation of other property, other than leasehold improvements, is based on the straight-line method over the estimated economic useful life. Depreciation of leasehold improvements is based on a straight-line method over the lesser of the economic useful life or term of the lease, including option renewal periods if renewal of the lease is probable. Repairs and maintenance expense items are charged to expense as incurred.

The Company estimates the useful lives of plant and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The majority of the Local segment plant and equipment is depreciated using the group method, which develops a depreciation rate (annually) based on the average useful life of a specific group of assets rather than for each individual asset as would be utilized under the unit method. The estimated life of the group changes as the composition of the group of assets and their related lives changes. Such estimated life of the group is based on historical experience with similar assets, as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Likewise, if the anticipated technological or other changes occur more slowly than expected, the life of the group could be extended based on the life assigned to new assets added to the group. This could result in a reduction of deprecation and amortization expense in future periods. A one-year decrease or increase in the useful life of these assets would increase or decrease depreciation and amortization expense by approximately $16.2 million and $11.0 million, respectively. The Company has reviewed these types of assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. In assessing impairments, the Company follows the provisions of Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

During the fourth quarter of 2003, the Company revised the estimated economic useful life of its wireless TDMA network due to the expected migration of its TDMA customer base to its GSM/GPRS network. The Company shortened its estimate of the remaining economic useful life of its TDMA network to December 31, 2006. This has resulted in a $20.6 million increase in accumulated depreciation during 2004. If the migration

to GSM/GPRS technology occurs more rapidly than the Company’s current estimates and the existing TDMA network can not be effectively redeployed, the Company may be required to revise its estimate further or record an impairment charge related to its TDMA network.

Technological change, which occurs more rapidly than expected, may have the affect of shortening the estimated depreciable life of other network and operating assets that the Company employs. This could have a substantial impact on the consolidated depreciation expense and net income of the consolidated Company.

Prior to the beginning of 2003, the Company estimated net removal costs for outside plant assets of CBT and to the extent these costs exceeded gross salvage values, the Company increased its periodic depreciation expense to capture the difference between estimated net removal costs and gross salvage values in accumulated depreciation. When the Company retired these assets and expended the net removal costs, the Company recognized net removal costs as a reduction to accumulated depreciation.

In connection with the adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), effective January 1, 2003, the Company removed the then existing accrued costs for the removal of outside telephone plant from the accumulated depreciation accounts. These accrued costs totaled $85.9 million, net of taxes, which the Company recognized as income. Refer to Note 1 of the Notes to Consolidated Financial Statements.

Since the Company had previously accrued for net removal costs in excess of salvage value in depreciation expense, depreciation expense for CBT was $6.7 million lower in 2003 than it would have otherwise been absent this accounting change. In total, CBT’s depreciation expense declined by $21.0 million in 2003 from $146.7 million in 2002 to $125.7 in 2003. CBT expensed $2.2 million of cost of products and services in 2003 related to net removal costs in excess of salvage value.

Goodwill and Indefinite-Lived Intangible Assets — Goodwill represents the excess of the purchase price consideration over the fair value of assets acquired recorded in connection with purchase business combinations. Indefinite-lived intangible assets consist primarily of Federal Communications Commission (“FCC”) licenses for spectrum of the Wireless segment. The Company determined that its wireless licenses met the definition of indefinite-lived intangible assets under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), as the Company believes the need for wireless spectrum will continue independent of technology and the Company may renew the wireless licenses in a routine manner every ten years for a nominal fee, provided the Company continues to meet the service and geographic coverage provisions required by the FCC. Upon the adoption of SFAS 142 on January 1, 2002, the Company ceased amortization of remaining goodwill and indefinite-lived intangible assets.

Pursuant to SFAS 142, goodwill and intangible assets not subject to amortization are tested for impairment annually, or when events or changes in circumstances indicate that the asset might be impaired. For goodwill, a two-step impairment test is performed. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill is in excess of the implied fair value of that goodwill, then an impairment loss is recognized equal to that excess. For indefinite-lived intangible assets, the impairment test consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

During 2004 and 2003, no write-down in the carrying value of goodwill was required based on its fair value. Fair value is an estimate based on the present value of an expected range of future cash flows. The expected range of future cash flows is based on internal forecasts developed utilizing management’s knowledge of the business and the anticipated effects of market forces. The discount rate used to determine

the present value is based on the weighted-average cost of capital in addition to a spread for other external market risks. Reducing the estimated fair value of goodwill by 10% would not have resulted in an impairment of the carrying value of goodwill.

During 2004 and 2003, no write-downs in the carrying values of indefinite-lived intangible assets were required based on their fair values. Indefinite-lived intangible assets consists of FCC licenses of the Wireless segment. Fair value is based on current external market rates for similar licenses. A 10% reduction in the estimated fair value of indefinite-lived intangible assets would not result in an impairment of the carrying value of the licenses.

Impairment of Long-lived Assets, Other than Goodwill and Indefinite-Lived Intangibles — The Company reviews the carrying value of long-lived assets, other than goodwill and indefinite-lived intangible assets discussed above, when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the estimated future undiscounted cash flows expected to result from the use of an asset (or group of assets) and its eventual disposition are less than its carrying amount. An impairment loss is measured as the amount by which the asset’s carrying value exceeds its estimated fair value.

Competition from new or more cost effective technologies could affect the Company’s ability to generate cash flow from its network-based services. This competition could ultimately result in an impairment of certain of the Company’s tangible or intangible assets. This could have a substantial impact on the operating results of the consolidated Company.

Pension and Postretirement Benefits — The Company calculates net periodic pension and postretirement expenses and liabilities on an actuarial basis under the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”), Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”) and Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits” (“SFAS 112”). The key assumptions used in determining these calculations are disclosed in Note 14 of the Notes to Consolidated Financial Statements. The actuarial assumptions attempt to anticipate future events and are used in calculating the expenses and liabilities related to these plans.

The most significant of these numerous assumptions, which are reviewed annually, include the discount rate, expected long-term rate of return on plan assets and health care cost trend rates. The discount rate is selected based on current market interest rates on high-quality, fixed-income investments at December 31 of each year. The health care cost trend rate is based on actual claims experience and future projections of medical cost trends. The actuarial assumptions used may differ materially from actual results due to the changing market and economic conditions and other changes. Revisions to and variations from these estimates would impact assets, liabilities, costs of services and products and selling, general and administrative expenses.

The following table represents the sensitivity of changes in certain assumptions related to the Company’s pension and postretirement plans:

	Pension Benefits									Postretirement and Other Benefits
(dollars in millions)	% Point Change			Increase/(Decrease) in Obligation		Increase/(Decrease) in 2004 Expense			Increase/(Decrease) in Obligation			Increase/(Decrease) in 2004 Expense
Discount rate		±0.5	%	$	(21.0)/22.0	$	(0.2)/0.1		$	(19.0)/19.0		$	(0.8)/0.8
Expected return on assets		±0.5	%		—	$	2.4/(2.4	)		—		$	0.4/(0.4	)
Health care cost trend rate		±1	%		n/a		n/a		$	52.7/(43.0	)	$	4.6/(3.6	)

The expected long-term rate of return on plan assets, developed using the building block approach, is based on the following: the participant’s benefit horizons; the mix of investments held directly by the plans, which is generally 60% equities and 40% bonds; and, the current view of expected future returns, which is influenced by historical averages. The required use of an expected versus actual long-term rate of return on plan assets may result in recognized pension expense or income that is greater or less than the actual returns

of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns. To the extent the Company changed its estimate of the expected long-term rate of return on plan assets, there would be an impact on pension expense or income and the associated net liability or asset.

In its pension calculations, the Company utilizes the market-related value of plan assets, which is a calculated asset value that recognizes changes in asset fair values in a systematic and rational manner. Differences between actual and expected returns are recognized in the market related value of plan assets over five years.

