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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 19992000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-15658

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Level 3 Communications, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 47-0210602
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1025 Eldorado Blvd., Broomfield, Colorado 80021
(Address of principal executive offices) (Zip code)

(720) 888-1000
(Registrant's telephone number including area code)

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Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
Rights to Purchase Series A Junior Participating Preferred Stock, par value
$.01 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

Title Outstanding

Common Stock, par value $.01 per share 341,772,589367,802,921 as of February 1, 200026, 2001

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

Portions of the Company's Definitive Proxy Statement for the 20002001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K

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Cautionary Factors That May Affect Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)

This report contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to Level 3 Communications, Inc. and its
subsidiaries ("Level 3" or the "Company"). When used in this report, the words
"anticipate", "believe", "plans", "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions.

Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this document. These forward-looking statements include,
among others, statements concerning:

. the Company's business plan to increase substantially its communications and information services business, and to expand the range of services
that the Company offers (the "Business Plan"), its
advantages and the Company's strategy for implementing the Business Plan;business
plan;

. anticipated growth of the communications and information services
industry;

. plans to devote significant management time and capital resources to the
Company's business;

. expectations as to the Company's future revenues, margins, expenses and
capital requirements;

. anticipated dates on which the Company will begin providing certain
services or reach specific milestones in the Business Plan;development and
implementation of its business; and

. other statements of expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.

These forward-looking statements are subject to risks and uncertainties,
including financial, regulatory, environmental, industry growth and trend
projections, that could cause actual events or results to differ materially
from those expressed or implied by the statements. The most important factors
that could prevent Level 3 from achieving its stated goals include, but are not
limited to, the Company's failure to:

. achieve and sustain profitability based on the creation and
implementation of its
advanced, international, facilities based communications network based
on Internet Protocol technology;

. overcome significant early operating losses;

. produce sufficient capital to fund the Business Plan;its business;

. develop financial and management controls, as well as additional
controls of operating expenses as well as other costs;

. attract and retain qualified management and other personnel;

. install on a timely basis the switches/routers, fiber optic cable and
associated electronics required for successful implementation of the
Business Plan;Company's business;

. successfully complete commercial testing of its softswitchnew technology forand Company
information systems to support new products and services, including
voice transmission services;

. negotiate new and maintain existing peering agreements; and

. develop and implement effective business support systems for processing
customer orders and provisioning.

The Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Further disclosures that the Company makes on related

2
subjects in its additional filings with the Securities and Exchange Commission
should be consulted. For further information regarding the risks and
uncertainties that may affect the Company's future results, please review our
Current Report on Form 8-K/A filed with the Securities and Exchange Commission
on November 9, 1999.

ITEM 1. BUSINESS

Level 3 Communications, Inc. and its subsidiaries ("Level 3" or the
"Company") engage in the communications, information services and coal mining
businesses through ownership of operating subsidiaries and substantial equity
positions in public companies. In late 1997, the Company announced the business
plan to increase substantially its information services business and to expand
the range of services it offers by building an advanced, international,
facilities based communications network based on Internet Protocol technology
(the "Business Plan").

Please see the Glossary of Terms for definitions of certain terms used in
this Report.

History

The Company was incorporated as Peter Kiewit Sons', Inc. in Delaware in 1941
to continue a construction business founded in Omaha, Nebraska in 1884. In
subsequent years, the Company invested a portion of the cash flow generated by
its construction activities in a variety of other businesses. The Company
entered the coal mining business in 1943, the telecommunications business
(consisting of MFS Communications Company, Inc. ("MFS") and, more recently, an
investment in C-TEC Corporation and its successors RCN Corporation ("RCN"),
Commonwealth Telephone Enterprises, Inc. ("Commonwealth Telephone") and Cable
Michigan, Inc.) in 1988, the information services business in 1990 and the
alternative energy business, through an investment in MidAmerican Energy
Holdings Company, formerly known as CalEnergy Company, Inc. ("MidAmerican"), in
1991. Level 3 also has made investments in several development-stage ventures.

In 1995, the Company distributed to the holders of its Class D Stock (as
defined) all of its shares of MFS. In the seven years from 1988 to 1995, the
Company invested approximately $500 million in MFS; at the time of the
distribution to stockholders in 1995, the Company's holdings in MFS had a
market value of approximately $1.75 billion. In December 1996, MFS was
purchased by WorldCom in a transaction valued at $14.3 billion.

In December 1997, the Company's stockholders ratified the decision of the
Board of Directors (the "Board") to effect the split-off separating the
Company's construction and mining management operations (the "Construction
Group") from the remaining operations of the Company. As a result of the split-
off, which was completed on March 31, 1998, the Company no longer owns any
interest in the Construction Group. In conjunction with the split-off, the
Company changed its name to "Level 3 Communications, Inc.," and the
Construction Group changed its name to "Peter Kiewit Sons', Inc."

In November 1998, Avalon Cable of Michigan, Inc. acquired all the
outstanding stock of Cable Michigan. Level 3 received approximately $129
million in cash for its interest in Cable Michigan and recognized a pre-tax
gain of approximately $90 million.

Business Plan

Since late 1997, the Company has substantially increased the emphasis it
places on and the resources devoted to its communications and information
services business. Since that time, the Company has becomeis a facilities based provider (that is, a provider that owns or
leases a substantial portion of the plant, property and equipment necessary to
provide its services) of a broad range of integrated communications services.
The Company has expanded
substantially the business ofcreated, generally by constructing its subsidiary PKS Information Services, Inc.
("PKSIS") and is creating,own assets, but also
through a combination of construction, purchasepurchasing and leasing of facilities, and other assets, anthe Level 3
Network--an advanced, international, facilities based communications network.
The Company has designed the Level 3 network based onNetwork to provide communications
services, which employ and leverage rapidly improving underlying optical and
Internet Protocol technology in order to
leverage the efficiencies of this technology to provide lower cost
communications services.technologies.

Market and Technology Opportunity. The Company believes that asongoing
technology advances a comprehensive range ofin both consumeroptical and businessInternet Protocol technologies are
revolutionizing the communications industry and information serviceswill facilitate rapid decreases
in unit costs for communications service providers that are able to most
effectively leverage these technology advances. Service providers that can
effectively leverage technology advances and rapidly reduce unit costs will be
provided over networks utilizingable to offer significantly lower prices, which, the Company believes, will
drive an even more dramatic increase in the demand for communications services.
The Company believes that there are two primary factors driving this market
dynamic which it refers to as "Silicon Economics":

. Rapidly Improving Technologies. Over the past few years, both optical
and Internet Protocol technology. These services will include traditional voice services,based networking technologies have undergone
extremely rapid innovation, due, in large part, to market based
development of underlying technologies. This rapid technology innovation
has resulted in both a rapid improvement in price-performance for
optical and Internet Protocol systems, as well as other data services such as Internet access and virtual private
networks. The Company believes this shift has begun, and over time should
accelerate, forrapid improvement in
the following reasons:

. Efficiency. As a packet-switched technology, Internet Protocol
technology generally uses network capacity more efficiently than the
traditional circuit-switched PSTN. This is because capacity in a packet
switched network is shared between end points only when they are
communicating at any given time, whereas in circuit switched networks,
capacity is reserved between communicating end points even when no
information is actually being transmitted. Therefore, services including
voice, e-mail and file transfer can be provided for lower cost over a
network using Internet Protocol technology.

. Open Protocol. Internet Protocol technology is an open protocol (a non-
proprietary standard) which allows for market driven development of new
servicesfunctionality and applications for Internet Protocol networks. In contrast,
the PSTN is based on proprietary protocols, which are governed and
maintainedsupported by international standards bodies that are generally
controlled by government-affiliated entities and slower to accept
change.

. Improving Technologies. The Company and other technology companies have
developed solutions to address problems associated with certain Internet
Protocol based applications that use the public Internet. For example,
typical voice over Internet Protocol solutions are characterized by
cumbersome two-stage dialing requirements, latency (delay through the
network which can negatively affect timing sensitive communications such
as voice), quality and concerns about adequate security and reliability.
During December 1999, Level 3 commercially launched (3)Voice long
distance service in 10 markets, the first voice service to utilize
softswitch technology. Level 3 expects to begin commercial testing of
some features associated with local service, such as caller ID, voice
mail and call forwarding, during the first quarter of 2000. Level 3's
Internet Protocol voice technology provides a seamless interconnection
with the PSTN using softswitch architecture.

. Open Architecture. The open architecture of Level 3's distributed
network enables new competition among suppliers for the individual
components of the Internet Protocol voice switching system.these technologies. The
Company believes that this competition amongst vendorsrapid innovation will enablecontinue well into the
future.

. High Demand Elasticity. The Company believes rapid decreases in
communication services costs and prices causes the development of new
bandwidth-intensive applications, which drive even more significant
increases in bandwidth demand. As an example, industry analysts estimate
that Internet traffic is growing at greater than 100% per year. In
addition, communications services are direct substitutes for other,
existing modes of information distribution such as traditional broadcast
entertainment and distribution of software, audio and video content
using physical media delivered over motor transportation systems. The
Company believes that as communications services improve more rapidly
than these alternative content distribution systems, significant demand
will be generated from these sources. The Company believes that high
elasticity of demand from both these new applications and substitution
for existing distribution systems will continue for the foreseeable
future.

The Company also believes that there are several significant implications
that result from this Silicon Economics market dynamic:

. Incorporating Technology Changes. Given the rapid rate of improvement in
optical and Internet Protocol technologies, those communications service
providers that are most effective at rapidly deploying new technologies
will have an inherent cost and service advantage over companies that are
less effective at deploying these new technologies.

. Capital Intensity. The rapid improvements in these technologies and the
price/need to move to new technologies more quickly results in shortened
economic lives of underlying assets. To achieve the rapid unit cost
reductions and improvements in service capabilities, service providers
must deploy new generations of technology sooner, resulting in a more
capital-intensive business model. Those providers with the technical,
operational and financial ability to take advantage of the rapid
advancements in these technologies are expected to have higher absolute
capital requirements, shortened asset lives, rapidly decreasing unit
costs and prices, rapidly increasing unit demand and higher cash flows
and profits.

. Industry Structure. As a result of the rapid innovation in the
underlying technology, the communications industry is visibly shifting
from a utility model to a technology model. Just as in the computing
industry, where market-based standards and rapid price performance
ratioimprovements have existed for over 20 years, it is extremely difficult
for a single communications company to be best-of-class across a wide
variety of individual network
componentsdisciplines in a rapidly changing environment. Rather, an
opportunity exists for companies to focus on areas in which they have
significant competitive advantages and thereby lower network cost.develop significant market share
in a disaggregated industry structure.

Level 3's Strategy. The Company is seeking to capitalize on the
benefits ofopportunities presented by significant advancements in optical and Internet
Protocol technologytechnologies by pursuing theits Business Plan. Key elements of the
Company's strategy include:

. Become the Low Cost Provider of Communications Services. OurLevel 3's
network ishas been designed to provide high quality communications
services at a lower cost. For example, the Level 3 networkNetwork is being
constructed using multiple conduits to allow the Company to cost-effectivelycost-
effectively deploy future generations of optical networking components
(both fiber and transmission electronics and optronics) and thereby
expand capacity and reduce unit costs. In addition, the Company's
strategy is to maximize the use of open, non-proprietary interfaces in
the design of its network software and hardware. This approach is
intended to provide Level 3 with the ability to purchase the most cost-effectivecost-
effective network equipment from multiple vendors. New technologies such as packet-
switching will also enhance the efficiencies of our network.vendors and allow Level 3 to
deploy new technology more rapidly and effectively.

. Combine Latest Generations of Fiber and Electronics.Optical Technologies. In order
to achieve unit cost reductions for transmission capacity, Level 3 has
designed its network with multiple conduits to deploy successive
generations of fiber to exploit improvements in optical transmission
electronics.technology. Optimizing optical transmission electronicssystems to exploit specific
generations of fiber optic technology currently provides transmission
4
capacity on the new fiber more cost effectively than deploying new
electronicsoptical transmission systems on previous generations of fiber.

. Offer a Comprehensive Range of Communications Services. The Company
provides a comprehensive range of communications services over the Level
3 network, including private line,Network. The Company is offering broadband transport services under
the brand name (3)Voice long distanceLinkSM, colocation services colocation,under the brand name
(3)CenterSM Colocation, Internet access services under the brand name
(3)CrossroadsSM, and managed modem.Softswitch based services under the brand names
(3)ConnectSM Modem and (3)VoiceSM. The availability of these services
varies by location.

. Provide Upgradeable Metropolitan Backbone Networks. Level 3's
significant investment in metropolitan optical networks enables the
Company to connect directly to points of traffic aggregation. These
traffic aggregation facilities are typically locations where Level 3's
customers wish to interconnect with the Level 3 expects to begin commercial testing of some features associated
with local service, such as caller ID, voice mail and call forwarding,
during the first quarter of 2000.Network. Level 3's
metropolitan backbone networks allow Level 3 to extend its network
services to these aggregation points at low costs. The Company is
also offering darkconstructing metropolitan networks totaling 15,000 conduit miles and
440,000 fiber and conduits along itsmiles. These metropolitan networks are a significant
strategic advantage versus other intercity communications companies that
must connect to customers using low capacity, legacy facilities provided
by former local and intercity networks on a long-term lease
basis.monopoly providers. This difficult situation is
sometimes referred to as the "local loop bottleneck".

. Provide Significant Colocation Facilities. Level 3 has been experiencing
higher demand for its colocation services from its web centric customers
than was anticipated in preparing the Business Plan. Level 3 believes that
providing colocation services on its network attracts web centriccommunications
intensive customers by allowing Level 3 to offer those customers reduced
bandwidth costs, rapid provisioning of additional bandwidth,
interconnection with other third-party networks and improved network
performance. Therefore, Level 3 believes that controlling significant
colocation facilities in its gatewaysGateways provides it with a competitive
advantage.

In addition,
significant colocation facilities in a gateway allow Level 3 to price
the exchange of traffic between its customers that are colocated in the
same facility at significantly lower cost than the exchange of traffic
between a customer located outside the facility and a customer located
within the facility.

As of December 31, 1999,2000, Level 3 had secured approximately 3.46.0 million
square feet of space for its gatewayGateway and colocation facilities and had
completed the buildout of approximately 1.32.8 million square feet of this space.
Level 3 believes it currently has more colocation and Gateway space than any of
its communications company competitors.

. Target Communications Intensive Customers. The Company's distribution
strategy is to utilize a direct sales force focused on communications
intensive businesses. These businesses include both traditional and next
generation carriers, ISPs, application service providers, content
providers, systems integrators, web-hosting companies, media
distribution companies, web portals, eCommerce companies, streaming
media companies, storage providers and wireless communications
providers. Providing communications services at continually declining
bandwidth costs and prices is at the core of the Company's market
enabling strategy since bandwidth generally represents a substantial
portion of these businesses' costs.

. Utilize Optimization Technologies. In January 2000,order to effectively manage its
business in a rapidly changing environment, Level 3 announcedhas assembled an
expansionoperations research department that has developed and continues to
refine a sophisticated non-linear, mixed integer optimization model. The
objective for this model is to maximize the net present value of the
Company's cash flows given relevant constraints. This tool is designed
to allow Level 3 to determine optimal pricing for its Business Planservices, to
increase significantlydetermine demand forecasts based on price elasticity, to optimize
network design based on optimal topology and optronics configuration, to
optimize network implementation based on optimal timing of capacity
installation, to optimize the aggregate amounttiming of introducing new technologies and
to determine long-term network requirements. The Company believes that
its global gateway facilities to 6.5 million square feet over the next two
to three years.optimization proficiency and technology is a source of significant
competitive advantage.

. Provide Seamless Interconnection to the PSTN. During December 1999, thePublic Switched Telephone
Network (the "PSTN"). The Company launched itsoffers (3)VoiceVoiceSM long distance
service, thatwhich service allows the seamless interconnection of the Level
3 networkNetwork with the PSTN for long distance voice transmissions. Seamless
interconnection allows customers to use Level 3's Internet Protocol
based services without modifying existing telephone equipment or dialing
procedures (that is, without the need to dial access codes or follow
other similar special procedures). The Company's managed(3)ConnectSM Modem
turnkey modem infrastructure service uses similar softswitchSoftswitch technology
to seamlessly interconnect to the PSTN.

. Accelerate Market Roll-out. To supportPSTN and to the launch of its services and
develop a customer base in advance of completing the construction of its
network, Level 3 offers services over a combination of leased local and
intercity facilities. Over time, these leased networks will be displaced
by the networks that the Company is constructing.

. Target Web Centric Customers. The Company's distribution strategy is to
utilize a direct sales force focused on communications intensive and web
centric businesses. These businesses include ISPs, application service
providers, content providers, systems integrators, next generation
carriers, web-hosting companies, streaming media companies and Internet
Protocol based storage providers. Providing continually declining
bandwidth costs to these companies is at the core of the Company's
market enabling strategy because bandwidth generally represents a
substantial portion of web centric businesses' costs.public Internet.

. Develop Advanced Business Support Systems. The Company is developinghas developed and
continues to develop a substantial, scalable and web-enabled business
support system infrastructure specifically designed to enable the
Company to offer services efficiently to its targeted customers. The
Company believes that this system will reduce its operating costs, give
its customers direct control over some of the services they buy from the
Company and allow the Company to grow rapidly without redesigning the architecturewhile minimizing redesign
of its business support system.

. Leverage Existing Information Services Capabilities. The Company is
expanding its existing capabilities in computer network systems
integration, consulting, outsourcing and software

reengineering, with particular emphasis on the conversion of legacy
software systems to systems that are compatible with Internet Protocol
networks and web browser access.systems.

. Attract and Motivate High Quality Employees. The Company has developed
programs designed to attract and retain employees with the technical
skills necessary to implement the Business Plan. The programs include
the Company's Shareworks stock purchase plan and its Outperform Stock
Option program.

Competitive Advantages. The Company believes that it has the following
competitive advantages that, together with its strategy, will assist it in
implementing the Business Plan:

. Experienced Management Team. Level 3 has assembled a management team
that it believes is well suited to implement the Business Plan. Most of
Level
3's senior management was involvedhas substantial experience in leading the
development and marketing of telecommunicationscommunications products and services and in
designing, constructing and managing intercity, metropolitan and
international networks.

. A More Readily UpgradableUpgradeable Network Infrastructure. Level 3's network
design takes advantage of recent technological innovations,
incorporating many of the features that are not present in older
communication networks, and provides Level 3 flexibility to take
advantage of future developments and innovations. Level 3 has designed
the transmission network to optimize all aspects of fiber and electronicsoptronics
simultaneously as a system to deliver the lowest unit cost to its
customers. As fiber and optical transmission electronic technology changes, Level 3
expects to realize new unit cost improvements by deploying the latest
fiber and
transmission electronics technology in available empty or spare conduitconduits in the multiple conduit Level
3 network.Network. Each new generation of fiber enables associated optical
transmission equipment to be spaced further apart and carry more traffic
than the same equipment deployed on older generations of fiber. The
Company believes that the spare conduit design of the Level 3 networkNetwork
will enable Level 3 to effect this deployment more quicklylower costs and at lower costprices while enjoying higher
margins than other
carriers.its competitors.

. Integrated End-to-End Network Platform. Level 3's strategy is to deploy
network infrastructure in major metropolitan areas and to link these
networks with significant intercity networks in North America and
Europe. The Company believes that the integration of its localmetropolitan
and intercity networks with its colocation facilities will expand the
scope and reach of its on-net customer coverage, and facilitate the uniform
deployment of technological innovations as the Company manages its
future upgrade paths.

. Systems Integration Capabilities. Thepaths and allow the Company to grow or scale its service
offerings rapidly. Level 3 believes that it is the only global
communications service provider with the unique combination of large
fiber-count, multi-conduit metropolitan networks, uniformly deployed
multi-conduit intercity networks and substantial colocation facilities.

. Prefunded Business Plan. Level 3 has substantially prefunded its
abilityBusiness Plan through free cash flow breakeven through approximately $14
billion in cumulative debt and equity capital raised to offer computer outsourcing and systems integration services,
particularly services relatingdate. As a
result, Level 3 believes that it has lower financial risk relative to
allowing a customer's legacy systems
to be accessed with web browsers, will provide additional opportunities
for selling the Company's products and services.certain other communications service providers.

The Level 3 Network.

The Level 3 Network An important element of the Business Plan is the development of the Level 3
network, an advanced, international, facilities based
communications network
optimized for Internet Protocol technology. Today,network. Through 2000, the Company is primarily offeringoffered its
communications services using local and intercity facilities that arehad been
leased from third parties. This enablesenabled the Company to develop and offer
certain of its services during the construction of its own facilities. Over time,As the
Company has substantially completed the construction of the North American
intercity network and as well as two Rings of the European intercity network,
the portion of the Company's network that is owned by the Company will increase
significantly and the portion of the facilities leased will decrease. Over the next two to three years,decrease
significantly. At completion, the Company's network is expected to encompass:

. an intercity network covering nearly 16,000 miles in North America;

. leased or owned local networks in 56 North American markets;

. an intercity network covering approximately 4,750 miles across Europe;

. leased or owned local networks in 21 European and Pacific Rim markets;

. approximately 6.5 million square feet of gatewayGateway and transmission
facilities in North America, Europe and the Pacific Rim; and

6
. significant undersea capacity, including a 1.28 Tbps transatlantic cable
system and a 2.56 Tbps Northern Asia cable system initially connecting Hong Kong,
to
Tokyo.

6
Japan, Taiwan and Korea.

Intercity Networks. The Company's nearly 16,000 mile fiber optic intercity
network in North America will consistconsists of the following:

. Rights-of-way ("ROW") from a number of third parties including
railroads, highway commissions and utilities. The Company has procured
these rights from sources that maximize the security and quality of the
Company's installed network. The Company has secured 100% of the ROW
required for the planned North American intercity network. It has
obtained these rights pursuant to agreements with railroads, state and
local departments of transportation, utilities, pipeline companies and
others.

. Multiple conduits connecting local networks in approximately 200 North American cities. In
general, Level 3 will installhas installed groups of 10 to 12 conduits in its
intercity network. The Company believes that the availability of spare
conduit will allow it to deploy future technological innovations in
optical networking components as well as providing Level 3 with the
flexibility to offer conduit to other entities.

. Initial installation of optical fiber strands designed to accommodate
dense wave division multiplexing transmission technology. This fiber
allows deployment of equipment which transmits signals on 32 or more
individual wavelengths of light per strand, thereby significantly
increasing the capacity of the Company's network relative to older
networks which generally use optical fiber strands that transmit fewer
wavelengths of light per strand. In addition,
the Company believes that the installation of newer optical fibers will
allow a combination of greater wavelengths of light per strand, higher digital
transmission speeds and greater spacing of network electronics. The
Company also believes that each new generation of optical fiber will
allow increases in the performance of these aspects of the fiber and
will result in lower unit costs.

. High speed SONET transmission equipment employing self-healing
protection switching and designed for high quality and reliable
transmission. The Company expects that over time, SONET equipped
networks will be replaced with network designs that employ a "mesh"
architecture made possible by advances in optical technologies. A mesh
architecture allows carriers to establish alternative protection schemes
that reduce the amount of capacity required to be reserved for
protection purposes.

. A design that maximizes the use of open, non-proprietary hardware and
software interfaces to allow less costly upgrades as hardware and
software technology improves.

In December 1999, Level 3 began carrying customer traffic between Dallas and
Houston onDuring 2000, the firstCompany substantially completed and lit segmentthe construction of its
North American intercity network.

To support the launch of its services in the third quarter of 1998, the
Company leased intercity capacity from two providers. This leased capacity will
be displaced over time by Level 3's North American intercity network.

On July 20, 1998, Level 3 entered into a network construction cost-sharing
agreement with INTERNEXT, LLC, a subsidiary of NEXTLINK Communications, Inc.
The agreement, which is valued at $700 million, calls for INTERNEXT to acquire
the right to use 24 fibers and certain associated facilities installed along
the entire route of Level 3's North American intercity network in the United
States. INTERNEXT will pay Level 3 as segments of the intercity network are
completed which will reduce the overall cost of the network to the Company. The
network as provided to INTERNEXT will not include the necessary electronics
that allow the fiber to carry communications transmissions. Also, under the
terms of the agreement, INTERNEXT has the right to an additional conduit for
its exclusive use and to share costs and capacity in certain future fiber cable
installations in Level 3 conduits.

The following diagram depicts the currently planned North American intercity
network when fully constructed:

[GRAPHIC OF CURRENTLY PLANNED NORTH AMERICAN INTERCITY NETWORK]

The Company expects to substantially complete its North American intercity
network by the end of the year 2000. Deployment of the North American intercity
network will bewas accomplished through simultaneous construction efforts in multiple
locations, with different portions being completed at different times. As of
December 31, 1999,2000, the Company had completed 9,334construction of 15,486 route miles
of the North American intercity network and had approximately 6,200 route miles under construction.network.

In Europe, the Company is deploying an approximately 4,750 mile fiber optic
intercity network with characteristics similar to those of the North American
intercity network. As in North America,During 2000, the Company will provide initial
service in Europe over a leased network that will be displaced over time bycompleted the
intercity network owned by the Company.

On April 29, 1999, Level 3 announced that it had finalized contracts
relating to construction of both
Ring 1 and Ring 2 of its European network in France, Belgium,
the Netherlands, Germany and the United Kingdom.network. Ring 1, which is approximately 1,800
miles, will connectconnects the major European cities of Paris, Frankfurt, Amsterdam,
Brussels and London. TheLondon and was operational at December 31, 2000. Ring 2, which is
approximately 1,600 miles, connects the major German cities of Berlin, Cologne,
Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. Construction on Ring 2
has been completed and the Company expects Ring 2 to be operational during the
first quarter of 2001.

Level 3's European network is expected to be ready for service by September 2000. Ring 1 is part
of the approximately 4,750 mile intercity network. This European network will
be linked to the Level 3 North American intercity
network by the Level 3 transatlantic 1.28 Tbps cable system, currently under development,which was also
expectedcompleted and placed into service during 2000. The transatlantic cable system--
referred to be ready for service by September 2000.

On July 26, 1999, the Company as Yellow--has an initial capacity of 320 Gbps and
is upgradeable to 1.28 Tbps. The deployment of Yellow was complete pursuant to
a co-build agreement announced two important developments of its
European network build with agreements with Eurotunnel and Alcatel. Eurotunnel
will install and supply Level 3 with multiple cross-Channel cables between the
United Kingdom and France through the high-security service tunnel. The first
of these cables will be completed by the end of the first quarter of 2000.
Subsequent cables will be installed to upgrade and expand the network as and
when required or when new fiber technology becomes available. Alcatel will
design, develop and install an undersea cable to link the Level 3 network
between the United Kingdom and Belgium. The cable system is already under
development and will be completed by the end of the first half of 2000.

In addition, on May 4, 1999, Level 3 and COLT Telecom Group plc ("COLT")
announced an agreement to share costs for the construction of European
networks. The agreement calls for Level 3 to share construction costs of COLT's

planned 1,600 mile intercity German network linking Berlin, Cologne,
Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. In return, COLT will
share construction costs of Ring 1 of Level 3's planned European network.

The Company has entered into transoceanic capacity agreements that will link
Level 3's North American, European and Pacific Rim intercity networks. One
agreement provides for Level 3's participationin February 2000, whereby Global Crossing Ltd.
participated in the construction of, an
undersea cable system that will connect Japan and obtained a 50% ownership interest in,
Yellow. Under the United States by the endco-build agreement, Level 3 and Global Crossing Ltd. each now
separately own and operate two of the year 2000. The remaining agreements relate to the Company's
transatlantic capacity. These agreements are in addition to the agreement
relating to the Company's 1.28 Tbps transatlantic undersea cable system.

In the Pacific Rim, the Company currently intends to provide service over a
leased line intercity network and long-term leases of submarine cable capacity.
In 1999,four fiber pairs on Yellow. Level 3 openedalso
acquired additional capacity on Global Crossing Ltd.'s transatlantic cable,
Atlantic Crossing 1, during 2000 to serve as redundant capacity for its fiber
pairs on Yellow.

The Company established its Asia Pacific headquarters in Hong Kong in 1999,
and during 2000 the Company completed and opened its Gateway facilities in
Tokyo and Hong Kong. OnIn January
24, 2000, Level 3 announced two important developments of its Asian network
with the planned construction ofintention to
develop and construct a 2.56 TbpsNorthern Asia undersea cable system initially
connecting Hong Kong to Tokyo and gateway facilities in each city. This
connection betweenJapan. The Hong Kong and Tokyo isKong-Japan cable was intended to be
the first stage inof the Company's construction by Level 3 of an undersea network in the
regionregion. At that time, the Company indicated its intention to share construction
and is scheduled
for completionoperating expenses of the system with one or more industry partners.

In December 2000, the Company signed an agreement to collaborate with FLAG
Telecom on the development of the Northern Asia undersea cable system
connecting Hong Kong, Japan, Korea and Taiwan. The system will include Level
3's previously announced eastern link connecting Hong Kong and Japan and a new
western link that FLAG Telecom will build to connect Hong Kong, Korea, Taiwan
and Japan. The Company expects the Hong Kong to Japan segment of the eastern
link to be in service in the second quarter of 2001, with the eastern link's
Taiwan segment to follow in late 2001. The Company expects the entire western
link to be ready for service in early 2002. Level 3 and FLAG Telecom will each
own three fiber pairs throughout the new system. The total cost of the entire
Northern Asia system is estimated to be approximately $900 million. Level 3's
share of the cost is approximately $450 million.

Local Market Infrastructure. The Company's local facilities include fiber
optic networks in a SONET ring configuration, connecting Level 3's intercity network gatewayGateway sites to ILEC and
CLEC central offices, long distance carrier points-of-presence or POPs,
buildings housing communication-intensive end users and Internet peering and
transit facilities. Level 3's high fiber count metropolitan networks allow
Level 3 to extend its services directly to its customers' locations at very low
costs, because the availability of this network infrastructure does not require
extensive multiplexing equipment to reach a customer location, which is
required in ordinary fiber constrained metropolitan networks.

The Company had secured approximately 3.46.0 million square feet of space for
its gatewayGateway and transmission facilities as of December 31, 19992000 and had
completed the buildout of approximately 1.32.8 million square feet of this space.
The Company's gatewayinitial Gateway facilities are beingwere designed to house local sales
staff, operational staff, the Company's transmission and Internet Protocol
routing/switchingrouting and Softswitch facilities and technical space to accommodate
(3)CenterSM Colocation services--that is, the colocation of equipment by high-volumehigh-
volume Level 3 customers, such as ISPs, in an environmentally controlled, secure site with
direct access to the Level 3 networkNetwork through dual, fault tolerant connections.
The percentage of the total square feet of these facilities that is available
for the provision of (3)Center Colocation services is expected to grow over
time as the buildout of additional facilities and expansion of existing
facilities is completed. These newer facilities are typically larger than the
Company's initial facilities and are being designed to include a smaller
percentage of total square feet for the Company's transmission and Internet
Protocol routing/Softswitch facilities and a larger percentage of total square
feet for the provision of (3)Center Colocation services. The Company is
offering private line,its (3)Voice, colocationLinkSM Transport services, Internet
access(3)CenterSM Colocation services,
(3)CrossroadsSM services, (3)ConnectSM Modem services and managed modem(3)VoiceSM services
at its gatewayGateway sites. The availability of these services varies by location.

As of December 31, 1999,2000, the Company had operational, facilities based local
metropolitan networks in 2226 U.S. markets and 3six European markets. Also as of
December 31, 1999,2000, the Company had entered into interconnection agreements with
RBOCs covering 49 North American markets.

The Company has negotiated master leases with several CLECs and ILECs to
obtain leased capacity from those providers so that the Company can provide its
clients with local transmission capabilities before its own local networks are
complete and in locations not directly accessed by the Company's owned
facilities.

The launches of services in London and Frankfurt followed the Company's
acquisitions of BusinessNet Limited, a leading UK ISP, in January 1999 and
miknet Internet Based Services GmbH, a leading German ISP, in September 1998.
In addition, in June 1999,8

At February 15, 2001, the Company completed the constructionhad a total of its
metropolitan network63 markets in service: 52
in the City of London. TheUnited States, nine in Europe and two in Asia. In the United States, the
Company launched its
international gatewaymarkets in Londonservice include:

Albany Jacksonville Portland
Atlanta Jersey City Providence
Austin Kansas City Raleigh
Baltimore Las Vegas Richmond
Boston Long Island Sacramento
Buffalo Los Angeles Salt Lake City
Charlotte Louisville San Antonio
Chicago Manchester San Diego
Cincinnati Memphis San Francisco
Cleveland Miami San Jose
Dallas Nashville Seattle
Denver New Orleans St. Louis
Detroit New York Stamford
El Paso Newark Tampa
Fort Worth Omaha Washington, D.C.
Hartford Orlando Wilmington
Houston Philadelphia
Indianapolis Phoenix

In Europe, the markets in January 1999service include:

Amsterdam Hamburg
Berlin London
Brussels Munich
Dusseldorf Paris
Frankfurt

In Asia, markets in service included Hong Kong and Paris, Amsterdam and
Frankfurt in June 1999. The 75,000 square foot office and operations facility
in London is the hub of European operations and houses the operational center
and network equipment, along with additional space for expansion and colocation
services. In addition, in July 1999, Level 3 acquired a building with an
additional approximately 263,000 square feet of space to serve as colocation
technical space in London. The Company is currently offering services in and
among London, Paris, Amsterdam and Frankfurt.Tokyo.

Communications and Information Services

In connection with the Business Plan, the Company is substantially
increasing the emphasis it places on and the resources devoted to its
communications and information services business. The Company is building

on the strengths of its information services business and the benefits of theCommunications Services. Level 3 network to offer a broad range of other services to business and other
end users.

As the Business Plan is being implemented, the Company is offeringoffers a comprehensive range of
communications services, including the following:

. Transport Services. The Company's transport services are branded
"(3)Link SM" and consist of private
line and special access(3)Link SM Global Wavelengths, (3)Link SM
Private Line services and (3)Link SM Dark Fiber.

[_](3)Link SM Global Wavelength. Level 3 is offering (3)Link Global
Wavelengths--a point-to-point connection of a fixed amount of
bandwidth on a particular wavelength or color of light. Currently,
(3)Link Global Wavelength is available at 2.5GBps and 10GBps. This
product is targeted to those customers that require both significant
amounts of bandwidth and desire to provide their own traffic
protection schemes. The approach enables customers to build and
manage a network by deploying their own SONET, ATM or IP equipment
at the end points where the wavelength is delivered. (3)Link Global
Wavelength is offered through short term, annual and long-term leases of dark fiber and
conduits.pre-
paid leases.

[_](3)Link SM Private Line and Special Access.services. (3)Link Private line and special accessLine services
are established asconsist of a permanent physical connectionfixed amount of dedicated bandwidth between fixed
locations for the exclusive use of the customer. These services are
offered with committed levels of quality and with network protection
schemes included. (3)Link Private Line services are currently priced
at a fixed rate depending upon the

distance between end points and the amount of bandwidth required. The
Company is offering the following types of private line and special access
services:

. (3)Link SM Private Line.Line--U.S. Intercity Services. Level 3
provides this transport service over its North American intercity
network. Available transmission speeds include DS-3, OC-3, OC-12
and OC-48.

. (3)Link SM Private Line--Metro Services. Level 3 provides this
service within a metropolitan area. This typeservice is provided in
three categories: Metro Access Stand-alone--a metro circuit is
installed from a customer site to a colocation cabinet in a Level
3 Gateway in that city; Metro Point to Point--a circuit is
installed between two of linka customers' sites by passing through
the Level 3 Gateway in that city; and Metro Access--a circuit is
a dedicated line connecting
two end-user locations for voiceinstalled from the customer's location to access backbone
services that are located within the Level 3 Gateway. Available
transmission speeds include DS-3, OC-3, OC-12 and data applications, including
ISPs.OC-48.

. Carrier-to-Carrier Special Access. This type of link connects
carriers (long distance providers, wireless providers, ILECs and
CLECs) to other carriers.

. End-user to Long Distance Provider Special Access. This type of
link connects an end-user, such as a large business, with the
local POP of its chosen long distance provider.

The Company is currently offering its special access and(3)Link SM Private Line--International Services. Level 3 provides
this private line services withservice between two locations on a point to
point basis that cross an international boundary. This service
can be installed between two customer points-of-presence where
each point is located within a Level 3 Gateway facility. The
service is available between mainland Europe and the United
Kingdom, the United States, Japan and Hong Kong. Available
transmission speeds depends upon the country locations, but range
from T1DS-1 to OC3 and
OC48.OC-48.

[_](3)Link SM Dark Fiber and Conduits. The Company is offeringFiber. Level 3 offers long-term leases of dark fiber
and conduit along its local and intercity networks on a long-term lease
basis. Customers can lease dark fiber and conduit in any combination
of three ways: (1) segment by segment, (2) full ring or (3) the
entire Level 3 network.Network. Level 3 offers colocation space in its
gatewayGateway and intercity retransmissionre-transmission facilities to these customers
for their transmission electronics.

Although Level 3 will not be
responsible for the management of the transmission electronics,
Level 3 is contemplating providing installation. Colocation and maintenance
services for this equipment on a fee for service basis.

.Gateway Services.

[_](3)Center SM Colocation. The Company is offering itsoffers high quality, data center
grade space where customers can locate servers, content storage
devices and other service
providers the ability to locate their communications and networkingnetwork equipment at Level 3's gateway sites in a safe and secure
technical operating environment.

The demand for these colocation services has
increased as companies expand into geographic areas in which they do not
have appropriate space or technical personnel to support their equipment
and operations. At its operational colocation sites, the Company is
offering customers AC/DC power, optional UPS power, emergency back-up
generator power, HVAC, fire protection and security. Level 3 is also
offeringoffers high-speed, reliable
connectivity to the Level 3 leased networkNetwork and to other networks, including
both local and wide area networks, the PSTN and Internet. Level 3
also offers customers AC/DC power, emergency back-up generator power,
HVAC, fire protection and security. These sites are being monitored and
maintained 24 hours a day, seven days a week.

As of December 31, 2000, Level 3 offered (3)Center Colocation in 63
facilities in 60 markets located in the United States, Europe and
Asia. Level 3 believes that its ability to offer both metropolitan
and intercity communications services to its (3)Center Colocation
customers provides it with an advantage over its competitors, because
(3)Center Colocation customers often spend between 25% and 50% of
their operating expenses on communications services.

. (3)CrossRoads SM. (3)CrossRoads is a high quality, high speed Internet
access product offering. The service is offered in a variety of
capacities--100BaseT, GigE, DS-1, DS-3, OC-3 and OC-12--using a variety
of interfaces including Ethernet and SONET. A unique feature of the
service is Destination Sensitive Billing or DSB. Through DSB,
(3)CrossRoads customers pay for bandwidth based on the origination and
destination of their traffic. DSB customers pay for either "Sent" or
"Received" bandwidth, but not both.

Level 3 believes that the combination of Destination Sensitive Billing
with metropolitan and intercity networks and significant colocation
space is a competitive advantage and that this accounts for the rapid
market acceptance of (3)CrossRoads to date.

