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DS9 "In Purgatory's Shadow (Part 1)":

SISKO: A Dominion invasion of the Alpha Quadrant will affect Cardassia every bit as much as it's going to affect us. Besides, we need all the help we can get. The Dominion picked a perfect time to invade. The Cardassian fleet is in shambles, the Romulans are not much better off, and between the Klingon War and the recent Borg attack, Starfleet's spread pretty thin.

This episode takes place in 2373, the same year as the movie First Contact.

Star Trek: TNG movie First Contact:

FLEET COMMUNICATIONS: Flagship to Endeavor. Standby to engage at grid A-fifteen. ...Defiant and Bozeman, fall back to mobile position one. ...Acknowledge. ...We have it in visual range. A Borg cube on course zero point two one five, speed warp point nine six.

BORG COMMUNICATIONS: We are the Borg. Lower your shields and surrender your ships. We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile.

FLEET COMMUNICATIONS: All units open fire. ...They've broken through the defence perimeter. ... Continue to attack. ...We need reinforcements. ...Ninety-six dead and twenty-two wounded on the Lexington.

Hardly a disaster for the fleet.

(the Borg cube, under attack, approaches Earth. The Defiant is one of the attacking ships) [Defiant bridge]

WORF: Report!

CONN OFFICER: Main power is off-line. We've lost shields and our weapons have gone.

WORF: Perhaps today is a good day to die. Prepare for ramming speed!

Again it's one ship, and the Defiant is happy and healthy over at DS9 for this episode, so it didn't affect the fleet.

CONN OFFICER: Sir, there's another starship coming in. ...It's the Enterprise!

[Enterprise-E bridge]

RIKER: The Defiant's losing life support.

PICARD: Bridge to transporter room three. Beam the Defiant survivors aboard.

So by this episode whatever damage was done to the Defiant had already been repaired.

PICARD: They're creating a temporal vortex.

RIKER: Time travel!

(the Enterprise suffers a shockwave)

This is the key point though, the Borg goes back in time.

PICARD: Data, report!

DATA: We appear to be caught in a temporal wake.

WORF: Captain, ...Earth.

DATA: The atmosphere contains high concentrations of methane, carbon monoxide and fluorine.

PICARD: Life signs?

DATA: Population ...approximately nine billion. ...All Borg!

TROI: How?

PICARD: They must have done it in the past. ...They went back and assimilated Earth. ...Changed history.

CRUSHER: Then if they changed history why are we still here?

DATA: The temporal wake must somehow have protected us from the changes in the time-line. (Data's console bleeps)

DATA: Sir, the vortex is collapsing.

PICARD: Hold your course, Mr. Hawk. We must follow them back. Repair whatever damage they've done.

So at this point in the movie in 2373 the Federation now never was created, in fact the only humans we know that still exist outside of Borg influence are the crew of the Enterprise. The only Federation ship that exists is the Enterprise at this point in the movie.

The movie ends with them returning to their correct time.

DATA: Helm standing by.

PICARD: Mr. Data, lay in a course for the twenty-fourth century. I suspect our future is there waiting for us.

DATA (OC): Course laid in, sir.

So Picard acknowledges that things are back how they were.

Once Picard returns I'm not sure exactly how much of everything the Federation is going to know about.

It doesn't appear that this was a major confrontation that would weaken Starfleet in any way. They mention a couple ships that took damage. The Defiant was repaired by the time of the episode "In Purgatory's Shadow" so I assume the other ships were as well.

What Borg attack is Sisko talking about that spread the Federation thin? If it is the battle in "First Contact" that he's referring to, how did that attack spread the Federation thin?

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    Do not assume that seeing an intact Defiant means anything. That ship has been explicitly replaced at least once (by the renamed Sao Paulo) in the series, and the cloaking device which was destroyed during the reconquisition of DS9 has been replaced without mention, too(it is used again in Valiant, which btw. is also the name of yet another "Defiant"). Also note that in First Contact, the Borg cube is shown destroying at least a dozen federation ships as "drive by" and another dozen or so during the stand-off and its explosion. Even if the timeline is repaired, that's many ships lost. – Damon Jun 19 '15 at 15:44
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    "Hardly a disaster for the fleet." Did you actually watch the movie? "I assume the other ships were as well." Including those that we saw completely destroyed during a lengthy battle sequence? Also, the Borg cube had to actually get to Earth.... – Lightness Races with Monica Jun 19 '15 at 15:51
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    Seriously look at the battle itself: youtube.com/watch?v=vPzJSBHG4pI The Federation is losing a ship nearly every time you look at the Cube. – neothoron Feb 14 '16 at 17:23
  • "So Picard acknowledges that things are back how they were." How would he know? He's speculating! – Lightness Races with Monica Aug 9 '16 at 15:02
  • Most of the ships we saw destroyed or being destroyed when we actually see the cube could be ships that were simply run down from extended combat time with the Borg and insufficient time to repair. Most of those ships could easily be from the original fleet that fought the Borg, attacking in waves. One wave hits and attacks for a period of time, then retreats, second wave hits, attacks for a period, then retreats... and so on. – Deks May 28 '18 at 20:47
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Yes, Sisko is referring to the First Contact's Battle of Sector 001, as this was the only Borg assault in that year we know about.

Quite a few ships were destroyed either by the Cube, or got caught up in the explosion. Memory-Alpha claims that at least 20 ships were destroyed, including an Admiral's ship. The number you gave up was on Lexington alone.

That was a pretty big hit, even considering we've seen many times more ships destroyed in a single battle in DS9.

How does it affect things? Not only a big amount of hardware and manpower was lost, this also means the necessity to move ships from the front line back to Earth, for defence, most likely more than before, in case of future attacks. The Borg threat was not gone. it also meant sending more ships to patrol paths from where the Borg can enter the Alpha Quadrant. Which were numerous, due to Borg's transwarp network.

The point about time travel is moot. The Earth was never assimilated, so the attack from 2373 happened, so these ships were lost. Picard said "I guess" because he couldn't have been sure that they didn't change something, but they haven't.

That, in addition to having to patrol the border with the Klingon Empire and keep an eye on them, as they could attack, did indeed spread the Federation thin. At the very least dozens of ships delegated to tasks elsewhere.

"Spread thin" doesn't mean "took heavy casualities", it means there are too many tasks and too few ships.

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    It's also worth remembering that colonies were attacked on the way. IIRC an admiral tells Picard that at the start of First Contact. There's potential for ships to have been attacked as well (although if it was me I'd retreat and join the fleet to have a proper go at it). – PointlessSpike Jun 19 '15 at 10:17
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    @PointlessSpike though it is hard to run from a cube as they typically have a higher warp then federation ships so if they got unlucky and picked up by the cubes sensors(which where also better then theirs) they probably got blown up before they could retreat. – Himarm Jun 19 '15 at 13:06
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    Consider the location also, it is Earth: The heart of the Federation. The cube had to reach that point, so there are all the automated defenses lost (assuming as there are none active on screen), the outer ship defenses and considering that it is indeed Earth the ships posted there would be top of the line, in terms of defense, so hard to replace. so ignoring the level of damage to the fleets strong defenders, all the automated defenses would need to be supplimented by even more ships than usually stationed there. – user001 Aug 9 '16 at 14:31

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