Changes in actual asset return experience and discount rate assumptions can impact the Company’s operating results, financial position and cash flows. Actual asset return experience results in an increase or decrease in the asset base and this effect, in conjunction with a decrease in the pension discount rate, may result in a plan’s assets being less than a plan’s accumulated benefit obligation (“ABO”). The ABO is the present value of benefits earned to date and is based on past compensation levels. The Company is required to show in its consolidated balance sheet a net liability that is at least equal to the ABO less the market value of plan assets. This liability is referred to as an additional minimum pension liability (“AML”). An AML, which is recorded and updated on December 31 each year, is reflected as a long-term pension liability with the offset recorded as an intangible asset, to the extent the Company has unrecognized prior service costs, with the remainder recorded in accumulated other comprehensive income (loss) in the equity section of the consolidated balance sheet, net of tax. With regards to the non-management pension plan, an increase in the ABO, or a corresponding decrease in plan assets of $3.0 million or greater as of December 31, 2004, would result in an AML of approximately $40.0 million, net of tax.

The actuarial expense calculation for the postretirement health plan is based on numerous assumptions, estimates and judgments including health care cost trend rates and cap-related cost sharing. Our non-management labor contract with the union contains contractual limits on the Company funded portion of retiree medical costs (referred to as “caps”). The Company has waived the premiums in excess of the caps during the current and past labor contract periods and, therefore has waived any cost sharing from those non-management retirees. The Company has previously accounted for the obligation for non-management retiree medical costs based on the terms of the written labor contract with the union. The Company has provided the same benefits for non-management and management retirees and therefore, has accounted for the obligation for management retiree medical costs on the same basis as non-management retiree medical costs.

The Company has determined that its past history of waiving and/or increasing caps in labor contract negotiations with the union, coupled with the expectation that the caps will be waived or increased in future contract negotiations, creates a substantive plan that is an uncapped plan and differs from the written plan. Accordingly, effective December 31, 2004, the Company has accounted for its retiree medical benefit obligation for non-management and management retirees as if there were no caps.

In May 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 provides guidance on accounting for the effects of the new Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”) by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. FSP 106-2 was effective as of the first interim period beginning after June 15, 2004. The Company adopted FSP 106-2 during the third quarter of 2004 which reduced postretirement medical expense by $1.1 million and reduced the postretirement benefit obligation by $10.3 million in 2004. The reduction in postretirement expense for 2004 was comprised of a $0.6 million benefit related to interest cost and a $0.5 million benefit in the amortization of the actuarial loss.

Results of Operations

Consolidated Overview

The financial results for 2004, 2003, and 2002 referred to in this discussion should be read in conjunction with the Consolidated Statements of Operations and Comprehensive Income (Loss) on page 67 of this Report on Form 10-K.

2004 Compared to 2003

Revenue

Consolidated revenue totaled $1,207.1 million in 2004, which was $350.7 million, or 23%, less than 2003. Foregone revenue associated with disposed broadband assets is the primary reason that 2004 revenue has declined. Revenue of the Broadband segment, which no longer generates any revenue, decreased $332.4 million (or $302.1 million net of intercompany eliminations) in 2004 compared to 2003. Related to its sale of its assets which were located outside of the Company’s local telephone or wireless operating territories, the Company estimates that revenue in its Hardware and Managed Services segment decreased approximately $33.4 million in 2004. Also, revenue in the Local segment declined $12.8 million during 2004 as data revenue growth from DSL transport and dial-up Internet access only partially offset declines in voice revenue.

Refer to Discussion of Operating Segment Results on page 29 of this Report on Form 10-K for detailed discussion of revenue by segment.

Costs and Expenses

Cost of services and products totaled $481.4 million in 2004 compared to $681.5 million in 2003. The decrease represents a decrease of $200.1 million, or 29%, compared to 2003. As a result of asset sales discussed above, the Broadband and the Hardware and Managed Services segments respectively contributed cost decreases of $202.8 million ($177.8 million net of intercompany eliminations) and $25.6 million during 2004. The Company also made improvements to its cost structure, in an effort to offset the effects of its Local segment declining voice revenue, by installing new switching infrastructure and negotiating lower transport costs in its long distance business and through recently enacted Ohio legislation which changed the basis of CBT’s Ohio tax liability from a gross receipts basis to a franchise tax (income basis). These reduced the cost of services and products in 2004 by $10.2 million and $6.8 million respectively. Adding to cost of services and products, the Wireless segment incurred an additional $18.0 million of costs associated with increased handset sales. These sales supported both a 27% increase in new gross customer additions as well as the migration of 17% of the Company’s legacy TDMA customers to its new GSM network.

Selling, general and administrative (“SG&A”) expenses of $227.6 million in 2004 decreased $125.5 million, or 36%, compared to 2003 primarily due to the sale of substantially all the broadband assets in the second quarter of 2003. The SG&A decrease associated with the broadband assets sold was $128.9 million during 2004. Additionally, $7.6 million of reduced Hardware and Managed Services segment SG&A, largely the result of lower costs associated with the sale of the outside-of-territory assets, and an $11.2 million charge paid in 2003 to senior executives for certain success-based incentives and termination benefits (Refer to Note 3) substantially offset a $9.9 million increase in legal, compliance and other contracted services, a $7.8 million increase in advertising and promotional expenses related to the Company’s increased gross new customer additions of 27% in Wireless and 25% in DSL and $3.2 million of corporate administrative expenses, which the Company had allocated to its Broadband segment in 2003.

Depreciation expense increased by 6%, or $9.5 million, to $178.6 million in 2004 compared to $169.1 million in 2003. The increase was primarily driven by $20.6 million of additional depreciation related to a decrease in the estimated economic useful lives of the Wireless TDMA network assets which more than offset $8.5 million of decreased Local segment depreciation.

Amortization expense of $9.1 million increased by $8.5 million compared to 2003. The increase was a result of $7.4 million in accelerated amortization expense related to the change in estimated economic useful lives of AWE roaming and trade name agreements, which ended in conjunction with Cingular’s merger with AWE on October 26, 2004.

Restructuring charges during 2004 of $11.6 million were $14.2 million higher than 2003. During 2004, the Company initiated a restructuring plan in order to improve its operating efficiency and more effectively align its cost structure with future business opportunities. The restructuring plan includes a workforce reduction that will be implemented in stages, which began in the fourth quarter 2004. The Company expects

to recognize approximately $20 to $25 million in annual cost savings related to this restructuring plan. Results in 2003 included $7.2 million in reversals of previously established reserves due to the settlement of terminated contract obligations and a change in the estimate of the termination costs of remaining contractual obligations. In December 2003, the Company initiated a restructuring plan to reduce future cash operating costs by approximately $9.1 million. This restructuring resulted in a charge of $4.6 million related to employee separation benefits.

In 2004, the Company recorded $3.2 million of asset impairments and other charges, which primarily consisted of $3.5 million recorded to write-down certain TDMA assets, which were removed from service and a $2.4 million impairment charge related to certain intangible assets. These charges were offset by a $1.5 million gain on the sale of assets, and a $1.1 million gain from the sale of its out-of-territory assets of the Hardware and Managed Services segment.

The Broadband segment recorded a gain on sale of broadband assets as a result of the expiration of certain indemnities to the buyer of $3.7 million during 2004 compared to $336.7 million during 2003. A detailed discussion of the sale of the broadband business is provided in Note 2 of the Notes to Consolidated Financial Statements.

As a result of the above, operating income decreased by $384.7 million to $299.3 million in 2004 compared to $684.0 million in 2003. The decrease in operating income was primarily due to the aforementioned gain on the sale of the broadband assets recorded in 2003.

Minority interest income of $0.5 million in 2004 relates to the 19.9% minority interest of Cingular in the net income of Cincinnati Bell Wireless LLC (“CBW”). This compares to minority interest expense of $42.2 million in 2003 as a result of a $32.0 million decline resulting from the exchange of the 12-1/2% Junior Exchangeable Preferred Stock of BRCOM (the “12-1/2% Preferreds”) for common stock of the Company in September 2003 and a decline in the net income of CBW.