. Softswitch Services. Level 3 has pioneered and developed the
Softswitch--a distributed computer system that emulates the functions
performed by traditional circuit switches enabling Level 3 to control
and process telephone calls over an Internet Protocol network.
Currently, Level 3 is offering customers, including ISPs, the opportunity to
colocate their web-server computers at the Company's larger gateway
sites, enabling them to take advantage of the marketing, customer
service, internal company information networks ("intranets")two Softswitch based services:
(3)Connect SM Modem and other
benefits offered by such web presence. By colocating its web-server in a
Level 3 facility, a customer has the ability to deploy a high-quality,
high-reliability Internet presence without investing capital in data
center space, multiple high-speed connections or other capital intensive
infrastructure. Although the customer is responsible for maintaining the
content and performance of its server, the Company's technicians will be
available to monitor basic server operation. The Company will also offer
redundant infrastructure consisting of multiple routers and connections
to Internet backbones.

. Internet Access. The Company is offering Internet access to business
customers, other carriers and ISPs. These services include high-capacity
Internet connections ranging from 45 Mbps to 1,000 Mbps.

. Managed(3)Voice SM.

[_](3)Connect SM Modem. The Company is offering to its (3)Connect Modem
customers an outsourced, turn-key infrastructure solution for the
management of dial up access to either the public Internet or a
corporate data network

that may include access to the public Internet ("Managed Modem"). This
servicenetwork. (3)Connect Modem was the first service
offered by the Company that used softswitchSoftswitch technology to seamlessly
interconnect to the PSTN. While ISPs comprise a majority of the customer
base for (3)Connect Modem and are provided a fully managed dial-updial up
network infrastructure for access to the public Internet, corporateInternet. Corporate
customers that purchase Managed(3)Connect Modem services receive
connectivity for remote users to support data applications such as
telecommuting, e-mail retrieval, and client/server applications.

For Managed Modem customers,As part of this service, Level 3 arranges for the provision of local
network coverage, dedicated local telephone numbers (which the
Managed(3)Connect Modem customer distributes to its customers in the case
of an ISP or to its employees in the case of a corporate customer),
racks and modems as well as dedicated connectivity from the
customer's location to the Level 3 gatewayGateway facility. Level 3 also
provides monitoring of this infrastructure 24 hours a day, seven
days a week. By providing a turn-key infrastructure modem solution,
Level 3 believes that this product allows its customers to save both
capital and operating costs.

. Voice. During December 1999, Level 3 commercially launched costs associated with maintaining the
infrastructure.

[_](3)Voice itsSM Services. The Company also offers (3)Voice, an Internet
Protocol based long distance service, which uses softswitchSoftswitch
technology. This long distance service is currently available for
originating long distance calls in 10
markets.24 markets and is generally
targeted at carriers. The Company expects to begin commercial testingend users of some
features associated with local service, such as caller ID, voice mail
and call forwarding, during the first quarter of 2000. Customers accessCompany's (3)Voice
carrier customers place a long distance servicecall by using existing
telephone equipment and dialing procedures. The Company believes thatlocal service
provider transfers the call to the Level 3 Softswitch where it is
converted to Internet Protocol format. The call is then transmitted
along the Level 3 Network to another Level 3 Gateway facility
closest to the receiving city where it is sent to the called party
in whatever format is desired, including a standard telephone call.
Calls on the Level 3 Softswitch network can be terminated or
completed anywhere in the world. The (3)Voice long distance service
is offered at a quality level equal to that of the PSTN.

Level 3 currently offers, through its subsidiary PKSIS, computer operations
outsourcing and systems integration services to customers located throughout
the United States as well as abroad. The Company's systems integration services
help customers define, develop and implement cost-effective information
services. The computer outsourcing services offered by the Company include
networking and computing services necessary for older mainframe-based systems
and newer client/server-based systems. The Company provides its outsourcing
services to clients that want to focus their resources on core businesses,
rather than expend capital and incur overhead costs to operate their own
computing environments. PKSIS believes that it is able to utilize its expertise
and experience, as well as operating efficiencies, to provide its outsourcing
customers with levels of service equal to or better than those achievable by
the customers themselves, while at the same time reducing the customers' cost
for such services. This service is particularly useful for those customers
moving from older computing platforms to more modern client/server networks.

PKSIS offers reengineering services that allow companies to convert older
legacy software systems to modern networked computing systems, with a focus on
reengineering software to enable older software application and data
repositories to be accessed by web browsers over the Internet or over private
or limited access Internet Protocol networks. PKSIS also provides customers
with a combination of workbench tools and methodologies that provide a complete
strategy for converting mainframe-based application systems to client/server
architecture.traditional
telephone network.

Distribution Strategy

Level 3's distributionsales strategy is to utilize a direct sales force focused on
communications intensive and web centric businesses. These targeted businesses include both
traditional and next generation carriers, ISPs, application service providers,
content providers, systems integrators, next generation carriers, web-hosting companies, streaming media
companies, storage providers and Internet Protocol based storagewireless communications providers. Level 3
believes that these companies are the most significant drivers of bandwidth
demand. The past distinctions between retail and wholesale have been blurred as
these communications intensive and web centric businesses purchase Level 3 services, add value
to our services and then remarket the servicesmarket to end-users. Bandwidth constitutes a significant portion of
these companies' cost structure and their needs for bandwidth in many cases are
growing at an exponential rate. Providing continually declining bandwidth costs
to these companies is at the core of Level 3's market enabling strategy.

Level 3 expects thatFor the year ended December 31, 2000, approximately 85% of itsthe Company's
sales will bewere to web centriccommunications intensive customers that package communications
services into value added services and directly sell into the residential and
business markets. The remaining approximately 15% of Level 3's sales will bewere to
other customers that are
communications intensivecarriers and have high growth in communications and information
services consumption. Level 3 has segmented its sales organization into four
channels to implement this distribution strategy. These include a
Regional/Account Sales Group, a Carrier Sales Group and a Dark Fiber Sales
Group.enterprises.

Business Support System

In order to pursue its sales and distribution strategies, the Company has
developed and is developingcontinuing to develop and implement a set of integrated
software applications designed to automate the Company's operational processes.
Through the development of a robust, scalable business support system, the
Company believes that it has the opportunity to develop a competitive advantage
relative to traditional telecommunications companies. Whereas traditional
telecommunications companies operate extensive legacy business support systems
with compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and features, the CompanyLevel 3 has developed a business
support system architecture intended to maximize both reliability and
scalability.

Key design aspects of the business support system development program are:

. integrated modular applications to allow the Company to upgrade specific
applications as new products are available;

. a scalable architecture that allows certain functions that would
otherwise have to be performed by Level 3 employees to be performed by
the Company's alternative distribution channel participants;

. phased completion of software releases designed to allow the Company to
test functionality on an incremental basis;

. ""web-enabled""web-enabled" applications so that on-line access to all order entry,
network operations, billing, and customer care functions is available to
all authorized users, including Level 3's customers and resellers;

. use of a three-tiered,tiered, client/server architecture that is designed to separate
data and applications, and is expected to enable continued improvement
of software functionality at minimum cost; and

. maximum use of pre-developed or "shrink wrapped" applications, where applicable,
which will interface to Level 3's enterprise resource planning suites.

The first four releases of the business support system have been delivered
and contain functionality necessary to support the set of services presently
offered. See "--Communications and Information Services."internally developed applications.

Interconnection and Peering

As a result of the Telecom Act, properly certificated companies may, as a
matter of law, interconnect with ILECs on terms designed to help ensure
economic, technical and administrative equality between the interconnected
parties. The Telecom Act provides, among other things, that ILECs must offer
competitors the services and facilities necessary to offer local switched
services. See "--Regulation."

As of December 31, 1999,2000, the Company had entered into interconnection
agreements covering 49 markets. The Company may be required to negotiate new or
renegotiate existing interconnection agreements as Level 3 expands its
operations in current and additional markets in the future and as existing
agreements expire or are terminated.

Peering agreements between the Company and ISPs are necessary in order for
the Company to exchange traffic with those ISPs without having to pay transit
costs. The Company is considered a Tier 1 Internet Service Provider and has
peering arrangements with approximately 90 domestic ISPs and approximately 50150
international ISPs and is currently purchasing transit from one major ISP. The
basis on which the large national ISPs make peering available or impose
settlement 12
charges is evolving as the provision of Internet access and related
services has expanded.

Recently, companies that have previously offered peering have cut
back or eliminated peering relationships and are establishing new, more
restrictive criteria for peering. In order to maintain certain of its peering
relationships, Level 3 will have to meet these more restrictive criteria.

Employee Recruiting and Retention

As of December 31, 1999,2000, Level 3 had 3,1755,537 employees in the communications
portion of its business and PKSIS(i)Structure had approximately 681674 employees, for a
total of 3,8566,211 employees. The Company believes that its

ability to implement the Business Plan will depend in large part on its ability
to attract and retain substantial numbers of additional qualified employees.

In order to attract and retain highly qualified employees, the Company
believes that it is important to provide (i) a work environment that encourages
each individual to perform to his or her potential, (ii) a work environment
that facilitates cooperation towards shared goals and (iii) a compensation
program designed to attract the kinds of individuals the Company seeks and to
align employees' interests with the Company's. The Company believes that its
current business and the Business Plan andlocation of its relocation to newheadquarters facilities in the Denver
metropolitan area help provide such a work environment. With respect to
compensation programs, while the Company believes financial rewards alone are
not sufficient to attract and retain qualified employees, the Company believes
a properly designed compensation program is a necessary component of employee
recruitment and retention. In this regard the Company's philosophy is to pay
annual cash compensation which, if the Company's annual goals are met, is
moderately greater than the cash compensation paid by competitors. The
Company's non-cash benefit programs (including medical and health insurance,
life insurance, disability insurance, etc.) are designed to be comparable to
those offered by its competitors.

The Company believes that the qualified candidates it seeks place particular
emphasis on equity-based long term incentive ("LTI") programs. The Company
currently has two complementary programs: (i) the equity-based "Shareworks"
program, which helps ensure that all employees have an ownership interest in
the Company and are encouraged to invest risk capital in the Company's stock;
and (ii) an innovative Outperform Stock Option ("OSO") program applicable to
the Company's employees. The Shareworks program currently enables employees to
contribute up to 7% of their compensation toward the purchase of restricted
common stock.stock, which purchases are matched one for one by the Company. If an
employee remains employed by the Company for three years from the date of
purchase, the shares will vest and be matchedthat are contributed by the Company with a grantwill vest. The shares
that are purchased by the employee are vested at the time of an equal number of shares of its common stock.purchase. The
Shareworks program also provides that, subject to satisfactory Company
performance, the Company's employees will be eligible annually for grants by
the Company of its restricted common stock of up to 3% of the employees'
compensation, which shares will vest three years from the employee's initial
grant date. For the year ended December 31, 2000, the Company granted to its
eligible employees the full 3% grant.

The Company has adopted the OSO program, which differs from LTI programs
generally adopted by the Company's competitors that make employees eligible for
conventional non-qualified stock options ("NQSOs"). While widely adopted, the
Company believes such NQSO programs reward employees when company stock price
performance is inferior to investments of similar risks, dilute public
stockholders in a manner not directly proportional to performance and fail to
provide a preferred return on stockholders' invested capital over the return to
option holders. The Company believes that the OSO program is superior to an
NQSO-based program with respect to these issues while, at the same time,
providing employees a success-based reward balancing the associated risk.

The Company's OSO program is the primary component of Level 3's long term
incentive, stock based compensation programs. The OSO program was designed by
the Company so that its stockholders receive a market related return on their
investment before OSO holders receive any return on their options. The Company
believes that the OSO program aligns directly employees' and stockholders'
interests by basing stock option value on the Company's ability to outperform
the market in general, as measured by the S&P 500 Index. The value received for
options under the OSO plan is based on a formula involving a multiplier related
to how much our common stock outperforms the S&P 500 Index. Participants in the
OSO program do not realize any value from options unless our common stock price
outperforms the S&P 500 Index. To the extent that ourthe Level 3 common stock
outperforms the S&P 500, the value of OSOs to an option holder may exceed the
value of NQSOs.

In July 2000, the Company adopted a convertible outperform stock option
program, ("C-OSO") as an extension of the existing OSO plan. The program is a
component of the Company's ongoing employee retention efforts and offers
similar features to those of an OSO, but provides an employee with the greater
of the value of a single share of the Company's common stock at exercise, or
the calculated OSO value of a single OSO at the time of exercise.

C-OSO awards were made to eligible employees employed on the date of the
grant. The awards were made in September 2000 and December 2000. Each award
vests over three years as follows: 1/6 of each grant at the end of the first
year, a further 2/6 at the end of the second year and the remaining 3/6 in the
third year. Each award is immediately exercisable upon vesting. Awards expire
four years from the date of the grant.

Subsequent to the split-offMarch 31, 1998 (the effective date of the Construction Group from its other
businesses,separation of the
Company's former construction business), the Company adopted the recognition
provisions of SFAS No. 123. Under SFAS No. 123, the fair value of an OSO (as
computed in accordance with accepted option valuation models) on the date of
grant is amortized over the vesting period of the OSO. The recognition
provisions of SFAS No. 123 are applied prospectively upon adoption. As a
result, they are applied to all stock awards granted in the year of adoption
and are not applied to awards granted in previous years unless those awards are
modified or settled in cash after adoption of the recognition provisions. The
adoption of SFAS No. 123 resulted in non-cash charges to operations of $241
million in 2000, $126 million in 1999 and $39 million in 1998 and will continue
to result in non-cash charges to operations for future periods that the Company
believes will also be material. The amount of the non-
cashnon-cash charge will be
dependent upon a number of factors, including the number of options granted and
the fair value estimated at the time of grant.

Competition

The communications and information services industry is highly competitive. Many of the Company's
existing and potential competitors in the communications
and information services industry have
financial, personnel, marketing and other resources significantly greater than
those of the Company, as well as other competitive advantages including
existing customer bases. Increased consolidation and strategic alliances in the
industry resulting from the Telecom Act, the opening of the U.S. market to
foreign carriers, technological advances and further deregulation could give
rise to significant new competitors to the Company.

In the special access and private linerecent years, competition has increased in all areas of Level 3's
communications services market, themarket. The Company's primary competitors are IXCs,
ILECs, and CLECs. Most of these competitors have a
significant base of customers for whom they are currently providing colocation
services. Due to the high costs to CLECs, of switching colocation sites, the
Company may have a competitive disadvantage relative to these competitors. The
market for the colocation of web-servers is extremely competitive. In this
market, the Company competes with ISPs and many others, including Exodus,
GlobalCenterother companies that provide communications products and
Qwest.services. The following information identifies key competitors for each of the
Company's product offerings.

For voicetransport services, the Company will compete primarily with national and
regional network providers. AT&T, Sprint, MCI WorldCom and Qwest currently own
nationwide long distance fiber optic networks. Significant newLevel 3's key competitors
could arise as a result of increased consolidation and strategic alliances in
the industry resulting from recent Congressional and FCC actions. MCI WorldCom
has entered into an agreement to acquire Sprint. In Europe, GTS, MCI WorldCom
and Viatel currently own intercity networks. Qwest's network as well as the
intercity networks being deployed by others, including Broadwing and Williams
Communications in the United States and KPNQwest, i-21 andare
other facilities based communications companies including Williams
Communications, Global Crossing, inQwest Communications, Broadwing, and
360Networks. In Europe use advanced technology similar to thatand Asia, the Company's key competitors are other
carriers such as KPNQwest N.V., Viatel Inc., Carrier1 International, Colt
Telecom Group plc, Asia Global Crossing and Crosswave.

The Company's key competitors for its (3)Connect Modem services are other
providers of dial up Internet access including UUNet, Genuity, Sprint, ICG and
AT&T. In addition, the Level 3 network and
offer significantly more capacity tokey competitors for the marketplace. Increased capacity may
cause significant decreases in the prices for services. The abilityCompany's (3)Voice service
offering are other providers of the
Company to compete effectively in this market will depend upon its ability to
maintain high qualitywholesale long distance communications services
at prices equal to or below those charged by its
competitors. Interexchange Carriersincluding AT&T, Worldcom Inc., Sprint and certain CLECs with excess fiber optic
strands may be competitors in the dark fiber business. In theRBOCs. The RBOCs are seeking
authorizations to provide certain long distance market, the Company's primary competitorsservices which will include AT&T, MCI WorldCom,
Sprint and Qwest, all of whom have extensive experiencefurther
increase competition in the long distance services market. In addition,See "--Regulation."

Level 3's key competitors for its (3)Center Colocation services are other
facilities based communications companies, and other colocation providers such
as web hosting companies and third party colocation companies. These companies
include Exodus, Equinix, Williams Communications, Qwest Communications and
360Networks.

For the Telecom Act will allow the RBOCsCompany's (3)Crossroads Internet access service, Level 3 competes
with companies that include UUNet, Genuity, Williams Communications and others to enter
the long distance market. Bell Atlantic was recently authorized to conduct in-
region long distance service in New York. SBC has filed an application to
conduct such service in Texas. These providers are also competitors in the
provision of internet access. In local markets the Company will compete with
ILECs and CLECs, many of whom have extensive experience in the local market.Global
Crossing.

The communications and information services industry is subject to rapid and significant changes in
technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those which the
Company plans on providing. Accordingly, in the future the Company's most
significant competitors may be new entrants to the communications and
information services industry, which are not burdened by an installed base of
outmoded or legacy equipment.

Regulation

The Company's communications and information services business will be
subject to varying degrees of federal, state, local and international
regulation.

Federal Regulation

The FCC regulates interstate and international telecommunications services.
The FCC imposes extensive regulations on common carriers such as ILECs that
have some degree of market power. The FCC imposes less regulation on common
carriers without market power, such as the Company. The FCC permits these
nondominant carriers to provide domestic interstate services (including long
distance and access services) without prior authorization; but it requires
carriers to receive an authorization to construct and operate
telecommunications facilities, and to provide or resell telecommunications
services, between the United States and international points. The Company has
recently obtained FCC approval to land its transatlantic cable in the U.S. The
Company has obtained FCC authorization to provide international services on a
facilities and resale basis. The Company has filed tariffs for its interstateaccess and
international long distance services with the FCC.

Under the Telecom Act, any entity, including cable television companies, and
electric and gas utilities, may enter any telecommunications market, subject to
reasonable state regulation of safety, quality and consumer protection. Because
implementation of the Telecom Act is subject to numerous federal and state
policy rulemaking proceedings and judicial review, there is still uncertainty
as to what impact it will have on the Company. The Telecom Act is intended to
increase competition. The Telecom Act opens the local services market by
requiring ILECs to permit interconnection to their networks and establishing
ILEC obligations with respect to:

. Reciprocal Compensation. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements at prices
based on a reasonable approximation of incremental cost or through
mutual exchange of traffic without explicit payment.

. Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, ILECs are required to offer wholesale versions
of all retail services to other telecommunications carriers for resale
at discounted rates, based on the costs avoided by the ILEC in the
wholesale offering.

. Interconnection. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all ILECs to
permit interconnection at any technically feasible point within their
networks, on nondiscriminatory terms and at prices based on cost (which
may include a reasonable profit). At the option of the carrier seeking
interconnection, colocation of the requesting carrier's equipment in an
ILEC's premises must be offered, except where the ILEC can demonstrate
space limitations or other technical impediments to colocation.

. Unbundled Access. Requires all ILECs to provide nondiscriminatory access
to specified unbundled network elements (including certain network
facilities, equipment, features, functions, and capabilities) at any
technically feasible point within their networks, on nondiscriminatory
terms and at prices based on cost (which may include a reasonable
profit).

. Number Portability. Requires all ILECs and CLECs to permit, to the
extent technically feasible, users of telecommunications services to
retain existing telephone numbers without impairment of quality,
reliability or convenience when switching from one telecommunications
carrier to another.

15
. Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll
service, and to provide nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with no
unreasonable dialing delays.

. Access to Rights-of-Way. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and rights-of-way at
regulated prices.

ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Even
when an agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunications regulatory
commissions.

In August 1996, the FCC released a decision (the "Interconnection Decision")
establishing rules implementing the above-listed requirements and providing
guidelines for review of interconnection agreements by state public utility
commissions. The United States Court of Appeals for the Eighth Circuit (the
"Eighth Circuit") vacated certain portions of the Interconnection Decision. On
January 25, 1999, the Supreme Court reversed the Eighth Circuit with respect to
the FCC's jurisdiction to issue regulations governing local interconnection
pricing (including regulations governing reciprocal compensation). The Supreme
Court also found that the FCC had authority to promulgate a "pick and choose"
rule and upheld most of the FCC's rules governing access to unbundled network
elements. The Supreme Court, however, remanded to the FCC the standard by which
the FCC identified the network elements that must be made available on an
unbundled basis.

On November 5, 1999, the FCC released an order largely retaining its list of
unbundled network elements but eliminating the requirement that ILECs provide
unbundled access to local switching for customers with four or more lines in
the densest portion of the top 50 Metropolitan Statistical Areas, and the
requirement to unbundle operator services and directory assistance. The Eighth Circuit decisions and their recent reversal byIn its
decision, the FCC reaffirmed that network elements should be priced using a
total element long run incremental pricing ("TELRIC") methodology. A number of
parties challenged the FCC's TELRIC finding. On Jan. 22, 2001, the U.S. Supreme
Court continueagreed to cause uncertainty about the rules governing thehear those appeals. The Supreme Court's decision could effect
some pricing terms in the Company's existing interconnection agreements and conditionsmay
require the renegotiation of existing interconnection agreements. The Supreme
Court's action in
particular may require or trigger the renegotiation of existing agreements.
Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during
the pendency of the Eighth Circuit proceedings, the Supreme Court's recent
ruling and further proceedings on remand (either at the Eighth Circuit or the
FCC) may affect the scope of state commissions' authority to conduct such
proceedings or to implement or enforce interconnection agreements. Theydecision could also result in new or additional rules being promulgated by the FCC.
Given the general uncertainty surrounding the effect of the Eighth Circuitthese decisions and
the recent decision of the Supreme Court reversing them,appeals, the Company may not be able to continue to obtain or enforce
interconnection terms that are acceptable to it or that are consistent with its
business plans.

The Telecom Act also codifies the ILECs' equal access and nondiscrimination
obligations and preempts inconsistent state regulation. The Telecom Act
contains special provisions that modify previous court decrees that prevented
RBOCs from providing long distance services and engaging in telecommunications
equipment manufacturing. These provisions permit a RBOC to enter the long
distance market in its traditional service area if it satisfies several
procedural and substantive requirements, including obtaining FCC approval upon
a showing that the RBOC has entered into interconnection agreements (or, under
some circumstances, has offered to enter into such agreements) in those states
in which it seeks long distance relief, the interconnection agreements satisfy
a 14-point "checklist" of competitive requirements, and the FCC is satisfied
that the RBOC's entry into long distance markets is in the public interest. Recently,To
date, the FCC has approved petitions to provide long distance service by
Verizon in New York and Southwestern Bell Atlantic's petitionin Texas, Oklahoma and Kansas.
Verizon has refiled its application to offerprovide long distance service in
New York. SBC has filed an application to conduct such service in
Texas.Massachusetts. The Telecom Act permitted the RBOCs to enter the out-of-region
long distance market immediately upon its enactment.

In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant carriers such as the Company maintain tariffs on
file with the FCC for domestic interstate services. This order applies to all
non-dominant interstate carriers, including AT&T. The order does not apply to
the RBOCs or other local exchange providers. The FCC order was issued pursuant
to authority granted to the FCC in the Telecom Act to "forbear" from regulating
any telecommunications services provider if the FCC determines that the public
interest will be served. On February 13, 1997, the
United StatesU.S. Court of Appeals for the District of Columbia Circuit stayed the implementation of the
FCC order. On April 28, 2000, all litigation with respect to the FCC's order
pending its reviewwas resolved in favor of the order on the merits. Currently, that
temporary stay remains in effect.FCC. As a

If the stay is lifted and the FCC order becomes effective,
telecommunicationsresult, a deadline of August 1, 2001 has been established for non-dominant
carriers, such as Level 3, to eliminate tariffs for interstate services. Today,
the only service that the Company will no longer be able to rely
on the filing of tariffs with the FCCoffers that is characterized as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934.service is (3)Link Private Line--U.S. Intercity Service. While tariffs provided
a means of providing notice of prices as well as terms and conditions for the
provision of service, the Company intends to relyhas historically relied primarily on its
sales force and direct marketing activities to provide such information to its customers.customers
regarding these matters and expects to continue to do so after August 1, 2001.

The Company's costs of providing long distance services, as well as its
revenues from providing local services, will both be affected by changes in the
"access charge" rates imposed by ILECs on long distance carriers for
origination and termination of calls over local facilities. The FCC has made
major changes in the interstate access charge structure. In a December 24, 1996
order, the FCC removed restrictions on ILECs' ability to lower access prices
and relaxed the regulation of new switched access services in those markets
where there are other providers of access services. On August 5, 1999 the FCC
adopted an order granting price cap LECs additional pricing flexibility,
implementing certain access charge reforms and seeking comments on others. The
order provides certain immediate regulatory relief to price cap carriers and
sets a framework of "triggers" to provide those companies with greater pricing
flexibility to set interstate access rates as competition increases. The order
also initiated a rulemaking to determine whether the FCC should regulate the
access charges of CLECs. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to price its interstate access services
competitively. A May 16, 1997 order substantially increased the amounts that
ILECs subject to the FCC's price cap rules ("price cap LECs") recover through
monthly flat-rate charges and substantially decreased the amounts that these
LECs recover through traffic sensitive (per-minute) access charges. Several
parties appealed the May 16th order. On August 19, 1998, the Eighth Circuit
upheld the FCC's access charge reform rules.

Recently, the large interexchange or long distance carriers have challenged
the ability of competitive local exchange carriers or CLECs to levy access
charges to terminate traffic on a CLEC's network. AT&T and Sprint have filed
Petitions for Declaratory Ruling with the FCC asking whether any statutory or
regulatory constraints prevent an interexchange carrier from declining or
terminating access services ordered or constructively ordered from CLECs and
what steps interexchange carriers must take either to avoid ordering or to
cancel service after it has been ordered or constructively ordered. As a
result, the FCC has asked for public comment on the extent to which
interexchange carriers may lawfully refuse to accept and pay for CLEC
interstate access services. The central issue in dispute is whether CLECs can
levy access charges that are higher than the incumbent local exchange carriers
or ILECs. The Company's long standing policy has been to mirror the access
rates charged by the ILECs. Given the general uncertainty surrounding the
effect of any FCC decision or new FCC rules that may result from the AT&T and
Sprint petition, the Company may be required to change the manner in which
access charges are assessed or collected in the future.

Beginning in June 1997, every RBOC advised CLECs that they did not consider
calls in the same local calling area from their customers to CLEC customers,
who are ISPs, to be local calls under the interconnection agreements between
the RBOCs and the CLECs. The RBOCs claim that these calls are exchange access
calls for which exchange access charges would be owed. The RBOCs claimed,
however, that the FCC exempted these calls from access charges so that no
compensation is owed to the CLECs for transporting and terminating such calls.
As a result, the RBOCs threatened to withhold, and in many cases did withhold,
reciprocal compensation for the transport and termination of such calls. To
date, thirty-six state commissions have ruled on this issue in the context of
state commission arbitration proceedings or enforcement proceedings. In thirty-
three states, to date, the state commission has determined that reciprocal
compensation is owed for such calls. Several of these cases are presently on
appeal. Reviewing courts have upheld the state commissions in eight decisions
rendered to date on appeal. Appeals from these decisions are pendingDecisions in the Fourth, Fifth and FifthSeventh U.S.
Circuit Courts of Appeal. The SeventhAppeal have upheld state determinations that reciprocal
compensation is owed for ISP bound traffic. A decision is pending before the
U.S. Circuit upheldCourt of Appeals for the Illinois Commerce Commission decision on June 18, 1999.District of Columbia. On February 25,
1999, the FCC issued a Declaratory Ruling on the issue of inter-carrier
compensation for calls bound to ISPs. The FCC ruled that the calls are largely
jurisdictionally interstate calls, not local calls. The FCC, however,
determined that this

issue was not dispositive of whether inter-carrier compensation is owed. The
FCC noted a number of factors which would allow the state commissions to leave
their decisions requiring the payment of compensation undisturbed. The Company
cannot predict the effect of the FCC's ruling on existing state decisions, or
the outcome of pending appeals or of additional pending cases. The Ninth
Circuit dismissed an appeal of a Washington decision on the ground that it
constituted a collateral attack on the FCC's ruling. The FCC also issued
proposed rules to address inter-carrier compensation in the future.

The Company recentlyhas entered into an agreementagreements with Verizon, formerly Bell
Atlantic, which
establishes ratesthat provides for transmission of localpayment for ISP bound traffic in the 14-state
Verizon territory and Internet bound traffic.with SBC Corporation for the 13-state operating territory
that includes its affiliates Pacific Bell, Southwestern Bell, Ameritech and
Southern New England Telephone.

The FCC has to date treated ISPs as "enhanced service providers," exempt
from federal and state regulations governing common carriers, including the
obligation to pay access charges and contribute to the universal service fund.
Nevertheless, regulations governing disclosure of confidential communications,
copyright, excise tax, and other requirements may apply to the Company's
provision of Internet access services. The Company cannot predict the
likelihood that state, federal or foreign governments will impose additional

regulation on the Company's Internet business, nor can it predict the impact
that future regulation will have on the Company's operations.

In December 1996, the FCC initiated a Notice of Inquiry regarding whether to
impose regulations or surcharges upon providers of Internet access and
information services (the "Internet NOI"). The Internet NOI sought public
comment upon whether to impose or continue to forebear from regulation of
Internet and other packet-switched network service providers. The Internet NOI
specifically identifies Internet telephony as a subject for FCC consideration.
On April 10, 1998, the FCC issued a Report to Congress on its implementation of
the universal service provisions of the Telecom Act. In that Report, the FCC
stated, among other things, that the provision of transmission capacity to ISPs
constitutes the provision of telecommunications and is, therefore, subject to
common carrier regulations. The FCC indicated that it would reexamine its
policy of not requiring an ISP to contribute to the universal service
mechanisms when the ISP provides its own transmission facilities and engages in
data transport over those facilities in order to provide an information
service. Any such contribution by a facilities based ISP would be related to
the ISP's provision of the underlying telecommunications services. In the
Report, the FCC also indicated that it would examine the question of whether
certain forms of "phone-to-phone Internet Protocol telephony" are information
services or telecommunications services. It noted that the FCC did not have an
adequate record on which to make any definitive pronouncements on that issue at
this time, but that the record the FCC had reviewed suggests that certain forms
of phone-to-phone Internet Protocol telephony appear to have similar
functionality to non-Internet Protocol telecommunications services and lack the
characteristics that would render them information services. If the FCC were to
determine that certain Internet Protocol telephony services are subject to FCC
regulations as telecommunications services, the FCC noted it may find it
reasonable that the ISPs pay access charges and make universal service
contributions similar to non-Internet Protocol based telecommunications service
providers. The FCC also noted that other forms of Internet Protocol telephony
appear to be information services. The Company cannot predict the outcome of
these proceedings or other FCC proceedings that may effect the Company's
operations or impose additional requirements, regulations or charges upon the
Company's provision of Internet access services.

On May 8, 1997, the FCC issued an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new universal service funds to support telecommunications and
information services provided to qualifying schools and libraries (with an
annual cap of $2.25 billion) and to rural health care providers (with an annual
cap of $400 million). The FCC also expanded the federal subsidies for local
exchange telephone services provided to low-income consumers and recently
doubled the size of the high cost fund for non-rural LECs. Providers of
interstate telecommunications service, such as the Company, as well as certain
other entities, must pay for these programs. The Company's contribution to
these universal service funds will be based on its telecommunications service
end-user revenues. The extent to which the Company's services are viewed as
telecommunications services or as information services will impact the

18
amount of the Company's contributions, if any. As indicated in the preceding
paragraph, that issue has not been resolved. Currently, the FCC assesses such
payments on the basis of a provider's revenue for the previous year. The
Company is currently unable to quantify the amount of subsidy payments that it
will be required to make and the effect that these required payments will have
on its financial condition because of uncertainties concerning the size of the
universal fund and uncertainties concerning the classification of its services.
The Fifth Circuit Court of Appeals recently upheld the FCC in most respects,
but rejected the FCC's effort to base contributions on intrastate revenues. The
FCC's universal service program may also be altered as a result of the agency's
reconsideration of its policies, or by future Congressional action.

The FCC recently adopted new rules designed to make it easier and less
expensive for CLECs to obtain colocation at ILEC central offices by, among
other things, restricting the ILEC's ability to prevent certain types of
equipment from being colocated and requiring ILECs to offer alternative
colocation arrangements which will be less costly.

On November 18, 1999, the FCC adopted a new order requiring ILECs to provide
line sharing, which will allow CLECs to offer data services over the same line
the consumer uses for voice services without the CLECs being required to offer
the voice services. State commissions have been authorized to establish the
prices to the CLECs for such services. The decision has been appealed.

18
State Regulation

The Telecom Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecom Act is subject to numerous state rulemaking proceedings on these
issues, it is currently difficult to predict how quickly full competition for
local services, including local dial tone, will be introduced.

State regulatory agencies have jurisdiction when Company facilities and
services are used to provide intrastate services. A portion of the Company's
traffic may be classified as intrastate and therefore subject to state
regulation. The Company expects that it will offer more intrastate services
(including intrastate switched services) as its business and product lines
expand. To provide intrastate services, the Company generally must obtain a
certificate of public convenience and necessity from the state regulatory
agency and comply with state requirements for telecommunications utilities,
including state tariffing requirements. The Company currently is authorized to
provide telecommunications services in all fifty states and the District of
Columbia, other than Alaska.Columbia. The Company has a pending application foris seeking expanded authority to provide
telecommunications services in Alaska. In addition, the Company has filed an
application with the California Public Utilities Commission to expand the
Company's network within that state. While approvalstates of the application is
expected by mid-2000, the Company cannot predict how quickly the Commission
will actIowa,
Wisconsin and whether any such delays will affect its ability to complete the
network.New Mexico.

States also often require prior approvals or notifications for certain
transfers of assets, customers or ownership of certificated carriers and for
issuances by certified carriers of equity or debt.

Local Regulation

The Company's networks will be subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city-by-city, county-
by-county and state-by-state basis. To install its own fiber optic transmission
facilities, the Company will need to obtain rights-of-way over privately and
publicly owned land. Rights-of-way that are not already secured may not be
available to the Company on economically reasonable or advantageous terms.

Canadian Regulation

The Canadian Radio-television and Telecommunications Commission (the "CRTC")
generally regulates long distance telecommunications services in Canada.
Regulatory developments over the past several years have terminated the
historic monopolies of the regional telephone companies, bringing significant
competition

19
to this industry for both domestic and international long distance services,
but also lessening regulation of domestic long distance companies. Resellers,
which, as well as facilities-based carriers, now have interconnection rights,
but which are not obligated to file tariffs, may not only provide transborder
services to the U.S. by reselling the services provided by the regional
companies and other entities but also may resell the services of the former
monopoly international carrier, Teleglobe Canada ("Teleglobe"), including
offering international switched services provisioned over leased lines.
Although the CRTC formerly restricted the practice of "switched hubbing" over
leased lines through intermediate countries to or from a third country, the
CRTC recently lifted this restriction. The Teleglobe monopoly on international
services and submarineundersea cable landing rights terminated as of October 1, 1998,
although the provision of Canadian international transmission facilities-based
services remains restricted to "Canadian carriers" with majority ownership by
Canadians. Ownership of non-
internationalnon-international transmission facilities are limited
to Canadian carriers but the Company can own international submarineundersea cables
landing in Canada. The Company cannot, under current or foreseen law, enter the
Canadian market as a provider of transmission facilities-based domestic
services. Recent CRTC rulings address issues such as the framework for
international contribution charges payable to the local

19
exchange carriers to
offset some of the capital and operating costs of the provision of switched
local access services of the incumbent regional telephone companies, in their
capacity as ILECs, and the new entrant CLECs.

While competition is permitted in virtually all other Canadian
telecommunications market segments, the Company believes that the regional
companies continue to retain a substantial majority of the local and calling
card markets. Beginning in May 1997, the CRTC released a number of decisions
opening to competition the Canadian local telecommunications services market,
which decisions were made applicable in the territories of all of the regional
telephone companies except SaskTel (although Saskatchewan has subsequently
allowed local service competition in that province). As a result, networks
operated by CLECs may now be interconnected with the networks of the ILECs.
Transmission facilities-based CLECs are subject to the same majority Canadian
ownership "Canadian carrier" requirements as transmission facilities-based long
distance carriers. CLECs have the same status as ILECs, but they do not have
universal service or customer tariff-filing obligations. CLECs are subject to
certain consumer protection safeguards and other CRTC regulatory oversight
requirements. CLECs must file interconnection tariffs for services to
interexchange service providers and wireless service providers. Certain ILEC
services must be provided to CLECs on an unbundled basis and subject to
mandatory pricing, including central office codes, subscriber listings, and
local loops in small urban and rural areas. For a five-year period, certain
other important CLEC services must be provided on an unbundled basis at
mandated prices, notably unbundled local loops in large, urban areas. ILECs,
which, unlike CLECs, remained fully regulated, will be subject to price cap
regulation in respect of their utility services for an initial four-year period
beginning May 1, 1997, and these services must not be priced below cost.
Interexchange contribution payments are now pooled and distributed among ILECs
and CLECs according to a formula based on their respective proportions of
residential lines, with no explicit contribution payable from local business
exchange or directory revenues. CLECs must pay an annual telecommunications fee
based on their proportion of total CLEC operating revenues. All bundled and
unbundled local services (including residential lines and other bulk services)
may now be resold, but ILECs need not provide these services to resellers at
wholesale prices. Transmission facilities-based local and long distance
carriers (but not resellers) are entitled to colocate equipment in ILEC central
offices pursuant to terms and conditions of tariffs and intercarrier
agreements. Certain local competition issues are still to be resolved. The CRTC
has ruled that resellers cannot be classified as CLECs, and thus are not
entitled to CLEC interconnection terms and conditions.

The Company's Other Businesses

investment in C-TEC Corporation and its successors RCN Corporation,
Commonwealth Telephone Enterprises, Inc. and Cable Michigan, Inc.) in 1988, the
information services business in 1990 and the alternative energy business,
through an investment in MidAmerican, in 1991. Level 3 also has made
investments in several development-stage ventures.

In 1995, the Company distributed to the holders of Class D Stock all of its
shares of MFS. In the seven years from 1988 to 1995, the Company invested
approximately $500 million in MFS; at the time of the distribution to
stockholders in 1995, the Company's holdings in MFS had a market value of
approximately $1.75 billion. In December 1996, MFS was purchased by WorldCom in
a transaction valued at $14.3 billion. In December 1997, the Company's
stockholders ratified the decision of the Board to effect the split-off
separating the Construction Group. As a result of the split-off, which was
completed on March 31, 1998, the Company no longer owns any interest in the
Construction Group. In conjunction with the split-off, the Company changed its
name to "Level 3 Communications, Inc.," and the Construction Group changed its
name to "Peter Kiewit Sons', Inc."

In January 1998, the Company completed the sale to MidAmerican of its energy
investments, consisting primarily of a 24% equity interest in MidAmerican. The
Company received proceeds of approximately $1.16 billion from this sale, and as
a result recognized an after-tax gain of approximately $324 million in 1998. In
November 1998, Avalon Cable of Michigan, Inc. acquired all the outstanding
stock of Cable Michigan. Level 3 received approximately $129 million in cash
for its interest in Cable Michigan and recognized a pre-tax gain of
approximately $90 million.