Interest expense and other financing costs of $203.3 million in 2004 decreased $30.9 million, or 13%, compared to $234.2 million recorded in 2003. This was primarily the result of a $24.8 million reduction in amortization of note issuance costs pertaining to the write-off of deferred financing costs related to the prepayment of the Company’s credit facilities in 2003, which did not occur in 2004. The remaining $6.1 million reduction of interest expense is primarily the net of approximately $531.0 million reduced average debt outstanding offset partially by the issuance of the $500.0 million 7.25% Notes in July 2003 and the issuance of the 16% notes. Including fixed-rate interest hedges which expired in 2003, a 1.6% decrease from 5.6% in 2003 to 4.0% in 2004 in the average effective interest rate related to the Company’s bank credit facilities decreased interest expense $8.0 million in 2004.

The Company had income tax expense of $36.1 million in 2004 compared to a benefit of $828.8 million in 2003. The increase in expense is primarily the result of the fourth quarter 2003 reversal of the Company’s deferred income tax valuation allowance as a result of the substantial resolution of uncertainties related to BRCOM’s liquidity. The effective income tax rate in 2004 is 36%, which differs from the federal statutory rate primarily due to the effects of certain non-deductible interest expense amounts, benefits from the reduction of certain state deferred tax valuation allowances and recurring state income tax expenses. The Company used $25.2 million of federal and state operating loss tax carryforwards in 2004 to defray payment of the majority of its federal and state tax liabilities. The Company paid $2.3 million in federal and state tax liabilities during 2004.

As a result of the items previously discussed, income before cumulative effect of change in accounting principle decreased to $64.2 million in 2004 compared to $1,246.0 million in 2003. In addition, the corresponding diluted earnings per share totaled $0.21 in 2004 compared to diluted earnings per share of $5.02 in the prior year.

Effective January 1, 2003, the Company recorded a benefit of $85.9 million as a cumulative effect of a change in accounting principle, net of taxes, related to the adoption of SFAS 143. The benefit principally related to the estimated telephone plant removal costs previously included in accumulated depreciation, which were reversed. Refer to Note 1 of the Notes to Consolidated Financial Statements for a detailed discussion of the adoption of SFAS 143.

2003 Compared to 2002

Revenue

Consolidated revenue totaled $1,557.8 million in 2003, which was $620.8 million, or 28%, less than 2002. The primary reason for the revenue decline was the sale of substantially all the broadband assets on June 13, 2003 (refer to Note 2 of the Notes to Consolidated Financial Statements). As a result of the sale, the Broadband segment will no longer generate revenue for broadband transport and switched voice services and will experience significant reductions in data and Internet revenue.

Refer to Discussion of Operating Segment Results on page 29 of this Report on Form 10-K for detailed discussion of revenue by segment.

Costs and Expenses

Cost of services and products totaled $681.5 million in 2003 compared to $1,035.6 million in 2002, a decrease of $354.1 million or 34%. The majority of the decrease, or $316.8 million, was the result of the sale of substantially all of the broadband assets. The 2002 costs included $13.3 million of construction contract termination costs not repeated in 2003. The remaining decline of $37.3 million was primarily the result of lower Cincinnati Bell Technology Solutions (“CBTS”) costs related to decreased equipment sales.

Selling, general and administrative (“SG&A”) expenses of $353.1 million in 2003 decreased $149.1 million, or 30%, compared to 2002. The decrease was primarily due to the sale of substantially all the broadband assets in the second quarter of 2003, lower payroll costs as a result of the October 2002 restructuring and cost reductions of $4.7 million as the Wireless segment assumed responsibility for network management services previously outsourced to AWE. The SG&A decrease associated with the broadband assets sold was $159.3 million. The decrease was offset by an increase in SG&A expense of $11.2 million which was primarily the result of success-based contractual incentives and termination benefits for certain senior executives pursuant to the sale of the broadband assets (Refer to Note 3 of the Notes to Consolidated Financial Statements). The termination benefits included $0.8 million of non-cash charges related to the accelerated vesting of stock options.

Depreciation expense decreased by 64%, or $301.9 million, to $169.1 million in 2003 compared to $471.0 million in 2002. The decrease was primarily driven by the Broadband segment as the Company recorded a non-cash impairment charge of $1,901.7 million in the fourth quarter of 2002 related to the Broadband segment’s tangible assets (refer to Note 1 of the Notes to Consolidated Financial Statements). Additionally, due to the definitive agreement to sell substantially all of the assets of its Broadband segment, the broadband assets were classified as “held for sale,” and the Company ceased depreciation in accordance with SFAS 144 on March 1, 2003 (refer to Note 2 of the Notes to Consolidated Financial Statements). The adoption of SFAS 143 on January 1, 2003 (refer to Note 1 of the Notes to Consolidated Financial Statements) also contributed to the reduction in depreciation expense as removal costs previously recorded as depreciation expense in the Local segment ceased, accounting for $6.4 million of the decrease.

Amortization expense of $0.6 million in 2003 relates to roaming and trade name agreements acquired by the Wireless segment. Amortization expense in 2003 decreased by $24.7 million compared to 2002. The decrease was due to the write-down of approximately $298.3 million of intangible assets in 2002 in association with the $2,200.0 million non-cash asset impairment charge recorded at the Broadband segment as discussed in Note 1 of the Notes to Consolidated Financial Statements.

Restructuring credits during 2003 of $2.6 million were $39.7 million lower than 2002 charges. Results in 2003 include $7.2 million in reversals of previously established reserves due to the settlement of terminated contract obligations and a change in the estimate of the termination costs of remaining contractual obligations. In December 2003, the Company initiated a restructuring plan to reduce future cash operating costs by approximately $9.1 million. This restructuring plan resulted in a charge of $4.6 million related to employee separation benefits for 106 employees. The $37.1 million of restructuring charges in 2002 were comprised of $16.5 million recorded in the first quarter of 2002 for employee termination benefits, the termination of a

contractual commitment with a vendor related to the November 2001 restructuring, $9.6 million recorded in the third quarter of 2002 primarily for employee termination benefits related to the September 2002 restructuring plan, and $14.7 million recorded in the fourth quarter of 2002 related to the October 2002 restructuring plan. A detailed discussion of restructuring charges is provided in Note 5 of the Notes to Consolidated Financial Statements.

In 2003, the Company recorded $8.8 million of asset impairments and other charges, which consisted of $3.6 million in asset impairments related to a write-down of the value of its public payphone assets to fair value and a $5.2 million charge in 2003 as a result of a settlement reached with a customer related to a contract dispute. Based on certain indicators, including a potential asset sale, the Company performed an impairment analysis of the assets of its Broadband segment in the fourth quarter of 2002. The Company’s impairment analysis indicated the carrying value of the assets was not recoverable. Accordingly, the Company wrote down the assets to estimated fair market value, resulting in a non-cash impairment charge of $2.2 billion. Refer to Note 1 of the Notes to Consolidated Financial Statements.

Also included in the Company’s operating income in 2003 was a $336.7 million gain related to the sale of broadband assets. Refer to Note 2 of the Notes to Consolidated Financial Statements.

Operating income increased by $2,777.5 million to $684.0 million in 2003 compared to an operating loss of $2,093.5 million in 2002. The increase was principally due to reduced expenses as a result of the sale of the broadband assets and the related gain, in addition to the asset impairment charge in 2002 of $2,200.0 million related to the Broadband segment.

Minority interest expense of $42.2 million and $57.6 million in 2003 and 2002, respectively, includes the accrual of dividends and accretion on the 12-1/2% Junior Exchangeable Preferred Stock of BRCOM (the “12-1/2% Preferreds”) and the 19.9% minority interest of AT&T Wireless Services Inc. (“AWE”) in the net income of CBW. Although the Company announced the deferral of the August 15, 2002, November 15, 2002, February 15, 2003, May 15, 2003, and August 15, 2003 cash dividend payment on the 12-1/2% Preferreds, the Company continued to accrue the dividends in accordance with the terms of the security. On September 8, 2003 the Company completed the exchange of all of the 12-1/2% Preferreds for approximately 14.1 million shares of Cincinnati Bell Inc. common stock. As a result of this exchange, minority interest expense in 2003 decreased $13.8 million compared to 2002, to $32.0 million. Under the terms of the exchange, holders of the 12-1/2% Preferreds were not paid any accumulated or unpaid dividends. A detailed discussion of minority interest is provided in Note 9 of the Notes to Consolidated Financial Statements.

Interest expense and other financing costs of $234.2 million in 2003 increased $70.0 million, or 43%, compared to $164.2 million in 2002. The increase is the result of the issuance of the 16% notes, the increase in the interest rate on the convertible subordinated notes in March 2003, the issuance of the 7-1/4% Senior notes due 2013 in July 2003, the $16.4 million write-off of deferred financing costs related to the prepayment and amendments of the Company’s credit facilities, and an increase in the interest rate on the Company’s credit facilities. These increases were partially offset by a decline in interest expense on the Company’s credit facilities resulting from the significant reduction in outstanding borrowings under these facilities. A detailed discussion of indebtedness is presented in Note 7 of the Notes to Consolidated Financial Statements.

On September 8, 2003, the Company retired the remaining $46.0 million of BRCOM 9% notes (“9% notes”) and satisfied $1.6 million in accrued interest in exchange for approximately 11.1 million shares of common stock of the Company, which had a fair value of $65.0 million at the exchange date. As a result, the Company recorded a loss on extinguishment of debt, in other non-operating expense, of $17.4 million during the third quarter of 2003.

On November 19, 2003, the Company purchased all of the outstanding Convertible Subordinated Notes due 2009, which bore interest at a rate of 9%, at a discounted price equal to 97% of their accreted value. As a result, the Company recorded other non-operating income of $16.2 million from the extinguishment of debt.

In the fourth quarter of 2003, the Company recorded a gain of $10.0 million in other non-operating income from the modification of a capital lease at the Company’s headquarters. This modification required the lease to be reclassified from a capital lease to an operating lease. The gain primarily represents the difference

between the carrying value of the capital lease assets and the related lease obligation at the date of modification. The Company recorded a $10.7 million non-cash loss on investments in 2002 due to an other than temporary decline in value of one of the Company’s cost-based investments.

The Company reported an income tax benefit of $828.8 million in 2003. This compares to an expense of $123.7 million reported in 2002. The income tax benefit recorded in 2003 relates substantially to the reversal of a previously recorded deferred tax valuation allowance due to the uncertainties surrounding the liquidity of the Company’s subsidiary, BRCOM Inc. In the fourth quarter of 2003, the Company reversed $823.0 million of the valuation allowance as the uncertainties surrounding BRCOM’s liquidity were substantially mitigated. In 2002, the Company had income tax expense of $123.7 million, due substantially to the establishment of a valuation allowance of $1,110.7 million against certain federal and state deferred tax assets (including net operating loss carryforwards), offset substantially by the tax effect of the $2.2 billion asset impairment. The effective rate of negative (198.7%) in 2003 was 193.4 points lower than the effective rate of negative (5.3%) in the same period of 2002. The decrease in the rate was due to reversal of a previously recorded deferred tax valuation allowance. Refer to Note 13 of the Notes to Consolidated Financial Statements.

As a result of the items previously discussed, income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased $3,695.2 million in 2003 to $1,246.0 million compared to a loss of $2,449.2 million in 2002. In addition, the corresponding diluted earnings per share from continuing operations totaled $5.02 in 2003 compared to the diluted loss per share from continuing operations of $11.27 in 2002.

Substantially all of the assets of Cincinnati Bell Directory (“CBD”) were sold on March 8, 2002 for $345.0 million cash and a 2.5% equity interest in the newly formed company. Income from discontinued operations totaled zero in 2003 compared to $217.6 million in 2002. The net gain from the sale of substantially all of the assets of CBD of $211.8 million was recorded in 2002 and the remaining income was related to the operations of CBD from January 1 through March 8, 2002. A detailed discussion of discontinued operations is provided in Note 16 of the Notes to Consolidated Financial Statements.

Effective January 1, 2002, the Company recorded a $2,008.7 million charge as a cumulative effect of a change in accounting principle, net of taxes, related to the adoption of SFAS 142. The write-down of goodwill, finalized in the second quarter of 2002, was related to the fair value of goodwill associated with the broadband business acquired in 1999. See Note 4 of the Notes to Consolidated Financial Statements for a detailed discussion of the adoption of SFAS 142.

Discussion of Operating Segment Results

The Company realigned its business segments during the first quarter of 2004. CBTS, a data equipment and managed services subsidiary, was previously reported in the Broadband segment and is now reported in the Hardware and Managed Services segment. Additionally, the sale of telephony equipment of Cincinnati Bell Telephone (“CBT”) and its associated installation and maintenance business, previously reported in the Local segment, is now included in the Hardware and Managed Services segment. Accordingly, the historical results of operations of the Local, Hardware and Managed Services and Broadband segments have been recast to reflect the current segment reporting. As of January 1, 2002, the high-speed digital subscriber lines (“DSL”) and dial-up Internet operations of ZoomTown, formerly reported in the Other segment, were merged with the operations of CBT and are reflected in the Local segment in all periods presented.

Local

The Local segment provides local voice telephone service, including enhanced custom calling features, and data services, which include dedicated network access, Gigabit Ethernet (“Gig-E”) and Asynchronous Transfer Mode (“ATM”) based data transport, and DSL and dial-up Internet access, to customers in

southwestern Ohio, northern Kentucky and southeastern Indiana. These services are provided primarily by CBT. CBT’s traditional operating market has consisted of approximately 2,400 square miles located within an approximate 25-mile radius of Cincinnati, Ohio. CBT’s network includes 643 Synchronous Optical Network (“SONET”) rings and 2,154 fiber network miles, has full digital switching capability and can provide data transmission services to up to 89% of its residential households via DSL.

During 2004, the Local segment also extended its geographic service area by offering local voice services within the 700 square mile market surrounding Dayton, Ohio through Cincinnati Bell Extended Territories (“CBET”), which operates as a competitive local exchange carrier (“CLEC”). In the greater Dayton market the Local segment provides service on its own network and by purchasing Unbundled Network Elements (“UNE-L’s or loop”) or UNE-platform (“UNE-P or platform”) from the incumbent local carrier. The Local segment also operates outside of its traditional ILEC territory in communities which lie contiguous to it. The Local segment provides service either completely on its own network or through UNE-L to 25% of its customer base which resides outside of its traditional ILEC territory. The Local segment links its Cincinnati and Dayton geographies through its fiber networks, which provides route diversity via two separate routes.

(dollars in millions)	2004		2003		$ Change 2004 vs. 2003			% Change 2004 vs. 2003			2002			$ Change 2003 vs. 2002			% Change 2003 vs. 2002
Revenue
Voice	$	519.8	$	536.6	$	(16.8	)		(3	)%	$	548.7		$	(12.1	)		(2	)%
Data		203.9		196.3		7.6			4	%		191.0			5.3			3	%
Other services		38.0		41.6		(3.6	)		(9	)%		42.0			(0.4	)		(1	)%
Total revenue		761.7		774.5		(12.8	)		(2	)%		781.7			(7.2	)		(1	)%
Operating costs and expenses:
Cost of services and products		220.2		232.2		(12.0	)		(5	)%		227.1			5.1			2	%
Selling, general and administrative		134.8		128.8		6.0			5	%		135.3			(6.5	)		(5	)%
Depreciation		117.2		125.7		(8.5	)		(7	)%		146.7			(21.0	)		(14	)%
Restructuring		10.4		4.5		5.9		n/m				(0.5	)		5.0		n/m
Asset impairments and other charges		—		0.6		(0.6	)	n/m				0.3			0.3			100	%
Total operating costs and expenses		482.6		491.8		(9.2	)		(2	)%		508.9			(17.1	)		(3	)%
Operating income	$	279.1	$	282.7	$	(3.6	)		(1	)%	$	272.8		$	9.9			4	%
Operating margin	36.6%		36.5%					0 pts			34.9%						+2 pts

2004 Compared to 2003

Local service revenue of $761.7 million during 2004 decreased 2%, or $12.8 million, compared to 2003. Revenue declines related to access line losses were partially offset by DSL revenue growth.