The Company's other businesses include its investment in the C-TEC Companies
(as defined), coal mining, the SR91 Tollroad (as defined) and certain other
assets. In 1998, the Company completed the sale of its interests in United
Infrastructure Company, MidAmerican and Kiewit Investment Management Corp.

(i)Structure, Inc.

Level 3 currently offers, through its subsidiary (i)Structure, Inc.
(formerly PKS Information Services, Inc.), computer operations outsourcing and
systems integration services to customers located throughout the United States
as well as abroad.

The Company's systems integration services help customers define, develop
and implement cost-effective information services. The computer outsourcing
services offered by the Company include networking and computing services
necessary for older mainframe-based systems and newer client/server-based
systems. The Company provides its outsourcing services to clients that want to
focus their resources on core businesses, rather than expend capital and incur
overhead costs to operate their own computing environments. (i)Structure
believes that it is able to utilize its expertise and experience, as well as
operating efficiencies, to provide its outsourcing customers with levels of
service equal to or better than those achievable by the customers themselves,
while at the same time reducing the customers' cost for such services. This
service is particularly useful for those customers moving from older computing
platforms to more modern client/server networks.

(i)Structure offers reengineering services that allow companies to convert
older legacy software systems to modern networked computing systems, with a
focus on reengineering software to enable older software application and data
repositories to be accessed by web browsers over the Internet or over private
or limited access Internet Protocol networks. (i)Structure also provides
customers with a combination of workbench tools and methodologies that provide
a complete strategy for converting mainframe-based application systems to
client/server architecture.

C-TEC Companies

On September 30, 1997, C-TEC completed a tax-free restructuring, which
divided C-TEC Corporation into three public companies (the "C-TEC Companies"):
C-TEC, which changed its name to Commonwealth Telephone Enterprises, Inc.
("Commonwealth Telephone"), RCN Corporation ("RCN") and Cable Michigan.Michigan,

Inc. ("Cable Michigan"). The Company's interests in the C-TEC Companies are
held through a holding company (the "C-TEC Holding Company"). The Company owns
90% of the common stock of the C-TEC Holding Company, and preferred stock of
the C-TEC Holding Company with a liquidation value of approximately $499$540
million as of December 31, 1999.2000. The remaining 10% of the common stock of the
C-TEC Holding Company is held by David C. McCourt, a director of the Company
who was formerly the Chairman of C-TEC. In the event of a liquidation of the C-TECC-
TEC Holding Company, the Company would first receive the liquidation value of
the preferred stock. Any excess of the value of the C-TEC Holding Company above
the liquidation value of the preferred stock would be split according to the
ownership of the common stock.

Commonwealth Telephone. Commonwealth Telephone is a Pennsylvania public
utility providing local telephone service to a 19-county, 5,191 square mile
service territory in Pennsylvania. Commonwealth

Telephone services approximately 291,000 main access lines. Commonwealth Telephone also provides network
access and long distance services to IXCs. Commonwealth Telephone's business
customer base is diverse in size as well as industry, with very little
concentration. A subsidiary, Commonwealth Communications Inc. provides
telecommunications engineering and technical services to large corporate
clients, hospitals and universities in the northeastern United States. Another
subsidiary, Commonwealth Long Distance operates principally in Pennsylvania,
providing switched services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis. As of
December 31, 1999,2000, the C-TEC Holding Company owned approximately 47.9%46.3% of the
outstanding common stock of Commonwealth Telephone.

On October 23, 1998, Commonwealth Telephone completed a rights offering of
3.7 million shares of its common stock. In the offering, Level 3 exercised all
rights it received and purchased approximately 1.8 million additional shares of
Commonwealth Telephone common stock for an aggregate subscription price of
$37.7 million.

RCN. RCN is a full service provider of local, long distance, Internet and
cable television services primarily to residential users in densely populated
areas in the Northeast. RCN operates as a competitive telecommunications
service provider in New York City and Boston. RCN also owns cable television
operations in New York, New Jersey and Pennsylvania; a 40%49% interest in
Megacable, S.A. de C.V., Mexico's second largest cable television operator; and
has long distance operations (other than the operations in certain areas of
Pennsylvania). RCN is developing advanced fiber optic networks to provide a
wide range of telecommunications services, including local and long distance
telephone, video programming and data services (including high speed Internet
access), primarily to residential customers in selected markets in the Boston
to Washington, D.C. and San Francisco to San Diego corridors. During the first
quarter of 1998, RCN acquired Ultranet Communications, Inc.corridors and Erols Internet,
Inc., two ISPs with operations in the Boston to Washington, D.C. corridor.Chicago. As of
December 31, 1999,2000, the C-TEC Holding Company owned approximately 34.5%30.8% of the
outstanding common stock of RCN.

Cable Michigan. Cable Michigan was a cable television operator in the State
of Michigan which, as of December 31, 1997, served approximately 204,000
subscribers including approximately 39,400 subscribers served by Mercom.
Clustered primarily around the Michigan communities of Grand Rapids, Traverse
City, Lapeer and Monroe (Mercom), Cable Michigan's systems serve a total of
approximately 400 municipalities in suburban markets and small towns.Michigan. On June 4, 1998, Cable Michigan announced that it had agreed to be
acquired by Avalon Cable. Level 3 received approximately $129 million in cash
when the transaction closed on November 6, 1998.

Coal Mining

The Company is engaged in coal mining through its subsidiary, KCP, Inc.
("KCP"). KCP has a 50% interest in threetwo mines, which are operated by a
subsidiary of Peter Kiewit Sons', Inc. ("New PKS"). Decker Coal Company
("Decker") is a joint venture with Western Minerals, Inc., a subsidiary of The
RTZ Corporation PLC. Black Butte Coal Company ("Black Butte") is a joint
venture with Bitter Creek Coal Company, a subsidiary of Union Pacific Resources
Group Inc. Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of PhillipsAnadarko Petroleum
Company.Corporation. The Decker mine is located in southeastern Montana and the Black
Butte mine is in southwestern Wyoming, and the Walnut Creek mine is in east-central
Texas.Wyoming. The coal mines use the surface mining
method.

In September 2000, the Company sold its entire 50% ownership interest in the
Walnut Creek Mining Company to a subsidiary of Peter Kiewit Sons', Inc. for
cash of $37 million.

The coal produced from the KCP mines is sold primarily to electric
utilities, which burn coal in order to produce steam to generate electricity.
Approximately 95% of sales are made under long-term contracts, and the
remainder are made on the spot market. Approximately 75%76%, 77%75% and 79%77% of KCP's
revenues in 2000, 1999 1998 and 19971998 respectively, were derived from long-term
contracts with Commonwealth Edison Company (with Decker and Black Butte) and
The Detroit Edison Company (with Decker). The primary customer of Walnut Creek
is the Texas-New Mexico Power Company ("TNP"). KCP also has other sales commitments,
including those with Sierra Pacific, Idaho Power, Solvay Minerals, Pacific
Power & Light Minnesota Power, and 21

MississippiMinnesota Power, that provide for the delivery of
approximately 1310 million tons through 2005. The level of cash flows generated
in recent periods by the Company's coal operations will not continue after the
year 2000 because the delivery requirements under the Company's current long-termlong-
term contracts decline significantly. Under a mine management agreement, KCP
pays a subsidiary of New PKS an annual fee equal to 30% of KCP's adjusted
operating income. The fee for 19992000 was $33$29 million.

The coal industry is highly competitive. KCP competes not only with other
domestic and foreign coal suppliers, some of whom are larger and have greater
capital resources than KCP, but also with alternative methods of generating
electricity and alternative energy sources. In 1997,1998, KCP's production
represented 1.4%1.3% of total U.S. coal production. Demand for KCP's coal is
affected by economic, political and regulatory factors. For example, recent
"clean air" laws may stimulate demand for low sulfur coal. KCP's western coal
reserves generally have a low sulfur content (less than one percent) and are
currently useful principally as fuel for coal-fired, steam-electric generating
units.

KCP's sales of its western coal, like sales by other western coal producers,
typically provide for delivery to customers at the mine. A significant portion
of the customer's delivered cost of coal is attributable to transportation
costs. Most of the coal sold from KCP's western mines is currently shipped by
rail to utilities outside Montana and Wyoming. The Decker and Black Butte mines
are each served by a single railroad. Many of their western coal competitors
are served by two railroads and such competitors' customers often benefit from
lower transportation costs because of competition between railroads for coal
hauling business. Other western coal producers, particularly those in the
Powder River Basin of Wyoming, have lower stripping ratios (that is, the amount
of overburden that must be removed in proportion to the amount of minable coal)
than the Black Butte and Decker mines, often resulting in lower comparative
costs of production. As a result, KCP's production costs per ton of coal at the
Black Butte and Decker mines can be as much as four and five times greater than
production costs of certain competitors. KCP's production cost disadvantage has
contributed to its agreement to amend its long-term contract with Commonwealth
Edison Company to provide for delivery of coal from alternate source mines
rather than from Black Butte. Because of these cost disadvantages, KCP does not
expect that it will be able to enter into long-term coal purchase contracts for
Black Butte and Decker production as the current long-term contracts expire. In
addition, these cost disadvantages may adversely affect KCP's ability to
compete for spot sales in the future.

The Company is required to comply with various federal, state and local laws
and regulations concerning protection of the environment. KCP's share of land
reclamation expenses for the year ended December 31, 19992000 was approximately $7$6
million. KCP's share of accrued estimated reclamation costs was $100$94 million at
December 31, 1999.2000. The Company did not make significant capital expenditures
for environmental compliance with respect to the coal business in 1999.2000. The
Company believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since its competitors
in the mining industry are similarly affected by such laws. However, failure to
comply with environmental protection and land restoration laws, or actual
reclamation costs in excess of the Company's accruals, could have an adverse
effect on the Company's business, results of operations, and financial
condition.

SR91 Tollroad

The Company has invested $12.9$13.1 million for a 65% equity interest and lent
$6.4$8.0 million to California Private Transportation Company L.P. ("CPTC"), which
developed, financed, and currently operates the 91 Express Lanes, a ten mile,
four-lane tollroad in Orange County, California (the "SR91 Tollroad"). The
fully automated highway uses an electronic toll collection system and variable
pricing to adjust tolls to demand.

Capital costs at completion were $130 million, $110 million of which was funded
with debt that was not guaranteed by Level 3. However, certain defaults by
Level 3 on its outstanding debt and certain judgments against Level 3 can
result in default under this debt of CPTC. Revenue collected over the 35-year
franchise period is used for operating expenses, debt repayment, and profit
distributions. The SR91 Tollroad opened in December 1995 and achieved operating
break-even in 1996. Approximately 93,90096,100 customers have registered to use the
tollroad as of December 31, 1999,2000, and weekday volumes typically exceed 21,60025,700
vehicles per day during December 1999.

Industry Overview

History and Industry Development

Telecommunications Industry. Prior to its court-ordered breakup in 1984 (the
"Divestiture"), AT&T largely monopolized the telecommunications services in the
United States even though technological developments had begun to make it
economically possible for companies (primarily entrepreneurial enterprises) to
compete for segments of the communications business.

The present structure of the U.S. telecommunications market is largely the
result of the Divestiture. As part of the Divestiture, seven local exchange
holding companies were created to offer services in geographically defined
areas called LATAs. The RBOCs were separated from the long distance provider,
AT&T, resulting in the creation of two distinct market segments: local exchange
and long distance. The Divestiture provided for direct, open competition in the
long distance segment.

The Divestiture did not provide for competition in the local exchange
market. However, several factors served to promote competition in the local
exchange market, including: (i) customer desire for an alternative to the
RBOCs, also referred to as the ILECs; (ii) technological advances in the
transmission of data and video requiring greater capacity and reliability than
ILEC networks were able to accommodate; (iii) a monopoly position and rate of
return-based pricing structure which provided little incentive for the ILECs to
upgrade their networks; and (iv) the significant fees, called "access charges,"
that long distance carriers were required to pay to the ILECs to access the
ILECs' networks.

The first competitors in the local exchange market, designated as CAPs by
the FCC, were established in the mid-1980s. Most of the early CAPs were
entrepreneurial enterprises that operated limited networks in the central
business districts of major cities in the United States where the highest
concentration of voice and data traffic is found. Since most states prohibited
competition for local switched services, early CAP services primarily consisted
of providing dedicated, unswitched connections to long distance carriers and
large businesses. These connections allowed high-volume users to avoid the
relatively high prices charged by ILECs for dedicated, unswitched connections.

As CAPs proliferated during the latter part of the 1980s, certain federal
and state regulators issued rulings which favored competition and promised to
open local markets to new entrants. These rulings allowed CAPs to offer a
number of new services, including, in certain states, a broad range of local
exchange services, including local switched services. Companies providing a
combination of CAP and switched local services are sometimes referred to as
CLECs. This pro-competitive trend continued with the passage of the
Telecommunications Act of 1996 (the "Telecom Act"), which provided a legal
framework for introducing competition to local telecommunications services
throughout the United States.

Over the last three years, several significant transactions have been
announced representing consolidation of the U.S. telecom industry. Among the
ILECs, Bell Atlantic and NYNEX merged in August 1997, Pacific Telesis Group and
SBC Communications merged in April 1997, SBC Communications and Ameritech
merged in October 1999, GTE and Bell Atlantic have proposed a merger and MCI
WorldCom has agreed to acquire Sprint. Long distance providers have sought to
enhance their positions in local markets, through transactions such as AT&T's
acquisition of Teleport Communications Group and of Tele-Communications, Inc.,
WorldCom's mergers with MFS and Brooks Fiber Properties and Qwest's proposed
acquisition of US West. They have also sought to otherwise improve their
competitive positions, through transactions such as WorldCom's merger with MCI.

Many international markets resemble that of the United States prior to the
Divestiture. In many countries, traditional telecommunications services have
been provided through a monopoly provider, frequently controlled by the
national government, such as a Post, Telegraph and Telephone Company. In recent
years, there has been a trend toward liberalization of many of these markets,
particularly in Europe. Led by the introduction of competition in the United
Kingdom, the European Union mandated open competition as of January 1998.
Similar trends are emerging, albeit more slowly, in Asia.

Internet Industry. The Internet is a global collection of interconnected
computer networks that allows commercial organizations, educational
institutions, government agencies and individuals to communicate
electronically, access and share information and conduct business. The Internet
originated with the ARPAnet, a restricted network that was created in 1969 by
the United States Department of Defense Advanced Research Projects Agency to
provide efficient and reliable long distance data communications among the
disparate computer systems used by government-funded researchers and academic
organizations. The networks that comprise the Internet are connected in a
variety of ways, including by the public switched telephone network and by high
speed, dedicated leased lines. Communications on the Internet are enabled by
Internet Protocol, an inter-networking standard that enables communication
across the Internet regardless of the hardware and software used.

Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an ISP became more prevalent. ISPs offer access, e-
mail, customized content and other specialized services and products aimed at
allowing both commercial and residential customers to obtain information from,
transmit information to, and utilize resources available on the Internet.

ISPs generally operate networks composed of dedicated lines leased from
ILECs, CLECs and ISPs using Internet Protocol based switching and routing
equipment and server-based applications and databases. Customers are connected
to the ISP's POP by facilities obtained by the customer or the ISP from either
ILECs or CLECs through a dedicated access line or the placement of a circuit-
switched local telephone call to the ISP.

Internet Protocol Communications Technology. There are two widely used
switching technologies in currently deployed communications networks: circuit-
switching systems and packet-switching systems. Circuit-switch based
communications systems establish a dedicated channel for each communication
(such as a telephone call for voice or fax), maintain the channel for the
duration of the call, and disconnect the channel at the conclusion of the call.
Packet-switch based communications systems format the information to be
transmitted, such as e-mail, voice, fax and data into a series of shorter
digital messages called "packets." Each packet consists of a portion of the
complete message plus the addressing information to identify the destination
and return address.

Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, certain
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by the Internet traffic volumes,
are straining capacity and contributing to latency (delays) and interruptions
in communications transmissions.

On June 23, 1999, Level 3 announced a minimum four year, $250 million
strategic agreement with Lucent Technologies to purchase Lucent systems,
including software switches or "softswitches." The minimum purchase commitment
is subject to certain conditions and has the potential to grow to $1 billion
over five years.

Under this nonexclusive agreement, Lucent will provide Level 3 its Lucent
Technologies Softswitch, a software switch for Internet Protocol networks that
is intended to combine the reliability and features that customers expect from
the public switched telephone network with the cost effectiveness and
flexibility of Internet Protocol technology. With the Lucent Softswitch, Level
3 expects to provide a full range of Internet Protocol based communications
services similar in quality and ease of use to services on traditional circuit
voice networks. In addition, the companies also agreed to collaborate on future
enhancements of softswitches and gateway products to support next-generation
broadband services for business and consumers that will combine high-quality
voice and video communications with Internet-style web data services.2000.

Telecommunications Services Market

Overview of U.S. Market. The traditional U.S. market for telecommunications
services can be divided into three basic sectors: long distance services, local
exchange services and Internet access services. It has been estimated that in
1998 local exchange services accounted for revenues of $96.8 billion, long
distance services generated revenues of $110.5 billion and Internet access
revenues totaled $8.3 billion. Revenues for both local exchange and long
distance services include amounts charged by long distance carriers and
subsequently paid to ILECs (or, where applicable, CLECs) for long distance
access.

Long Distance Services. A long distance telephone call can be envisioned as
consisting of three segments. Starting with the originating customer, the call
travels along an ILEC or CLEC network to a long distance carrier's POP. At the
POP, the call is combined with other calls and sent along a long distance
network to a POP on the long distance carrier's network near where the call
will terminate. The call is then sent from this POP along an ILEC or CLEC
network to the terminating customer. Long distance carriers provide only the
connection between the two local networks, and pay access charges to LECs for
originating and terminating calls.

The following diagram is a simplified illustration of a typical long
distance call:

[GRAPHIC OF TYPICAL LONG DISTANCE CALL]

Local Exchange Services. A local call is one that does not require the
services of a long distance carrier. In general, the local exchange carrier
connects end user customers within a LATA and also provides the local portion
of most long distance calls.

The following diagram is a simplified illustration of a typical local call:

[GRAPHIC OF TYPICAL LOCAL CALL]

Internet Service. Internet services are generally provided in at least two
distinct segments. A local network connection is required from the ISP customer
to the ISP's local facilities. For large, communication-intensive users and for
content providers, these connections are typically unswitched, dedicated
connections provided by ILECs or CLECs, either as independent service providers
or, in some cases, by a company which is both a CLEC and an ISP. For
residential and small/medium business users, these connections are generally
PSTN connections obtained on a dial-up access basis as a local exchange
telephone call. Once a local connection is made to the ISP's local facilities,
information can be transmitted and obtained over a packet-switched Internet
Protocol data network, which may consist of segments provided by many
interconnected networks operated by a number of ISPs. This collection of
interconnected networks makes up the Internet. A key feature of Internet
architecture and packet-switching is that a single dedicated channel between
communication points is never established, which distinguishes Internet-based
services from the PSTN.

The following diagram is a simplified illustration of a typical Internet
access service:

[GRAPHIC OF TYPICAL INTERNET ACCESS SERVICE]

Overview of International Market. The traditional market for
telecommunications services outside of the United States can also be divided
into three basic sectors: long distance services, local exchange services and
Internet access services. It has been estimated that in 1998 local exchange
services accounted for revenues of $124.6 billion, long distance services
generated revenues of $199.6 billion and Internet access revenues totaled $7.1
billion.

Internet Protocol Network and Interconnection. The Company designed the
Level 3 network to be optimized for Internet Protocol based communications,
rather than circuit-switch based communications such as that utilized by the
PSTN. The network was designed with the goal of providing the Company with the
ability to adapt its facilities, hardware and software to future technology
developments in packet-switch based communications systems.

There are many Internet Protocol networks currently in operation. While
generally adequate for data transmission needs, these networks usually are not
configured to provide the voice quality, real-time communications requirements
of a traditional telephone call. With current technology, this quality can only
be achieved by providing a substantial cushion of communications capacity. In
addition, existing voice-over Internet Protocol services generally require
either customized end-user equipment or the dialing of "access codes" or the
following of other similar special procedures to initiate a call. There are
also concerns about the reliability and security of existing Internet Protocol
voice networks.

The Company has developed its Internet Protocol voice services so that
customers will not be required to dial access codes or follow other special
procedures to initiate a call. The Company and other technology providers have
developed, and we are commercially testing, softswitch technology to enable the
transmission of traffic seamlessly between a router-based Internet Protocol
network and the circuit-based PSTN. When commercially deployed, this technology
will provide the Level 3 network with the same ubiquity of the PSTN.
Specifically, this technology will provide Level 3 with (1) the ability to
originate PSTN telephone traffic from an ILEC's switch (when the origination
point is not on the Level 3 network), (2) route the traffic over the Level 3
network and (3) deliver the traffic either (a) directly to its destination (if
the destination is on the Level 3 network) or (b) to an interconnection point
where the traffic is transferred back to the PSTN (the routing of traffic to
this interconnection point will be determined based on a least-cost routing
criteria). Level 3 expects to be able to obtain the benefits of packet-switch
based communications protocols on its network, while allowing its customers to
use their existing equipment, telephone numbers and dialing procedures, without
additional access codes, for routing the call to the Level 3 network. Level 3
believes that by building its own network with significant excess capacity,
expandability and the latest technological advances in network design and
equipment and having the ability to route calls over the PSTN in the event of
service disruptions, the other significant issues associated with Internet
Protocol voice transmission (quality, latency, reliability and security) will
have been satisfactorily addressed. The Company commercially launched its
Internet Protocol long distance voice transmission services in December 1999.
The Company expects to begin commercial testing of some features associated
with local service, such as caller ID, voice mail and call forwarding, during
the first quarter of 2000.

On November 16, 1998, Level 3 and Bell Communications Research Inc.
announced the merger of their respective specifications for a new protocol
designed to bridge between the current circuit-based PSTN and emerging Internet
Protocol based networks. The merged specification, called the Media Gateway
Control Protocol, or MGCP, represents a combination of the Internet Protocol
Device Control, or lPDC, specification developed by a consortium formed by
Level 3 and made up of leading communications hardware and software companies,
and the Simple Gateway Control protocol, developed by Bell Communications
Research and Cisco Systems. The MGCP specification is available without a fee
to service providers and hardware and software vendors interested in
implementing it in their networks and equipment.

The significance of MGCP is that when implemented it will provide customers
with a seamless interconnection between traditional PSTN and the newer Internet
Protocol technology networks. Level 3 believes that this integration will
enable customers to benefit from the lower cost of Internet Protocol network
services, including voice and fax, without modifying existing telephone and fax
equipment or dialing access codes. Level 3 plans to use MGCP in the development
of its own network.

On May 13, 1999, a group of leading telecommunications companies announced
the formation of the International Softswitch Consortium, or the "Consortium."
Level 3 was one of the founding members of this

Consortium. The Consortium currently has approximately 100 members. The purpose
of the organization is to promote open standards and protocols and new
application development for the distributed set of hardware and software
platforms that are referred to as softswitches and can seamlessly interconnect
the PSTN with information and applications currently available only over the
Internet. The Consortium is the first group to focus exclusively on
interconnection between Internet Protocol networks and the PSTN, and is
promoting worldwide compatibility and interoperability of these networks. The
Consortium's charter also calls for it to act as a catalyst in stimulating
independent software vendors to develop value-added services for service
providers and network users of Internet Protocol networks.

Glossary of Terms

access...................... Telecommunications services that permit long
distance carriers to use local exchange
facilities to originate and/or terminate long
distance service.

access charges.............. The fees paid by long distance carriers to LECs
for originating and terminating long distance
calls on the LECs' local networks.

backbone.................... A centralized high-speed network that
interconnects smaller, independent networks. It
is the through-portion of a transmission
network, as opposed to spurs which branch off
the through-portions.

CAP......................... Competitive Access Provider. A company that
provides its customers with an alternative to
the local exchange company for local transport
of private line and special access
telecommunications services.

capacity.................... The information carrying ability of a
telecommunications facility.

carrier..................... A provider of communications transmission
services by fiber, wire or radio.

Central Office.............. Telephone company facility where subscribers'
lines are joined to switching equipment for
connecting other subscribers to each other,
locally and long distance.

CLEC........................ Competitive Local Exchange Carrier. A company
that competes with LECs in the local services
market.

common carrier.............. A government-defined group of private companies
offering telecommunications services or
facilities to the general public on a non-discriminatorynon-
discriminatory basis.

conduit..................... A pipe, usually made of metal, ceramic or
plastic, that protects buried cables.

DS-3........................ A data communications circuit capable of
transmitting data at 45 Mbps.

dark fiber.................. Fiber optic strands that are not connected to
transmission equipment.

dedicated lines............. Telecommunications lines reserved for use by
particular customers.

dialing parity.............. The ability of a competing local or toll service
provider to provide telecommunications services
in such a manner that customers have the ability
to route automatically, without the use of any
access code, their telecommunications to the
service provider of the customers' designation.

equal access................ The basis upon which customers of interexchange
carriers are able to obtain access to their
Primary Interexchange Carriers' (PIC) long
distance telephone network by dialing "1", thus
eliminating the need to dial additional digits
and an authorization code to obtain such access.

facilities based carriers... Carriers that own and operate their own network
and equipment.

fiber optics................ A technology in which light is used to transport
information from one point to another. Fiber
optic cables are thin filaments of glass through
which light beams are transmitted over long
distances carrying enormous amounts of data.
Modulating light on thin strands of glass
produces major benefits including high
bandwidth, relatively low cost, low power
consumption, small space needs and total
insensitivity to electromagnetic interference.

Gbps........................ Gigabits per second. A transmission rate. One
gigabit equals 1.024 billion bits of
information.

ILEC........................ Incumbent Local Exchange Carrier. A company
historically providing local telephone service.
Often refers to one of the Regional Bell
Operating Companies (RBOCs). Often referred to
as "LEC" (Local Exchange Carrier).

interconnection............. Interconnection of facilities between or among
local exchange carriers, including potential
physical colocation of one carrier's equipment
in the other carrier's premises to facilitate
such interconnection.

InterLATA................... Telecommunications services originating in a
LATA and terminating outside of that LATA.

Internet.................... A global collection of interconnected computer
networks which use a specific communications
protocol.

IntraLATA................... Telecommunications services originating and
terminating in the same LATA.

ISDN........................ Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.

ISPs........................ Internet Service Providers. Companies formed to
provide access to the Internet to consumers and
business customers via local networks.

IXC......................... Interexchange Carrier. A telecommunications
company that provides telecommunications
services between local exchanges on an
interstate or intrastate basis.

Kbps........................ Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.

LATA........................ Local Access and Transport Area. A geographic
area composed of contiguous local exchanges,
usually but not always within a single state.
There are approximately 200 LATAs in the United
States.

leased line................. Telecommunications line dedicated to a
particular customer along predetermined routes.

LEC......................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
LECs include both ILECs and CLECs.

local exchange.............. A geographic area determined by the appropriate
state regulatory authority in which calls
generally are transmitted without toll charges
to the calling or called party.

local loop.................. A circuit that connects an end user to the LEC
central office within a LATA.

long distance carriers Long distance carriers provide services between
local
(interexchange carriers)... local exchanges on an interstate or intrastate
basis. A long distance carrier may offer
services over its own or another carrier's
facilities.

Mbps........................ Megabits per second. A transmission rate. One
megabit equals 1.024 million bits of
information.

MPLS........................ MultiProtocol Label Switching. A switching
standard for the transmission of data at
increased speeds. The concept is based on having
routers at the edge of a communications network
and switches at the core of the network for the
faster transmission of data communications.

multiplexing................ An electronic or optical process that combines a
large number of lower speed transmission lines
into one high speed line by splitting the total
available bandwidth into narrower bands
(frequency division), or by allotting a common
channel to several different transmitting
devices, one at a time in sequence (time
division).

NAP......................... Network Access Point. A location at which ISPs
exchange each other's traffic.

OC3.........................OC-3........................ A data communications circuit consisting of
three DS3sDS-3s capable of transmitting data at 155
Mbps.

OC48........................OC-12....................... A data communications circuit consisting of
twelve DS-3s capable of transmitting data at 622
Mbps.

OC-48....................... A data communications circuit consisting of
forty-eight DS3sDS-3s capable of transmitting data
at approximately 2.45 Gbps.

peering..................... The commercial practice under which ISPs
exchange each other's traffic without the
payment of settlement charges. Peering occurs at
both public and private exchange points.

POP......................... Point of Presence. Telecommunications facility
where a communications provider locates network
equipment used to connect customers to its
network backbone.

private line................ A dedicated telecommunications connection
between end user locations.

PSTN........................ Public Switched Telephone Network. That portion
of a local exchange company's network available
to all users generally on a shared basis (i.e.,
not dedicated to a particular user). Traffic
along the public switched network is generally
switched at the local exchange company's central
offices.

RBOCs....................... Regional Bell Operating Companies. Originally,
the seven local telephone companies (formerly
part of AT&T) established as a result of the
AT&T Divestiture. Currently consists of four
local telephone companies as a result of the
mergers of Bell Atlantic with NYNEX and SBC with
Pacific Telesis and Ameritech.

reciprocal compensation..... The compensation of a CLEC for termination of a
local call by the ILEC on the CLEC's network,
which is the same as the compensation that the
CLEC pays the ILEC for termination of local
calls on the ILEC's network.

resale...................... Resale by a provider of telecommunications
services (such as a LEC) of such services to
other providers or carriers on a wholesale or a
retail basis.

router...................... Equipment placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.

SONET....................... Synchronous Optical Network. An electronics and
network architecture for variable bandwidth
products which enables transmission of voice,
data and video (multimedia) at very high speeds.
SONET ring architecture provides for virtually
instantaneous restoration of service in the
event of a fiber cut by automatically rerouting
traffic in the opposite direction around the
ring.

special access services..... The lease of private, dedicated
telecommunications lines or "circuits" along the
network of a local exchange company or a CAP,
which lines or circuits run to or from the long
distance carrier POPs. Examples of special
access services are telecommunications lines
running between POPs of a single long distance
carrier, from one long distance carrier POP to
the POP of another long distance carrier or from
an end user to a long distance carrier POP.

switch...................... A device that selects the paths or circuits to
be used for transmission of information and
establishes a connection. Switching is the
process of interconnecting circuits to form a
transmission path between users and it also
captures information for billing purposes.

Tbps........................ Terabits per second. A transmission rate. One
terabit equals 1.024 trillion bits of
information.

T1..........................T-1......................... A data communications circuit capable of
transmitting data at 1.544 Mbps.

unbundled................... Services, programs, software and training sold
separately from the hardware.

unbundled access............ Access to unbundled elements of a
telecommunications services provider's network
including network facilities, equipment,
features, functions and capabilities, at any
technically feasible point within such network.

web site.................... A server connected to the Internet from which
Internet users can obtain information.

wireless.................... A communications system that operates without
wires. Cellular service is an example.

world wide web or web....... A collection of computer systems supporting a
communications protocol that permits multimedia
presentation of information over the Internet.

xDSL........................ A term referring to a variety of new Digital
Subscriber Line technologies. Some of these new
varieties are asymmetric with different data
rates in the downstream and upstream directions.
Others are symmetric. Downstream speeds range
from 384 Kbps (or "SDSL") to 1.5 to 8 Mbps
("ADSL").

3228

Directors and Executive Officers

Set forth below is information as of February 1, 200015, 2001 about each director
and each executive officer of the Company. The executive officers of the
Company have been determined in accordance with the rules of the SEC.

Name Age Position
---- --- --------

Walter Scott, Jr........ 68Jr.......... 69 Chairman of the Board
James Q. Crowe.......... 50 President,Crowe............ 51 Chief Executive Officer and Director
Kevin J. O'Hara........... 40 President, Chief Operating Officer and Director
Vice Chairman of the Board and Executive Vice
R. Douglas Bradbury..... 49Bradbury....... 50 President
Vice Chairman of the Board and Executive Vice
Charles C. Miller, III.... 48 President
Lee Jobe.................. 43 Executive Vice President
Chief Financial Officer and Director
Kevin J. O'Hara......... 39 ExecutiveSureel A. Choksi.......... 28 Group Vice President and Chief OperatingFinancial Officer
Colin V.K. Williams..... 60 Executive Vice President
Stephen C. Liddell...... 38
Group Vice President, Kathleen A. Perone...... 46General Counsel and
Thomas C. Stortz.......... 49 Secretary
John F. Waters, Jr........ 35 Group Vice President
Gail P. Smith........... 40 Group Vice President
Philip B. Fletcher...... 66Colin V.K. Williams....... 61 Director
Mogens C. Bay............. 52 Director
William L. Grewcock..... 74Grewcock....... 75 Director
Richard R. Jaros........ 48Jaros.......... 49 Director
Robert E. Julian........ 60Julian.......... 61 Director
David C. McCourt........ 43McCourt.......... 44 Director
Kenneth E. Stinson...... 57Stinson........ 58 Director
Michael B. Yanney....... 66Yanney......... 67 Director

Other Management

Set forth below is information as of February 1, 2000,15, 2001, about the following
members of senior management of the Company.

Name Age Position
---- --- --------

Jimmy D. Byrd........... 39 President and Chief Executive Officer of PKSIS
Linda J. Adams.......... 43Adams............ 44 Group Vice President
E. Benjamin Buttolph...... 37 Group Vice President
Daniel P. Caruso........ 36Caruso.......... 37 Group Vice President
Sureel A. Choksi........ 27Donald H. Gips............ 41 Group Vice President
and Treasurer
Donald H. Gips.......... 40John Neil Hobbs........... 41 Group Vice President
Joseph M. Howell, III... 53III..... 54 Group Vice President
Michael D. Jones........ 42Jones.......... 43 Group Vice President Thomasand Chief Executive Officer
(i)Structure, Inc.
Stephen C. Stortz........ 48 Group Vice President, General Counsel and Secretary
Ronald J. Vidal.........Liddell........ 39 Group Vice President
John F. Waters, Jr. .... 34Edward Van Macatee........ 46 Group Vice President
Gail P. Smith............. 41 Group Vice President
Ronald J. Vidal........... 40 Group Vice President

Walter Scott, Jr. has been the Chairman of the Board of the Company since
September 1979, and a director of the Company since April 1964. Mr. Scott has
been Chairman Emeritus of New PKS since the split-off. Mr. Scott is also a
director of New PKS, Berkshire Hathaway Inc., Burlington Resources Inc.,
MidAmerican, ConAgra, Inc., Commonwealth Telephone, RCN, Kiewit Materials
Company and Valmont Industries, Inc.

James Q. Crowe has been the President and Chief Executive Officer of the Company since
August 1997, and a director of the Company since June 1993. Mr. Crowe was also
President of the Company until February 2000. Mr. Crowe was President and Chief
Executive Officer of MFS from June 1993 to June 1997. Mr. Crowe also served as
Chairman of the Board of WorldCom from January 1997 until July 1997, and as
Chairman of the Board of MFS from 1992 through 1996. Mr. Crowe is presently a
director of New PKS, Commonwealth Telephone RCN
and InaCom Communications, Inc.

R. Douglas Bradbury has been Executive Vice President and Chief Financial
Officer of the Company since August 1997, and a director of the Company since
March 1998. Mr. Bradbury served as Chief Financial Officer of MFS from 1992 to
1996, Senior Vice President of MFS from 1992 to 1995, and Executive Vice
President of MFS from 1995 to 1996.RCN.

Kevin J. O'Hara has been Executive Vice President of the Company since August 1997,July 2000 and Chief
Operating Officer of the Company since March 1998. Mr. O'Hara was also
Executive Vice President of the Company from August 1997 until July 2000. Prior
to that, Mr. O'Hara served as President and Chief

33
Executive Officer of MFS
Global Network Services, Inc. from 1995 to 1997, and as Senior Vice President
of MFS and President of MFS Development, Inc. from October 1992 to August 1995.
From 1990 to 1992, he was a Vice President of MFS Telecom, Inc. ("MFS
Telecom").

Colin V.K. WilliamsR. Douglas Bradbury has been Vice Chairman of the Board since February 2000
and Executive Vice President since August 1997. Mr. Bradbury was also Chief
Financial Officer of the Company from August 1997 until July 2000. Mr. Bradbury
has been a director of the Company since March 1998. Mr. Bradbury served as
Chief Financial Officer of MFS from 1992 to 1996, Senior Vice President of MFS
from 1992 to 1995, and Executive Vice President of MFS from 1995 to 1996. Mr.
Bradbury is also a director of LodgeNet Entertainment Corporation.

Charles C. Miller, III has been Vice Chairman of the Board and Executive
Vice President of the Company since July 1998 andFebruary 15, 2001. Prior to that, Mr.
Miller was President of Level 3Bellsouth International, Inc. since July 1998.a subsidiary of Bellsouth
Corporation from 1995 until December 2000. Prior to joining the company,that, Mr. Williams was Chairman of WorldCom International,
Inc., where he was responsible for the international communications businessMiller held
various senior level officer and the development and operation of WorldCom's fiber networks overseas. In
1993 Mr. Williams initiated and built the international operations of MFS.
Prior to joining MFS, Mr. Williams was Corporate Director, Business Developmentmanagement position at British TelecomBellSouth from 1988 until 1992.

Stephen C. Liddell1990.

Lee Jobe has been the GroupExecutive Vice President, Global Operations of the Company
since February 1,June 2000. Mr Liddell is responsible for the Company's Asian operations. Prior to that, Mr. LiddellJobe was SeniorPresident, Network and Systems for
Concert Global Network Services Limited from June 1999 until June 2000. Prior
to that, Mr. Jobe was president of Citizens Communications from 1996 to 1999.
Prior to that, Mr. Jobe was Vice President Business Operations for Pacific Bell
from 1993 to 1995.

Sureel A. Choksi has been Group Vice President and Chief Financial Officer
of the Company since July 2000. Prior to that, Mr. Choksi was Group Vice
President Corporate Development and Treasurer of the Company from MayFebruary 2000
until August 2000. Prior to that, Mr. Choksi served as Vice President and
Treasurer of the Company from January 1999 to February 1, 2000. Prior to that,
Mr. LiddellChoksi was President, Asia-
Pacific Region at MCI-WorldCom from January 1996 to April 1999 and was Vice
President and General Manager, International Networks at MFS Communications
from July 1994 to January 1996. Mr. Liddell was Commercial Director anda Director of PlanningFinance at the Company from 1997 to 1998, an
Associate at TeleSoft Management, LLC in 1997 and Business Developmentan Analyst at Syncordia (British Telecom)Gleacher
Natwest from November 19911995 to July 1994 and Business Development Executive at British
Telecom from April 1989 to November 1991.

Kathleen A. Perone1997.

Thomas C. Stortz has been Group Vice President, General Counsel and
Secretary of the Company since February 1, 2000. Ms. Perone is responsible for the Company's North American
operations. Prior to that, Ms. Perone wasMr. Stortz served
as Senior Vice President, SalesGeneral Counsel and Secretary of the Company from
September 1998 to February 1, 2000. Prior to that, Ms. Perone was President, Global
Services and Telecom East, of MFS/WorldCom, from 1990 to 1998 andhe served as Vice President
National Accounts at Cable & Wirelessand General Counsel of Peter Kiewit Sons', Inc. and Kiewit Construction Group,
Inc. from 1989April 1991 to 1990.