Voice revenue, which includes local service, switched access, information services and value-added services revenues, of $519.8 million in 2004 decreased 3%, or $16.8 million, compared to 2003. Local service revenue declined $11.9 million as a result of both fewer access lines in service, which declined 1.6% from 986,000 at December 31, 2003 to 970,000 at December 31, 2004, and a 1% lower average revenue per line. The lower average revenue per line is the result of selected price discounts to enterprise customers and certain rate plans related to the service launch in Dayton, Ohio.

Access lines within the segment’s ILEC territory decreased 37,000, or 3.8%, from 977,000 to 940,000. The majority of this decrease is a 21,000 decrease in primary residential access lines, which the Company believes is primary due to customers electing to use wireless communication (“wireless substitution”) in lieu of the traditional local service. In March 2004, the Company expanded its product suite in Dayton, Ohio and began to mass market voice services to residential and small business customers. This helped to increase CLEC access lines by 21,000 lines during 2004, bringing total access lines outside its ILEC service territory to 30,000, which is 3% of its total access lines at December 31, 2004.

Voice revenues also declined $3.1 million as a result of decreases in trunking revenue and $1.4 million as a result of decreases in Value Added Services revenue due to price decreases to consumers and small businesses provided within the Company’s “Super Bundle”, Custom Connections^SM.

Data revenue consists of data transport, high-speed Internet access (including DSL), dial-up Internet access, digital trunking and Local Area Network (“LAN”) interconnection services. Revenue in 2004 was $203.9 million, representing a $7.6 million, or 4%, increase compared to 2003. Internet-based revenue, high-speed DSL and dial-up access increased $11.0 million in 2004 primarily driven by a 31,000 increase in DSL subscribers, which were 131,000 at December 31, 2004. As of December 31, 2004, 89% of CBT’s access lines in its incumbent local exchange operating territory were loop-enabled for DSL transport with a penetration of approximately 16.7% of total access lines, up from 12.6% at December 31, 2003. Other high speed/high capacity data services such as transport, digital trunking, LAN and customized services revenue decreased $2.5 million in 2004 as a result of both competitive pressures and regulatory-mandated price decreases for wholesale services sold to other telecommunications providers.

The Company believes that its rate of access line loss would have been greater and its increase in DSL subscribers would have been less without the success of its “Super Bundle”, Custom Connections^SM. The Company added 52,000 new, Super Bundle subscribers in 2004, to reach a total of 123,000, a 73% increase compared to December 31, 2003. At December 31, 2004, 20% of CBT’s primary residential, ILEC access lines were in a Super Bundle. Also, as a result of its success, the Local segment in-territory revenue per consumer household (local revenue divided by average primary access lines) increased by $0.9, 2%, to $47.49 in 2004 compared to $46.61 in 2003.

Other services revenue of $38.0 million during 2004 decreased $3.6 million compared to 2003, primarily as a result of a decrease in wiring revenue.

Costs and Expenses

Cost of services and products decreased $12.0 million, or 5%, to $220.2 million in 2004 compared to 2003. The decrease was primarily due to a decline in operating taxes of approximately $7.4 million, of which $6.8 million relates to a change in Ohio law. CBT is no longer subject to franchise taxes based on gross receipts, but instead is subject to state and local income tax and is included in the combined Ohio state income tax return with other Cincinnati Bell operating companies. Additionally, cost of goods sold and material costs declined $1.6 million during 2004 related to lower material costs associated with the decrease in wiring revenue compared to 2003.

SG&A expenses increased 5%, or $6.0 million, to $134.8 million in 2004. This increase was due to an additional $4.2 million of advertising and promotional expense related to a 25% increase in DSL gross additions and a 26,000 gross addition in Dayton local customer additions.

Total labor and related expense decreased $2.5 million, or 1%, as compared to 2003 primarily as a result of a $2.4 million curtailment charge in 2003 related to the sale of substantially all of the broadband assets. A 2% reduction in CBT’s headcount also helped to keep labor costs otherwise relatively flat.

Depreciation expense of $117.2 million decreased $8.5 million, or 7%, in 2004 compared to 2003, due to a decrease in depreciable assets and reduced capital spending.

Restructuring charges during 2004 of $10.4 million were $5.9 million higher than 2003. For further description and purpose of these restructuring charges, please refer to Note 5 of the Notes to Consolidated Financial Statements.

Operating Income

As a result of the above, operating income decreased $3.6 million, or 1%, to $279.1 million and operating margin remained nearly flat in 2004 compared to 2003.

2003 Compared to 2002

Revenue

Voice revenue, which includes local service, switched access, information services and value-added services revenues, of $536.6 million during 2003 decreased 2%, or $12.1 million, in comparison to the prior year. Voice revenue decreased primarily due to an $8.3 million decrease in local services revenue where

access lines decreased 2.6% from 1,012,000 lines in service at December 31, 2002 to 986,000 as of December 31, 2003. Decreases in trunking of $3.5 million, switched access of $2.3 million and information services of $1.7 million also contributed to the voice revenue decline.

A $2.7 million increase in value added service revenue partially offset the aforementioned declines in voice revenue as the Company’s Complete Connections® bundled services offering added 23,600 subscribers during 2003, bringing total subscribership to 312,500 and penetration of residential access lines to 44%.

In the first quarter of 2003, CBT also introduced Custom Connections^SM, a bundled suite of services that leverages the Company’s local, long distance, wireless and DSL products and enables consumers to customize packages that meet their personal communication needs. Custom Connections^SM added 54,700 subscribers in 2003. The favorable bundled pricing associated with Custom Connections^SM has driven increased demand for the Company’s ZoomTown DSL offering, which added 25,000 customers in 2003, growth of 33% from December 31, 2002, and has been a key driver behind the increase in revenue per household to $46.61 in 2003 compared to $45.04 in 2002. As a result of this growth, total lines to the consumer (defined as consumer access lines plus DSL subscribers) increased slightly on a year-over-year basis. As of December 31, 2003, 86% of CBT’s access lines were loop-enabled for DSL transport with a penetration of approximately 12.6% of these addressable network access lines, up from 9.3% at December 31, 2002.

As result of the Company’s increase in DSL penetration, internet services revenues increased $8.6 million. Consequently, data revenue, which consists of data transport, high-speed Internet access (including DSL), dial-up Internet access, digital trunking and LAN interconnection services increased by $5.3 million to $196.3 million, a 3% increase, compared to 2002. A $3.7 million decrease in data transport revenue, largely a result of Federal Communications Commission (“FCC”) mandated special access price reductions set equal to inflation, net of a 6.5% productivity offset, partially offset the internet services revenue increase.

Other services revenue of $41.6 million during 2003 decreased $0.4 million, or 1%, compared to 2002.

Costs and Expenses

Cost of services and products increased $5.1 million, or 2%, to $232.2 million in 2003 compared to 2002. The increase was primarily due to an increase in employee expenses of $5.0 million. The increase in employee expenses was a net result of a 7% reduction in headcount offset by normal wage increases and an increase in actuarially determined employee benefit expenses.

SG&A expenses decreased 5%, or $6.5 million, in 2003 compared to 2002, as the Local segment experienced decreases in bad debt, advertising, promotional and contract services expenses. These expense reductions were partially offset by higher payroll and related expenses of $1.9 million, which was the net effect of a reduction in headcount, offset by normal wage increases and higher benefits expense.

Depreciation expense of $125.7 million decreased $21.0 million, or 14%, in 2003 compared to 2002. A decrease in depreciable assets, reduced capital spending, regulatory depreciation rate decreases and the adoption of SFAS 143 on January 1, 2003 (refer to Note 1 of the Notes to Consolidated Financial Statements) contributed to the reduction in depreciation expense.

Restructuring charges of $4.5 million during 2003 were $5.0 million higher than the $0.5 million in restructuring credits in 2002. In December 2003, the Company initiated a restructuring plan to reduce future cash operating costs by approximately $9.1 million. The Local segment’s charge was $4.5 million related to employee separation benefits associated with the elimination of approximately 90 positions.

Operating Income

As a result of the above, operating income increased by $9.9 million, or 4%, to $282.7 million in 2003 compared to $272.8 million in 2002. Operating margin showed similar improvements, increasing approximately two points from a margin of 34.9% in 2002 to a margin of 36.5% in 2003.

Wireless

outside of its regional operating territory through wholesale, re-sale arrangements (“roaming agreements”) with other wireless operators. The segment also sells related telecommunications equipment, wireless handset devices and related accessories to support its service business.

The wireless segment consists of Cincinnati Bell Wireless LLC (“CBW”), a joint venture with Cingular Wireless Corporation (“Cingular”), through its recently acquired subsidiary AT&T PCS LLC (“AWE”). The Company owns 80.1% of CBW while Cingular owns the remaining 19.9%.

Since October 2003, CBW has deployed service on both Time Division Multiple Access (“TDMA”) and Global System for Mobile Communications and General Packet Radio Service (“GSM/GPRS”) technologies. TDMA is CBW’s legacy technology and provides both voice and short message service (“SMS”) data services. GSM/GPRS technology, to which CBW plans to migrate its subscriber base, provides, in addition to voice communication and SMS, enhanced wireless data communication services, such as mobile web browsing, internet access, email and picture messaging. The GSM/GPRS is EDGE compatible, requiring only software upgrades to deliver higher speeds of data transmission and capacity. Based on current estimates, the Company expects that it will operate its TDMA network at least through December 31, 2006.

(dollars in millions, except for operating metrics)	2004			2003			$ Change 2004 vs. 2003			% Change 2004 vs. 2003			2002			$ Change 2003 vs. 2002			% Change 2003 vs. 2002
Revenue
Service	$	242.0		$	246.4		$	(4.4	)		(2	)%	$	253.3		$	(6.9	)		(3	)%
Equipment		19.7			13.1			6.6			50	%		13.9			(0.8	)		(6	)%
Total revenue		261.7			259.5			2.2			1	%		267.2			(7.7	)		(3	)%
Operating Costs and Expenses:
Cost of services and products		133.2			110.5			22.7			21	%		119.5			(9.0	)		(8	)%
Selling, general and administrative		56.5			50.0			6.5			13	%		47.3			2.7			6	%
Depreciation		58.3			38.3			20.0			52	%		30.6			7.7			25	%
Amortization		9.1			0.5			8.6		n/m				0.7			(0.2	)		(29	)%
Restructuring		0.1			—			0.1		n/m				—			—		n/m
Asset impairments and other charges		5.9			—			5.9		n/m				—			—		n/m
Total operating costs and expenses		263.1			199.3			63.8			32	%		198.1			1.2			1	%
Operating income (loss)	$	(1.4	)	$	60.2		$	(61.6	)	n/m			$	69.1		$	(8.9	)		(13	)%
Operating margin	(0.5		)%	23.2		%				(24) pts			25.9		%					(3) pts
Operating metrics
Postpaid ARPU*	$	54.43		$	55.98		$	(1.55	)		(3	)%	$	58.75		$	(2.77	)		(5	)%
Prepaid ARPU*	$	19.85		$	19.24		$	0.61			3	%	$	18.32		$	0.92			5	%

The Company has presented certain information regarding monthly average revenue per user (“ARPU”) because the Company believes ARPU provides a useful measure of the operational performance of the wireless business. ARPU is calculated by dividing service revenue by the average subscriber base for the period. For a given period, the average subscriber base is calculated by adding subscribers at the beginning of the period to subscribers at the end of the period and dividing the sum by two.

2004 Compared to 2003

Revenue

Wireless segment revenue increased $2.2 million, or 1%, to $261.7 million during 2004 compared to 2003. Equipment revenue increased $6.6 million in 2004 primarily due to a 27% increase in new service activations and 17% of CBW’s existing TDMA customers purchasing new handsets to switch their service to the its Company’s new GSM service. This increase in equipment revenue offset a $3.6 million decrease in roaming revenue and a $0.8 million decrease in CBW subscriber service revenue.

CBW’s roaming revenue declined primarily as a result of a 20% decrease in average revenue per roaming minute as a greater amount of AWE roaming traffic was lower priced GSM minutes than in 2003. Total

roaming revenue equaled $13.0 million in 2004. As a result of the Cingular Merger, CBW expects to lose substantially all of its roaming revenue in 2005 as AWE customers begin roaming on Cingular’s network versus CBW’s network. As a part of CBW’s Agreement with Cingular, CBW expects that it will substantially offset the effect of this lost roaming revenue through a rate reduction on the cost of its roaming minutes that it will purchase from Cingular.

Subscriber service revenue declined $0.8 million as a result of a $3.8 million postpaid service revenue decrease more than offsetting a $3.0 million increase in prepaid service revenue. Postpaid revenue decreased as a result of a 5,600 decrease in subscribers, driven primarily by an average monthly customer churn which increased to 2.55% in 2004 compared to 1.81% in 2003, and a $0.50 decrease in postpaid ARPU, excluding roaming revenue, from $51.42 in 2003 to $50.92, which is in part the result of customer migrations to lower priced GSM rate plans. The Company believes that the increase in postpaid churn during the year is the result of a combination of factors most notably network quality issues created by CBW’s network migration. The Company expects to resolve these quality issues during 2005, thus enabling churn levels to trend back to more historic levels. At December 31, 2004 CBW had 306,300 postpaid subscribers.

Prepaid service revenue increases were largely the result of increased subscribers. As of December 31, 2004 prepaid subscribers totaled approximately 174,700, a 12,200 increase over December 31, 2003. Likely a result of both the aforementioned network quality issues as well as unmeasured TDMA customer migrations to the new GSM network, average monthly, prepaid customer churn increased to 6.13% in 2004 compared to 4.95% in 2003. Total wireless subscribers at December 31, 2004 were approximately 481,000, or 14%, of the population in CBW’s licensed operating territory.

Data revenue of $14.7 million increased $5.6 million, or 62%, from $9.1 million as compared to 2003. Data revenue is 6% of total revenue.

As mandated by the FCC, wireless local number portability (“WLNP”) was effective November 24, 2003 and allows customers the ability to change service providers within the same local area and retain the same phone number. WLNP did not have any significant impact in 2004.

Costs and Expenses

Cost of services and products consists largely of the costs of equipment sales to both new and existing subscribers, CBW’s network operation costs, the cost to purchase wholesale roaming minutes on other carriers’ networks (“incollect expense”), operating taxes and customer service expenses. These costs and expenses increased $22.7 million, or 21%, to $133.2 million in 2004 compared to the prior year. The increase was due largely to an $18.0 million increase of costs associated with increased handset subsidies, which supported both a 27% increase in new gross customer additions as well as the migration of 17% of the Company’s legacy TDMA customers to its new GSM network.

In the fourth quarter of 2004, CBW recorded a $3.2 million adjustment related to prior periods to account for certain rent escalations associated with its tower site leases on a straight-line basis. These rent escalations are associated with lease renewal options that were deemed to be reasonably assured of renewal, thereby extending the initial term of the leases. The adjustment was not considered material to the current year or to any prior years’ earnings, earnings trends or individual financial statement line items. Additionally, customer service expense increased $2.4 million as a result of increased customer contacts, driven by the GSM migration and quality issues, which was offset by a decrease in incollect expense of $4.7 million. Lower incollect expense was the result of a 20% decrease in the average cost per roaming minute of which a greater percentage were on lower priced GSM network.

SG&A expenses of $56.5 million increased by $6.5 million, or 13%, in 2004, primarily as a result of a $3.3 million increase in advertising and promotional expense to support the 27% increase in new customer gross additions.

Depreciation expense of $58.3 million increased $20.0 million in 2004 compared to 2003. The increase was a result of $20.6 million in additional depreciation related to the change in estimated economic useful life of the TDMA network to December 31, 2006.

Amortization expense of $9.1 million increased $8.6 million in 2004 compared to 2003. The increase was a result of $7.4 million in accelerated amortization related to the shortened, estimated economic useful lives of certain AWE roaming and trade name agreements, as a result of the merger between Cingular Wireless and AWE, consummated on October 26, 2004.