Gail P. SmithSeptember 1998. He has served as a director of Peter
Kiewit Sons', Inc., RCN, C-TEC, Kiewit Diversified Group Inc. and CCL
Industries, Inc.

John F. Waters, Jr. has been Group Vice President and Chief Technology
Officer of the Company since February 2000. Prior to that, Mr. Waters was Vice
President, Engineering of the Company from November 1997 until February 1,
2000. Prior to that, Ms. Smith served as Senior Vice President, International
Sales and MarketingMr. Waters was an executive staff member of the CompanyMCI
Communications from December 1998 to February 1, 2000.
Prior to that, Ms. Smith was Vice President and General Manager of WorldCom
International Networks from November 1994 to July 1997 and European Marketing
Director during the start-up phase of MFS International.

Philip B. FletcherNovember 1997.

Mogens C. Bay has been a director of the Company since February 1999.November 2000. Since
January 1997, Mr. Fletcher wasBay has been the Chairman of the Board of ConAgra, Inc. from May 1993 until
September 1998. Mr. Fletcher wasand Chief Executive Officer of
ConAgra,Valmont Industries, Inc., a company engaged in the infrastructure and
irrigation businesses. Prior to that, Mr. Bay was President and Chief Executive
Officer of Valmont Industries from September 1992August 1993 to September 1997. Mr. Fletcher isDecember 1996 as well as a
director of Valmont since October 1993. Mr. Bay is also a director of New PKS
and ConAgra, Inc.
and chairman of its executive committee.

William L. Grewcock has been a director of the Company since January 1968.
Prior to the split-off, Mr. Grewcock was Vice Chairman of the Company for more
than five years. He is presently a director of New PKS.

Richard R. Jaros has been a director of the Company since June 1993 and
served as President of the Company from 1996 to 1997. Mr. Jaros served as
Executive Vice President of the Company from 1993 to 1996 and Chief Financial
Officer of the Company from 1995 to 1996. He also served as President and Chief
Operating Officer of CalEnergy from 1992 to 1993, and is presently a director
of MidAmerican, Commonwealth Telephone, RCN and Homeservices.com, Inc.

Robert E. Julian has been a director of the Company since March 31, 1998.
Mr. Julian haswas also been Chairman of the Board of PKSIS since 1995.(i)Structure from 1995 until 2000.
From 1992 to 1995 Mr. Julian served as Executive Vice President and Chief
Financial Officer of the Company. Mr. Julian is the Chairman of the Audit
Committee of the Board of Directors.

David C. McCourt has been a director of the Company since March 31, 1998.
Mr. McCourt has also served as Chairman and Chief Executive Officer of
Commonwealth Telephone and RCN since October 1997. From 1993 to 1997 Mr.
McCourt served as Chairman of the Board and Chief Executive Officer of C-TEC.

Kenneth E. Stinson has been a director of the Company since January 1987.
Mr. Stinson has been Chairman of the Board and Chief Executive Officer of New
PKS since the Split-Off. Prior to the Split-Off, Mr. Stinson was Executive Vice
President of the Company for more than the last five years. Mr. Stinson is also
a director of ConAgra, Inc. and Valmont Industries, Inc.

Colin V.K. Williams has been a director of the Company since August 2000.
From July 1998 until December 31, 2000, Mr. Williams was Executive Vice
President of the Company and President of Level 3 International, Inc. Prior to
joining the company, Mr. Williams was Chairman of WorldCom International, Inc.,
where he was responsible for the international communications business and the
development and operation of WorldCom's fiber networks overseas. In 1993 Mr.
Williams initiated and built the international operations of MFS. Prior to
joining MFS, Mr. Williams was Corporate Director, Business Development at
British Telecom from 1988 until 1992.

Michael B. Yanney has been a director of the Company since March 31, 1998.
He has served as Chairman of the Board, President and Chief Executive Officer
of America First Companies L.L.C. for more than the last five years. Mr. Yanney
is also a director of Burlington Northern Santa Fe Corporation, RCN, Forest Oil
Corporation and Mid-America Apartment Communities, Inc.

Jimmy D. Byrd has been the President and Chief Executive Officer of PKSIS
since March 1999. Mr. Byrd was President and General Manager of the New South
Wales Office of Corporate Express, Inc. and Chief Information Officer of
Corporate Express, Inc. Australia/New Zealand from 1997 to 1999. From 1993 to
1997 he was Vice President and CIO for Temple-Inland, Inc., was a National
Sales Manager for Visual Information Technologies from 1990 to 1993 and was an
Advisory Marketing Representative for IBM from 1982 to 1990.

Linda J. Adams has been Group Vice President Human Resources of the Company
since February 1, 2000. Prior to that, Ms. Adams was Vice President Human
Resources of the Company from November 1998 to February 1, 2000. Prior to that,
Ms. Adams was initially Vice President of Human Resources Rent-A-Center, a
subsidiary of Thorn Americas, Inc., and then Senior Vice President of Human
Resources for Thorn Americas, Inc. from August 1995 until August 1998. Prior to
that, Ms. Adams was Vice President of Worldwide Compensation & Benefits for
PepsiCo, Inc. from August 1994 to August 1995.

E. Benjamin Buttolph has been Group Vice President Finance of the Company
since August 2000. Prior to that, Mr. Buttolph was Vice President Network
Commercial Management for Concert Global Network Services Limited from 1999 to
August 2000. Prior to that, Mr. Buttolph was Vice President Finance of Citizens
Communications from 1998 to 1999, Principal Consultant with Price Waterhouse,
LLP from 1997 to 1998 and Manager, Business Development of Ameritech
Corporation from 1995 to 1997.

Daniel P. Caruso has been Group Vice President Transport Services of the
Company since January 2001. Prior to that Mr. Caruso was Group Vice President
Global Customer Operations of the Company sincefrom February 1, 2000. Prior to that,
Mr. Caruso served as Senior Vice President, Network Services of the Company
from October 1997 to February
1, 2000. Prior to that, Mr. Caruso was Senior Vice
President, Local Service Delivery of WorldCom from December 1992 to September
1997 and was a member of the senior management of Ameritech from June 1986 to
November 1992.

Sureel A. Choksi31

Donald H. Gips has been Group Vice President Corporate Development and
TreasurerStrategy of the
Company since February 1, 2000.January 2001. Prior to that, Mr. Choksi
served as Vice President and Treasurer of the Company from January 1999 to
February 1, 2000. Prior to that, Mr. ChoksiGips was a Director of Finance at the
Company from 1997 to 1998, an Associate at TeleSoft Management, LLC in 1997 and
an Analyst at Gleacher Natwest from 1995 to 1997.

Donald H. Gips has been Group Vice President
Sales and Marketing of the Company sincefrom February 1, 2000. Prior to that, Mr. Gips
served as Senior Vice President, Corporate Development of the Company from
November 1998 to February
1, 2000. Prior to that, Mr. Gips served in the White
House as Chief Domestic Policy Advisor to Vice President Gore from April 1997
to April 1998. Before working at the White House, Mr. Gips was at the Federal
Communications Commission as the International Bureau Chief and Director of
Strategic Policy from January 1994 to April 1997. Prior to his government
service, Mr. Gips was a management consultant at McKinsey and Company.

John Neil Hobbs has been Group Vice President Global Sales, Distribution and
Marketing Operations since September 2000. Prior to that, Mr. Hobbs was
President, Global Accounts for Concert, a joint venture between AT&T and
British Telecom from July 1999 until September 2000. Prior to that, Mr. Hobbs
was Director Transition and Implementation for the formation of Concert
representing British Telecom from June 1998 until July 1999. From April 1997
until June 1998, Mr. Hobbs was British Telecom's General Manager for Global
Sales & Service and from April 1994 until April 1997, Mr. Hobbs was British
Telecom's General Manager for Corporate Clients.

Joseph M. Howell, III has been Group Vice President Corporate Marketing of
the Company since February 1, 2000. Prior to that, Mr. Howell served as Senior
Vice President, Corporate Marketing of the Company from October 1997 to
February 1, 2000. Prior to that, Mr. Howell was Senior Vice President of
MFS/WorldCom from 1993 to 1997.

Michael D. Jones has served as Group Vice President and Chief Information
Officer of the Company since February 1,2000 and Chief Executive Officer of
(i)Structure, Inc. since August 2000. Prior to that, Mr. Jones served as Senior
Vice President and Chief Information Officer of the Company from December 1998
to February 1, 2000. Prior to that, Mr. Jones was Vice President and Chief
Information Officer of Corporate Express, Inc. from May 1994 to May 1998.

ThomasStephen C. StortzLiddell has been a Group Vice President General Counsel and
Secretary of the Company since
February 1, 2000. Mr. Liddell is responsible for the Company's Asian
operations. Prior to that, Mr. StortzLiddell was Senior Vice President of the Company
from May 1999 to February 1, 2000. Prior to that, Mr. Liddell was President,
Asia-Pacific Region at MCI-WorldCom from January 1996 to April 1999 and was
Vice President and General Manager, International Networks at MFS
Communications from July 1994 to January 1996. Mr. Liddell was Commercial
Director and Director of Planning and Business Development at Syncordia
(British Telecom) from November 1991 to July 1994 and Business Development
Executive at British Telecom from April 1989 to November 1991.

Edward Van Macatee has served as Group Vice President of Service Activation
of the Company since January 2001. Prior to that, Mr. Macatee was Group Vice
President of Global Customer Operations of the Company from September 1999
until January 2001. Prior to that Mr. Macatee was Vice President, Network
Operations of the Company from April 1998 until September 1999 and Vice
President of Managed Network Services for TCI Communications, Inc.

Gail P. Smith has been Group Vice President of the Company Cross Product
Strategy since January 1, 2001. Prior to that, Ms. Smith was Group Vice
President responsible for the Company's European operations from February 1,
2000 until January 1, 2001. Prior to that, Ms. Smith served as Senior Vice
President, General CounselInternational Sales and SecretaryMarketing of the Company from SeptemberDecember 1998
to February 1, 2000. Prior to that, he served asMs. Smith was Vice President and General
CounselManager of Peter Kiewit Sons', Inc.WorldCom International Networks from November 1994 to July 1997 and
Kiewit
Construction Group, Inc. from April 1991 to September 1998. He has served as a
directorEuropean Marketing Director during the start-up phase of Peter Kiewit Sons', Inc., RCN, C-TEC, Kiewit Diversified Group Inc.
and CCL Industries, Inc.MFS International.

Ronald J. Vidal has been Group Vice President New Ventures and Investor
Relations of the Company since February 1, 2000. Prior to that, Mr. Vidal
served as Senior Vice President, New Ventures of the Company from October 1997
to February 1, 2000. Prior to that, Mr. Vidal was a Vice President of
MFS/WorldCom from September 1992 to October 1997. Mr. Vidal joined the Company
in construction project management in July 1983.

John F. Waters, Jr. has been Group Vice President and Chief Technology
Officer of the Company since February 1, 2000. Prior to that, Mr. Waters was
Vice President, Engineering of the Company from November 1997 until February 1,
2000. Prior to that, Mr. Waters was an executive staff member of MCI
Communications from 1994 to November 1997.32

The Board is divided into three classes, designated Class I, Class II and
Class III, each class consisting, as nearly as may be possible, of one-third of
the total number of directors constituting the Board. The Class I Directors
consist of Walter Scott, Jr., James Q. Crowe, Mogens C. Bay, Charles C. Miller,
III and Philip B. Fletcher;Colin V.K. Williams; the Class II Directors consist of William L.
Grewcock, Richard R. Jaros, Robert E. Julian and David C. McCourt; and the
Class III Directors consist of R. Douglas Bradbury, Kevin J. O'Hara, Kenneth E.
Stinson and Michael B. Yanney. There is one vacancy among
the Class I Directors. The term of the Class I Directors will terminate
on the date of the 2001 annual meeting of stockholders; the term of the Class
II Directors will terminate on the date of the 2002 annual meeting of
stockholders; and the term of the Class III Directors will terminate on the
date of the 20002003 annual meeting of stockholders. At each annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for three-year terms. The Company's officers are
elected annually to serve until each successor is elected and qualified or
until his death, resignation or removal.

Employees

ITEM 2. PROPERTIES

The Company's headquarters are located on 46 acres in the Northwest corner
of the Interlocken office parkAdvanced Technology Environment within the City of
Broomfield, Colorado, and within Boulder County, Colorado. When construction is completed, theThe campus facility
is expected to encompass eventuallyencompasses over 850,000 square feet of office space. It is anticipated that construction will be completed by the end of the
second quarter of 2000. In addition, the Company
has leased approximately
250,000 square feet of temporary office space in Louisville,the Broomfield, Colorado to allow
for the relocation of the majority of its employees (other than those of PKSIS)
while its permanent facilities are under construction.area.

Properties relating to the Company's coal mining segment are described under
"ITEM 1. BUSINESS--The Company's Other Businesses" above. In connection with
certain existing and historical operations, the Company is subject to
environmental risks.

The Company has approximately 3.4 million square feet of space for its
gateway facilities. The Company's gatewayGateway facilities are being designed to house local sales
staff, operational staff, the Company's transmission and IP routing/switching
facilities and technical space to accommodate colocation of equipment by high-volumehigh-
volume Level 3 customers. 36

PKSISThe Company has approximately 6.0 million square feet
of space for its Gateway and transmission facilities and has completed
construction on approximately 2.8 million square feet of this space.
(i)Structure also maintains its corporate headquarters in Omaha, Nebraska and leases
approximately 35,00010,000
square feet of office space in Omaha.the Broomfield, Colorado area and leases
approximately 16,000 square feet of office space in Omaha, Nebraska. The
computer outsourcing business of PKSIS(i)Structure is located at an 89,000 square
foot office space in Omaha and at a 60,000 square foot computer center in
Tempe, Arizona. PKSIS(i)Structure maintains additional office space in BostonParsippany,
New Jersey (approximately 11,000 square feet), Bangalore, India (approximately
18,000 square feet) and Parsippanyseveral locations in the United Kingdom (approximately
22,000 square feet) for its systems integration business.

ITEM 3. LEGAL PROCEEDINGS

In August 1999, the Company was named as a defendant in Schweizer vs. Level
3 Communications, Inc., et al., a purported national class action, filed in the
District Court, County of Boulder, State of Colorado which involves the
Company's right to install its fiber optic cable network in easements and
right-of-ways crossing the plaintiffs' land. In general, the Company obtained
the rights to construct its network from railroads, utilities, and others, and
is installing its network along the rights-of-way so granted. Plaintiffs in the
purported class action assert that they are the owners of lands over which the
Company's fiber optic cable network passes, and that the railroads, utilities,
and others who granted the Company the right to construct and maintain its
network did not have the legal ability to do so. The action purports to be on
behalf of a national class of owners of land over which the Company's network
passes or will pass. The complaint seeks damages on theories of trespass,
unjust enrichment and slander of title and property, as well as punitive
damages. Although the Company is not aware of any additional similar claims,
theThe Company may in the future receive claims and demands related to
rights-of-
wayrights-of-way issues similar to the issues in

the Schweizer litigation that may be based on similar or different legal
theories. Although it is too early for the Company to reach a conclusion as to
the ultimate outcome of this litigation, management believes that the Company
has substantial defenses to the claims asserted in the Schweizer action (and
any similar claims which may be named in the future), and intends to defend
them vigorously.

The Company and its subsidiaries are parties to many pendingother legal
proceedings. Management believes that any resulting liabilities for these legal
proceedings, beyond amounts reserved, will not materially affect the Company's
financial condition, future results of operations, or future cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information. The Company's common stock is traded on the Nasdaq
National Market under the symbol "LVLT." As of February 7, 2000,26, 2001, there were
approximately 3,8004,285 holders of record of the Company's common stock, par value
$.01 per share. The Common Stock began trading on the Nasdaq National Market on
April 1, 1998, the day following the Split-off. The table below sets forth, for the calendar quarters
indicated, the high and low per share closing sale prices of ourthe common stock
as reported by the Nasdaq National Market.

The prices set
forth in the table have been adjusted to reflect the two-for-one split of our
common stock effected as a stock dividend in August 1998.

High Low
------------- ------

Year Ended December 31, 19992000
First Quarter................................................. $72.81 $39.75Quarter................................................ $130.19 $73.81
Second Quarter............................................... 98.50 66.50
Third Quarter................................................ 93.06 60.06
Third Quarter................................................. 65.50 46.8892.44 59.50
Fourth Quarter................................................ 84.56 51.19Quarter............................................... 75.23 26.88
Year Ended December 31, 19981999
First Quarter................................................ $ 72.81 $39.75
Second Quarter (from April 1, 1998)........................... $37.13 $24.00Quarter............................................... 93.06 60.06
Third Quarter................................................. 42.13 29.78Quarter................................................ 65.50 46.88
Fourth Quarter................................................ 43.13 24.00Quarter............................................... 84.56 51.19

Dividend Policy. The Company's current dividend policy, in effect since
April 1, 1998, is to retain future earnings for use in the Company's business.
As a result, management does not anticipate paying any cash dividends on shares
of Common Stock in the foreseeable future. In addition, the Company is
effectively restricted under certain debt covenants from paying cash dividends
on shares of its Common Stock.

Information For Periods Prior to April 1, 1998.

The following information relates to the equity securities of the Company
for periods prior to April 1, 1998. As part of the Split-off, an amended and
restated certificate of incorporation for the Company was filed in the State of
Delaware to provide for only one class of common stock, par value $.01 per
share. The information that follows is for historical purposes only and is
required to be presented by the rules of the Securities and Exchange
Commission.

Company Repurchase Duty. Pursuant to the terms of the Company's Certificate
of Incorporation prior to April 1, 1998 (the "Pre-April 1998 Certificate"), the
Company was generally required to repurchase shares at a formula price upon
demand. Under the Pre-April 1998 Certificate effective January 1992, the
Company had three classes of common stock: Class B Construction & Mining Group
Nonvoting Restricted Redeemable Convertible Exchangeable Common Stock ("Class
B"), Class C Construction & Mining Group Restricted Redeemable Convertible
Exchangeable Common Stock, par value $.0625 per share (the "Class C Stock"),
and Class D Diversified Group Convertible Exchangeable Common Stock, par value
$.0625 per share (the "Class D Stock"). Prior to April 1, 1998, Class C Stock
was issued only to Company employees and could only be resold to the Company at
a formula price based on the year-end book value of the Construction Group. The
Company was generally required to repurchase Class C Stock for cash upon a
stockholder's demand. Class D Stock had a formula price based on the year-end
book value of the Diversified Group. The Company was generally required to
repurchase Class D Stock for cash upon a stockholder's demand at the formula
price, unless the Class D Stock become publicly traded.

Formula values. The formula price of the Class D Stock was based on the book
value of the Diversified Group and its subsidiaries, plus one-half of the book
value, on a stand-alone basis, of the parent company. The formula price of the
Class C Stock was based on the book value of the Construction Group and its
subsidiaries, plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price was the subtraction
of the book value of property, plant, and equipment used in construction
activities.

Conversion. Under the Pre-April 1998 Certificate, Class C Stock was
convertible into Class D Stock at the end of each year. Between October 15 and
December 15 of each year a Class C Stockholder was able to elect to convert
some or all of his or her shares. Conversion occurred on the following January
1. The conversion ratio was the relative formula prices of Class C and Class D
Stock determined as of the last Saturday in December. Class D Stock was
convertible into Class C Stock only as part of an annual offering of Class C
Stock to employees. Instead of purchasing the offered shares for cash, an
employee owning Class D Stock was able to convert such shares into Class C
Stock at the applicable conversion ratio.

Restrictions. Ownership of Class C Stock was generally restricted to active
Company employees. Upon retirement, termination of employment, or death, Class
C Stock was required to be resold to the Company at the applicable formula
price, but may be converted into Class D Stock if the terminating event occurs
during the annual conversion period. Class D Stock was not subject to ownership
or transfer restrictions.

3834

Dividends and Prices. During 1997 the Company declared or paid the following
dividends on shares of Class C Stock and Class D Stock. The table also shows
the stock price after each dividend payment or other valuation event.

Date Date Paid Amount Class Date Price Adjusted Price
---- --------- ------ ----- ---------- --------------

Oct. 25, 1996 Jan. 4, 1997 0.70 C Dec. 28, 1996 40.700
Apr. 23, 1997 May 1, 1997 0.70 C May 1, 1997 40.000
Oct. 22, 1997 Jan. 5, 1998 0.80 C Dec. 27, 1997 51.200
Oct. 27, 1995 Jan. 5, 1996 0.05 D Dec. 30, 1995 4.950*
Oct. 25, 1996 Jan. 4, 1997 0.05 D Dec. 28, 1996 5.425*
D Dec. 27, 1997 5.825*

* All stock prices and dividends for the Class D Stock reflect a dividend
of four shares of Class D Stock for each outstanding share of Class D
Stock that was effective December 1997 and a dividend of one share of
Common Stock (formerly Class D Stock) for each outstanding share of
Common Stock effective August 1998.

ITEM 6. SELECTED FINANCIAL DATA

The Selected Financial Data of Level 3 Communications, Inc. and its
subsidiaries appears below.

Fiscal Year Ended (1)
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
1995
------ ------ ------ ------ ---------------- --------- --------- --------- ---------
(dollars in millions, except per share amounts)

Results of Operations:
Revenue.................................Revenue................ $ 1,185 $ 515 $ 392 $ 332 $ 652
$ 580
Earnings (loss) from
continuing operations
(2)............................................ (1,455) (487) (128) 83 104
126
Net earnings (loss)
(3).................................... (1,455) (487) 804 248 221 244
Per Common Share:
Earnings (loss) from
continuing operations.............................operations
(2)................... (4.01) (1.46) (0.43) 0.33 0.45
0.58
Dividends (4)..................................... -- -- -- -- 0.05
0.05
Financial Position:
Total assets............................ 8,904assets........... 14,919 8,906 5,522 2,776 3,063 2,942
Current portion of
long-term debt.......debt........ 7 6 5 3 57 40
Long-term debt, less
current portion (5)....................................... 7,318 3,989 2,641 137 320
361
Stockholders' equity
(6)................................... 4,549 3,405 2,165 2,230 1,819 1,607

- --------
(1) In October 1993, Level 3 acquired 35% of the outstanding shares of C-TEC
Corporation ("C-TEC"), which shares entitled Level 3 to 57% of the
available voting rights of C-TEC. At December 28, 1996, Level 3 owned 48%
of the outstanding shares and 62% of the voting rights of C-TEC.

As a result of the restructuring of C-TEC in 1997, Level 3 ownsowned less than
50% of the outstanding shares and voting rights of each of the three entities, into which C-TEC was divided,RCN
Corporation, Commonwealth Telephone Enterprises, Inc., and Cable Michigan,
Inc., and therefore accounted for each entity using the equity method infrom
1997 1998 and 1999.to 2000. Level 3 consolidated C-TEC in its financial statements for
1995 and 1996.

The financial position and results of operations of the former construction
and mining management businesses ("Construction Group") of Level 3 have
been classified as discontinued operations due to the March 31, 1998 split-offsplit-
off of Level 3's Construction Group from its other businesses.

In 1995, Level 3 dividended its investment in its former subsidiary, MFS
Communications Company, Inc. ("MFS") to the holders of Class D Stock. MFS'
results of operations have been classified as a single line item on the
statements of operations for 1995.

Level 3 sold its energy segment to MidAmerican Energy Holdings Company
(f/k/a CalEnergy Company, Inc.)
("MidAmerican") in 1998 and classified it as discontinued operations within
the financial statements.

Certain prior year amounts have been reclassified to conform to current
year presentation.

(2) Level 3 incurred significant expenses in conjunction with the expansion of
its communications and information services business beginning in 1998.

In 2000, 1999 and 1998, RCN Corporation issued stock in public offerings
and for certain transactions. These transactions reduced the Company's
ownership in RCN to 31%, 35% and 41% at December 31, 2000, 1999 and 1998,
respectively, and resulted in pre-tax gains to the Company of $95 million,
$117 million and $62 million in 2000, 1999 and 1998, respectively.

In 1998, Level 3 acquired XCOM Technologies, Inc. ("XCOM") and its developing
telephone-to-IP network bridge technology. Level 3 recorded a $30 million
nondeductible charge against earnings for the write-off of in-
processin-process
research and development acquired in the transaction.

In 1998, Cable Michigan, Inc. was acquired by Avalon Cable of Michigan,
Inc. Level 3 received approximately $129 million for its shares of Cable
Michigan, Inc. in the disposition and recognized a pre-tax gain of
approximately $90 million in 1998.

(3) In 1998, Level 3 recognized a gain of $608 million equal to the difference
between the carrying value of the Construction Group and its fair value.
No taxes were provided on this gain due to the tax-free nature of the
split-
off.split-off.

Level 3 also recognized in 1998 an after-tax gain of $324 million on the
sale of its energy segment to MidAmerican.

35
(4) The 1996 and 1995 dividends include $.05 for dividends declared in 1996 and
1995 but paid in
January of the subsequent year.

The Company's current dividend policy, in effect since April 1998, is to
retain future earnings for use in the Company's business. As a result,
management does not anticipate paying any cash dividends on shares of
Common Stock in the foreseeable future. In addition, the Company is
effectively restricted under certain covenants from paying cash dividends
on shares of its Common Stock.

(5) In 1998, Level 3 issued $2 billion of 9.125% Senior Notes due 2008 and
received net proceeds of $500 million from the issuance of $834 million
principal amount at maturity of 10.5% Senior Discount Notes due 2008.

In 1999, Level 3 received $798 million of net proceeds from an offering of
$823 million aggregate principal amount of its 6% Convertible Subordinated
Notes Due 2009. In addition, Level 3 and certain Level 3 subsidiaries
entered into a $1.375 billion senior secured credit facility. Level 3
borrowed $475 million in 1999 under the senior secured credit facility.

In 2000, Level 3 received net proceeds of approximately $3.2 billion from
the offering of $863 million in convertible subordinated notes, $1.4
billion in three tranches of U.S. dollar denominated senior debt
securities, $780 million from two tranches of Euro denominated senior debt
securities and $233 million from mortgage financings.

(6) In 1999, the Company received approximately $1.5 billion of net proceeds
from the sale of 28.75 million shares of its Common Stock.

40
In 2000, the Company received approximately $2.4 billion of net proceeds
from the sale of 23 million shares of its Common Stock.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This document contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to Level 3 Communications, Inc. and its
subsidiaries ("Level 3" or the "Company"). When used in this document, the
words "anticipate", "believe", "plans", "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document. See
"Cautionary Factors That May Affect Future Results."

Recent Developments

BusinessNet Ltd. AcquisitionExpansion of Business Plan

On January 5, 1999,24, 2000, Level 3 acquired BusinessNet Ltd. ("BusinessNet"), a
leading London-based Internet service provider, in a largely stock-for-stock
transaction valued at $12announced the expansion of its business plan to
increase the amount of its Gateway and technical space it intends to secure to
approximately 6.5 million and accounted for as a purchase. After
completionsquare feet. As of certain adjustments,December 31, 2000, the Company agreedhas
secured approximately 6.0 million square feet of Gateway space around the world
and has pre-funded the acquisition of another .5 million square feet for data
center space. In addition, the expansion includes plans to issue approximately
400,000 sharesbuild-out additional
local markets in Europe and Asia, and the expansion of common stockexisting local
facilities. At February 15, 2001, Level 3 had operational Gateways in 52 U.S.
markets, 9 European markets and paid $1 million in cash in exchange for alltwo Asian markets.

Northern Asia Undersea Cable System

On January 24, 2000, Level 3 announced its intention to develop and
construct a Northern Asia undersea cable system initially connecting Hong Kong
and Japan. The Hong Kong-Japan cable was intended to be the first stage of the
issuedCompany's construction of an undersea network in the region. At that time, the
Company indicated its intention to share construction and outstanding sharesoperating expenses of
BusinessNet's capital stock. Of the approximately 400,000 sharessystem with one or more industry partners.

On December 29, 2000, the Company signed an agreement to collaborate with
FLAG Telecom on the development of the Northern Asia submarine cable system
connecting Hong Kong, Japan, Korea and Taiwan. The system will include Level
3's previously announced eastern link connecting Hong Kong, Taiwan and Japan
and a new western link that FLAG Telecom will build to connect Hong Kong, Korea
and Japan. The Company expects the Hong Kong to Japan segment of the eastern
link to be in service in the second quarter of 2001, with the eastern link's
Taiwan segment to follow in late 2001. The Company expects the entire western
link to be ready for service in early 2002. Level 3 agreedand FLAG Telecom will each
own three fiber pairs throughout the new system. The total cost of the entire
Northern Asia system is estimated to issue in connection withbe approximately $900 million. Level 3's
share of the acquisition,cost is approximately 150,000 shares of its common stock have been pledged
to$450 million.

Global Crossing Co-Build Agreement

On February 17, 2000, Level 3 to secure certain indemnification obligationsannounced a co-build agreement whereby Global
Crossing Ltd. participated in the construction of and obtained a 50% ownership
interest in the previously announced Level 3 transatlantic fiber optic cable.
Under the co-build agreement, Level 3 and Global Crossing Ltd. each separately
own and operate two of the former
BusinessNet stockholders. In October 1999,four fiber pairs on Level 3's transatlantic cable.
Level 3 released approximately
42,000 shares of the pledged shares.also acquired additional capacity on Global Crossing Ltd.'s
transatlantic cable, Atlantic Crossing 1, during 2000. The pledge of the remaining shares will
terminatetransatlantic cable
was completed in July 2000 unless otherwise extended pursuant to the terms of the
acquisition agreement. Liabilities exceeded assets acquired, and goodwill of
$16 million was recognized from the transaction and is being amortized over
five years.November 2000.

Common Stock Offering

On March 9, 1999,February 29, 2000, the Company closed the offeringsale of 28.7523 million shares of
its common stock through aan underwritten public offering. The net proceeds from
the offering of approximately $1.5$2.4 billion, after underwriting discounts and
offering expenses, are being used for working capital, capital expenditures,
acquisitions and other general corporate purposes in connection with the
implementation of the Business Plan.

Increase in Authorized Shares Outstandingbusiness plan.

Debt Offerings

On February 25, 1999, the Company's Board of Directors approved an increase
in the number of authorized shares of common stock from 500 million to 1
billion. On April 12, 1999, the Board of Directors approved a further increase
in the number of authorized shares of common stock by 500 million to 1.5
billion. The Company's stockholders approved the increase in authorized shares
at its 1999 Annual Meeting held on May 27, 1999.

Transatlantic Undersea Cable System

On April 23, 1999, Level 3 announced that it had contracted with Tyco
Submarine Systems Ltd. to design and build a transatlantic 1.28 Tbps undersea
cable system from Long Island, New York to North Cornwall, UK. The cable system
is expected to be in service by September29, 2000, and is expected to cost between
$600 to $800 million. The total cost will depend on how the cable is upgraded
over time. Level 3 has prefunded the purchase of significant amounts of
undersea capacity as part of the Business Plan, but may require additional
funding depending on the cable's ultimate structure, pre-construction sales and
ownership.

European Network

Level 3 announced on April 29, 1999 that it had finalized contracts relating
to construction of Ring 1 of its European network in France, Belgium, the
Netherlands, Germany and the United Kingdom. Ring 1, which is approximately
1,800 miles, will connect Paris, Frankfurt, Amsterdam, Brussels and London. The
network is expected to be ready for service by September 2000. Ring 1 is part
of the approximately 4,750 mile intercity network. This European network will
be linked to the Level 3 North American intercity network by the Level 3
transatlantic 1.28 Tbps cable system currently under development, also expected
to be ready for service by September 2000.

On July 26, 1999, the Company announced two important developmentsissued, in private and public offerings,
convertible subordinated notes, senior notes and senior discount notes which
generated aggregate gross proceeds of its
European network build with agreements with Eurotunnel and Alcatel. Eurotunnel
will install and supply Level 3 with multiple cross-Channel cables between the
United Kingdom and France through the high-security service tunnel. The first
of these cables will be completed by the end of the first quarter of 2000.
Subsequent cables will be installed to upgrade and expand the network as and
when required or when new fiber technology becomes available. Alcatel will
design, develop and install an undersea cable to link the Level 3 network
between the United Kingdom and Belgium. The cable system is already under
development and will be completed by the end of the first half of 2000.

COLT Cost Sharing Agreement

On May 4, 1999, Level 3 and COLT Telecom Group plc ("COLT") announced an
agreement to share costs for the construction of European networks. The
agreement calls for Level 3 to share construction costs of COLT's planned 1,600
mile intercity German network linking Berlin, Cologne, Dusseldorf, Frankfurt,
Hamburg, Munich and Stuttgart. In return, COLT will share construction costs of
Ring 1 of Level 3's planned European network.

Lucent Agreement

On June 23, 1999, the Company announced a minimum four year, $250 million
strategic agreement with Lucent Technologies to purchase Lucent systems,
including new software switches or "softswitches." The minimum purchase
commitment is subject to certain conditions and has the potential to grow to $1
billion over five years.

6% Convertible Subordinated Notes

On September 14, 1999, the Company closed the offering of $823 million
aggregate principal amount of its 6% Convertible Subordinated Notes due 2009
("Convertible Subordinated Notes").approximately $2.3 billion. The net
proceeds from the offeringofferings of approximately $798 million,$2.2 billion, after underwriting discounts and
offering expenses, are being used for working capital, capital expenditures,
acquisitions and other general corporate purposes in connection with the
implementation of the Business Plan.

Senior Secured Credit Facility

On September 30, 1999,business plan. The debt offerings consisted of the
Company entered into a Senior Secured Credit
Facility in thefollowing:

$863 million aggregate principal amount of $1.375 billion ("Senior Secured
Credit Facility"). The facility is comprised of a senior secured revolving
credit facility in theits 6% Convertible Subordinated
Notes due 2010
$800 million aggregate principal amount of $650its 11% Senior Notes due 2008
$250 million and a two-tranche senior secured
term loan facility aggregating $725 million. At December 31, 1999 the Company
had $475 million in outstanding aggregate borrowings under the two-tranche
senior secured term loan facility.

(3)Voice(SM)

During December 1999, Level 3 commercially launched (3)Voice, its Internet
Protocol long distance service, which utilizes softswitch technology. This long
distance service is currently available in 10 markets. The Company expects to
begin commercial testing of some features associated with local service, such
as caller ID, voice mail and call forwarding, during the first quarter of 2000.
Customers access the (3)Voice long distance service by using existing telephone
equipment and dialing procedures.

Northern Asia Undersea Cable System

On January 24, 2000, Level 3 announced its intention to develop and
construct a 2.56 Tbps Northern Asia undersea cable system initially connecting
Hong Kong and Tokyo. This connection is expected to be in service by the end of
the second quarter of 2001. The Hong Kong-Tokyo cable is intended to be the
first stage of the Company's construction of an undersea network in the region.
The Company plans to share construction and operating expenses of the system
with one or more industry partners.

Expansion of Business Plan

On January 24, 2000, Level 3 announced the expansionprincipal amount of its Business Plan to
increase the11.25% Senior Notes due 2010
$675 million aggregate principal amount at maturity of gateway space it intends to secure to approximately 6.5
million square feet. Level 3 currently has secured approximately 3.4 million
square feet of gateway space. The Company has completed the buildout of
approximately 1.3 million square feet of a gateway space.

Securitiesits 12.875% Senior
Discount Notes due 2010

Euro Denominated Debt Offerings

On February 2,29, 2000, Level 3 announced a series of separate securities
offerings. As of the date of the filing of this Report, the Company is offering
15 million shares of common stock and $500 million of convertible subordinated
notesissued in separate registeredprivate offerings pursuant to an effective registration
statement. It is also offeringEuro
denominated senior notes and senior discount notes that will
generatewhich generated aggregate gross proceeds of
$1 billion, and 400approximately (Euro) 800 million of
euro-denominated (approximately $391 million) senior notes.($780 million at issuance). The dollar-
denominated and euro-denominated senior notes will not be registered under the
Securities Act of 1933 and may not be sold in the United States absent
registration or an applicable exemptionnet proceeds
from the registration requirements.
Eachofferings of the offerings isapproximately (Euro) 780 million ($763 million at
issuance), after underwriting

discounts and offering expenses, are being made pursuant to a separate prospectus
supplement or offering memorandum. No offering is conditioned on the closing of
any other. The Company may not complete any of the offerings. In addition, the
size of each offering is subject to change. The Company will use the proceeds
from these offerings,used for working capital, capital
expenditures, acquisitions and other general corporate purposes in connectionof the
Company's European subsidiaries. The debt offerings consisted of the following:

(Euro) 500 million aggregate principal amount of its 10.75% Senior Euro
Notes due 2008
(Euro) 300 million aggregate principal amount of its 11.25% Senior Euro
Notes due 2010

The Company registered the Euro denominated securities with the implementationLuxembourg
Stock Exchange in the second quarter of 2000.

The Company valued the Euro denominated notes in total at $780 million at
February 29, 2000. Due to the decline in the Euro exchange rate ((Euro) 1 to
$0.975 at February 29, 2000 compared to (Euro) 1 to $0.930 at December 31,
2000), the Euro denominated notes were valued by the Company at $744 million at
December 31, 2000. The difference between the carrying value at December 31,
2000 and the value at issuance was included in other comprehensive income.

Viatel Agreement

On April 12, 2000, Level 3 signed an agreement with Viatel Inc. whereby
Viatel Inc. agreed to purchase an ownership interest, in one fiber pair on
Level 3's transatlantic fiber optic cable system installed by Level 3. As a
result of this agreement, both companies own and operate one fiber pair on the
transatlantic cable. The Company recognized revenue of $94 million on this
contract during the fourth quarter of 2000, with the remainder being recognized
over the term of the Business Plan. Althoughcontract.

Corning Fiber Agreement

On August 24, 2000, the Company evaluates potential acquisitionsannounced that it had signed a letter of
intent to purchase more than two million cabled fiber kilometers of third
generation LEAF fiber from timeCorning Incorporated. Level 3 plans to time, it currently has no agreements or understanding with any personbegin
installing the fiber in its second conduit in the first quarter of 2001 and
expects to effect any material acquisition.be substantially complete by the end of 2001. Corning's LEAF fiber
will significantly increase Level 3's network capacity.

Recent Accounting Developments

In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standard, ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133,
as amended by SFAS Nos. 137 and 138, is effective for fiscal years beginning
January 1, 2001. SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge designated by the transaction. The
Company currently makes minimal use of derivative instruments as defined by
SFAS No. 133. If the Company does not increase the utilization of these
derivatives, the adoption of this standard is expected to have a minimal effect
on the Company's results of operations or its financial position.

In December 1999 the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition"Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of
revenue in the financial statements. The Company adopted SAB 101 must be applied to the financial statements no later than
the first quarteras of January
1, 2000. The Company doesadoption did not believe that the adoption of
SAB 101 will have a material affecteffect on the financial results
as the Company's financial results.

43
revenue recognition policies which were already consistent
with SAB 101.

Effective July 1, 1999, the Financial Accounting Standards Board ("FASB")FASB issued Interpretation No. 43, "Real Estate
Sales, an interpretation of FASB Statement No. 66."66" ("FIN 43"). Certain sale and
long-term right-to-use IRU agreements of dark fiber and capacity entered into
after June 30, 1999 are required to be accounted for in the same manner as
sales of real estate with property improvements or integral equipment. Failure
to satisfy the requirements of the Interpretation will result in the deferral
of revenue recognition for these contracts. The adoption of this Interpretation
does not have a current effect on the Company's cash flows.

38
Accounting practice and guidance with respect to the accounting treatment of
these transactions is evolving. Any changes in the accounting treatment could
affect the way the Company accounts for revenue and expenses associated with
these agreements in the future.

Results of Operations 2000 vs. 1999

Revenue for the years ended December 31, 2000 and December 31, 1999 is
summarized as follows (in millions):

2000 1999
------ ----

Communications and Information Services......................... $ 973 $289
Coal Mining..................................................... 190 207
Other........................................................... 22 19
------ ----
$1,185 $515
====== ====

Communications and information services revenue in 2000 increased $684
million or 237% from 1999 revenue of $289 million. This increase is due to the
growth and expansion of the communications business, which segment's revenue
has increased 440% to $858 million. In 2000, the Company generated services
revenue, including private line, colocation, voice, managed modem, Internet
access and wavelengths, of $489 million compared to $98 million in 1999. The
completion of several metropolitan networks and Gateways in the United States
and Europe are primarily responsible for the increase. At December 31, 2000,
Level 3 had local networks in 32 domestic and international cities and Gateway
facilities in 60 markets. This compares to 25 local networks and 31 Gateways at
the end of 1999. Dark fiber sales for contracts entered into before June 30,
1999 increased from $26 million in 1999 to $209 million in 2000. This is a
result of a significant portion of Level 3's North American intercity network
being completed in 2000. Level 3 also recognized revenue of $105 million
related to submarine systems, primarily from the completion of its
transatlantic submarine cable and subsequent sale to Viatel Inc. in November of
2000. Also included in 2000 communications revenue was $55 million of
reciprocal compensation revenue from executed and approved interconnection
agreements compared to $24 million in 1999. Level 3 reached an agreement with
SBC Communications, Inc. in January 2001 which establishes a rate structure for
transmission and switching services provided by one carrier to complete or
carry traffic originating on another carrier's network. The implementation of
the rate structure and reciprocal compensation billing settlement is contingent
upon certain conditions including approval by relevant regulatory authorities.
Level 3 did not recognize any revenue related to this agreement in 2000 and, as
is its policy, will not recognize revenue in 2001 until the necessary
regulatory approvals have been received. Information services revenue declined
by $15 million in 2000 to $115 million. This decline is primarily attributable
to Year 2000 computer processing and consulting work completed in 1999.

The communications business generated Cash Revenue of $1.26 billion in 2000.
In addition to revenue, the Company includes the change in the cash portion of
deferred revenue in its definition of Cash Revenue. The increase in cash
deferred revenue for the communications business for the year was $404 million
and is in part due to the implementation of FIN 43 which requires the Company
to defer the recognition of certain dark fiber contracts and IRU sales over the
term of the agreement, typically 10-20 years. For these types of agreements,
the Company normally receives a deposit at the time the contract is signed and
the remainder when the fiber is delivered and accepted by the customer. In 1999
Cash Revenue for the communications business was $256 million.

Coal Mining revenue declined approximately 8% in 2000 from $207 million in
1999 to $190 million in 2000. Coal revenue was expected to decline in 2000 as a
result of the reduced shipments under long-term coal contracts and the sale of
the Company's entire interest in Walnut Creek Mining Company. The Company
expects to experience a significant decline in coal revenue and earnings
beginning in 2001 as long-term contracts begin to expire.

Other revenue in 2000 approximated 1999 revenue and is primarily
attributable to California Private Transportation Company, L.P. ("CPTC") the
owner-operator of the private SR91 tollroad in southern California.

Cost of Revenue for 2000 was $794 million, representing a 121% increase over
1999 cost of revenue of $360 million as a result of the expanding
communications business. Overall the cost of revenue for the communications
business, as a percentage of revenue, decreased significantly from 115% during
1999 to 73% for 2000. This decrease is attributed to the expanding
communications business. The Company recognized $196 million of costs
associated with dark fiber and transoceanic cable sales in 2000. The cost of
revenue for the information services businesses, as a percentage of its
revenue, was 77% for 2000 compared to 65% for 1999. Lower margins on new
contracts and the omission of Year 2000 related work resulted in the decline in
margins. The cost of revenue for the coal mining business, as a percentage of
revenue, was 40% for 2000 and 45% in 1999. In December 1999, Commonwealth
Edison Company ("Commonwealth Edison") and the Company renegotiated certain
coal contracts whereby Commonwealth Edison is no longer required to take
delivery of its coal commitments but still must pay Level 3 the margins Level 3
would have earned had the coal been delivered.

Depreciation and Amortization expenses for 2000 were $584 million, a 156%
increase over 1999 deprecation and amortization expenses of $228 million. This
increase is a direct result of the communications assets placed in service in
the later half of 1999 and throughout 2000, including Gateways, local
metropolitan networks and domestic, international and submarine networks.

Selling, General and Administrative expenses were $1,152 million in 2000,
representing a 72% increase over 1999. This increase primarily results from the
Company's addition of over 2,350 employees during 2000. There was a substantial
increase in compensation, travel and facilities costs due to the additional
employees. The Company also recorded $241 million in non-cash compensation
expense for the year ended December 31, 2000, for expenses recognized under
SFAS No. 123 related to grants of stock options and warrants; $126 million of
non-cash compensation was recorded for the same period in 1999. The increase in
non-cash compensation is due predominantly to an increase in the number of
employees. Communications, insurance, bad debt, data processing and marketing
costs also contributed to the higher selling, general and administrative
expenses. In addition to the expenses noted above, the Company capitalized $162
million and $116 million of selling, general and administrative expenses in
2000 and 1999, respectively, which consisted primarily of compensation expense
for employees and consultants working on capital projects. As the Company
continues to implement the business plan, selling, general and administrative
costs are expected to continue to increase.

EBITDA, as defined by the Company, consists of earnings (losses) before
interest, income taxes, depreciation, amortization, non-cash operating expenses
(including stock-based compensation and in-process research and development
charges) and other non-operating income or expenses. The Company excludes non-
cash compensation due to its adoption of the expense recognition provisions of
SFAS No. 123. EBITDA decreased to a loss of ($520) million for the year ended
December 31, 2000 from a ($387) million loss for 1999. This decrease was
predominantly due to the increase in selling, general and administrative
expenses resulting from the rapid expansion of the communications business.
EBITDA is commonly used in the communications industry to analyze companies on
the basis of operating performance.

Adjusted EBITDA, as defined by the Company, is EBITDA as defined above plus
the change in cash deferred revenue and minus the non-cash cost of goods sold
associated with certain transoceanic IRU sales and dark fiber contracts. For
2000, Adjusted EBITDA was $80 million compared to a loss of ($307) million in
1999. An increase in cash deferred revenue of $404 million and non-cash cost of
goods sold related to transoceanic and dark fiber sales of $196 million are
primarily responsible for the improved Adjusted EBITDA figures.

EBITDA and Adjusted EBITDA are not intended to represent operating cash flow
for the periods indicated and are not GAAP. See Consolidated Statements of Cash
Flows.

Interest Income was $328 million for 2000 compared to $212 million in 1999.
This 55% increase was predominantly due to the Company's increased average
cash, cash equivalents and marketable securities balances. Average cash
balances increased largely due to the approximately $5.4 billion in proceeds
received from the February 29, 2000 debt and equity offerings. The Company's
average cash balance also increased as a result of the September 1999 6%
Convertible Subordinated Notes offering and the Senior Secured Credit Facility
agreement. The increase in interest income is also due to increasing yields on
the Company's investments due to increased market rates. Pending utilization of
the cash equivalents and marketable securities in implementing the business
plan, the Company intends to invest the funds primarily in United States
government securities, money market funds, bank repurchase agreements and
commercial paper. This investment strategy provides lower yields on the funds,
but reduces the risk to principal in the short term prior to using the funds in
implementing the business plan. Interest income is expected to decrease in 2001
as the Company continues to fund the investing and operating activities of the
communications business.

Interest Expense, net for 2000 of $282 million represents a 62% increase
from 1999. The substantial increase was due to the 6% Convertible Subordinated
Notes issued in September 1999, the Senior Secured Credit Facility entered into
in September 1999, as well as the approximately $3 billion in debt securities
issued on February 29, 2000. The amortization of the related debt issuance
costs also contributed to the increased interest expense in 2000. Partially
offsetting this increase was an increase in capitalized interest to $353
million in 2000 from $116 million in 1999. Capitalized interest is expected to
decrease substantially in 2001 as a result of the completion of both the North
American and European intercity networks and other facilities being placed in
service.

Equity in Losses of Unconsolidated Subsidiaries was $284 million in 2000
compared to $127 million in 1999. The equity losses are predominantly
attributable to the Company's investment in RCN Corporation ("RCN"). RCN is a
facilities-based provider of bundled local and long distance phone, cable
television and Internet services to residential markets primarily on the East
and West coasts as well as Chicago. RCN is incurring significant costs in
developing its business plan. The Company's share of RCN's losses, increased to
$261 million in 2000 from $135 million in 1999. During the fourth quarter of
2000, Level 3's proportionate share of the RCN's fourth quarter losses exceeded
the remaining carrying value of Level 3's investment in RCN. Level 3 does not
have additional financial commitments to RCN; therefore it can only recognize
equity losses equal to its investment in RCN. As of December 31, 2000, Level 3
had not recorded approximately $20 million of equity losses attributable to
RCN's fourth quarter losses. If RCN becomes profitable, Level 3 will not record
its equity in RCN's profits until unrecorded equity losses have been offset.
Level 3 does not expect, based on RCN's current business plan and analysts'
estimates, to recognize equity earnings or losses attributable to RCN in the
foreseeable future. Equity losses for 2000 also include $24 million of losses
attributable to the Commonwealth Telephone Enterprises, Inc. ("Commonwealth
Telephone"). In December 2000, Commonwealth Telephone announced that it was
going to record a charge to earnings for the restructuring of its CTCI
subsidiary. Commonwealth Telephone indicated that the charge would range from
$46-$72 million on an after-tax basis. Level 3 recorded $27 million of equity
losses, representing its proportionate share of the midpoint, or $59 million,
of the estimated restructuring charge.

Gains on Equity Investee Stock Transactions was $100 million for 2000
compared to $118 million for 1999. RCN issued stock for the acquisition of 21st
Century Telecom Group, Inc. and for certain transactions in early 2000, which
diluted the Company's ownership of RCN from 35% at December 31, 1999 to 31% at
December 31, 2000. These transactions diluted Level 3's ownership in RCN but
increased its proportionate share of RCN's common equity. As a result, Level 3
recognized $95 million of pre-tax gains related to RCN stock activity in 2000.
In 1999, RCN issued stock in a public offering and for certain transactions,
which resulted in a pre-tax gain of $117 million to the Company. The Company
does not expect to recognize future gains on RCN stock activity unless the
gains exceed the accumulated net equity losses not recognized by the Company.
Level 3 also recognized pre-tax gains of $5 million and $1 million in 2000 and
1999, respectively, for Commonwealth Telephone stock activity that diluted the
Company's ownership to 46% at December 31, 2000.

Gain (Loss) on Sale of Assets decreased to ($19) million in 2000. In the
second half of 2000, market conditions and the valuations assigned to companies
in certain Internet related sectors and the Company's view of the business
prospects of such entities declined dramatically. Therefore, the Company
recorded a $37 million pre-tax charge for an other-than-temporary decline in
the value of a publicly traded investment. Partially offsetting this charge was
a $21 million pre-tax gain on the sale of the Company's entire interest in the
Walnut Creek Mining to Peter Kiewit Sons' Inc. Also included are gains and
losses on the sale of construction and other operating equipment.

Other, net decreased to ($2) million in 2000 from $7 million in 1999. The
decrease is predominately due to foreign exchange losses recorded in 2000.

Income Tax Benefit for 2000 differs from the prior year and the statutory
rate primarily due to limited availability of taxable income in the carryback
period to offset current year losses. The income tax benefit for 1999 differs
from the statutory rate of 35% primarily due to losses incurred by the
Company's international subsidiaries which cannot be included in the
consolidated U.S. federal return, nondeductible goodwill amortization expense
and state income taxes. For fiscal 2000, Level 3 recognized a benefit equal to
the amount of refund available due to utilization of net operating loss
carrybacks. As of December 31, 2000, Level 3 had approximately $638 million of
net operating loss carryforwards available to offset future taxable income. At
this time, the Company is unable to determine when it will have taxable income
to offset the loss carryforwards.

Results of Operations 1999 vs. 1998

Revenue for the years ended December 31, 1999 and December 31, 1998 is
summarized as follows (in millions):

1999 1998
---- ----

Communications and Information Services........................... $289 $144
Coal Mining....................................................... 207 228
Other............................................................. 19 20
---- ----
$515 $392
==== ====

Communications and information services revenue increased from $144 million
for the year ended December 31, 1998 to $289 million for the year ended
December 31, 1999. Revenue attributable to the communications business
increased from $24 million in 1998 to $159 million in 1999. In May 1999, the
Massachusetts Department of Public Utilities ruled that Verizon (formerly known
as Bell AtlanticAtlantic), was no longer required to pay the established reciprocal
compensation rates for certain services. As a result, beginning in the second
quarter, Level 3 elected not to recognize additional revenue from these
agreements until the uncertainties were resolved. The Company reached a tentativean
agreement with Bell AtlanticVerizon in October 1999. The agreement established new
intercarrier or reciprocal compensation rates between the two carriers and
assures that the Company will be paid for the traffic it terminates from
Bell Atlantic.Verizon. As part of the agreement, the Company and Bell Atlantic have alsoVerizon settled past
disputes over reciprocal compensation billing issues. The implementation of the
new rate structure and reciprocal compensation billing settlement was
contingent upon certain conditions including approval by relevant regulatory
authorities. During the fourth quarter, Massachusetts and other states approved
the agreement and therefore, the Company recognized $16 million of reciprocal
compensation revenue. Also during the fourth quarter the Company completed
certain sections of its intercity and metropolitan networks and recognized $26
million of revenue from IRUdark fiber contracts entered into before June 30, 1999.
In 1999, the Company recognized a total of $24 million and $37 million of
revenue attributable to reciprocal compensation agreements and IRUdark fiber
contracts, respectively. In addition, during 1999 the Company recognized in 1999 $33
million of revenue attributable to private line services, $24 million of
revenue attributable to managed modem services, $23 million attributable to
colocation services, and $18 million of revenue attributable to Internet access
services.

The communications business generated Cash Revenue of $256 million in 1999.
Cash deferred revenue increased $97 million in 1999 as a result of several new
dark fiber contracts. Cash Revenue in 1998 for the communications business was
$51 million.

Systems integration revenue increased 11% to $63 million in 1999. Revenue
for the computer outsourcing business increased 6% to $67 million in 1999.
Revenue attributable to new customers and additional services for existing
customers led to the increase in computer outsourcing and systems integration
revenue.

Mining revenue in 1999 decreased to $207 million from $228 million in 1998
due to reduced tonnage requirements under existing contracts with Commonwealth
Edison Company ("Commonwealth") and the expiration of a long-term contract with Commonwealth in 1998.

If current market conditions continue, the Company will
experience a significant decline in coal revenue and earnings beginning in 2001
as long-term contracts begin to expire.

Other revenue was consistent with 1998 and is primarily attributable to
California Private Transportation Company, L.P. ("CPTC") the owner-operator of
the SR91 tollroad in southern California.

44
CPTC.

Cost of Revenue increased $161 million or 81% to $360 million in 1999 as a
result of the expanding communications business. In 1999, communications
network expenses were $183 million as compared to $12 million in the prior
year. The increase in costs is primarily attributable to the FrontierGlobal Crossing
North America, Inc. and IXCBroadwing Communications Inc., leased network expenses,
the costs associated with the XCOM Technologies, Inc. ("XCOM") and GeoNet
Communications, Inc. ("GeoNet") acquisitions, and costs attributable to the
products the Company began offering in late 1998 and 1999. The cost of revenue
for the information services business, as a percentage of revenue, decreased
for the year ended December 31, 1999 compared to the same period in 1998. This
decrease is primarily due to an increase in the utilization rates of systems
integration personnel in 1999. The cost of revenue for the coal business, as a
percentage of revenue, increased due to the expiration of a high margin long-termlong-
term contract in 1998.

Depreciation and Amortization expense increased from $66 million in 1998 to
$228 million in 1999. The significant increase in the amount of assets placed
in service during the latter part of 1998 and throughout 1999 for the
communications business resulted in the increase in depreciation expense. The
acquisitions of XCOM, GeoNet and BusinessNet in 1998 and 1999 also contributed
to the increase in depreciation and amortization expense in 1999.

Selling, General and Administrative expenses increased significantly to $668
million in 1999 from $332 million in 1998 primarily due to the cost of
activities associated with the expanding communications business. Compensation,
travel and facilities costs increased substantially due to the additional
employees that have been hired to implement the Business Plan.business plan. The total number
of employees of the Company increased to approximately 3,850 at December 31,
1999 from approximately 2,200 at December 31, 1998. Professional fees,
including legal costs associated with obtaining licenses, agreements and
technical facilities and other development costs associated with the Company's
plans to expand services offered in U.S., European and Asian markets,
consulting fees incurred to develop and implement the Company's business
support systems, and advertising, marketing and other selling costs contributed
to the higher selling, general and administrative expenses. The Company also
recorded $126 million of non-cash compensation in 1999 for expenses recognized
under SFAS No. 123 related to grants of stock options and warrants, up from $39
million in 1998. In addition to the expenses noted above, the Company
capitalized $116 million and $52 million of selling, general and administrative
expenses in 1999 and 1998, respectively, which consisted primarily of
compensation expense for employees and consultants working on capital projects.

As the Company continues to implement the Business Plan, selling, general and
administrative costs are expected to continue to increase significantly.

Write-off of In-Process Research and Development of $30 million in 1998 was
the portion of the purchase price allocated to the telephone network-to-
Internet Protocol network bridge technology acquired by the Company in the XCOM
transaction and was estimated through formal valuation. In accordance with
generally accepted accounting principles, the $30 million was taken as a
nondeductible charge against earnings in the second quarter of 1998.

EBITDA, as defined by the Company, consists of earnings (losses) before
interest, income taxes, depreciation, amortization, non-cash operating expenses
(including stock-based compensation and in process research and development
charges) and other non-operating income or expenses. The Company excludes non-
cash compensation due to its adoption of the expense recognition provisions of
SFAS No. 123. EBITDA decreased from ($100) million in 1998 to
($387) million in 1999 primarily due to the significant increase in selling,
general and administrative expenses, described above, incurred in connection
with the implementation of the Company's Business Plan.business plan.

Adjusted EBITDA is commonly usedfor 1999 was ($307) million compared to ($73) million in
the
communications industry1998. Increases in selling, general and administrative expenses partially
offset by an increase in cash deferred revenue of $97 million and non-cash cost
of goods sold related to analyze companies on the basisdark fiber sales of operating
performance. EBITDA is not intended to represent cash flow$17 million, are primarily
responsible for the periods
indicated. See Consolidated Statements of Cash Flows.decrease in Adjusted EBITDA.

Interest Income increased from $173 million in 1998 to $212 million in 1999
primarily as a function of the Company's increasing average cash, cash
equivalents and marketable securities balances. The average cash balance
increased from approximately $3.7 billion during 1998 to approximately $4.2
billion during 1999 as a result of the December 1998 Senior Discount Notes
offering, the March 1999 equity offering and the September 1999 Subordinated
Notes offering and Senior Secured Credit Facility agreement. Yields on the
45
portfolio, however, have declined by approximately 50 basis points in 1999 from
the yields in 1998 primarily due to the funds being invested in shorter term
treasury securities. The accelerating Business Planbusiness plan has required the Company to
shorten the average term of treasury securities in which it invested in 1999.
Pending utilization of the cash equivalents and marketable securities in
implementing the Business Plan, the Company intends to invest the funds
primarily in United States government and governmental agency securities. This
investment strategy will provide lower yields on the funds, but is expected to
reduce the risk to principal in the short term prior to using the funds in
implementing the Business Plan.

Interest Expense, net increased $42 million to $174 million in 1999 due to
the completion of the offering of $2 billion aggregate principal amount of
Senior Notes in April 1998, $834 million aggregate principal amount at maturity
of Senior Discount Notes offered in December 1998, the Convertible Subordinated
Notes issued in September 1999, and Senior Secured Credit Facility entered into
in September 1999. The amortization of the related debt issuance costs also
contributed to the increased interest expense in 1999. The Company capitalized
$116 million and $15 million of interest expense on network construction and
business support systems in 1999 and 1998, respectively.

Equity in Losses of Unconsolidated Subsidiaries are $127 million in 1999 and
are primarily attributable to the RCN Corporation, Inc. ("RCN"). RCN is the
largest single source, facilities-based provider of communications services to
the residential markets primarily in the Northeast and California and the
largest regional Internet service provider in the Northeast. RCN is also
incurring significant costs in developing its business plan.RCN. RCN's losses increased from $205 million in
1998 to $369 million in 1999. The Company's proportionate share of these
losses, including goodwill amortization, was $135 million and $92 million in
1999 and 1998, respectively. In 1998, the Company elected to discontinue its
funding of Gateway Opportunity Fund, LP, ("Gateway"), which provided venture
capital to developing businesses. The Company recorded losses of $28 million in
1998, to reflect Level 3's equity in losses of the underlying businesses of
Gateway. Also included are equity earnings and losses of other equity method
investments not individually significant.

Gain on Equity Investee Stock Transactions increased to $118 million in
1999. RCN issued stock in a public offering and for certain transactions in
1998 and 1999 which diluted the Company's ownership of RCN from 41% at December
31, 1998 to 35% at December 31, 1999. The increase in the Company's
proportionate share of RCN's net assets as a result of these transactions
resulted in a pre-tax gain of $117 million from subsidiary stock sales for the
Company in 1999. The Company recognized $62 million of gains for similar stock
transactions of RCN in 1998. The Company also recognized $1 million of gains
attributable to other equity method investees.

Gains (Losses) on Sale of Assets decreased significantly in 1999 due to the
sale of Cable Michigan to Avalon Cable of Michigan, Inc. in November 1998. The
Company recognized a gain of approximately $90 million from the cash-for-stock
transaction. Included in gains (losses) on the disposal of assets are ($3)
million of losses and $8 million of gains on the disposal of property, plant
and equipment in 1999 and 1998 respectively, and $1 million and $9 million of
gains on the sale of marketable securities in 1999 and 1998 respectively.

Income Tax Benefit in 1999 and 1998 differs from the statutory rate of 35%
primarily due to losses incurred by the Company's international subsidiaries
which cannot be included in the consolidated U.S. federal return, nondeductible
goodwill amortization expense and state income taxes. The income tax benefit in
1999 also differs from the statutory rate due to foreign tax credits expected
to be released upon carryback of 1999 net operating losses that the Company
will be unable to utilize. The income tax benefit in 1998 also differs from the
statutory rate due to the $30 million nondeductible write-off of the research
and development costs acquired in the XCOM acquisition.

Discontinued Operations includes the one-time gain of $608 million
recognized upon the distribution of the Construction Group to former Class C
stockholders on March 31, 1998. Also included in discontinued operations is the
gain, net of tax, of $324 million from the Company's sale of its energy assets
to MidAmerican on January 2, 1998.

4644

Results of Operations 1998 vs. 1997

In 1998 the Company's Board of Directors changed Level 3's fiscal year end
from the last Saturday in December to a calendar year end. The additional five
days in the 1998 fiscal year are reflected in the period ended December 31,
1998. There were 52 weeks in fiscal year 1997.

Revenue for the years ended December 31, 1998 and December 27, 1997 is
summarized as follows (in millions):

1998 1997
---- ----

Communications and Information Service............................ $144 $ 95
Coal Mining....................................................... 228 222
Other............................................................. 20 15
---- ----
$392 $332
==== ====

Communications and Information Services revenue increased 52% in 1998. The
communications business generated revenues of approximately $24 million in
1998, of which $22 million is attributable to the acquisition of XCOM.
Approximately 87% of XCOM's revenue is attributable to reciprocal compensation
agreements with Bell Atlantic. The computer outsourcing business experienced
significant revenue growth in 1998. The inclusion of a full year of revenue
from customers which began service in 1997 and an increase in revenue from the
existing customer base, resulted in a 26% increase in outsourcing revenue. The
systems integration business experienced a 27% increase in revenue in 1998.
This increase is primarily attributable to new acquisitions and a strong demand
for Year 2000 renovation during the first six months of 1998 and other systems
reengineering services.

Revenue from coal mines increased slightly in 1998. An increase in alternate
source coal sales to Commonwealth was partially offset by the expiration of a
long-term contract also with Commonwealth. In 1998, the Company and
Commonwealth amended their contract to allow Commonwealth to accelerate
delivery of coal. The amended contract requires Commonwealth to take delivery
of its year 2001 coal commitments in 1998, 1999 and 2000. Of the 2001
commitments, 50% was taken in 1998 and 25% will be taken in both 1999 and 2000.
The expiration of the long-term contract was partially offset by contracts with
new customers in 1998.

Other revenue is primarily attributable to CPTC the owner-operator of the
SR91 tollroad in southern California. Revenues increased in 1998 primarily due
to higher traffic counts and increases in toll rates.

Cost of Revenue increased 22% from $163 million in 1997 to $199 million in
1998 primarily due to expenses incurred in connection with the Company's
Business Plan to expand the communications and information services businesses.
Operating expenses related to communications and information services revenue
in 1998 were $98 million up from $62 million in 1997. Costs attributable to the
XCOM and GeoNet acquisitions as well as costs associated with the leased
capacity from Frontier were responsible for an $11 million increase in
operating expenses. Operating expenses for the computer outsourcing and systems
integration business increased $5 million and $20 million in 1998,
respectively. The increase in the computer outsourcing operating expenses is
primarily attributable to the startup expenses associated with the second data
center in Tempe, Arizona. Higher than expected costs for Year 2000 work
resulted in the significant increase in systems integration operating expenses
in 1998. The Company also incurred expenses to refocus its efforts away from
Year 2000 services to systems and software reengineering for IP related
applications. Operating expenses related to coal mining were consistent with
the prior year.

Depreciation and Amortization expense has increased $46 million from $20
million in 1997. The primary reason for this increase is the $910 million of
capital expenditures in 1998, of which approximately $481 million was placed in
service in 1998. The majority of the assets placed in service are associated
with 15 gateway sites constructed for the expansion of the communications
business. Also contributing to the

increase was the depreciation and amortization on equipment purchased for
computer outsourcing contracts, assets acquired through business acquisitions
in 1998 and the amortization of goodwill related to these acquisitions.
Depreciation and amortization will continue to increase in 1999 as additional
facilities are placed in service.

Selling, General and Administrative expenses increased $226 million to $332
million in 1998. This increase of 213% from 1997 is primarily attributable to
the implementation of the Business Plan, including additional communications
and information services personnel. The total number of communications and
information services employees at December 31, 1998 was approximately 2,200 as
compared to approximately 1,000 at December 27, 1997. Cash compensation
included in expense increased from $14 million in 1997 to $51 million in 1998.
In addition, $39 million of non-cash stock based compensation expense was
recorded in 1998, of which, $24 million was related to the Company's Outperform
Stock Option program introduced in the second quarter of 1998. These costs are
accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." Professional fees increased $74 million in 1998 primarily for
legal costs associated with obtaining licenses, agreements and technical
facilities and other development costs associated with starting to offer
services in U.S. cities. Also included in professional fees is third party
software and associated development costs incurred in developing integrated
business support systems. These expenses were recorded in accordance with the
American Institute of Certified Public Accountant's ("AICPA") Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", which specifically identifies those costs that
should be expensed or capitalized for internally developed software. Selling,
general and administrative expenses are expected to increase significantly in
future periods as the Company continues to implement the Business Plan.

Write-off of In-Process Research and Development was $30 million in 1998. On
April 23, 1998 the Company completed the acquisition of XCOM, a privately held
company that developed certain components necessary for the Company to develop
an interface between its IP based network and the existing public switched
telephone network.

The Company accounted for this transaction, valued at $154 million, as a
purchase. Of the total purchase price, $115 million was originally allocated to
acquired in-process research and development, and was taken as a nondeductible
charge to earnings in the second quarter of 1998. In October 1998, the SEC
issued new guidelines for valuing acquired research and development which are
applied retroactively. Consequently, the Company has reduced the charge by $85
million, which also increased goodwill by a corresponding amount. Goodwill
associated with the XCOM transaction is being amortized over a 5 year period.

EBITDA, as defined by the Company, decreased from $84 million in 1997 to
($100) million in 1998 primarily due to the significant increase in selling,
general and administrative expenses, described above, incurred in connection
with the implementation of the Company's Business Plan. EBITDA is commonly used
in the communications industry to analyze companies on the basis of operating
performance. EBITDA is not intended to represent cash flow for the periods. See
Consolidated Statements of Cash Flows.

Interest Income increased significantly in 1998 to $173 million from $33
million in 1997 as the Company's cash, cash equivalents and marketable
securities balances increased to $3.7 billion at December 31, 1998 from $765
million at December 27, 1997 as a result of the two debt offerings and the
proceeds from the sale of its energy business.

Interest Expense, net increased significantly from $15 million in 1997 to
$132 million in 1998 due to the completion of the offering of $2 billion
aggregate principal amount of 9.125% Senior Notes due 2008 issued on April 28,
1998 and $834 million aggregate principal amount at maturity of 10.5% Senior
Discount Notes due 2008 issued on December 2, 1998. The amortization of a
portion of the $79 million of debt issuance costs associated with the Senior
Notes and Senior Discount Notes also increased interest expense in 1998. The
Company capitalized $15 million of interest expense on network construction and
business support systems development projects in 1998.

Equity in Losses of Unconsolidated Subsidiaries increased to $132 million in
1998 primarily due to the equity losses attributable to RCN. RCN also incurred
significant costs in developing its business plan including the acquisition of
several Internet service providers. RCN's losses increased from $52 million in
1997 to $205 million in 1998. The Company's proportionate share of these
losses, including goodwill amortization, was $92 million and $26 million in
1998 and 1997, respectively. In 1998, the Company elected to discontinue its
funding of Gateway, which provided venture capital to developing businesses.
The Company recorded losses of $28 million and $15 million in 1998 and 1997,
respectively, to reflect Level 3's equity in losses of the underlying
businesses of Gateway. Also included in equity losses were equity earnings and
losses of the Company's other equity method investees.

Gain on Equity Investee Stock Transactions was $62 million in 1998. During
1998, RCN issued stock in a public offering and for certain acquisitions. These
transactions decreased the Company's ownership in RCN from 48% in 1997 to 41%
in 1998, but increased its proportionate share of RCN's net assets. The Company
recorded a pre-tax gain of approximately $62 million to reflect this increase
in value.

Gains on Sale of Assets increased significantly in 1998 due to the sale of
Cable Michigan to Avalon Cable of Michigan, Inc. in November 1998. The Company
recognized a gain of approximately $90 million from the cash for stock
transaction. Also included in gains on the disposal of assets are $8 million
and $1 million of gains on the disposal of property, plant and equipment in
1998 and 1997 respectively, and $9 million of net gains on the sale of
marketable securities in both periods.

Income Tax Benefit differs from the expected statutory rate of 35% primarily
due to the nondeductible write-off of the in-process research and development
costs allocated in the XCOM transaction, losses incurred by the Company's
international subsidiaries which cannot be included in the consolidated US
federal income tax return and state income taxes. In 1997 the effective rate
was less than the expected statutory rate primarily due to prior year tax
adjustments, partially offset by the effect of nondeductible compensation
expense associated with the conversion of the information services option and
SAR plans to the Level 3 Stock Plan.

Financial ConditionCondition--December 31, 2000

The Company's working capital decreased approximately $0.7 billion during
1999increased slightly from $3.5 billion at December 31, 1998 to $2.8 billion at
December 31, 1999. The decrease was1999 to $3.1 billion at December 31, 2000 due primarily due to the
proceeds from the debt and equity offerings completed in February 2000 and dark
fiber IRU transactions, offset by funds used in operations and in construction
of the Level 3 Network. In February 2000, the Company received approximately
$2.4 billion of net proceeds from an equity offering and approximately $3.0
billion from the issuance of debt. These financing activities, along with dark
fiber IRU transactions, were partially offset by capital expenditures of $5.9
billion and operating expenses incurred to implementexpand the Business Plan. Partially offsetting these
expenditures werecommunications business.

Cash provided by operations increased from $438 million in 1999 to $1
billion in 2000. The increase is primarily attributable to a $585 million
increase in deferred revenue, receipt of $246 million of federal income tax
refunds and changes in other working capital items including accounts payable
and accrued interest payable reduced by the change in receivables. The increase
in deferred revenue is a result of the accounting guidance in FASB
Interpretation No. 43 issued in June 1999, which requires the Company to defer
recognition of certain dark fiber sales and capacity agreements over the term
of the contract. Dark fiber agreements typically require customers to pay a
deposit at the time the contract is signed with the remaining amount due when
the fiber is delivered and accepted by the customer.

Investing activities include using the proceeds from the $1.5debt and equity
offerings to purchase $8.3 billion equity offering completed
in March 1999, the $823 million offering of Convertible Subordinated Notes and
the $475 million proceeds from the $1.375 billion Senior Secured Credit
Facility. Both the Convertible Subordinated Notes offering and the Senior
Secured Credit Facility were completed in September 1999.

Cash provided by continuing operations increased from approximately $170
million in 1998 to approximately $438 million in 1999 primarily due to the
changes in components of working capital and an increase in interest income. An
increase in the costs paid to implement the Business Plan also reduced cash
provided by continuing operations. Interest income increased in 1999 as a
result of the proceeds received from the Senior Notes, Senior Discount Notes,
Convertible Subordinated Notes, the Senior Secured Credit Facility and the
March 1999 equity offering. The increase in cash provided by interest income
was partially offset by the semi-annual payment of interest on the Senior
Notes. The initial interest payment on the Convertible Subordinated Notes is
due in 2000. Interest payments on amounts outstanding under the Senior Secured
Credit Facility are due periodically based on the Company's selection of
alternative base rate and LIBOR loans. A commitment fee on the unused portions
of the Senior Secured Credit Facility is payable on the last business day of
each calendar quarter. Interest payments on the Senior Discount Notes are
deferred until 2004.

Investing activities include the purchase and sale of approximately $4.6
billion and $5.2 billion, respectively, of marketable securities. The Company
also incurred costssecurities and approximately
$5.9 billion of $3.4 billion for capital expenditures, primarily for the expanding
communications and information services business. In 1999,Provisions of a commercial
mortgage financing for one of the Company's Gateway facilities required the
Company invested $1.4to place approximately $145 million of funds in a restricted account to
be used for completing the buildout of that Gateway facility. The Company also
realized $7.8 billion on its U.S. intercityof proceeds from the sales and maturities of marketable
securities and $99 million of proceeds from the sale of non-telecom assets and
network $.5 billion on its international networks and
gateway facilities, $.3 billion on transoceanic networks and $.7 billion on
gateway facilities and local networks.construction equipment.

Financing sources in 19992000 consisted primarily of the net proceeds of $451
million from the Senior Secured Credit Facility, net proceeds of $798 million
from the offering of $823 million aggregate principal amount of Convertible
Subordinated Notes due 2009, net proceeds of $1.5$2.4
billion from the issuance of 28.7523 million shares of Level 3 common stock, $836
million in Convertible Subordinated Notes, $1.4 billion in three tranches of
U.S. dollar denominated debt securities, $763 million from two tranches of Euro
denominated senior debt securities and $224 million from mortgage financings.
The Company also received proceeds of $15 million in 2000 from the exercise of
Company stock options for $22 million. The Company alsoand repaid long-term debt of approximately $6$21 million during 1999.primarily
related to the Pavilion Towers office complex.

Liquidity and Capital Resources

Since late 1997, the Company has substantially increased the emphasis it
places on and the resources devoted to its communications and information
services business. The Company has commenced the implementation of a plan to
become a facilities basedfacilities-based provider (that is,
a provider that owns or leases a substantial portion of the property, plant and
equipment necessary to provide its services) of a broad range of integrated
communications services. To reach this goal, the Company is expanding substantially the business of its
subsidiary, PKS Information Services, Inc. to create,has created, through a
combination of construction, purchase and leasing of facilities and other
assets, an advanced, international, facilities basedend-to-end, facilities-based communications
network. The Company is
designinghas designed its network based on Internet Protocol
technology in order to leverage the efficiencies of this technology to provide
lower cost communications services.

The continued development of the Business PlanCompany's businesses will require
significant capital expenditures, a substantial portion of which will be
incurred before any significant related revenues from the Business Plan are expected to be realized.
These expenditures, together with the associated early operating expenses,
have, and may continue to result in

substantial negative operating cash flow and substantial net operating losses
for the Company for the foreseeable future. Although the Company believes that
its cost estimates and additional build-out schedule are reasonable, the actual
construction costs or the timing of the expenditures may deviate from current
estimates. The Company's capital expenditures in connection with the Business Planbusiness
plan were approximately $3.4$5.9 billion during 2000. The majority of the spending
was for construction of the U.S. and European intercity networks, certain local
metropolitan networks in 1999. The
Company estimates that itsthe U.S. and Europe, and the transatlantic cable
network. Total capital expenditures in connectionfor 2001 are expected to be approximately
$3.4 billion. The proceeds received from the February 2000 debt and equity
offerings combined with the Business
Plan will approximate $3.5cash and marketable securities already on hand and
the undrawn commitments of $900 million at December 31, 2000 under the Senior
Secured Credit Facility, provided Level 3 with approximately $4.9 billion in 2000.of
funds available at the end of the year. Additionally, on January 8, 2001, the
Company borrowed an additional $250 million under the credit facility. The
Company's current liquidity and the agreement with INTERNEXTcommitted contracts should be sufficient to
fund the currently committed portions of the Business Plan.business plan.

On January 24, 2000, the Company announced that it was expanding the scope
of its Business Planbusiness plan to include a significant increase in the amount of
colocation space available to the Company's web-centriccommunications intensive customers,
and additional local fiber facilities. The Company currently estimates that the
implementation of the Business Planbusiness plan will require between $13 and $14 billion
over the 10-year period of the Business Plan.business plan. The Company's successful debt and
equity offerings in February 2000 have given the Company the ability to
implement the Business
Plan and meet its projected growth is dependent upon its abilitycommitted portions of the business plan. However, if additional
opportunities should present themselves, the Company may be required to secure
substantial
additional financing in the future. In order to pursue these possible
opportunities and provide additional flexibility to fund its business plan, the
Company filed a "universal" shelf registration for an additional $3 billion of
common stock, preferred stock, debt securities, warrants, stock purchase
agreements and depositary shares. The Company expects to meet its
additional capital needsregistration statement (declared
effective by the Securities and Exchange Commission on January 31, 2001), in
combination with the proceeds from credit facilities and other
borrowings, including the Senior Secured Credit Facility entered into on
September 30, 1999, and sales or issuanceremaining availability under an existing universal shelf
registration statement, allows Level 3 to offer an aggregate of up to $3.156
billion of additional equity securities or
additional debt securities, including those announced on February 2, 2000. The
9.125% Senior Notes and the 10.5% Senior Discount Notes were issued under
indentures which permit the Company andto fund its subsidiaries to incur substantial
amounts of debt. The Senior Secured Credit Facility also permits the Company to
incur substantial amounts of unsecured debt.business plan. In addition to
raising capital through the debt and equity markets, the Company may sell or
dispose of existing businesses or investments to fund portions of the Business Plan.business
plan. The Company may also sell or lease fiber optic capacity, or access to its
conduits.