Asset impairment charges of $5.9 million in 2004 were comprised of $3.5 million recorded to write-down certain TDMA assets, which CBW removed from service, and a $2.4 million asset impairment charge related to certain intangible assets.

Operating Income (Loss)

As a result of the items discussed above, operating income decreased $61.6 million to an operating loss of $1.4 million and operating margin decreased 24 points to a negative margin of 0.5% in 2004 compared to 2003.

2003 Compared to 2002

Revenue

Wireless segment revenue decreased $7.7 million, or 3%, to $259.5 million during 2003 compared to 2002.

This revenue decline was primarily driven by postpaid services. In 2003, revenue from postpaid customers decreased $10.0 million, or 5%, to $209.3 million. Postpaid ARPU decreased from $58.75 in 2002 to $55.98 in 2003, or $2.77 per user, per month, due to pricing pressure from increasing competition and a marketing strategy employed through the first three quarters of 2003 to retain lower usage, higher margin customers. Through September 30, 2003, postpaid subscribers had declined by 12,000 compared to the December 31, 2002.

Beginning in September 2003, the Company introduced more competitive rate plans in order to reduce churn and to build momentum in front of its GSM/GPRS network launch in October 2003. In the fourth quarter of 2003, net adds totaled 13,000, which reversed a declining subscriber trend for the first three quarters of 2003 and allowed CBW to end the year with approximately the same number of postpaid subscribers as at the end of 2002, or nearly 312,000. This subscribership represents an estimated 9% penetration of the population within the Company’s licensed service area in the Greater Cincinnati and Dayton, Ohio metropolitan markets. In the first three quarters of 2003, the Company also focused its marketing efforts on prepaid subscribers. These subscribers require less growth capital on the Company’s TDMA network, which the Company attempted to minimize because it curtailed TDMA capital expenditures, while it completed construction of its GSM/GPRS network.

WLNP became effective during 2003, however, average monthly customer churn remained low in the face of aggressive competition and WLNP at 1.81% for postpaid subscribers in 2003 compared to 1.73% in 2002.

The postpaid revenue decline is partially offset by the prepaid product, which experienced subscriber growth in 2003 of 2% compared to subscribers as of December 31, 2002. The Company had approximately 162,000 prepaid subscribers at December 31, 2003, or nearly 3,300 more than at December 31, 2002, which represents an estimated penetration of approximately 5% of the population in the Company’s licensed service area. Prepaid revenue of $37.1 million in 2003 represented growth of $3.0 million, or 9%, compared to 2002 due to increased revenue from text messaging services, which increased ARPU. ARPU for prepaid subscribers increased from $18.32 in 2002 to $19.24 in 2003, or $0.92 per user. The Company’s text messaging services, comprising a growing proportion of total prepaid revenue, increased by $2.2 million versus 2002 to $6.0 million, which represents 16% of total prepaid service revenue.

Costs and Expenses

Cost of services and products consists largely of incollect expense (whereby CBW incurs costs associated with its subscribers using their handsets while in the territories of other wireless service providers), network operations costs, interconnection expenses and cost of equipment sold. These costs were $110.5 million during

2003, or 43% of revenue, compared to $119.5 million, or 45% of revenue, in 2002. In total, cost of services and products decreased $9.0 million, or 8%, during 2003 compared to 2002. These declines were due primarily to decreased incollect charges of $2.1 million related to postpaid subscribership, decreased operating taxes of $4.1 million and $4.7 million from cost reductions because the Wireless segment assumed responsibility for network management services previously outsourced to AWE.

SG&A expenses include the cost of customer acquisition, which consists primarily of advertising, distribution and promotional expenses. These expenses increased by $2.7 million in 2003 compared to 2002 due to an increase in advertising of $2.1 million and employee-related expenses of $3.5 million. These increases were partially offset by a decrease in bad debt expense of $2.7 million.

Depreciation expense of $38.3 million increased $7.7 million, or 25%, in 2003 compared to 2002 as a result of $5.2 million in accelerated depreciation related to the change in estimated economic useful life of the TDMA network to December 31, 2006.

Operating Income

As a result of the above, operating income decreased $8.9 million, or 13%, to $60.2 million and operating margin decreased approximately 3 points to 23.2% in 2003 compared to 2002.

Hardware and Managed Services

The Hardware and Managed Services segment provides data center collocation, IT consulting services, telecommunications and computer equipment in addition to their related installation and maintenance. The Hardware and Managed Services is comprised of the operations within CBTS. In March 2004, CBTS sold certain operating assets, which were generally residing outside of the Company’s area for approximately $3.2 million in cash. During the second quarter of 2004, CBTS paid $1.3 million to the buyer of the assets in working capital adjustments related to the sale.

(dollars in millions)	2004			2003			$ Change 2004 vs. 2003			% Change 2004 vs. 2003			2002			$ Change 2003 vs. 2002			% Change 2003 vs. 2002
Revenue
Hardware	$	74.0		$	89.6		$	(15.6	)		(17	)%	$	141.1		$	(51.5	)		(37	)%
Managed services		60.7			73.2			(12.5	)		(17	)%		74.3			(1.1	)		(2	)%
Total revenue		134.7			162.8			(28.1	)		(17	)%		215.4			(52.6	)		(24	)%
Operating Costs and Expenses:
Cost of services and products		104.7			121.4			(16.7	)		(14	)%		170.8			(49.4	)		(29	)%
Selling, general and administrative		16.7			24.3			(7.6	)		(31	)%		28.0			(3.7	)		(13	)%
Depreciation		1.1			0.7			0.4			57	%		6.4			(5.7	)		(89	)%
Restructuring		0.6			—			0.6		n/m				0.1			(0.1	)		(100	)%
Asset impairments and other charges (gains)		(1.1	)		(1.1	)		—			—			19.5			(20.6	)	n/m
Total operating costs and expenses		122.0			145.3			(23.3	)		(16	)%		224.8			(79.5	)		(35	)%
Operating income (loss)	$	12.7		$	17.5		$	(4.8	)		(27	)%	$	(9.4	)	$	26.9		n/m
Operating margin		9.4	%		10.7	%				(1) pt				(4.4	%)				+15 pts

2004 Compared to 2003

Revenue

Revenue is reported in two major categories, hardware and managed services.

Hardware revenue is driven by the reselling of major manufacturers IT, data, and telephony equipment. CBTS is a reseller of and has relationships with major telecommunications and computer hardware manufacturers. In 2004, CBTS earned Cisco gold certification, joining an elite group of Cisco business partners, and allowing it to leverage the maximum level of benefits offered by the manufacturer.

Hardware revenue of $74.0 million during 2004 decreased 17%, or $15.6 million, compared to 2003. The decrease was primarily due to the sale of the assets of the out-of-territory business, offset by several large equipment sales and hardware sales including $10.1 million to customers referred by the buyer of the out-of territory assets, as a sales agent. The sale of the assets of the out-of-territory business better aligned the CBTS business model and better aligned the subsidiary with the growth strategy of its parent.

Managed services revenue consists of the sale of outsourced technology resources, leveraging assets within the Company, including but not limited to data center assets, and revenue of technical services and maintenance directly related to the sale of IT, data and telephony equipment. The CBTS business model links the capability to sell a wide range of equipment from various manufacturers along with the Company’s technical and infrastructure capability to offer complete technology solutions for the small, medium, and large business customer.

In 2004, managed services revenue of $60.7 million decreased 17%, or $12.5 million, compared to 2003. The decreases were primarily due to the sale of the assets of the out-of-territory business, price reductions and customer attrition. The managed services revenues associated with the sale of assets were based on billing of non-strategic outsourced technology resources.

Costs and Expenses

Cost of services and products decreased $16.7 million, or 14%, to $104.7 million in 2004 compared to 2003. The decrease in cost of services was primarily associated with the decrease in revenue discussed above. SG&A expenses decreased 31%, or $7.6 million, to $16.7 million in 2004. The decreases were due to lower payroll and related expenses of $7.7 million driven by lower headcount as a result of the sale of the out-of-territory assets.

In conjunction with the sale of the assets of the out-of-territory business discussed above, the Hardware and Managed Services segment recorded a gain of $1.1 million during 2004.