The Company may not be successful in producing sufficient cash flow, raising
sufficient debt or equity capital on terms that it will consider acceptable, or
selling or leasing fiber optic capacity or access to its conduits. In addition,
proceeds from dispositions of the Company's assets may not reflect the assets'
intrinsic value.values. Further, expensesexpenditures may

50
exceed the Company's estimates and
the financing needed may be higher than estimated. Failure to generate
sufficient funds may require the Company to delay or abandon some of its future
expansion or expenditures, which could have a material adverse effect on the
implementation of the Business Plan.

The Company may not be able to obtain such financing if and when it is
needed and, if available, such financing may not be on terms acceptable to the
Company. If the Company is unable to obtain additional financing when needed,
it may be required to scale back significantly its Business Plan and, depending
upon cash flow from its existing businesses, reduce the scope of its plans and
operations.business plan.

In connection with implementing the Business Plan,business plan, management will continue
reviewing the existing businesses of the Company to determine how those
businesses will complement the Company's focus on communications and
information services. If it is decided that an existing business is not
compatible with the communications and information services business and if a
suitable buyer can be found, the Company may dispose of that business.

Year 2000

Level 3 Communications, LLC.

Level 3's wholly owned subsidiary, Level 3 Communications, LLC, is a new
company that is implementing new technologies to provide Internal Protocol
technology-based communications services to its customers. The expenses
associated with Level 3 Communications, LLC's Year 2000 remediation program did
not have a material effect on the operating results or financial condition of
Level 3 Communications, LLC through December 31, 1999. There can be no
assurance, however, that the Year 2000 problem, and any loss incurred by any
customers of Level 3 as a result of the Year 2000 problem, will not have a
material adverse effect on Level 3 Communications, LLC's financial condition or
results of operations in the future.

PKSIS.

PKS Information Services, Inc. ("PKSIS") provides a wide variety of
information technology services. PKSIS has two main lines of business: computer
outsourcing and systems integration. The computer outsourcing business is
managed by PKS Computer Services LLC ("PKSCS"). The systems integration is
managed by PKS Systems Integration LLC ("PKSSI").

PKSIS derived a substantial portion of its revenues in 1999 from projects
that its subsidiary, PKSSI, conducted involving Year 2000 assessment and
renovation services. This exposes PKSSI to potential risks that may include
problems with services provided by PKSSI to its customers and the potential
claims arising under PKSSI's customer contracts. PKSSI attempts to
contractually limit its exposure to liability for Year 2000 compliance issues.
However, these contractual limitations may not be effective.

The expenses associated with PKSIS' Year 2000 efforts, did not, and the
related potential effect on PKSIS' earnings are not expected to, have a
material effect on the future operating results or financial condition of Level
3. There can be no assurance, however, that the Year 2000 problem, and any loss
incurred by any customers of PKSIS as a result of the Year 2000 problem, will
not have a material adverse effect on Level 3's financial condition or results
of operations in the future.

Costs of Year 2000 Issues. Level 3 Communications, LLC incurred
approximately $2 million of costs in 1999. These costs primarily arise from
direct costs of Level 3 employees verifying equipment and software as Year 2000
ready. However, Level 3 does not separately track the internal employee costs
incurred for its Year 2000 projects. Level 3 does track all material costs
incurred for its Year 2000 projects as well as all costs incurred by the Year
2000 program office. Level 3 estimated the time and effort expended by its
employees on Year 2000 projects based on an analysis of Year 2000 project
plans.

PKSIS incurred approximately $4 million of costs to implement its Year 2000
program through 1998, and incurred an additional approximately $4 million of
costs in 1999. These costs primarily arise from direct costs of PKSCS employees
working on upgrades per vendor specifications of operating system software for
PKSCS outsourcing customers and the cost of vendor supplied operating systems
software upgrades and the cost of additional hardware. However, PKSIS does not
separately track the internal costs incurred for its Year 2000 projects and
does not track the cost and time its employees spend on Year 2000 projects.
PKSCS has estimated the time and effort expended by its employees on Year 2000
projects based on an analysis of Year 2000 project plans. Labor costs for
PKSCS' Year 2000 projects were estimated to be $2 million for 1998 and $1
million in 1999. Costs for software upgrades, additional equipment costs and a
test system for PKSCS' Year 2000 projects were estimated to be $2 million for
1998 and $3 million in 1999. Such costs are not available for PKSSI but are not
believed to be material. Year 2000 costs for PKSSI are believed to be
substantially less than PKSCS and focus primarily on the cost of evaluating
and, if necessary, upgrading network and desktop hardware and software. The
costs incurred by PKSSI for performing Year 2000 services for its customers are
included within PKSSI's pricing for such services.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Level 3 is subject to market risks arising from changes in interest rates,
equity prices and foreign exchange rates. The Company's exposure to interest
rate risk increased due to the $1.375 billion Senior Secured Credit Facility
entered into by the Company in September 1999.1999 and the commercial mortgages
entered into in 2000. As of December 31, 1999,2000, the Company had borrowed $475
million under the Senior Secured Credit Facility.Facility and $233 million under the
commercial mortgages. Amounts drawn on the term loan and revolving credit facilitiesthese debt instruments bear interest at
the alternate base rate or LIBOR rate plus applicable margins. As the alternate
base rate and LIBOR raterates

fluctuate, so too will the interest expense on amounts borrowed under the
facility.credit facility and mortgages. A hypothetical 10 percent10% increase in interest rates
would increase annual interest expense of the Company by approximately $5
million.$7
million based on outstanding amounts under these variable rate instruments of
$708 million at December 31, 2000. At December 31, 2000, the Company had $6.6
billion of fixed rate debt bearing interest at annual rates ranging from 6.0%
to 12.875%. A decline in interest rates in the future on this fixed rate debt
will not benefit the Company due to the terms and conditions of the loan
agreements that prohibit prepayment of the debt or require the Company to
repurchase the debt at specified premiums. Thus, a potential decline in
interest rates exposes the Company to market risk that the cost of debt is
higher than competitors. The Company continues to evaluate alternatives to
limit interest rate risk.

Level 3 continues to hold positions in certain publicly traded entities,
primarily Commonwealth Telephone and RCN. The Company accounts for these two
investments using the equity method. The market value of these investments is
approximately $1.866 billion$540 million as of December 31, 1999,2000, which is significantly
higher than their carrying value of $292$105 million. The Company does not
currently have plans to dispose of these investments;investments, however, if any such
transaction occurred, the value received for the investments would be affected
by the market value of the underlying stock at the time of any such
transaction. A 20% decrease in the price of Commonwealth Telephone and RCN
stock would result in approximately a $373$108 million decrease in fair market value of
these investments. The Company does not currently utilize financial instruments
to minimize its exposure to price fluctuations in equity securities.

The Company's Business Planbusiness plan includes developing and constructing networks in
Europe and Asia. As of December 31, 1999,2000, the Company had invested significant
amounts of capital in Europeboth regions and will continue to expand its presence in
Europe and Asia in 2000. As2001. The Company issued (Euro) 800 million in Senior Euro
Notes in February 2000 as an economic hedge against its net investment in its
European subsidiaries. Due to the historically low exchange rates involving the
U.S. Dollar and the Euro during the fourth quarter, Level 3 elected to set
aside the remaining Euros received from the February debt offerings and
purchase on the spot market the Euros required to fund its current European
investing and operating activities. Other than the issuance of December 31, 1999,the Euro
denominated debt and the purchase of the Euros on the spot market, the Company
has not made significant use of financial instruments to minimize its exposure
to foreign currency fluctuations. The Company will continuecontinues to analyze risk
management strategies to reduce foreign currency exchange risk in the future.risk.

The change in interest rates and equity security prices is based on
hypothetical movements and isare not necessarily indicative of the actual results
that may occur. Future earnings and losses will be affected by actual
fluctuations in interest rates, equity prices and foreign currency rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary financial information for Level 3
Communications, Inc. (f/k/a Peter Kiewit Sons', Inc.) and Subsidiaries begin on
page F-1.

The financial statements of an equity method investee (RCN Corporation) are
required by Rule 3.09 and will be filed as a part of this Report by an
amendment to this Report upon the filing by RCN of their Form 10-K for the year
ended December 31, 1999.2000. RCN's filing of their Form 10-K is not yet due.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The following information with regard to the Company's change of independent
accountants was first reported by the Company's filing of a Current Report on
Form 8-K on September 1, 1998.

The following information is provided in response to the requirements of
Item 304(a)(1) of Regulation S-K.

i) PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P. which
became PricewaterhouseCoopers LLP on July 1, 1998) was dismissed as the
Company's independent accountants effective as of the close of business on
August 25, 1998.

ii) The reports of PricewaterhouseCoopers LLP on the consolidated financial
statements of the Company at December 27, 1997 and December 28, 1996, and for
the three years ended December 27, 1997 contain no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.

iii) The Company's Audit Committee participated in and approved the decision
to change independent accountants.

iv) In connection with its audits for the fiscal years ended December 27,
1997 and December 28, 1996 and through August 25, 1998 there were no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principle or practice, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to
make reference thereto in their report on the financial statements for such
years.

v) During the fiscal years ended December 27, 1997 and December 28, 1996 and
through August 25, 1998 there were no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).

The following information is provided in response to the requirements of
Item 304(a)(2) of Regulation S-K.

The Company engaged Arthur Andersen LLP as its new independent accountants
as of August 26, 1998. During the most recent two fiscal years and through
August 25, 1998, the Company has not consulted with Arthur Andersen LLP on
items which (1) were or should have been subject to a AICPA Statement on
Auditing Standards No. 50, "Reports on the Application of Accounting
Principles," or (2) concerned the subject matter of a disagreement or
reportable event with the Company's former auditor (both as set forth in
Regulation S-K Item 304(a)(2)).Not Applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTREGISTRANT.

The information required by this Item 10 is incorporated by reference to the
Company's definitive proxy statement for the 20002001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission, however
certain information is included in Item 1. Business above under the caption
"Directors and Executive Officers" under Item 1. Business.Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference to the
Company's definitive proxy statement for the 20002001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by reference to the
Company's definitive proxy statement for the 20002001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is incorporated by reference to the
Company's definitive proxy statement for the 20002001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial statements and financial statement schedules required to be
filed for the registrant under Items 8 or 14 are set forth following
the index page at page F-1.F-l. Exhibits filed as a part of this report are
listed below. Exhibits incorporated by reference are indicated in
parentheses.

Exhibit
Number Description
------- -----------

3.1 Restated Certificate of Incorporation dated March 31, 1998 (Exhibit 1 to
Registrant's Form 8-A filed on April 1, 1998)1,1998).

3.2 Certificate of Amendment of Restated Certificate of Incorporation of
Level 3 Communications, Inc. (Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated June 3, 1999).

3.3 Specimen Stock Certificate of Common Stock, par value $.01 per share
(Exhibit 3 to the Registrant's Form 8-A filed on March 31, 1998).

3.4 Amended and Restated By-laws as of May 27, 1999 (Exhibit 3.2 to
Company's Current Report on Form 8-K dated June 3, 1999).

3.5 Rights Agreement, dated as of May 29, 1998, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent, which includes the Form
of Certificate of Designation, Preferences, and Rights of Series A.
Junior Participating Preferred Stock of the Registrant, as Exhibit A,
the Form of Rights Certificate as Exhibit B and the Summary of Rights
to Purchase Preferred Stock, as Exhibit C (Exhibit 1 to the
Registrant's Form 8-A Amendment No. 1 filed on June 10, 1998).

4.1 Indenture, dated as of April 28, 1998, between the Registrant and IBJII3J
Schroder Bank & Trust Company as Trustee relating to the Registrant's 9
1/8% Senior Notes due 2008 (Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 File No. 333-56399).

4.2 Indenture, dated as of December 2, 1998, between the Registrant and IBJ
Schroder Bank & Trust Company as Trustee relating to the Registrant's
10 1/2% Senior Discount Notes due 2008 (Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 File No. 333-
71687)333-71687).

4.3.1 Form of Senior Indenture (incorporated by reference to Exhibit 4.1 to
Amendment 1 to the Registrant's Registration Statement on Form S-3
(File No. 333-68887) filed with the Securities and Exchange Commission
on February 3, 1999).
4.3.2 First Supplemental Indenture, dated as of September 20, 1999, between
the Registrant and IBJ Whitehall Bank & Trust Company as Trustee
relating to the Registrant's 6% Convertible Subordinated Notes due 2009
(Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
September 20, 1999).

4.3.3 Second Supplemental Indenture, dated as of February 29, 2000, between
the Registrant and The Bank of New York as Trustee relating to the
Registrant's 6% Convertible Subordinated Notes due 2010 (Exhibit 4.1 to
the Registrant's Current Report on Form 8-K dated February 29, 2000).

4.4 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11% Senior
Notes due 2008 (Exhibit 4.1 to the Registrant's Registration Statement
on Form S-4 File No. 333-37362).

4.5 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11 1/4% Senior
Notes due 2010 (Exhibit 4.2 to the Registrant's Registration Statement
on Form S-4 File No. 333-37362).

4.6 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 12 7/8% Senior
Discount Notes due 2010 (Exhibit 4.3 to the Registrant's Registration
Statement on Form S-4 File No. 333-37362).

4.7 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 10 3/4% Senior
Euro Notes due 2008 (Exhibit 4.1 to the Registrant's Registration
Statement on Form S-4 File No. 333-37364).

4.8 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11 1/4% Senior
Euro Notes due 2010 (Exhibit 4.2 to the Registrant's Registration
Statement on Form S-4 File No. 333-37364).

10.1 Separation Agreement, dated December 8, 1997, by and among PKS, KiewitRiewit
Diversified Group Inc., PKS Holdings, Inc. and Kiewit Construction
Group Inc. (Exhibit 10.1 to the Registrant's Form 10-K for 1997).

Exhibit
Number Description
------- -----------

10.2 Amendment No. 1 to Separation Agreement, dated March 18, 1997, by and
among PKS, Kiewit Diversified Group Inc., PKS Holdings, Inc. and Kiewit
Construction Group Inc. (Exhibit 10.1 to the Registrant's Form 10-K for
1997).

10.3 Cost Sharing and IRU Agreement between Level 3 Communications, LLC and
INTERNEXT, LLC dated July 18, 1998 (Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-QIO-Q for the three months ended September 30,
1998).

10.4 Credit Agreement dated as of September 30, 1999 among Level 3
Communications, Inc.,LLC, the Borrowers named therein, the Lenders Party
thereto and The Chase Manhattan Bank, as Agent (Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the three months ended
September 30, 1999).

16 Letter Regarding Change in Certifying Accountant (Included in the
Registrant's Current Report on Form 8-K dated September 1, 1998).

21 List of subsidiaries of the Company

23.1 Consent of Arthur Andersen LLP

23.2 Consent of PricewaterhouseCoopers LLP

23.3 Consent of PricewaterhouseCoopers LLP

27 Financial data schedules

(b) Reports on Form 8-K filed by the Registrant during the fourth quarter
of 1999.

None.

552000.

On November 7, 2000, the Registrant filed with the Securities and
Exchange Commission a Current Report on Form 8-K relating to the issuance
of a press release containing an open letter to the Level 3 Stockholders.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, this 14th7th day of
February, 2000.March, 2001.

LEVEL 3 COMMUNICATIONS, INC.

/s/ James Q. Crowe
By: _________________________________
Name: James Q. Crowe
Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Walter Scott, Jr. Chairman of the Board February 14, 2000
____________________________________March 7, 2001
______________________________________
Walter Scott, Jr.

/s/ James Q. Crowe President, Chief Executive February 14, 2000
____________________________________ Officer March 7, 2001
______________________________________ and Director
James Q. Crowe

/s/ Kevin J. O'Hara President, Chief Operating March 7, 2001
______________________________________ Officer and Director
Kevin J. O'Hara

/s/ R. Douglas Bradbury Vice Chairman and March 7, 2001
______________________________________ Executive Vice President
February 14, 2000
____________________________________R. Douglas Bradbury

/s/ Charles C. Miller, III Vice Chairman and March 7, 2001
______________________________________ Executive Vice President
Charles C. Miller, III

/s/ Sureel A. Choksi Group Vice President and March 7, 2001
______________________________________ Chief Financial Officer
and
R. Douglas Bradbury Director (principal
financial officer)Sureel A. Choksi (Principal Financial
Officer)

/s/ Eric J. Mortensen Vice President and March 7, 2001
______________________________________ Controller (principal February 14, 2000
____________________________________ accounting officer)(Principal
Eric J. Mortensen Accounting Officer)

/s/ Mogens C. Bay Director March 7, 2001
______________________________________
Mogens C. Bay

/s/ William L. Grewcock Director February 14, 2000
____________________________________
William L. Grewcock

/s/ Philip B. Fletcher Director February 14, 2000
____________________________________
Philip B. FletcherMarch 7, 2001
______________________________________
William L. Grewcock

Signature Title Date
--------- ----- ----

/s/ Richard R. Jaros Director February 14, 2000
____________________________________March 7, 2001
______________________________________
Richard R. Jaros

/s/ Robert E. Julian Director February 14, 2000
____________________________________March 7, 2001
______________________________________
Robert E. Julian

/s/ David C. McCourt Director February 14, 2000
____________________________________March 7, 2001
______________________________________
David C. McCourt

/s/ Kenneth E. Stinson Director February 14, 2000
____________________________________March 7, 2001
______________________________________
Kenneth E. Stinson

/s/ Colin V.K. Williams Director March 7, 2001
______________________________________
Colin V.K. Williams
/s/ Michael B. Yanney Director February 14, 2000
____________________________________March 7, 2001
______________________________________
Michael B. Yanney

5651

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

ReportsReport of Independent Public Accountants................................Accountants................................. F-2
Financial Statements as of December 31, 19992000 and December 31, 19981999 and
for the three years ended December 31, 1999:2000:
Consolidated Statements of Operations.................................. F-4F-3
Consolidated Balance Sheets............................................ F-5F-4
Consolidated Statements of Cash Flows.................................. F-6F-5
Consolidated Statements of Changes in Stockholders' Equity............. F-8F-7
Consolidated Statements of Comprehensive Income (Loss)................. F-9F-8
Notes to Consolidated Financial Statements............................. F-10F-9

Schedules not indicated above have been omitted because of the absence of
the conditions under which they are required or because the information called
for is shown in the consolidated financial statements or in the notes thereto.

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Level 3 Communications, Inc.:

We have audited the consolidated balance sheets of Level 3 Communications,
Inc. and subsidiaries (a Delaware corporation) and subsidiaries as of December 31, 19992000 and
19981999, and the related consolidated statements of operations, cash flows,
changes in stockholders' equity and comprehensive income (loss) for each of the
three years then ended.in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Level 3
Communications, Inc. and subsidiaries as of December 31, 19992000 and 19981999, and the
consolidated results of their operations and their cash flows for each of the
three years thenin the period ended December 31, 2000 in conformity with accounting
principles generally accepted accounting principles.in the United States.

/s/ Arthur Andersen LLP Arthur Andersen LLP

Denver, Colorado
February 2, 2000January 24, 2001.

F-2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Level 3 Communications, Inc. and Subsidiaries
(formerly, Peter Kiewit Sons', Inc.)

We have audited the consolidated statements of operations, cash flows, changes
in stockholders' equity and comprehensive income (loss) of Level 3
Communications, Inc. and Subsidiaries (formerly, Peter Kiewit Sons', Inc.) for
the year ended December 27, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Level 3 Communications, Inc. and Subsidiaries for the year ended December 27,
1997 in conformity with generally accepted accounting principles.

/s/ PricewaterhouseCoopers LLP
Coopers & Lybrand LLP

Omaha, Nebraska
March 30, 1998

F-3

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three years ended December 31, 19992000

2000 1999 1998
1997
------- ----------- -----
(dollars in
millions, except
per share data)

Revenue.................................................Revenue................................................ $ 1,185 $ 515 $ 392
$ 332
CostCosts and Expenses:
Cost of revenue.......................................revenue...................................... (794) (360) (199)
(163)
Depreciation and amortization.........................amortization........................ (584) (228) (66) (20)
Selling, general and administrative...................administrative.................. (1,152) (668) (332) (106)
Write-off of in-process research and development......development..... -- -- (30)
--
------- ----------- -----
Total costs and expenses............................expenses........................... (2,530) (1,256) (627)
(289)
------- ------ -----
-----
Earnings (Loss)Loss from Operations.........................Operations................................... (1,345) (741) (235) 43
Other Income (Expense):
Interest income.......................................income...................................... 328 212 173
33
Interest expense, net.................................net................................ (282) (174) (132) (15)
Equity in losses of unconsolidated subsidiaries,
net..net................................................. (284) (127) (132) (43)
Gain on equity investee stock transactions............transactions........... 100 118 62 --
Gain (loss) on sale of assets.........................assets........................ (19) (2) 107
10
Other, net............................................net........................................... (2) 7 4
7
------- ----------- -----
Total other income (expense)............................................... (159) 34 82
(8)
------- ------ -----
-----
Earnings (Loss)Loss Before Income TaxesTax Benefit and Discontinued
Operations.............................................Operations............................................ (1,504) (707) (153)
35
Income Tax Benefit......................................Benefit..................................... 49 220 25
48
------- ------ -----
-----
Earnings (Loss)Loss from Continuing Operations..............Operations........................ (1,455) (487) (128) 83
Discontinued Operations:
Gain on Split-off of Construction Group............... -- 608 --
Construction operations, net of income tax expense of
($107)...............................................Group.............. -- -- 155608
Gain on disposition of energy business net of income
tax expense of ($175)............................................................... -- -- 324
--
Energy, net of income tax benefit of $1............... -- -- 10
------- ----------- -----
Income from discontinued operations...................operations.................. -- -- 932
165
------- ----------- -----
Net Earnings (Loss)......................................................................... $(1,455) $ (487) $ 804
$ 248
======= =========== =====

Earnings (Loss) Per Share of Level 3 Common Stock
(Basic and Diluted):
Continuing operations.................................operations................................ $ (1.46)(4.01) $(1.46) $(.43)
$ .33
======= =========== =====
Discontinued operations excluding construction
operations...........................................operations.......................................... $ -- $ -- $3.09
$ .04
======= =========== =====
Net earnings (loss) excluding construction
operations...........................................operations.......................................... $ (1.46)(4.01) $(1.46) $2.66
$ .37
======= =========== =====
Net earnings (loss) excluding gain on Split-off of
Construction Group...................................Group.................................. $ (1.46)(4.01) $(1.46) $ .64
======= ====== =====

See accompanying notes to consolidated financial statements.

F-3

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2000 and 1999

2000 1999
------- ------
(dollars in
millions,
except per
share data)

Assets
Current Assets:
Cash and cash equivalents................................... $ .371,269 $1,214
Marketable securities....................................... 2,742 2,227
Restricted securities....................................... 202 51
Receivables, less allowances for doubtful accounts of $33
and $9, respectively....................................... 617 150
Recoverable income taxes.................................... 67 241
Other....................................................... 148 55
------- ------
Total Current Assets.......................................... 5,045 3,938
Net Property, Plant and Equipment............................. 9,383 4,287
Investments................................................... 146 300
Other Assets, net............................................. 345 381
------- ------
$14,919 $8,906
======= ===== ===========

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable............................................ $ 1,552 $ 832
Current portion of long-term debt........................... 7 6
Accrued payroll and employee benefits....................... 90 43
Accrued interest............................................ 124 47
Deferred revenue............................................ 68 72
Other....................................................... 106 90
------- ------
Total Current Liabilities..................................... 1,947 1,090
Long-Term Debt, less current portion.......................... 7,318 3,989
Deferred Revenue.............................................. 652 63
Accrued Reclamation Costs..................................... 94 99
Other Liabilities............................................. 359 260
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 10,000,000
shares: no shares outstanding............................... -- --
Common stock:
Common stock, $.01 par value, authorized 1,500,000,000
shares: 367,599,870 outstanding in 2000 and 341,396,727
outstanding in 1999........................................ 4 3
Class R, $.01 par value, authorized 8,500,000 shares: no
shares outstanding......................................... -- --
Additional paid-in capital................................... 5,167 2,501
Accumulated other comprehensive loss......................... (73) (5)
Retained earnings (accumulated deficit)...................... (549) 906
------- ------
Total Stockholders' Equity.................................... 4,549 3,405
------- ------
$14,919 $8,906
======= ======

See accompanying notes to consolidated financial statements.

F-4

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS

For the three years ended December 31, 1999 and 19982000

2000 1999 1998
---------- ----------------- ------- -------
(dollars in millions,
except per share
data)millions)
Assets
Current Assets:
Cash Flows from Operating Activities:
Net Earnings (Loss)............................... $(1,455) $ (487) $ 804
Less: Income from Discontinued Operations......... -- -- (932)
------- ------- -------
Loss from continuing operations................... (1,455) (487) (128)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating
activities:
Write-off in process research and
cash equivalents............................. $ 1,219 $ 842
Marketable securities................................. 2,227 2,863
Restricted securities................................. 46 32
Accounts receivable, less allowancesdevelopment.................................. -- -- 30
Equity losses, net............................ 284 127 132
Depreciation and amortization................. 584 228 66
Dark fiber and submarine cable cost of
$9revenue...................................... 196 17 --
Amortization of premiums (discounts) on
marketable securities........................ (41) 10 (24)
Amortization of debt issuance costs........... 21 9 3
(Gain) loss on sale of property, plant and
$5..... 148 57
Income taxes receivable............................... 241 54
Other................................................. 55 29
---------- ----------
Total Current Assets.................................... 3,936 3,877
Net Property, Plant and Equipment....................... 4,287 1,061
Investments............................................. 300 300
Other Assets, net....................................... 381 284
---------- ----------
$ 8,904 $ 5,522
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable...................................... $ 830 $ 276
Current portion of long-term debt..................... 6 5
Accrued payroll and employee benefits................. 43 16
Accrued reclamationequipment and other mining costs............ 13 16
Accrued interest...................................... 47 33
Deferred revenue...................................... 111 1
Other................................................. 75 23
---------- ----------
Total Current Liabilities............................... 1,125 370
Long-Term Debt, less current portion.................... 3,989 2,641
Deferred Income Taxes................................... 68 86
Accrued Reclamation Costs............................... 99 96
Other Liabilities....................................... 218 164
Commitments and Contingencies
Stockholders' Equity:
Preferredassets................... (19) 2 (17)
Gain on equity investee stock $.01 par value, authorized 10,000,000
shares: no shares outstanding in 1999 and 1998........transactions.... (100) (118) (62)
Gain on sale of Cable Michigan................ -- -- Common stock:
Common(90)
Non-cash compensation expense attributable to
stock $.01 par value, authorized 1,500,000,000
shares: 341,396,727 outstandingawards................................. 241 126 39
Federal income tax refunds.................... 246 81 46
Deferred income taxes......................... -- (56) (50)
Deferred revenue.............................. 585 121 27
Deposits...................................... 24 (64) --
Accrued interest on marketable securities..... (5) (7) (43)
Accrued interest on long-term debt............ 176 69 35
Change in 1999working capital items:
Receivables................................. (475) (84) (1)
Other current assets........................ (178) (170) (10)
Payables.................................... 737 544 239
Other liabilities........................... 158 86 (19)
Other......................................... 21 3 (3)
------- ------- -------
Net Cash Provided by Continuing Operations.......... 1,000 437 170
Cash Flows from Investing Activities:
Proceeds from sales and 307,874,706 outstandingmaturities of marketable
securities....................................... 7,823 5,169 3,214
Purchases of marketable securities................ (8,284) (4,555) (5,334)
Increase in 1998...................... 3 3
Class R, $.01 par value, authorized 8,500,000 shares:
no shares outstanding in 1999restricted securities................. (150) (16) (8)
Capital expenditures.............................. (5,944) (3,436) (910)
Investments and 1998...............acquisitions, net of cash
acquired......................................... (34) (3) (67)
Proceeds from sale of property, plant and
equipment, and other investments................. 99 12 27
Proceeds from sale of Cable Michigan.............. -- -- Additional paid-in capital............................. 2,501 765
Accumulated other comprehensive income (loss).......... (5) 4
Retained earnings...................................... 906 1,393
---------- ----------
Total Stockholders' Equity.............................. 3,405 2,165
---------- ----------
$ 8,904 $ 5,522
========== ==========129
------- ------- -------
Net Cash Used in Investing Activities............... $(6,490) $(2,829) $(2,949)

See accompanying notes to consolidated financial statements.

F-5

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three years ended December 31, 1999

1999 1998 1997
------- ------- -----
(dollars in millions)

Cash Flows from Operating Activities:
Net Earnings (Loss)................................. $ (487) $ 804 $ 248
Less: Income from Discontinued Operations........... -- (932) (165)
------- ------- -----
Earnings (loss) from continuing operations.......... (487) (128) 83
Adjustments to reconcile earnings (loss) from
continuing operations to net cash provided by
continuing operations:
Write-off in process research and development... -- 30 --
Equity losses, net.............................. 127 132 43
Depreciation and amortization................... 228 66 20
Amortization of premiums (discounts) on
marketable securities.......................... 10 (24) --
Amortization of debt issuance costs............. 9 3 --
(Gain) loss on sale of property, plant and
equipment and other assets..................... 2 (17) (10)
Gain on equity investee stock transactions...... (118) (62) --
Gain on sale of Cable Michigan.................. -- (90) --
Compensation expense attributable to stock
awards......................................... 126 39 21
Federal income tax refunds...................... 81 46 146
Deferred income taxes........................... (56) (50) (103)
Deposits........................................ (64) -- --
Accrued interest on marketable securities....... 62 (39) --
Change in working capital items:
Receivables................................... (84) (1) (9)
Other current assets.......................... (170) (10) (1)
Payables...................................... 562 239 (3)
Other liabilities............................. 207 39 (5)
Other........................................... 3 (3) --
------- ------- -----
Net Cash Provided by Continuing Operations............ 438 170 182
Cash Flows from Investing Activities:
Proceeds from sales and maturities of marketable
securities......................................... 5,169 3,214 167
Purchases of marketable securities.................. (4,555) (5,334) (452)
Purchases of restricted securities.................. (11) (8) (2)
Capital expenditures................................ (3,436) (910) (26)
Investments and acquisitions, net of cash acquired.. (3) (67) (42)
Proceeds from sale of property, plant and equipment,
and other investments.............................. 12 27 1
Proceeds from sale of Cable Michigan................ -- 129 --
Other............................................... -- -- 3
------- ------- -----
Net Cash Used in Investing Activities................. $(2,824) $(2,949) $(351)

See accompanying notes to consolidated financial statements.

F-6

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

For the three years ended December 31, 19992000

2000 1999 1998
1997
------ ------ -----------
(dollars in
millions)

Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs......costs..... $3,195 $1,249 $2,426 $ 17
Payments on long-term debt, including current
portion..............................................portion............................................. (21) (6) (12) (2)
Issuances of common stock.............................stock, net of issuance costs..... 2,407 1,498 21
117Stock options exercised.............................. 15 22 11
Exchange of Class C Stock for Class D Stock, net......net..... -- -- 122 72
Stock options exercised............................... 22 11 21
Repurchases of common stock...........................stock.......................... -- -- (1)
--
Dividends paid........................................ -- -- (12)
------ ------ -----------
Net Cash Provided by Financing Activities...............Activities.............. 5,596 2,763 2,567 213
Cash Flows from Discontinued Operations:
Proceeds from sale of discontinued energy operations,
net of income tax payments of $192 million...........million.......... -- -- 967
--
Discontinued energy operations........................ -- -- 3
Investments in discontinued energy operations......... -- -- (31)
------ ------ -----------
Net Cash Provided by (Used in) Discontinued Operations..Operations........... -- -- 967
(28)Effect of Exchange Rates on Cash and Cash Equivalents of C-TEC at the Beginning of
1997...................................................Equivalents.. (51) 1 -- -- (76)
------ ------ -----------
Net Change in Cash and Cash Equivalents................. 377Equivalents................ 55 372 755 (60)
Cash and Cash Equivalents at Beginning of Year..........Year......... 1,214 842 87
147
------ ------ -----------
Cash and Cash Equivalents at End of Year................ $1,219Year............... $1,269 $1,214 $ 842
$ 87
====== ====== ===========
Supplemental Disclosure of Cash Flow Information:
Income taxes paid.....................................paid.................................... $ 2 $ 2 $ 246
$ 62
Interest paid.........................................paid........................................ 461 193 104 13
Noncash Investing and Financing Activities:
Equity securities received in exchange for services.. $ 43 $ 5 $ --
Issuances of stock for acquisitions:
Businessnet Ltd..................................... $Ltd.................................... 3 8 $ -- $ --
XCOM Technologies, Inc..............................Inc............................. -- -- 154
--
GeoNet Communications, Inc..........................Inc......................... -- -- 19
Others............................................. --
Others.............................................. -- 10 --

The activities of the Construction Group have been removed from the
consolidated statements of cash flows. The Construction Group had cash flows of
($62) million and $59 million for the three months ended March 31, 1998, (the date of the
Split-off) and fiscal 1997, respectively..

See accompanying notes to consolidated financial statements.

F-7F-6

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the three years ended December 31, 19992000

Class Accumulated Retained
B&C Additional Other Earnings
Common Common Paid-in Comprehensive Retained(Accumulated
Stock Stock Capital Income (Loss) EarningsDeficit) Total
------ ------ ---------- ------------- -------------------- -------
(dollars in millions)

Balance at December 28,
1996...................27,
1997................... $ 1 $ 18 $ 235 $16427 $ 1,566(5) $ 1,819
Common Stock:
Issuances............. -- -- 117 -- -- 117
Stock options
exercised............ -- -- 21 -- -- 21
Stock dividend........ -- 7 (7) -- -- --
Stock plan grants..... -- -- 27 -- -- 27
Class C Stock:
Issuances............. -- -- 33 -- -- 33
Repurchases........... -- -- -- -- (2) (2)
Dividends (a)......... -- -- -- -- (13) (13)
Conversion of
debentures........... -- -- 1 -- -- 1
Net Earnings............ -- -- -- -- 248 248
Other Comprehensive
Loss................... -- -- -- (21) -- (21)
----- --- ------ --- ------- -------
Balance at December 27,
1997................... 1 8 427 (5) 1,799 $ 2,230
Common Stock:
Issuances.............Issuances.............. -- 1 203 -- -- 204
Stock options
exercised............exercised............. -- 1 10 -- (1) 10
Designation of par
value to $.01........$.01......... -- (8) 8 -- -- --
Stock dividend........dividend......... -- 1 (1) -- -- --
Stock plan grants.....grants...... -- -- 44 -- -- 44
Income tax benefit from
exercise of options..............options... -- -- 19 -- -- 19
Class R Stock:
Issuance and forced
conversion...........conversion............ -- -- 164 -- (164) --
Class C Stock:
Repurchases...........Repurchases............ -- -- (25) -- -- (25)
Conversion of
debentures...........debentures............ -- -- 10 -- -- 10
Net Earnings............ -- -- -- -- 804 804
Other Comprehensive
Loss................... -- -- -- (6) -- (6)
Split-off of the
Construction & Mining
Group.................. (1) -- (94) 15 (1,045) (1,125)
--------- --- ------ ------- ------- -------
Balance at December 31,
1998................... -- 3 765 4 1,393 2,165
Common Stock:
Issuances, net of
offering costs.......costs........ -- -- 1,506 -- -- 1,506
Stock options
exercised............exercised............. -- -- 22 -- -- 22
Stock plan grants.....grants...... -- -- 130 -- -- 130
Income tax benefit from
exercise of options..............options... -- -- 78 -- -- 78
Net Loss................ -- -- -- -- (487) (487)
Other Comprehensive
Loss................... -- -- -- (9) -- (9)
--------- --- ------ ------- ------- -------
Balance at December 31,
1999................... -- 3 2,501 (5) 906 3,405
Common Stock:
Issuances, net of
offering costs........ -- 1 2,409 -- -- 2,410
Stock options
exercised............. -- -- 15 -- -- 15
Stock plan grants...... -- -- 237 -- -- 237
Shareworks plan........ -- -- 5 -- -- 5
Net Loss................ -- -- -- -- (1,455) (1,455)
Other Comprehensive
Loss................... -- -- -- (68) -- (68)
---- --- ------ ---- ------- -------
Balance at December 31,
2000................... $-- $ --4 $5,167 $(73) $ 3 $2,501 $(5)(549) $ 906 $ 3,405
=====4,549
==== === ====== ======= ======= =======

- --------
(a) Includes $.80 per share for dividends on Class C declared in 1997 but paid
in January 1998.

See accompanying notes to consolidated financial statements.

F-8F-7

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the three years ended December 31, 19992000

2000 1999 1998
1997------- ----- ---- ----
(dollars in
millions)

Net Earnings (Loss)................................................................................ $(1,455) $(487) $804 $248
Other Comprehensive Income (Loss) Before Tax:
Foreign currency translation adjustments...................adjustments............... (73) (10) 1
--
Unrealized holding lossesgains (losses) arising during
period............period................................................ 5 (3) (2) (23)
Reclassification adjustment for gains included in net
earnings (loss).................................................................................. -- (1) (9)
(9)------- ----- ---- ----
Other Comprehensive Loss, Before Tax.........................Tax..................... (68) (14) (10) (32)
Income Tax Benefit Related to Items of Other
Comprehensive Loss........................................................Loss...................................... -- 5 4
11------- ----- ---- ----
Other Comprehensive Loss Net of Taxes........................Taxes.................... (68) (9) (6)
(21)------- ----- ---- ----
Comprehensive Income (Loss)................................................................ $(1,523) $(496) $798
$227======= ===== ==== ====

See accompanying notes to consolidated financial statements.

F-9F-8

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Level 3
Communications, Inc. and subsidiaries (the "Company" or "Level 3") in which it
has control, which are engaged in enterprises primarily related to
communications and information services, and coal mining. Fifty-percent-owned
mining joint ventures are consolidated on a pro rata basis. Investments in
other companies in which the Company exercises significant influence over
operating and financial policies are accounted for by the equity method. All
significant intercompany accounts and transactions have been eliminated.

In 1997, the Company agreed to sell its energy assets to MidAmerican Energy
Holding Company, Inc. (f/k/a CalEnergy Company, Inc.) ("MidAmerican") and to separate the construction
operations ("Construction Group") from the Company. Therefore, the results of
operations of these businesses have been classified as discontinued operations
on the consolidated statements of operations and cash flows.flows (See notes 2 and
3).

Communications and Information Services Revenue

Revenue for communications services, including private line, colocation,
Internet access, managed modem and voice, is recognized monthly as the services
are provided. Reciprocal compensation revenue is recognized only when an
interconnection agreement is in place with another carrier, and the relevant
regulatory authorities have approved the terms of the agreement. Revenue
attributable to leases of dark fiber pursuant to indefeasible rights-of-use
agreements ("IRU's"IRUs") that qualify for sales-type lease accounting, and were
entered into prior to June 30, 1999, are generally
recognized at the time of delivery and
acceptance of the fiber by the lessee.
Dark fiber IRU's that do not meet the criteria for sales-type lease accounting
are accounted for as operating leases and revenue is recognized over the term
of the lease.

In Junecustomer.

Effective July 1, 1999, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB
Statement No. 66" ("FIN 43"). Under FIN 43, certain sale and long-term right-
of-use agreements of dark fiber and capacity entered into after June 30, 1999,
are required to be accounted for in the same manner as sales of real estate
with property improvements or integral equipment. Dark fiber is considered
integral equipment and accordingly, a lease must include a provision allowing
title to transfer to the lessee in order for that lease to be accounted for as
a sales-type lease. Failure to satisfy the requirements of the FASB
Interpretation result in the deferral of revenue recognition for these
agreements over the term of the agreement (currently up to 20 years).

The adoption of FIN 43 applies to leases of integral equipment entered into after June 30,
1999.did not have an effect on the Company's cash flows.
Dark fiber agreementsIRUs generally require the customer to make a down payment due upon
execution of the agreement with the balance due upon delivery and acceptance of
the fiber. Amounts billed or cash receivedThese long-term dark fiber contracts and the issuance of FIN 43 have
resulted in excessa substantial amount of deferred revenue earned arebeing recorded as deferred revenue.on the
balance sheet.

The Company is obligedobligated under dark fiber agreementsIRUs to maintain its network in
efficient working order and in accordance with industry standards. Customers
are obligated for the term of the agreement to pay for their allocable share of
the costs for operating and maintaining the network. The Company recognizes
this revenue monthly as services are provided.

The cost of revenue associated with the revenue recognized for dark fiber
agreements entered into prior to June 30, 1999, was determined based on an
allocation of the total estimated costs of the network to the dark fiber
soldprovided to the customers. The allocation takes into account the service
capacity of the specific dark fiber soldprovided to customers relative to the total
expected capacity of the network. The Company is recognizingChanges to total estimated costs and network
capacity are included in the allocation in the period in which they become
known. Cost of revenue in accordanceassociated with FIN 43the sale of a portion of the trans-
Atlantic submarine cable was determined based on actual costs incurred by Level
3 and its contractors to construct such assets. Cost of revenue also includes
leased capacity, right-of-way costs, access charges and other costs directly
attributable to the Securities and Exchange Commission ("SEC") Staffnetwork.

F-9

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." However, accounting practice and guidance with respect to the accounting treatment of these transactions is
evolving.submarine
dark fiber sales and terrestial IRU agreements continue to evolve. Any changes
in the accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these agreementstransactions in the future.

F-10

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Information services revenue is primarily derived from the computer
outsourcing business and the systems integration business. Level 3 provides
outsourcing services, typically through contracts ranging from 3-5 years, to
firms that desire to focus their resources on their core businesses. Under
these contracts, Level 3 recognizes revenue in the month the service is
provided. The systems integration business helps customers define, develop and
implement cost-effective information systems. Revenue from these services is
recognized on a time and materials basis or percentage of completion basis
depending on the extent of the services provided. Cost of revenue includes
costs of consultants' salaries and other direct costs for the information
services business.

The communications and information services industry is highly competitive.
Many of the Company's existing and potential competitors in the communications
and information services industry have financial, personnel, marketing and
other resources significantly greater than those of the Company, as well as
other competitive advantages including existing customer bases. Increased
consolidation and strategic alliances in the industry resulting from the
Telecommunications Act of 1996, the opening of the U.S. market to foreign
carriers, technological advances and further deregulation could give rise to
significant new competitors to the Company.

The Company provides telecommunications services to a wide range of
customers, ranging from well capitalized national carriers to local Internet
start-ups. The Company has in place policies and procedures to review the
financial condition of potential and existing customers. Based on these
policies and procedures, the Company believes its exposure to credit risk
within the communications business is mitigated. Concentration of credit risk
with respect to accounts receivable are limitedreceivables is mitigated due to the dispersion of the Company's
customer base among geographic areas and remedies provided by terms of
contracts and statutes.

Coal Sales Contracts

Historically, Level 3's coal is sold primarily under long-term contracts
with electric utilities, which burn coal in order to generate steam to produce
electricity. A substantial portion of Level 3's coal sales were made underrevenue was earned from
long-term contracts during 2000, 1999, 1998, and 1997.1998. The remainder of Level 3's
sales are made on the spot market where prices are substantially lower than
those in the long-term contracts. As the long-term contracts expire,Beginning in 2001, a higher proportion of
Level 3's sales will occur on the spot market.market as long-term contracts begin to
expire. Costs of revenue related to coal sales include costs of mining and
processing, estimated reclamation costs, royalties and production taxes.

The coal industry is highly competitive. Level 3 competes not only with
other domestic and foreign coal suppliers, some of whom are larger and have
greater capital resources than Level 3, but also with alternative methods of
generating electricity and alternative energy sources. Many of Level 3's
competitors are served by two railroads and, due to the competition, often
benefit from lower transportation costs than Level 3 which is served by a
single railroad. Additionally, many competitors have more favorable geological
conditions than Level 3, often resulting in lower comparative costs of
production.

Level 3 is also required to comply with various federal, state and local
laws concerning protection of the environment. Level 3 believes its compliance
with environmental protection and land restoration laws will not affect its
competitive position since its competitors are similarly affected by suchthese
laws.

Level 3 and its mining ventures have entered into various agreements with
its customers which stipulate delivery and payment terms on the sale of coal.
Prior to 1993, one of the primary customers deferred receipt of certain
commitments by purchasing undivided fractional interest in coal reserves of
Level 3 and the mining ventures. Under the agreements, revenue was recognized
when cash was received. The agreements with this customer were renegotiated in
1992. In accordance with the renegotiated agreements, there were no sales of
interest in coal reserves subsequent to January 1, 1993. Level 3 has delivered
and has the obligation to deliver the coal reserves to the customer in the
future if the customer exercises its option to take delivery of the coal. If
the option is exercised, Level 3 presently intends to deliver coal from
unaffiliated mines. In the opinion of the management, Level 3 has sufficient
coal reserves to cover the above sales commitments.

Level 3's coal sales contracts are with several electric utility and
industrial companies. In the event that these customers do not fulfill
contractual responsibilities, Level 3 wouldcould pursue the available legal
remedies.

F-11F-10

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation and Amortization

Property, plant and equipment are recorded at cost. Depreciation and
amortization for the majority of the Company's property, plant and equipment are computed on
accelerated and straight-line methods based on the following useful lives:

Facility and Leasehold Improvements......................... 20--40Improvements.......................... 20-40 years
Operating Equipment:........................................
Communications backbone.................................... 25
Network Infrastructure (including fiber).................... 7-25 years
Transmission equipment and electronics..................... 3--7electronics...................... 3-7 years
Network Construction Equipment.............................. 5--7Equipment............................... 5-7 years
Furniture, Fixtures and Office Equipment.............................. 3--7Equipment..................... 3-7 years
Other....................................................... 2--10Other........................................................ 2-10 years

Depletion of mineral properties is provided primarily on ana units-of-
extraction basis determined in relation to coal committed under sales
contracts.

Software Development Costs

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
effective date of this pronouncement was for fiscal years beginning after
December 15, 1998, however, the Company elected to account for internal
software development costs incurred in developing its integrated business
support systems in accordance with SOP 98-1 in 1998. The Company recognized $27
million of expense for the development of operating support systems in 1998
that would have previously been capitalized prior to adoption of SOP 98-1.

Start-Up Costs

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities", ("SOP 98-5"), which provides guidance on the
financial reporting for start-up and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
was effective for financial statements for fiscal years beginning after
December 15, 1998, however, the Company elected to adopt SOP 98-5 in 1998. The
adoption of SOP 98-5 did not result in a significant charge to earnings in
1998.

Subsidiary and

Investee Stock Activity

The Company recognizes gains and losses from the sale, issuance and
repurchase of stock by its subsidiaries and equity method investees in the statements of
operations.

Earnings Per Share

Basic earnings per share have been computed using the weighted average
number of shares during each period. Diluted earnings per share is computed by
including the dilutive effect of common stock that would be issued assuming
conversion or exercise of outstanding convertible debt, stock options and other
dilutive securities.

Intangible Assets

Intangible assets primarily include amounts allocated upon acquisitions of
businesses, franchises and subscriber lists. These assets are amortized on a
straight-line basis over the expected period of benefit.

F-12

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For intangibles originating from communications or other information
services related acquisitions, the Company is amortizing these assets over a
five year period. Intangibles attributable to other acquisitions and
investments are amortized over periods which do not exceed 40 years.

Long Lived Assets

The Company reviews the carrying amount of long lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Determination of any impairment would include a
comparison of estimated future operating cash flows anticipated to be generated
during the remaining life of the asset to the net carrying value of the asset.

Reserves for Reclamation

The Company follows the policy of providing an accrual for reclamation of
mined properties, based on the estimated total cost of restoration of such
properties to meet compliance with laws governing strip mining, by applying
per-ton reclamation rates to coal mined. These reclamation rates are determined
using the remaining

F-11

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

estimated reclamation costs and tons of coal committed under sales contracts.
The Company reviews its reclamation cost estimates annually and revises the
reclamation rates on a prospective basis, as necessary.

Income Taxes

Deferred income taxes are provided for the temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. In 2000, Level 3 utilized a portion of its accumulated net
operating tax losses to offset prior year taxable income. The remaining net
operating losses not utilized can be carried forward for 20 years to offset
future taxable income. A valuation allowance has been recorded against deferred
tax assets as the Company is unable to conclude under relevant accounting
standards that it is more likely than not that net operating losses will be
realizable.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings (loss) and other non-owner
related changes in equity not included in net earnings (loss), such as
unrealized gains and losses on marketable securities classified as available
for sale and foreign currency translation adjustments related to foreign
subsidiaries.

Foreign Currencies

Generally, local currencies of foreign subsidiaries are the functional
currencies for financial reporting purposes. Assets and liabilities are
translated into U.S. dollars at year-end exchange rates. Revenue, expenses and
cash flows are translated using average exchange rates prevailing during the
year. Gains or losses resulting from currency translation are recorded as a
component of accumulated other comprehensive income (loss) in stockholders'
equity and in the statements of comprehensive income.

Stock Dividend

Effective August 10, 1998, the Company issued a dividend of one share of
Level 3 Common Stock for each share of Level 3 Common Stock then outstanding.
All share information and per share data have been restated to reflect the
stock dividend.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the F-13

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In June 1998, the FASB issued SFASStatement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 as amended by SFAS Nos. 137 and 138, is effective for
fiscal years beginning after June 15, 2000 (JanuaryJanuary 1, 2001 for the
Company).2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at the fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction, and, if it is, the type of hedge, transaction.and the extent of hedge
ineffectiveness. The Company currently makes minimal use of derivative
instruments as defined by SFAS No. 133. If the Company

F-12

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

does not increase the utilization of these derivative instruments by
the effective date of SFAS No. 133,derivatives, the adoption of this
standard is not expected to have a significant effect on the Company's results
of operations or its financial position.

In December 1999 the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of
revenue in the financial statements. The Company adopted SAB 101 must be applied to the financial
statements no later than the first quarteras of January
1, 2000. The Company doesadoption did not
believe that the adoption of SAB 101 will have a material affecteffect on the financial results
as the Company's financial results.revenue recognition policies were already consistent with SAB
101.

Fiscal Year

In May 1998, the Company's Board of Directors changed Level 3's fiscal year
end from the last Saturday in December to a calendar year end. The results of
operations for the additional fivefour days in the 1998 fiscal year are reflected
in the Company's Form 10-K for the period ended December 31, 1998 and were not
material to the overall results of operations and cash flows. There were 52
weeks in fiscal year 1997.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current
year presentation.

(2) Reorganization--Discontinued Construction Operations

Prior to March 31, 1998, the Company had a two-class capital structure. The
Company's Class C Stock reflected the performance of the construction
operations ("Construction Group") and the Class D Stock reflected the
performance of the other businesses, including communications, information
services and coal mining. In 1997 the Board of Directors of Level 3 approved a
proposal for the separation of the Construction Group from the other operations
of the Company through a split-off of the Construction Group (the "Split-off").
In December 1997, the Company's stockholders approved the Split-off and in
March 1998, the Company received a ruling from the Internal Revenue Service
that stated the Split-off would be tax-free to U.S. stockholders. The Split-off
was effected on March 31, 1998. As a result of the Split-off, the Company no
longer owns any interest in the Construction Group. Accordingly, the separate
financial statements and management's discussion and analysis of financial
condition and results of operations of Peter Kiewit Sons', Inc. should be
obtained to review the results of operations of the Construction Group for the
three and twelve months ended March 31, 1998 and December 27, 1997,
respectively.

F-14

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)1998.

On March 31, 1998, the Company reflected the fair value of the Construction
Group as a distribution to the Class C stockholders because the distribution
was considered non-pro rata as compared to the Company's previous two-class
capital stock structure. The Company recognized a gain of $608 million within
discontinued operations, equal to the difference between the carrying value of
the Construction Group and its fair value in accordance with Financial
Accounting Standards BoardFASB Emerging
Issues Task Force Issue 96-4, "Accounting for Reorganizations Involving a Non-ProNon-
Pro Rata Split-off of Certain Nonmonetary Assets to Owners." NoThere were no
taxes were provided onrelated to this gain due to the tax-free nature of the Split-off.

In connection with the Split-off, the Class D Stock became the common stock
of Level 3 Communications, Inc. ("Common Stock"), on a one for one basis, and
shortly thereafter, began trading on the Nasdaq National Market under the
symbol "LVLT".

ThePrior to this Split-off, the Company's certificate of incorporation gave
stockholders the right to exchange their Class C Stock for Class D Stock under
a set conversion formula. That right was eliminated as a result of the Split-off.Split-
off. To replace that conversion right, Class C stockholders received an
aggregate of 6.5 million shares

F-13

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of a new Class R Stock in January 1998, which waswere convertible into Common
Stock in accordance with terms ratified by stockholders in December 1997. The
Company reflected in the equity accounts the exchange of the conversion right
and issuance of the Class R Stock at its fair value of $92 million at the date
of the Split-off.

On May 1, 1998, the Board of Directors of Level 3 Communications, Inc.
determined to force conversion of all shares of the Company's Class R Stock
into shares of Common Stock, effective May 15, 1998. The Class R Stock was
converted into Common Stock in accordance with the formula set forth in the
certificate of incorporation of the Company. Each holder of Class R Stock
ultimately received .7778 of a share of Common Stock for each share of Class R
Stock held. In total 6.5 million shares of Class R Stock were converted into
5.1 million shares of Common Stock. The value of the Class R Stock at the time
of the forced conversion was $164 million. The Company recognized the
additional $72 million of value upon conversion of the Class R Stock to Common
Stock in the equity accounts.

The following details the earnings per share calculations for Class C Stock:

Class C Stock 1997
------------- ------

Net Income Available to Common Shareholders (in millions)........... $ 155
Add: Interest Expense, Net of Tax Effect Associated with Convertible
Debentures......................................................... 1
------
Net Income for Diluted Shares....................................... $ 156
======
Total Number of Weighted Average Shares Outstanding Used to Compute
Basic Earnings per Share (in thousands)............................ 9,728
Additional Dilutive Shares Assuming Conversion of Convertible
Debentures......................................................... 441
------
Total Number of Shares Used to Compute Diluted Earnings per Share... 10,169
======
Net Income
Basic earnings per share.......................................... $15.99
======
Diluted earnings per share........................................ $15.35
======

The following is summarized financial information of the Construction Group:

Operations (in millions) 1997
------------------------ ------

Revenue............................................................. $2,764
Net Earnings........................................................ 155

F-15

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(3) Discontinued Energy Operations

On January 2, 1998, the Company completed the sale of its energy assets to
MidAmerican. These assets included approximately 20.2 million shares of
MidAmerican common stock (assuming the exercise of 1 million options held by
Level 3), Level 3's 30% interest in CE Electric and Level 3's investments in
international power projects in Indonesia and the Philippines. Level 3
recognized an after-tax gain on the disposition of $324 million and the after-
tax proceeds of approximately $967 million from the transaction are beingwere used in
part to fund the Business Plan.business plan. Results of operations for the period through
January 2, 1998 were not considered significant and the gain on disposition was
calculated using the carrying amount of the energy assets as of December 27,
1997.

In order to fund the purchase of Level 3's energy assets, MidAmerican sold,
in 1997 approximately 19.1 million shares of its common stock at a price of
$37.875 per share. This sale reduced Level 3's ownership in MidAmerican to
approximately 24% but increased its proportionate share of MidAmerican's
equity. Level 3 recognized an after-tax gain of approximately $44 million from
MidAmerican transactions in 1997.

In 1997 the Labour Party in the United Kingdom implemented a "Windfall Tax"
against privatized British utilities. This one-time tax was 23% of the
difference between the value of Northern Electric, plc at the time of
privatization and the utility's current value based on profits over a period of
up to four years. CE Electric recorded an extraordinary charge of approximately
$194 million when the tax was enacted in 1997. The total impact to Level 3
directly through its investment in CE Electric and indirectly through its
interest in MidAmerican, was $63 million.

The following is summarized financial information for discontinued energy
operations for the fiscal year ended December 27, 1997:

Income from Discontinued Operations (in millions)

1997
----

Operations
Equity in:
MidAmerican earnings, net............................................... $16
CE Electric earnings, net............................................... 17
International energy projects earnings, net............................. 5
Income Tax Expense........................................................ (9)
---
Income from operations.................................................. 29
MidAmerican Stock Transactions
Gain on Investee Stock Activity........................................... 68
Income Tax Expense........................................................ (24)
---
Gain on MidAmerican stock activity...................................... 44
Extraordinary Loss--Windfall Tax
Level 3's Share from MidAmerican.......................................... (39)
Level 3's Share from CE Electric.......................................... (58)
Income Tax Benefits....................................................... 34
---
Extraordinary loss...................................................... (63)
---
Income from Discontinued Energy Operations................................ $10
===

F-16

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following is summarized financial information of MidAmerican, CE
Electric, and the International energy projects:

Operations (in millions)

1997
------

Revenue:
MidAmerican.......................................................... $2,271
CE Electric.......................................................... 1,564
Net Earnings (Loss):
MidAmerican.......................................................... $ (84)
CE Electric.......................................................... (136)
International energy projects........................................ 2
(4) Earnings Per Share

The Company had a loss from continuing operations for the years ended
December 31, 2000, 1999 and 1998, therefore, the dilutive impact of the
approximately 1219 million shares and 13 million shares at December 31, 2000 and
1999, respectively, attributable to the Convertible Subordinated Notesconvertible subordinated notes and the
approximately 24 million, 21 million options and warrants outstanding at December 31, 1999
and approximately 23 million options and warrants
outstanding at December 31, 2000, 1999 and 1998 respectively, have not been
included in the computation of diluted earnings (loss) per share because the resulting computationtheir
inclusion would have been anti-dilutive. Foranti-dilutive to the year ended December 27, 1997, potentially dilutive stock options are calculated
in accordance with the treasury stock method which assumes that proceeds from
exercise of all options are used to repurchase common stock at the average
market value. The number of shares remaining after the assumed exercise
proceeds are exhausted represent the potentially dilutive effect of the
options.

F-17computation.

F-14

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following details the earnings (loss) per share calculations for the
Level 3 Common Stock.

A calculation of the earnings per share for the Class C Stock in
1997 can be found in Note 2 to the consolidated financial statements.

Year Ended
-----------------------------------------------------
2000 1999 1998
1997
-------- -------- --------------- ------- -------

Earnings (Loss)Loss from Continuing Operations (in millions)................................................. $(1,455) $ (487) $ (128) $ 83
Discontinued Operations:
Earnings from discontinued energy operations.....operations....... -- -- 324
10
Gain on separationsplit-off of construction operations....operations....... -- -- 608
--
-------- -------- --------------- ------- -------
Earnings from discontinued operations...........operations............ -- -- 932
10
-------- -------- --------------- ------- -------
Net Earnings (Loss) Excluding Discontinued
Construction Operations...........................Operations............................. $(1,455) $ (487) $ 804
$ 93
======== ======== =============== ======= =======
Total Number of Weighted Average Shares Outstanding
used to Compute Basic and Dilutive Earnings Per
Share (in thousands)........................................................................ 362,539 334,348 301,976 249,293
Additional Dilutive Stock Options.................. -- -- 1,079
-------- -------- --------
Total Number of Shares used to Compute Dilutive
Earnings (Loss) Per Share......................... 334,348 301,976 250,372
======== ======== ========
Earnings (Loss) per Share (Basic and Diluted):
Continuing operations............................operations.............................. $ (4.01) $ (1.46) $ (.43)
$ .33
======== ======== =============== ======= =======
Discontinued energy operations...................operations..................... $ -- $ -- $ 1.07
$ .04
======== ======== =============== ======= =======
Gain on split-off of discontinued construction
operations......................................operations........................................ $ -- $ -- $ 2.02
$ --
======== ======== =============== ======= =======
Net earnings (loss) excluding discontinued
construction operations.........................operations........................... $ (4.01) $ (1.46) $ 2.66
$ .37
======== ======== =============== ======= =======
Net earnings (loss) excluding gain on split-off of
construction operations......................operations........................... $ (4.01) $ (1.46) $ .64
$ .37
======== ======== =============== ======= =======

(5) Acquisitions

On January 5, 1999, Level 3 acquired BusinessNet Ltd. ("BusinessNet"), a
leading London-based Internet service provider in a largely stock-for-stock
transaction valued at $12 million and accounted for as a purchase. After
completion of certain adjustments, the Company agreed to issue approximately
400,000 shares of Common Stock and paid $1 million in cash in exchange for all
of the issued and outstanding shares of BusinessNet's capital stock. Of the
approximately 400,000 shares Level 3 agreed to issue in connection with the
acquisition, approximately 150,000 shares of Level 3 Common Stock have been
pledged to Level 3 to secure certain indemnification obligations of the former
BusinessNet stockholders. In October 1999, Level 3 released approximately
42,000 shares pursuant to the acquisition agreement. The pledge of the
remaining shares will terminate in July 2000, unless otherwise extended
pursuant to the terms of the acquisition agreement. Liabilities exceeded assets
acquired, and goodwill of $16 million was recognized from the transaction and
is being amortized over five years.

In April 1998, the Company acquired XCOM Technologies, Inc. ("XCOM"), a
privately held company that hasat the time had developed technology which providesprovided
certain key components necessary for the Company to develop an interface
between its Internet protocol-based network and the existing public switched
telephone network. The Company issued approximately 5.3 million shares of Level
3 Common Stock and 0.7 million options and warrants to purchase Level 3 Common
Stock in exchange for all the stock, options and warrants of XCOM.

F-18

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company accounted for this transaction, valued at $154 million, as a
purchase. Of the total purchase price, $115$30 million was originally allocated to in-process
research and development and was taken as a nondeductible charge to earnings in
the second quarter of 1998. The purchase price exceeded the fair value of the net assets acquired by
$30$115 million which was recognized as goodwill.

In October 1998, the SEC issued new guidelines for valuing acquired researchgoodwill and development which were applied retroactively. The Company believes its
accounting for the acquisition was made in accordance with generally accepted
accounting principles and established appraisal practices at the time of the
acquisition. However, due to the significance of the charge relative to the
total value of the acquisition, the Company reduced the charge for in-process
research and development from $115 to $30 million, and increased the related
goodwill by $85 million. The goodwill associated with the XCOM transaction is being amortized over a
five-year period.

In September 1998, Level 3 acquired GeoNet Communications, Inc. ("GeoNet"),
a regional Internet service provider located in Northern California. The
Company issued approximately 0.6 million sharesFor the XCOM acquisition and options in exchange for
GeoNet's capital stock, which valued the transaction at approximately $19
million. Acquired liabilities exceeded assets, and goodwill of $21 million was
recognized from this transaction which is being amortized over five years.

The cumulative operating results of BusinessNet, XCOM and GeoNet and other
1998 acquisitions were not significant relative to the Company's 1999 and 1998
results.

For the Company'sother acquisitions, the excess
purchase price over the fair market value of the underlying assets was
allocated to goodwill, other intangible assets and property based upon
preliminary estimates of fair value. The final purchase price allocation for
XCOM and GeoNetthese acquisitions did not vary significantly from preliminary estimates. The Company does not believe that the
final purchase price allocation for BusinessNet will vary significantly from
the preliminary estimates for BusinessNet.

(6) Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to determine classification
and fair values of financial instruments:

Cash and Cash Equivalents

Cash equivalents generally consist of funds invested in highly liquid
instruments purchased with an original maturity of three months or less. The
securities are stated at cost, which approximates fair value.

F-15

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Marketable and Restricted Securities

Level 3 has classified all marketable and restricted securities as
available-for-sale. Restricted securities include investments in mutual funds
that are restricted to fund certain reclamation liabilities of its coal mining
ventures, cash deposits related to construction renovations for the New York
Gateway facility, and cash deposits to collateralize letters of credit. The amortized cost of the
securities used in computing unrealized and realized gains and losses is
determined by specific identification. Fair values are estimated based on
quoted market prices for the securities on hand or for similar investments. Net
unrealized holding gains and losses are included in accumulated other
comprehensive income (loss) within stockholders' equity, net
of tax.

F-19

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)equity.

At December 31, 2000 and 1999, and 1998 the amortized cost, unrealized holding gains and
losses, and estimated fair values of marketable and restricted securities were
as follows:

Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------------- ---------- ---------- ------
(dollars in millions)

2000
Marketable Securities:
Commercial Paper......................... $ 204 $-- $-- $ 204
U.S. Treasury securities................. 2,534 4 -- 2,538
------ ---- ---- ------
$2,738 $ 4 $-- $2,742
====== ==== ==== ======
Restricted Securities:
Cash and cash equivalents................ $ 173 $-- $-- $ 173
Wilmington Trust:
Intermediate term bond fund............ 14 -- -- 14
Equity fund............................ 11 4 -- 15
------ ---- ---- ------
$ 198 $ 4 $-- $ 202
====== ==== ==== ======
1999
Marketable Securities:
U.S. Treasury securities..........securities................. $2,231 $-- $ (4) $2,227
------ ---- ---- ------
$2,231 $-- $ (4) $2,227
====== ==== ==== ======
Restricted Securities:
Cash and cash equivalents.........equivalents................ $ 1621 $-- $-- $ 1621
Wilmington Trust:
Intermediate term bond fund.....fund............ 13 -- -- 13
Equity fund.....................fund............................ 10 7 -- 17
------ ---- ---- ------
$ 3944 $ 7 $-- $ 46
====== ==== ==== ======
1998
Marketable Securities:
U.S. Treasury securities.......... $2,147 $ 8 $-- $2,155
U.S. Government Agency
securities....................... 639 1 -- 640
Equity securities................. 54 -- (3) 51
Other securities.................. 20 -- (3) 17
------ ---- ---- ------
$2,860 $ 9 $ (6) $2,863
====== ==== ==== ======
Restricted Securities:
Cash and cash equivalents......... $ 6 $-- $-- $ 6
Wilmington Trust:
Intermediate term bond fund..... 13 -- -- 13
Equity fund..................... 10 3 -- 13
------ ---- ---- ------
$ 29 $ 3 $-- $ 32
====== ==== ==== ======

For debt securities, amortized costs do not vary significantly from principal amounts.
The Company did not recognize any realized gains and losses on sales of
marketable and equity securities in 2000. Realized gains and losses on sales of
marketable and equity securities were $17 million and $16 million in 1999, and
$10 million and $1 million in 1998, and $9 million and $- million in 1997, respectively.

F-16

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 1999,2000, the contractual maturities of the debt securities are
as follows:

AmortizedCost Fair Cost Value
--------- ---------------- -----------
(dollars in millions)

Commercial Paper:
Less than 1 year..................................... $ 204 $ 204
========== ==========
U.S. Treasury Securities:
Less than 1 year......................................... $2,231 $2,227
====== ======year..................................... $ 2,534 $ 2,538
========== ==========

Maturities for the restricted securities have not been presented as theythe
types of securities included do not have a single maturity date.

F-20

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-Term Debt

The fair value of long-term debt was estimated using the December 31, 19992000
and 19981999 average of the bid and ask price for the publicly traded debt
instruments. The fair value of the outstanding amount under the Senior Secured
Credit Facility and mortgages approximates itstheir carrying valuevalues at December
31, 1999.2000.

The carrying amount and estimated fair values of Level 3's financial
instruments are as follows:

2000 1999
1998
--------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- -----------
(dollars in millions)

Cash and Cash Equivalents................... $1,219 $1,219 $ 842 $ 842Equivalents.................. $1,269 $1,269 $1,214 $1,214
Marketable Securities.......................Securities...................... 2,742 2,742 2,227 2,227
2,863 2,863
Restricted Securities....................... 46 46 32 32Securities...................... 202 202 51 51
Investments (Note 8)........................9)....................... 146 569 300 1,973 300 818
Long-term Debt, including current portion
(Note 10)..................................11)................................. 7,325 5,766 3,995 4,034 2,646 2,613

F-17

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(7) Receivables

Receivables at December 31, 2000 and 1999 were as follows:

Information
Communications Services Coal Other Total
-------------- ----------- ---- ----- -----
(dollars in millions)

2000
Accounts Receivable--Trade:
Services..................... $142 $ 25 $ 19 $ 1 $187
Dark Fiber................... 161 -- -- -- 161
Joint Build Costs.............. 252 -- -- -- 252
Other Receivables.............. 49 1 -- -- 50
Allowance for Doubtful
Accounts...................... (29) (4) -- -- (33)
---- ---- ---- ---- ----
$575 $ 22 $ 19 $ 1 $617
==== ==== ==== ==== ====

1999
Accounts Receivable--Trade:
Services..................... $ 64 $ 19 $ 18 $ 1 $102
Dark Fiber................... 2 -- -- -- 2
Joint Build Costs.............. 7 -- -- -- 7
Other Receivables.............. 46 2 -- -- 48
Allowance for Doubtful
Accounts...................... (6) (3) -- -- (9)
---- ---- ---- ---- ----
$113 $ 18 $ 18 $ 1 $150
==== ==== ==== ==== ====

Joint build receivables primarily relate to costs incurred by the Company
for construction of network assets in which Level 3 is partnering with other
companies. Generally, under these types of agreements, the sponsoring partner
will incur 100% of the construction costs and bill the other party as certain
construction milestones are accomplished. Joint build receivables include $90
million attributable to FLAG Telecom Limited for its share of the costs of the
Northern Asia submarine cable system.

The Company recognized bad debt expense in selling, general and
administrative expenses of $32 million, $11 million and $2 million in 2000,
1999 and 1998 respectively.

(8) Property, Plant and Equipment

Construction in Progress

The Company is currently constructing its communications network. Costs
associated directly with the uncompleted network, and interestincluding employee related
costs, are capitalized. Interest expense incurred during construction areis
capitalized based on the weighted average accumulated construction expenditures
and the interest rates related to borrowings associated with the construction
(Note 10)11). Certain gatewayintercity segments, Gateway facilities, local networks and
operating equipment have been placed in service during 1999.service. These assets are being
depreciated over their useful lives, primarily ranging from 3-
253-25 years.

As other segments of the network are placed in service, the assets
will be depreciated over their useful lives.F-18

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company is currently developingdevelops business support systems required for its Business Plan.business
plan. The external direct costs of software, materials and services, payroll
and payroll related expenses for employees directly associated with the
project, and interest costs incurred when developing the business support
systems are capitalized. Upon completion of the projects, the total cost of the
business support systems are amortized over their estimated useful lives of
3three years.

For the year ended December 31, 1999, the Company invested $3,299 million in
its communications business, including $1,384 million on the U.S. intercity
network, $255 million on the Pan European network, $270 million on transoceanic
networks, $613 million on domestic gateway facilities and local networks, and
$221 million on European gateway facilities and local networks.

F-21

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Capitalized business support systems and network construction costs that
have not been placed in service have been classified as construction-in-
progress within Property, Plant & Equipment below.

Accumulated Book
Cost Depreciation Value
------------- ------------ ------
(dollars in millions)

2000
Land and Mineral Properties........................ $ 167 $ (11) $ 156
Facility and Leasehold Improvements
Communications................................... 1,246 (33) 1,213
Information Services............................. 25 (4) 21
Coal Mining...................................... 68 (64) 4
CPTC............................................. 92 (12) 80
Network Infrastructure............................. 3,420 (62) 3,358
Operating Equipment
Communications................................... 1,213 (361) 852
Information Services............................. 54 (36) 18
Coal Mining...................................... 93 (85) 8
CPTC............................................. 17 (9) 8
Network Construction Equipment..................... 143 (27) 116
Furniture, Fixtures and Office Equipment........... 429 (162) 267
Other.............................................. 183 (68) 115
Construction-in-Progress........................... 3,167 -- 3,167
------- ----- ------
$10,317 $(934) $9,383
======= ===== ======
1999
Land and Mineral Properties.........................Properties........................ $ 5660 $ (11)(15) $ 45
Facility and Leasehold Improvements
Communications....................................Communications................................... 400 (14) 386
Information Services..............................Services............................. 26 (3) 23
Coal Mining....................................... 18 (15) 3
CPTC..............................................Mining...................................... 73 (64) 9
CPTC............................................. 92 (9) 83
Network Infrastructure............................. 211 (4) 207
Operating Equipment
Communications.................................... 686 (83) 603Communications................................... 475 (79) 396
Information Services..............................Services............................. 54 (37) 17
Coal Mining....................................... 176 (156) 20
CPTC..............................................Mining...................................... 115 (103) 12
CPTC............................................. 17 (7) 10
Network Construction Equipment......................Equipment..................... 98 (10) 88
Furniture, Fixtures and Office Equipment......................Equipment........... 150 (66) 84
Other...............................................Other.............................................. 155 (28) 127
Construction-in-Progress............................ 2,798Construction-in-Progress........................... 2,800 -- 2,798
------2,800
------- ----- ------
$4,726$ 4,726 $(439) $4,287
====== ===== ======
1998
Land and Mineral Properties......................... $ 32 $ (11) $ 21
Facility and Leasehold Improvements
Communications.................................... 80 (1) 79
Information Services.............................. 24 (2) 22
Coal Mining....................................... 18 (15) 3
CPTC.............................................. 91 (5) 86
Operating Equipment
Communications.................................... 245 (18) 227
Information Services.............................. 53 (30) 23
Coal Mining....................................... 180 (155) 25
CPTC.............................................. 17 (4) 13
Network Construction Equipment...................... 46 (1) 45
Furniture and Office Equipment...................... 67 (10) 57
Other............................................... 72 (2) 70
Construction-in-Progress............................ 390 -- 390
------ ----- ------
$1,315 $(254) $1,061
============= ===== ======

F-19

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation expense was $534 million in 2000, $192 million in 1999, and $48
million in 1998 and $20
million in 1997.1998. Depreciation expense attributable to the network construction
equipment is capitalized and included in Construction-in-Progress until such
time itthe constructed asset is placed in service.

F-22

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(8)(9) Investments

The Company holds significant equity positions in two publicly traded
companies;companies: RCN Corporation ("RCN") and Commonwealth Telephone Enterprises, Inc.
("Commonwealth Telephone"). RCN is a facilities-based provider of communications services to the residential market primarily in the northeastern
United States and California. RCN providesbundled local
and long distance phone, cable television and Internet services in several markets; including Boston, New
York, Washington, D.C.,to residential
markets primarily on the East and California's San Francisco to San Diego corridor.West coasts as well as Chicago. Commonwealth
Telephone holds Commonwealth Telephone Company, an incumbent local exchange
carrier operating in various rural Pennsylvania markets, and CTSI, Inc., a
competitive local exchange carrier which commenced operations in 1997.

On December 31, 1999,2000, Level 3 owned approximately 35%31% and 48%46% of the
outstanding shares of RCN and Commonwealth Telephone, respectively, and
accounts for each entity using the equity method. The market value of the
Company's investment in RCN and Commonwealth Telephone was $1,292$168 million and
$574$372 million, respectively, on December 31, 1999.2000. Due to the changes in RCN's
and Commonwealth Telephone's stock price, the market value of the Company's
investments in RCN and Commonwealth were $285 million and $386 million,
respectively, as of January 24, 2001.

Level 3's proportionate share of RCN's fourth quarter losses exceeded the
remaining carrying value of Level 3's investment in RCN. Level 3 does not have
additional financial commitments to RCN; therefore it recognizes equity losses
only to the extent of its investment in RCN. If RCN becomes profitable, Level 3
will not record its equity in RCN's profits until unrecorded equity losses have
been offset. Level 3 recorded equity losses attributable to RCN of $260 million
for the twelve months ended December 31, 2000. The Company's investment in RCN,
including goodwill, was zero and $166 million at December 31, 2000 and December
31, 1999, respectively. The Company has not recognized approximately $20
million of additional suspended equity losses attributable to RCN, which
exceeded the Company's carrying value of RCN.

The Company recognizes gains from the sale, issuance and repurchase of stock
by its subsidiaries and equity method investees in its statements of operations. During 1999,2000,
RCN issued stock for the acquisition of 21st Century Telecom Group, Inc.,
completed in a public offeringApril, 2000, and for certain transactions which diluted the
Company's ownership of RCN from 41% at December
31, 1998 to 35% at December 31, 1999.1999 to 31% at December 31,
2000. The increase in the Company's proportionate share of RCN's net assets as
a result of these transactions resulted in a pre-tax gain of $117$95 million for
the Company in 1999.for the year ended December 31, 2000. The Company also recognized
a similar gainpre-tax gains of $117 million and $62 million in 1998. The Company's investment
in RCN, including goodwill, was $166 million and $184 million at December 31, 1999 and 1998,
respectively. OnThe Company does not expect to recognize future gains on RCN
stock activity until suspended equity losses are recognized by the Company.

In October 4, 1999, RCN announced that Vulcan Ventures, Inc. had agreed to
invest $1.65 billion in RCN. This transaction, expected to close during the
first quarter ofThe investment, which closed in February 2000, is
in the form of mandatorily convertible preferred stock convertible tointo 26.6
million shares of RCN common stock. The preferred shares must be converted to
common shares within a three to seven year period at $62 per share.

F-20

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following is summarized financial information of RCN for the year ended
December 31, 2000 (unaudited) and the years ended December 31, 1999 and 1998,
and as of December 31, 2000 (unaudited) and December 31, 1999.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------

Operations:
RCN Corporation:
Revenue........................................... $ 333 $ 276 $ 211
Net loss available to common shareholders......... (891) (369) (205)

Level 3's Share:
Net loss.......................................... (260) (134) (91)
Goodwill amortization............................. (1) (1) (1)
------- ------- -------
$ (261) $ (135) $ (92)
======= ======= =======

December 31,
--------------
2000 1999
------ ------

Financial Position:
Current Assets.................................................. $2,005 $1,905
Other Assets.................................................... 2,774 1,287
------ ------
Total assets.................................................. 4,779 3,192

Current Liabilities............................................. 533 249
Other Liabilities............................................... 2,283 2,168
Minority Interest............................................... 75 130
Preferred Stock................................................. 1,991 253
------ ------
Total liabilities and preferred stock......................... 4,882 2,800
------ ------
Common equity............................................... $ (103) $ 392
====== ======
Level 3's Investment:
Equity in net assets.......................................... $ -- $ 139
Goodwill...................................................... -- 27
------ ------
$ -- $ 166
====== ======
On December 13, 1999, RCN6, 2000, Commonwealth Telephone announced that it was acquiring 21st Century
Telecom Group, Inc. ("21st Century") ingoing to
record a transaction valued at approximately
$500 million, payable in RCN stock and assumed debt. RCN expectscharge to issue 4.7
million sharesearnings for the outstanding stockrestructuring of 21st Century and will offer to
exchange approximately $62 million worth of RCN stock for 21st Century's
outstanding preferred stock. This transaction is subject to the antitrust and
regulatory approvals and is expected to closeits CTCI subsidiary in the
first quarter of 2000.fourth quarter. Commonwealth Telephone indicated that the charge would range
from $46-$72 million on an after-tax basis. Level 3 based on current market conditions, expects to recognize a
significant gain when Vulcan Ventures, Inc. convertsrecorded $27 million of
equity losses, its RCN preferred stock to
RCN common stockproportionate share of the midpoint, or $59 million, of the
estimated restructuring charge.