Operating Income

As a result of the items discussed above, the Hardware and Managed Services segment’s operating income decreased $4.8 million, or 27%, to $12.7 million in 2004, compared to the prior year. Additionally, operating margin decreased 1 point to 9% in 2004 compared to 2003.

2003 Compared to 2002

Revenue

Hardware revenue of $89.6 million during 2003 decreased 37%, or $51.5 million, compared to 2002 due to difficult economic conditions and decreases in capital spending by customers. Hardware revenue is volatile depending on individual customer equipment requirements, capital spending budgets, the introduction of new technologies and new telephony and data solutions.

Managed services revenue of $73.2 million during 2003 decreased 2%, or $1.1 million, compared to 2002. The decreases were primarily due to price reductions for large enterprise customers and customer attrition.

Costs and Expenses

Cost of services and products decreased $49.4 million, or 29%, to $121.4 million in 2003 compared to 2002. The decrease in cost of services was primarily associated with the decrease in revenue discussed above.

SG&A expenses decreased 13%, or $3.7 million, to $24.3 million in 2003 compared to 2002. The decrease was due primarily to lower payroll and related expenses of $3.5 million.

In the fourth quarter of 2002 the Company recorded a non-cash impairment charge of $19.5 million related to the Hardware and Managed Services segment’s tangible assets (refer to Note 1 of the Notes to Consolidated Financial Statements).

Operating Income

As a result of the items discussed above, the Hardware and Managed Services segment’s operating income increased $26.9 million to $17.5 million in 2003 compared to an operating loss of $9.4 million in 2002. Additionally, operating margin increased 15 points to 11% in 2003 compared to 2002.

Other

The Other segment combines the operations of Cincinnati Bell Any Distance (“CBAD”), Cincinnati Bell Complete Protection (“CBCP”) and Cincinnati Bell Public Communications Inc. (“Public”). CBAD resells long distance voice services and audio-conferencing, CBCP provides security hardware and monitoring for consumers and businesses, and Public provides public payphone services. In the fourth quarter of 2004, the Company sold its payphone assets located at correctional institutions and those outside of the Company’s operating area for $1.4 million.

(dollars in millions)	2004		2003			$ Change 2004 vs. 2003			% Change 2004 vs. 2003			2002		$ Change 2003 vs. 2002			% Change 2003 vs. 2002
Revenue	$	78.6	$	81.1		$	(2.5	)		(3	)%	$	82.8	$	(1.7	)		(2	)%
Operating costs and expenses:
Cost of services and products		44.5		54.1			(9.6	)		(18	)%		63.4		(9.3	)		(15	)%
Selling, general and administrative		14.3		14.8			(0.5	)		(3	)%		15.8		(1.0	)		(6	)%
Depreciation		1.7		2.0			(0.3	)		(15	)%		1.8		0.2			11	%
Amortization		—		0.1			(0.1	)		(100	)%		0.1		—			—
Asset impairments and other charges		0.1		3.6			(3.5	)		(97	)%		—		3.6		n/m
Total operating costs and expenses		60.6		74.6			(14.0	)		(19	)%		81.1		(6.5	)		(8	)%
Operating income	$	18.0	$	6.5		$	11.5		n/m			$	1.7	$	4.8		n/m
Operating margin	22.9%			8.0	%				+15pts			2.1%					+6 pts

2004 Compared to 2003

Other segment revenue of $78.6 million in 2004 decreased $2.5 million, or 3%, compared to 2003. Decreases of $2.2 million and $1.7 million in Public and retail long distance revenue more than offset $1.3 million and $0.2 million increases in wholesale long distance and CBCP revenue. Revenue from both decreased as a result of a decline in usage. Despite an increase of 23,000 lines, to approximately 562,000 subscribed access lines as of December 31, 2004, or 4%, compared to December 31, 2003, decreases in long distance usage per line more than offset the positive revenue impact related to line growth. CBAD’s Cincinnati market share for which a long distance carrier is selected was 76% in the consumer market and 48% in the business market up from 71% and 45%, respectively, compared to December 31, 2003.

Costs and Expenses

Cost of services and products totaled $44.5 million in 2004, representing a decrease of 18% compared to the prior year. This was due primarily to decreased access charges at CBAD cost of services of $10.2 million during 2004 due to a 35% lower cost per long distance minute associated with the Company’s installation of long distance switching equipment in June 2004 and the negotiation of lower wholesale long distance minute costs.

SG&A expenses decreased $0.5 million, or 3%, to $14.3 million in 2004 compared to the prior year. The decrease was primarily due to decreased bad debt expense.

Operating Income

As a result of the items discussed above, the Other segment reported operating income of $18.0 million, an increase of $11.5 million in 2004 compared to 2003. Operating margin showed similar improvements, increasing fifteen points from a margin of 8% in 2003 to 23% in 2004.

2003 Compared to 2002

Revenue

Other segment revenue of $81.1 million in 2003 decreased $1.7 million, or 2%, compared to 2002.

CBAD’s revenue declined $0.6 million, or 1%, in 2003 as price increases initiated in 2003 on its “Any Distance” long distance service offering were more than offset by a 10% decline in minutes of use in response to intense competition, including further penetration of wireless plans with free long distance. CBAD had 539,000 subscribed access lines as of December 31, 2003 in the Cincinnati and Dayton, Ohio operating areas, representing a decrease of 15,800 lines, or 3%, versus December 31, 2002, which the Company believed was primarily related to its access line loss in its local businesses. In spite of subscriber line decreases, the Company’s market share had increased as a function of the Local segment’s lines in service for which a long distance carrier had been chosen for residential and business access lines. CBAD’s residential and business market share increased in 2003 to approximately 71% and 45%, respectively, from 69% and 43%, respectively at the end of 2002. Public revenue declined $1.1 million, or 8%, compared to 2002 in response to further penetration of wireless communications offset partially by a favorable $0.4 million settlement with a major interexchange carrier.

Costs and Expenses

Cost of services and products totaled $54.1 million in 2003, representing a decrease of 15% compared to 2002. The decrease in cost of services was due primarily to decreased access charges at CBAD of $4.2 million as minutes of use declined. In 2003, CBAD purchased its wholesale minutes from the buyer of the broadband assets, based on an agreement signed in conjunction with the asset sale. Public also contributed decreases of $4.2 million in 2003, as a result of a favorable settlement with a major interexchange carrier and removal of unprofitable stations.

SG&A expenses decreased $1.0 million, or 6%, in 2003 compared to 2002. These decreases were incurred primarily at CBAD as a result of a decrease in payroll and related expenses partially offset by an increase in billing and collection expenses.

Public incurred a $3.6 million asset impairment in 2003 to write-down the value of its public payphone assets to fair value.

Operating Income

As a result of the items discussed above, the Other segment reported operating income of $6.5 million in 2003, an increase of $4.8 million compared to 2002. Operating margin showed similar improvements, increasing six points from a margin of 2% in 2002 to 8% in 2003.

Broadband

During the second and third quarters of 2003, the Company completed the sale of substantially all of its broadband assets (Refer to Note 2 of Notes to the Consolidated Financial Statements). Subsequent to the sale, the Company retained certain obligations. During 2004, the Company extinguished approximately $38.1 million of obligations related to the Broadband segment.

Subsequent to the closing of the asset sale, the Broadband segment now consists of retained liabilities not transferred to the buyer. Prior to the sale of the broadband assets, revenue for the Broadband segment was generated from broadband transport (which included revenue from IRU’s), switched voice services, data and Internet services (including data collocation and managed services) and other services. These transport and switched voice services were generally provided over the Broadband segment’s national optical network, which comprised approximately 18,700 route miles of fiber-optic transmission facilities.

(dollars in millions)	2004			$ Change 2004 vs. 2003					2002
Revenue
Broadband transport	$	—	159.3	$	(159.3	)	(100	)%	$	461.6	(302.3	)	(66	)%
Switched voice services		—	111.9		(111.9	)	(100	)%		335.9	(224.0	)	(67	)%
Data and Internet		—	59.5		(59.5	)	(100	)%		112.6	(53.1	)	(47	)%
Network construction and other services

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