During 2000 and the 21st Century transaction closes.

During 1999, Commonwealth Telephone issued stock for certain
transactions which slightly diluted the Company's ownership of Commonwealth
Telephone. The increase in the Company's proportionate share of Commonwealth
Telephone's net assets as a result of these transactions resulted in a pre-tax
gaingains of $5 million and $1 million for the Company in 1999.2000 and 1999,
respectively. The Company's investment in Commonwealth Telephone, including
goodwill, was $126$105 million and $116$126 million at December 31, 19992000 and 1998,1999,
respectively.

In September 1998, Commonwealth Telephone conducted a rights offering of 3.7
million shares of its common stock. Under the terms of the offering, each
stockholder received one right for every five shares of

F-21

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Commonwealth Telephone Common Stock or Commonwealth Telephone Class B Common
Stock held. The rights enabled the holder to purchase Commonwealth Telephone
Common Stock at a subscription price of F-23

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$21.25 per share. Level 3, which owned
approximately 48% of Commonwealth Telephone prior to the rights offering,
exercised itsthe 1.8 million rights it received with respect to the shares it held
for $38 million. As a result of subscriptions made by other stockholders, Level
3 maintained its 48% ownership interest in Commonwealth Telephone after the
rights offering.

In June 1998, Cable Michigan announced that its Board of Directors had
reached a definitive agreement to sell the company to Avalon Cable of Michigan,
Inc. for $40.50 per share in a cash-for-stock transaction. Level 3 received
approximately $129 million when the transaction closed in November 1998 and
recognized a pre-tax gain on sale of assets of approximately $90 million.

The following is summarized financial information of RCN for each of the
three years ended December 31, 1999Company continues to develop its program that involves making
investments in certain public and as of December 31, 1999 and 1998 (in
millions):

Year Ended
-----------------
1999 1998 1997
----- ---- ----

Operations:
RCN Corporation:
Revenue................................................... $ 276 $211 $127
Net loss available to common shareholders................. (369) (205) (52)

Level 3's Share:
Net loss.................................................. (134) (91) (26)
Goodwill amortization..................................... (1) (1) --
----- ---- ----
$(135) $(92) $(26)
===== ==== ====

1999 1998
------ ------

Financial Position:
Current Assets................................................... $1,924 $1,092
Other Assets..................................................... 1,289 816
------ ------
Total assets................................................... 3,213 1,908
------ ------

Current Liabilities.............................................. 269 178
Other Liabilities................................................ 2,169 1,282
Minority Interest................................................ 130 77
Preferred Stock.................................................. 253 --
------ ------
Total liabilities and preferred stock.......................... 2,821 1,537
------ ------
Common equity................................................ $ 392 $ 371
====== ======
Level 3's Investment:
Equity in net assets........................................... $ 139 $ 150
Goodwill....................................................... 27 34
------ ------
$ 166 $ 184
====== ======

In July 1999, the Company and Data Return Corporationprivate early stage Internet Protocol ("Data Return"IP")
entered into an agreement whereby Data Return wouldcentric entities in connection with those entities agreeing to purchase $5 million of
capacityvarious
services from the Company by December 31, 2001. In lieu of cash, the Company
agreed to accept, at the time, approximately 1.9 million shares of Data Return
restricted common stock as payment for services to be provided.Company. The Company recordedrecords these transactions as cost
method investments and deferred revenue. The value of the transaction as an investment and
deferred revenue is equal to the estimated fair value of the securities at the
time of the transaction or the value of the services to be provided. In October 1999, Data Return conducted an

F-24

LEVELprovided, which ever
is more readily determinable. Level 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

initial public offering. Theclosely monitors the success of these
investees in executing their business plans. For those companies that are
publicly traded, Level 3 also monitors current and historical market values of
the investee as it compares to the carrying value of the Company's investmentinvestment. The
Company recorded a charge of $37 million in Data
Return at2000 for an other-than temporary
decline in the value of one such investment. Additional impairments, if any,
will be recognized as they become apparent. If any of the privately held
investments become publicly-traded and meet the criteria for "available-for-
sale" securities pursuant to SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," they will be accounted for accordingly.
Otherwise, future appreciation will be recognized only upon sale or other
disposition of the securities. As of December 31, 1999 was approximately $104 million. The2000, the Company however, can not reflectheld
investments with a carrying amount of $37 million and had recognized less than
$1 million of revenue for services related to the fair value of the Data Return investmentinvestees in its
financial statements until it provides the services to Data Return or certain
restrictions expire.

(9)this program.

(10) Other Assets

At December 31, 2000 and 1999 and 1998 other non-current assets consisted of the
following:

2000 1999 1998
---- ----
(in
millions)

Goodwill:
XCOM,Debt Issuance Costs, net.......................................... $161 $101
Goodwill, net of accumulated amortization of $37$102 and $15............ $ 75 $100
GeoNet, net of accumulated amortization of $4 and $1............ 17 20
BusinessNet, net of accumulated amortization of $4 and $ --..... 12 --
Other, net of accumulated amortization of $8 and $1............. 14 21$52......... 68 118
Deposits.......................................................... 53 64
Prepaid Network Assets............................................ 35 30 --
Deposits.......................................................... 64 --
Debt Issuance Costs, net.......................................... 101 67
Pavilion Towers Office Complex.................................... 23 23
CPTC Deferred Development and Financing Costs..................... 15 15
Unrecovered Mine Development Costs................................ 14 15
Other............................................................. 1614 30
Pavilion Towers Office Complex.................................... -- 23
---- ----
Total other assets..............................................$345 $381 $284
==== ====

Goodwill amortization expense, excluding amortization expense attributable
to equity method investees, was $50 million in 2000, $36 million in 1999, $17and
$18 million in 1998 and $ -- in
1997.

(10)1998.

F-22

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(11) Long-Term Debt

At December 31, 19992000 and 1998,1999, long-term debt was as follows:

2000 1999 1998
---------- ----------
(dollars in millions)

Senior Notes (9.125% due 2008)....................... $ 2,000 $ 2,000
Senior Notes (11% due 2008).......................... 800 --
Senior Discount Notes (10.5% due 2008)............... 619 559
504Senior Euro Notes (10.75% due 2008).................. 465 --
Senior Discount Notes (12.875% due 2010)............. 399 --
Senior Euro Notes (11.25% due 2010).................. 279 --
Senior Notes (11.25% due 2010)....................... 250 --
Senior Secured Credit Facility:
Term Loan Facility
Tranche A (9.23%(9.52% due 2007)......................... 200 --200
Tranche B (9.98%(10.27% due 2008)................................................. 275 275
Commercial Mortgage:
GMAC (9.20% due 2003).............................. 120 --
Lehman (10.11% due 2003)........................... 113 --
Convertible Subordinated Notes (6.0% due 2010)....... 863 --
Convertible Subordinated Notes (6.0% due 2009)....... 823 --823
CPTC Long-termLong-Term Debt (with recourse only to CPTC):
(7.6%-9.5% due 2004 -2017).........................2004-2017).......................... 115 116115
Other................................................ 4 23 26
---------- ----------
7,325 3,995 2,646
Less current portion................................. (7) (6) (5)
---------- ----------
$ 3,9897,318 $ 2,6413,989
========== ==========

F-25

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9.125% Senior Notes

In April 1998, the Company received $1.94 billion of net proceeds from an
offering of $2 billion aggregate principal amount 9.125% Senior Notes Due 2008
("9.125% Senior Notes"). Interest on the notes accrues at 9.125% per year and
is payable on May 1 and November 1 each year in cash.

The 9.125% Senior Notes are subject to redemption at the option of the
Company, in whole or in part, at any time or from time to time on or after May
1, 2003, plus accrued and unpaid interest thereon to the redemption date, if
redeemed during the twelve months beginning May 1, of the years indicated
below:

Redemption
Year Price
---- ----------

2003............................................................ 104.563%
2004............................................................ 103.042%
2005............................................................ 101.521%
2006 and thereafter............................................. 100.000%

In addition, at any time or from time to time prior to May 1, 2001, the
Company may redeem up to 35% of the original aggregate principal amount of the
9.125% Senior Notes at a redemption price equal to 109.125% of the principal
amount of the 9.125% Senior Notes so redeemed, plus accrued and unpaid interest
thereon to

F-23

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the redemption date. The 9.125% Senior Notes are senior, unsecured obligations
of the Company, ranking pari passu with all existing and future senior
unsecured indebtedness of the Company. The Senior Notesnotes contain certain covenants,
which among other things, limit consolidated debt, dividend payments, and
transactions with affiliates. The Company used the net proceeds of the Senior
Notesnote
offering in connection with the implementation of its Business Planbusiness plan to increase
substantially its information services business and to expand the range of
services it offers by building an advanced, international, facilities-
basedfacilities-based
communications network based on IP technology.

Debt issuance costs of $65 million were capitalized and are being amortized
over the term of the Senior Notes.

11% Senior Notes due 2008

On February 29, 2000, the Company received $779 million of net proceeds,
after transaction costs, from a private offering of $800 million aggregate
principal amount of its 11% Senior Notes due 2008 ("11% Senior Notes").
Interest on the notes accrues at 11% per year and is payable semi-annually in
arrears in cash on March 15 and September 15, beginning September 15, 2000. The
11% Senior Notes are senior, unsecured obligations of the Company, ranking pari
passu with all existing and future senior debt. The 11% Senior Notes cannot be
prepaid, and mature on March 15, 2008. The 11% Senior Notes contain certain
covenants, which among other things, limit additional indebtedness, dividend
payments, certain investments and transactions with affiliates.

Debt issuance costs of $21 million were capitalized and are being amortized
as interest expense over the term of the 11% Senior Notes.

10.5% Senior Discount Notes due 2008

In December 1998, the Company sold $834 million aggregate principal amount
at maturity of 10.5% Senior Discount Notes Due 2008 ("10.5% Senior Discount
Notes"). The sales proceeds of $500 million, excluding debt issuance costs,
were recorded as long term debt. Interest on the 10.5% Senior Discount Notes
accretes at a rate of 10.5% per annum, compounded semiannually, to an aggregate
principal amount of $834 million by December 1, 2003. Cash interest will not
accrue on the 10.5% Senior Discount Notes prior to December 1, 2003; however,
the Company may elect to commence the accrual of cash interest on all
outstanding 10.5% Senior Discount Notes on or after December 1, 2001, in which
case the outstanding principal amount at maturity of each 10.5% Senior Discount
Note will on the elected commencement date be reduced to the accreted value of
the 10.5% Senior Discount Note as of that date and cash interest shall be
payable on that Note on June 1 and December 1 thereafter. Commencing June 1,
2004, interest on the 10.5% Senior Discount Notes will accrue at the rate of
10.5% per annum and will be payable in cash semiannually in arrears. Accrued
interest expense for the year ended December 31, 19992000 on the 10.5% Senior
Discount Notes of $55$60 million was added to long-term debt.

F-26

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The 10.5% Senior Discount Notes will be subject to redemption at the option
of the Company, in whole or in part, at any time or from time to time on or
after December 1, 2003 at the following redemption prices (expressed as
percentages of accreted value) plus accrued and unpaid interest thereon to the
redemption date, if redeemed during the twelve months beginning December 1, of
the years indicated below:

Redemption
Year Price
---- ----------

2003............................................................ 105.25%
2004............................................................ 103.50%
2005............................................................ 101.75%
2006 and thereafter ............................................thereafter............................................. 100.00%

F-24

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In addition, at any time or from time to time prior to December 1, 2001, the
Company may redeem up to 35% of the original aggregate principal amount at
maturity of the Notesnotes at a redemption price equal to 110.50% of the accreted
value of the notes so redeemed, plus accrued and unpaid interest thereon to the
redemption date. These notes are senior unsecured obligations of the Company,
ranking pari passu with all existing and future senior unsecured indebtedness
of the Company. The 10.5% Senior Discount Notes contain certain covenants
which, among other things, restrict the CompanysCompany's ability to incur additional
debt, make certain restricted payments, pay dividends, enter into sale and
leaseback transactions, enter into transactions with affiliates, and sell
assets or merge with another company.

The net proceeds of $486 million were used to accelerate the implementation
of its Business Plan,business plan, primarily the funding for the increase in committed
number of route miles of the Company's U.S. intercity network.

Debt issuance costs of $14 million have been capitalized and are being
amortized over the term of the 10.5% Senior Discount Notes.

10.75% Senior Euro Notes due 2008

On February 29, 2000, the Company received (Euro)488 million ($478 million
when issued) of net proceeds, after debt issuance costs, from an offering of
(Euro)500 million aggregate principal amount 10.75% Senior Euro Notes due 2008
("10.75% Senior Euro Notes"). Interest on the notes accrues at 10.75% per year
and is payable in Euros semi-annually in arrears on March 15 and September 15
each year beginning on September 15, 2000. The 10.75% Senior Euro Notes are not
redeemable by the Company prior to maturity. Debt issuance costs of (Euro)12
million ($12 million) were capitalized and are being amortized over the term of
the 10.75% Senior Euro Notes.

The 10.75% Senior Euro Notes are senior, unsecured obligations of the
Company, ranking pari passu with all existing and future senior debt. The
10.75% Senior Euro Notes contain certain covenants, which among other things,
limit additional indebtedness, dividend payments, certain investments and
transactions with affiliates.

The issuance of the (Euro)500 million 10.75% Senior Euro Notes has been
designated as, and is effective as, an economic hedge against the investment in
certain of the Company's foreign subsidiaries. Therefore, foreign currency
gains and losses resulting from the translation of the debt have been recorded
in other comprehensive income (loss) to the extent of translation gains or
losses on such investment. The 10.75% Senior Euro Notes were valued, based on
current exchange rates, at $465 million in the Company's financial statements
at December 31, 2000. The difference between the carrying value at December 31,
2000 and the value at issuance was recorded in other comprehensive income.

12.875% Senior Discount Notes due 2010

On February 29, 2000, the Company sold in a private offering $675 million
aggregate principal amount at maturity of its 12.875% Senior Discount Notes due
2010 ("12.875% Senior Discount Notes"). The sale proceeds of $360 million,
excluding debt issuance costs, were recorded as long-term debt. Interest on the
12.875% Senior Discount Notes accretes at a rate of 12.875% per year,
compounded semi-annually, to an aggregate principal amount of $675 million by
March 15, 2005. Cash interest will not accrue on the 12.875% Senior Discount
Notes prior to March 15, 2005. However, the Company may elect to commence the
accrual of cash interest on all outstanding 12.875% Senior Discount Notes on or
after March 15, 2003. In that case, the outstanding principal amount at
maturity of each 12.875% Senior Discount Note will, on the elected commencement
date, be reduced to the accreted value of the 12.875% Senior Discount Note as
of that date and

F-25

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

cash interest shall be payable on the 12.875% Senior Discount Notes on March 15
and September 15 thereafter. Commencing September 15, 2005, interest on the
12.875% Senior Discount Notes will accrue at the rate of 12.875% per year and
will be payable in cash semi-annually in arrears. Accrued interest expense from
the date of issuance through December 31, 2000 on the 12.875% Senior Discount
Notes of $39 million was added to long-term debt.

The 12.875% Senior Discount Notes are subject to redemption at the option of
the Company, in whole or in part, at any time or from time to time on or after
March 15, 2005. The Company may redeem the 12.875% Senior Discount Notes at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date. The following prices are for 12.875% Senior Discount Notes
redeemed during the 12-month period commencing on March 15 of the years set
forth below:

Redemption
Year Price
---- ----------

2005............................................................ 106.438%
2006............................................................ 104.292%
2007............................................................ 102.146%
2008 and thereafter............................................. 100.000%

In addition, at any time and from time to time, prior to March 15, 2003, the
Company may redeem up to a maximum of 35% of the aggregate principal amount at
maturity of the 12.875% Senior Discount Notes with the proceeds of one or more
private placements to persons other than affiliates of the Company or
underwritten public offerings of common stock of the Company resulting in gross
proceeds of at least $100 million in the aggregate. The Company may redeem the
12.875% Senior Discount Notes at a redemption price equal to 112.875% of the
accreted value of the notes plus accrued interest, if any, to the redemption
date.

The 12.875% Senior Discount Notes are senior, unsecured obligations of the
Company, ranking pari passu with all existing and future senior debt. The
12.875% Senior Discount Notes contain certain covenants, which among other
things, limit additional indebtedness, dividend payments, certain investments
and transactions with affiliates. Debt issuance costs of $9 million were
capitalized and are being amortized as interest expense over the term of the
12.875% Senior Discount Notes.

11.25% Senior Euro Notes due 2010

On February 29, 2000, the Company received (Euro)293 million ($285 million
when issued) of net proceeds, after debt issuance costs, from an offering of
(Euro)300 million aggregate principal amount 11.25% Senior Euro Notes due 2010
("11.25% Senior Euro Notes"). Interest on the notes accrues at 11.25% per year
and is payable semi-annually in arrears in Euros on March 15 and September 15
each year beginning September 15, 2000.

The 11.25% Senior Euro Notes are subject to redemption at the option of the
Company, in whole or in part, at any time or from time to time on or after
March 15, 2005. The 11.25% Senior Euro Notes may be redeemed at the redemption
prices set forth below, plus accrued and unpaid interest, if any, to the
redemption date. The following prices are for 11.25% Senior Euro Notes redeemed
during the 12-month period commencing on March 15 of the years set forth below,
and are expressed as percentages of principal amount.

Redemption
Year Price
---- ----------

2005............................................................ 105.625%
2006............................................................ 103.750%
2007............................................................ 101.875%
2008 and thereafter............................................. 100.000%

F-26

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In addition, at any time and from time to time, prior to March 15, 2003, the
Company may redeem up to a maximum of 35% of the original aggregate principal
amount of the 11.25% Senior Euro Notes. The Notes may be redeemed at a
redemption price equal to 111.25% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the redemption date. The redemption
must be made with the proceeds of one or more private placements to persons
other than affiliates of the Company or underwritten public offerings of common
stock of the Company resulting in gross proceeds of at least $100 million in
the aggregate.

Debt issuance costs of (Euro)7 million ($7 million) were capitalized and are
being amortized over the term of the 11.25% Senior Euro Notes. The 11.25%
Senior Euro Notes are senior, unsecured obligations of the Company, ranking
pari passu with all existing and future senior debt. The 11.25% Senior Euro
Notes contain certain covenants, which among other things, limit additional
indebtedness, dividend payments, certain investments and transactions with
affiliates.

The issuance of the (Euro)300 million 11.25% Senior Euro Notes has been
designated as, and is effective as, an economic hedge against the investment in
certain of the Company's foreign subsidiaries. Therefore, foreign currency
gains and losses resulting from the translation of the debt have been recorded
in other comprehensive income (loss) to the extent of translation gains or
losses on such net investment. The 11.25% Senior Euro Notes were valued, based
on current exchange rates, at $279 million in the Company's financial
statements at December 31, 2000. The difference between the carrying value at
December 31, 2000 and the value at issuance was recorded in other comprehensive
income.

11.25% Senior Notes due 2010

On February 29, 2000, the Company received $243 million of net proceeds,
after transaction costs, from a private offering of $250 million aggregate
principal amount of its 11.25% Senior Notes due 2010 ("11.25% Senior Notes").
Interest on the notes accrues at 11.25% per year and is payable semi-annually
in arrears on March 15 and September 15 in cash beginning September 15, 2000.

The 11.25% Senior Notes are subject to redemption at the option of the
Company, in whole or in part, at any time or from time to time on or after
March 15, 2005. The Company may redeem the 11.25% Senior Notes at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date. The following prices are for 11.25% Senior Notes redeemed
during the 12-month period commencing on March 15 of the years set forth below:

Redemption
Year Price
---- ----------

In addition, at any time and from time to time, prior to March 15, 2003, the
Company may redeem up to a maximum of 35% of the original aggregate principal
amount of the 11.25% Senior Notes. The redemption must be made with the
proceeds of one or more private placements to persons other than affiliates of
the Company or underwritten public offerings of common stock of the Company
resulting in gross proceeds of at least $100 million in the aggregate. The
Company may redeem the 11.25% Senior Notes at a redemption price equal to
111.25% of the principal amount of the notes plus accrued interest, if any, to
the redemption date.

The 11.25% Senior Notes are senior, unsecured obligations of the Company,
ranking pari passu with all existing and future senior debt. The 11.25% Senior
Notes contain certain covenants, which among other things, limit additional
indebtedness, dividend payments, certain investments and transactions with
affiliates.

F-27

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Debt issuance costs of $7 million were capitalized and are being amortized
as interest expense over the term of the 11.25% Senior Notes.

Senior Secured Credit Facility

On September 30, 1999, Level 3 and certain Level 3 subsidiaries entered into
a $1.375 billion secured credit facility ("Senior Secured Credit Facility").
The facility is comprised of a senior secured revolving credit facility in the
amount of $650 million and a two-tranche senior secured term loan facility
aggregating $725 million. The secured term loan facility consists of a $450
million tranche A and a $275 million tranche B term loan facility,
respectively. At December 31, 1999,2000, Level 3 had borrowed $200 million and $275
million under the tranche A and tranche B secured term loan facility,
respectively. On January 8, 2001, Level 3 borrowed the remaining $250 million
available under tranche A.

The obligations under the revolving credit facility are secured by
substantially all the assets of Level 3 and, subject to certain exceptions, its
wholly owned domestic subsidiaries (other than the borrower under the term loan
facility). Such assets will also secure a portion of the term loan facility.
Additionally, all obligations under the term loan facility will be secured by
the equipment that is purchased with the proceeds of the term loan facility.

Amounts drawn under the secured credit facility will bear interest, at the
option of the Company, at an alternate base rate or reserve-adjusted LIBOR plus
applicable margins. The applicable margins for the revolving credit facility
and tranche A term loan facility range from 50 to 175 basis points over the
alternate base rate and from 150 to 275 basis points over LIBOR and are fixed
for the tranche B term loan facility at 250 basis points over the alternate
base rate and 350 basis points over LIBOR. Interest and commitment fees on the
revolving credit facility and the term loan facilities are payable quarterly
with specific rates determined by actual borrowings under each facility.

F-27

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The revolving credit facility provides for automatic and permanent quarterly
reductions of the amount available for borrowing under that facility,
commencing at $17.25 million on March 31, 2004, and increasing to approximately
$61 million per quarter. The tranche A term loan facility amortizes in
consecutive quarterly payments beginning on March 31, 2004, commencing at $9
million per quarter and increasing to $58.5 million per quarter. The revolving
credit facility and tranche A term loan facility mature on September 30, 2007.
The tranche B term loan facility amortizes in consecutive quarterly payments
beginning on March 31, 2004, commencing at less than $1 million and increasing
to $67 million in 2007.

The Senior Secured Credit Facility contains certain covenants, which among
other things, limit additional indebtedness, dividend payments, certain
investments and transactions with affiliates. Level 3 and the borrowerscertain Level 3
subsidiaries must also comply with specific financial and operational tests and
maintain certain financial ratios. Debt issuance costs of $24 million were
capitalized and will be amortized as interest expense over the terms of Senior
Secured Credit Facility.

GMAC Commercial Mortgage due 2003

On June 9, 2000, HQ Realty, Inc. (a wholly owned subsidiary of the Company)
entered into a $120 million floating-rate loan ("GMAC Mortgage") providing
secured, non-recourse debt to finance the Company's world headquarters. HQ
Realty, Inc. is a single purpose entity organized solely to own, hold, operate
and manage the world headquarters which has been 100% leased to Level 3
Communications, LLC in Broomfield, Colorado. Under the terms of the loan
agreement, HQ Realty, Inc., will not engage in any business other than the
ownership, management, maintenance and operation of the world headquarters. The
assets of HQ

F-28

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Realty Inc. are not available to satisfy any third party obligations other than
those of HQ Realty, Inc. In addition, the assets of the Company are not
available to satisfy the obligations of HQ Realty, Inc. HQ Realty, Inc.
received $119 million of net proceeds after transaction costs. The lender is
holding $13 million of the net proceeds as a reserve deposit.

The initial term of the GMAC Mortgage is 36 months with two one-year no cost
extension options. Interest varies monthly with the 30 day London Interbank
Offering Rate ("LIBOR") for U.S. Dollar Deposits as follows:

The Index plus:

(1) 240 basis points during the Initial Term;
(2) 250 basis points during the First Extension Option; and
(3) 260 basis points during the Second Extension Option.

At December 31, 2000 the interest rate was 9.20%.

The GMAC Mortgage may not be prepaid during the first twenty four months.
Thereafter, the GMAC Mortgage may be prepaid at par in whole or in part in
multiples of $100,000. The entire principal is due at maturity or at the end of
the elected extension period. Interest only is due during the initial three-
year term. Interest and amortization are due during the extension terms based
on a 30 year amortization period with a balloon payment at maturity.

Debt issuance costs of $1 million were capitalized and are being amortized
as interest expense over the term of the GMAC Mortgage.

Lehman Commercial Mortgage due 2003

On December 19, 2000, 85 Tenth Avenue, LLC (a wholly owned subsidiary of the
Company) entered into a $113 million floating-rate loan ("Lehman Mortgage")
providing secured, non-recourse debt to finance the purchase and renovations of
the New York Gateway facility. 85 Tenth Avenue, LLC is a single purpose entity
organized solely to own, hold, sell, lease, transfer, exchange, operate and
manage the New York Gateway facility. Under the terms of the loan agreement, 85
Tenth Avenue, LLC will not engage in any business other than the ownership,
management, maintenance and operation of the New York Gateway facility. The New
York Gateway facility has been 100% leased to Level 3 Communications, LLC. The
assets of 85 Tenth Avenue, LLC are not available to satisfy any third party
obligations other than those of 85 Tenth Avenue, LLC. In addition, the assets
of the Company are not available to satisfy the obligations of 85 Tenth Avenue,
LLC.

85 Tenth Avenue, LLC received $105 million of net proceeds after transaction
costs. Under the terms of the loan agreement, the gross loan proceeds plus $32
million, deposited by 85 Tenth Avenue, LLC, are to be maintained in a
Renovation Reserve account. The reserve is held by 85 Tenth Avenue, LLC as
restricted cash and is maintained solely to perform the renovations of the New
York Gateway facility.

The initial term of the Lehman Mortgage is 36 months with two one-year no
cost extension options. There is a penalty if a principal payment is made prior
to January 1, 2002. The entire principal is due at maturity or at the end of
the elected extension period. Interest varies monthly with the 30 day LIBOR for
U.S. Dollar Deposits plus approximately 350 basis points. Interest and
amortization are due during the initial term based on a 20 year amortization
period. At December 31, 2000 the interest rate was 10.11%.

Debt issue costs of $8 million were capitalized and are being amortized as
interest expense over the term of the Lehman Mortgage.

F-29

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6% Convertible Subordinated Notes due 2010

On February 29, 2000, the Company received $836 million of net proceeds,
after transaction costs, from a public offering of $863 million aggregate
principal amount of its 6% Convertible Subordinated Notes due 2010
"Subordinated Notes 2010"). The Subordinated Notes 2010 are unsecured and
subordinated to all existing and future senior indebtedness of the Company.
Interest on the Subordinated Notes 2010 accrues at 6% per year and is payable
semi-annually in cash on March 15 and September 15 beginning September 15,
2000. The principal amount of the Subordinated Notes 2010 will be due on March
15, 2010.

The Subordinated Notes 2010 may be converted into shares of common stock of
the Company at any time prior to the close of business on the business day
immediately preceding maturity, unless previously redeemed, repurchased or the
Company has caused the conversion rights to expire. The conversion rate is
7.416 shares per each $1,000 principal amount of Subordinated Notes 2010,
subject to adjustment in certain events.

Prior to March 18, 2003, Level 3, at its option, may redeem the Subordinated
Notes 2010, in whole or in part, at the redemption prices specified below plus
accrued interest. Level 3 may exercise this option if the current market price
of Level 3's common stock equals or exceeds triggering levels specified below
for at least 20 trading days within any period of 30 consecutive trading days,
including the last trading day of the period.

Trigger Redemption
Period Percentage Price
- ------ ------------- ----------

February 29, 2000 through March 14, 2001.............. 170% ($229.23) 106.0%
March 15, 2001 through March 14, 2002................. 160% ($215.74) 105.4%
March 15, 2002 through March 17, 2003................. 150% ($202.26) 104.8%

On or after March 18, 2003, Level 3, at its option, may cause the conversion
rights to expire. Level 3 may exercise this option only if the current market
price exceeds approximately $188.78 (which represents 140% of the conversion
price) for at least 20 trading days within any period of 30 consecutive trading
days, including the last trading day of that period. At December 31, 2000, no
debt had been converted into shares of common stock.

Debt issue costs of $27 million were capitalized and are being amortized as
interest expense over the term of the Subordinated Notes.

6% Convertible Subordinated Notes due 2009

On September 14, 1999, the Company received $798 million of proceeds, after
transaction costs, from an offering of $823 million aggregate principal amount
of its 6% Convertible Subordinated Notes Due 2009 ("Subordinated Notes"Notes 2009").
The Subordinated Notes 2009 are unsecured and subordinated to all existing and
future senior indebtedness of the Company. Interest on the notesSubordinated Notes
2009 accrues at 6% per year and is payable each year in cash on March 15 and
September 15. The principal amount of the notesSubordinated Notes 2009 will be due
on September 15, 2009. The Subordinated Notes 2009 may be converted into shares
of common stock of the Company at any time prior to maturity, unless the
Company has caused the conversion rights to expire. The conversion rate is
15.3401 shares per each $1,000 principal amount of Subordinated Notes 2009,
subject to adjustment in certain circumstances. On or after September 15, 2002,
Level 3, at its option, may cause the conversion rights to expire. Level 3 may
exercise this option only if the current market price exceeds approximately
$91.27 (which represents 140% of the conversion price) for 20 trading days
within any period of 30 consecutive trading days including the last day of that
period. At December 31, 1999,2000, less than $1 million of debt had been converted
into shares of common stock.

F-30

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Debt issuance costs of $25 million were capitalized and are being amortized
as interest expense over the term of the Subordinated Notes.Notes 2009.

The debt instruments above contain certain covenants which the Company
believes it is in compliance with as of December 31, 2000.

Level 3 currently is using the proceeds from the senior securities, Senior
Secured Credit Facility and Subordinated Notessubordinated notes for working capital, capital
expenditures and other general corporate purposes in connection with the
implementation of its business plan, including the acquisition of
telecommunications assets.

The Company capitalized $116$353 million and $15$116 million of interest expense
and amortized debt issuance costs related to network construction and business
systems development projects for the years ended December 31, 19992000 and 1998,1999,
respectively.

CPTC

California Private Transportation Company, LP's ("CPTC") long-term debt
consists of a term note with a consortium of banks. The liability under the
term note was $61 million$58 and $64$61 million at December 31, 19992000 and 1998,1999, respectively.
The interest rate on the bank note is based on LIBOR plus a varying rate with
principal and interest payable quarterly. CPTC entered into an interest rate
swap agreement with the same parties. The swap agreement expires in January
2004 and fixes the interest rate on the bank note from 9.21% to 9.71% during
the term of the swap agreement. In addition,The impact to Level 3's consolidated results
and financial condition as a result of adoption of SFAS No. 133 in 2001 is
considered to be minimal. CPTC's long-term debt also consists of a term loan
held

F-28

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) by Connecticut General Life Insurance Company, a subsidiary of CIGNA
Corporation and Lincoln National Life Insurance Company. The liability under
the term loan was $35 million at December 31, 19992000 and 1998. The remaining
long-term debt consists of1999. Additionally, CPTC
had $10 million and $9 million of subordinated debt held by Orange County
Transportation Authority.Authority at December 31, 2000 and 1999, respectively. The debt
is due in varying amounts through 2004 and accrues interest at 9%. Lastly, CPTC
had borrowed $12 million as of December 31, 2000 and $10 million as of December
31, 1999 and $8 million as of December 31, 1998 from it'sits partners. The debt is generally subordinated to all other
debt of CPTC. Interest on the subordinated debt compounds annually at 9.3-9.5%
and is payable only as CPTC generates excess cash flows.

Future Debt Maturities:

Scheduled maturities of long-term debt are as follows (in millions): 2000--
$6; 2001--$7;
$7; 2002--$8;10; 2003--$9;237; 2004--$59 ;59; 2005--$115 and $3,906$6,897 thereafter.

(11)(12) Employee Benefit Plans

The Company adoptedapplies the recognition provisions of SFAS No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123") in 1998.. Under SFAS No. 123, the fair
value of an option or other stock-based compensation (as computed in accordance
with accepted option valuation models) on the date of grant is amortized over
the vesting periods of the options in accordance with FASB Interpretation No.
28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans"(" ("FIN 28"). The recognition provisions of
SFAS No. 123 are applied prospectively upon adoption. As a result, the recognition provisions are applied to
all stock awards granted in the year of adoption and are not applied to awards
granted in previous years unless those awards are modified or settled in cash after adoption of the recognition
provisions.cash.
Although the recognition of the value of the instruments results in
compensation or professional expenses in an entity's financial statements, the
expense differs from other compensation and professional expenses in that these
charges may be settled in cash, but rather, generally are settled through
issuance of common stock.

F-31

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company believes that the adoption of SFAS No. 123 will resulthas resulted in material non-cash charges to
operations since its adoption in 20001998, and thereafter.will continue to do so. The amount
of the non-cash charge will be dependent upon a number of factors, including
the number of grants and the fair value of each grant estimated at the time of
its award. On a pro forma basis, adopting SFAS No. 123 would not have had a
material effect on the results of operations for the year ended December 27,
1997.

The Company recognized a total of $241 million, $126 million and $39
million of non-cash compensation in 2000, 1999 and 1998, respectively. In
addition, to the Company capitalized $12 million, $10 million and $5 million in
2000, 1999 and 1998, respectively, of non-cash compensation for those employees
directly involved in the construction of the network or development of the
business support systems.

Non-qualified Stock Options and Warrants

In December 1997, stockholders approved amendments to the 1995 Level 3 Stock
Plan ("the Plan"). The amended plan, among other things, increases the number
of shares reserved for issuance upon the exercise of stock based awards to
70,000,000; increases the maximum number of optionsCompany granted to any one
participant to 10,000,000; provides for the acceleration of vesting in the
event of a change in control; allows for the grant of stock based awards to
directors of Level 3230,000, 55,100, and other persons providing services to Level 3; and
allows for the grant of nonqualified7,466,247 non-qualified stock
options ("NQSO"NQSOs") with an exercise
price less than the fair market value of Common Stock. In December 1997, Level
3 converted both option and stock appreciation rights plans of a subsidiarywarrants to the Plan. This conversion resulted in the issuance of 7.4 million options to
purchase Common Stock at $4.50 per share. Level 3 recognized an expense and a
corresponding increase in equity as a result of

F-29

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the transaction. The increase in equity and the conversion of the stock
appreciation rights liability to equity are reflected as option activity in the
Statement of Changes in Stockholders' Equity. The options vest over three or
five years with a five or ten year life.

The Company granted 55,100 and 7,466,247 nonqualified stock options to
employeesparticipants during the years ended December
31, 2000, 1999 and 1998, respectively. In
addition 1,898,036 warrants were granted to third parties in 1998 to acquire
shares of Common Stock at exercise prices ranging from $18.50--$20.00 per share
all of which were outstanding at December 31, 1999. The warrants vest quarterly
through June 30, 2001. The expense recognized for the year
ended December 31, 19992000 for NQSOs and warrants outstanding at December 31, 1999 in accordance with SFAS No. 123
was $7$10 million. In addition to the expense recognized, the Company capitalized
less than $1 million of non-cash compensation costs for employees directly
involved in the construction of the Internet ProtocolIP network and the development of the
business support systems. As of December 31, 1999,2000, the Company had not yet
recognized $5$10 million of unamortized compensation costs for NQSOs and warrants
granted in 1998 and 1999.since 1998.

The expense recognized in accordance with SFAS No. 123 for NQSOs and
warrants outstanding in 1999 and 1998 was $6$7 million and $5$11 million,
respectively. In addition to the expense recognized, the Company capitalized $1
million and $2 million, respectively of non-cash compensation costs related to
NQSOs for employees directly involved in the construction of the IP network and
the development of the business support systems.

The fair value of NQSOs and warrants granted in 2000 was calculated using the Black-
Scholes method with a risk free interest rate of 5.5%6.2% and expected life of 75%
of the total life of the NQSOs and warrants. The Company used an expected
volatility rate of 27.5%, except for when the minimum volatility of .001% was
used by the Company prior to becoming publicly traded in April 1998.34%. The fair value of the NQSOs and warrants granted in
1999,2000, in accordance with SFAS No. 123 was $1$16 million.

In 1998, the Company exchanged approximately 700,000 options and 100,000
options, ranging in prices from $0.12 to $1.76 and primarily from $0.90 to
$1.79 for the XCOM and GeoNet acquisitions, respectively.

Transactions involving stock options granted under the NQSO plan are
summarized as follows:

Weighted
Exercise Price Weighted Average
Shares Per Share Exercise Price
---------- -------------- ------------------------------

Balance December 28, 1996....... 4,440,000 $4.04--27, 1997............. 14,688,000 $4.95 $4.40
Options granted............... 14,990,930 4.50-- 4.04--$ 5.42 4.96
Options cancelled............. (106,000) 4.95$ 4.95
Options exercised............. (4,636,930) 4.04-- 4.95 4.46
----------
Balance December 27, 1997....... 14,688,000 $4.04--$5.42 $4.95
============== ======granted..................... 7,466,247 .12-- 41.25 8.67
Options granted............... 7,466,247 $.12--$41.25 $8.67
Options cancelled.............cancelled................... (668,849) .12-- 34.69 5.52
Options exercised.............exercised................... (2,506,079) .12-- 34.69 4.22
----------
Balance December 31, 1998.......1998............. 18,979,319 $.12--$.12-- 41.25 $6.50
============== ======6.50
Options granted...............granted..................... 55,100 $41.44--$41.44-- 84.75 $58.6158.61
Options cancelled.............cancelled................... (1,005,328) .12-- 41.25 10.84
Options exercised.............exercised................... (3,950,528) .12-- 41.25 5.60
----------
Balance December 31, 1999.......1999............. 14,078,563 $.12--.12-- 84.75 6.64
Options granted..................... 230,000 21.69 21.69
Options cancelled................... (1,840,529) .12-- 61.75 4.88
Options exercised................... (2,079,326) .12-- 56.75 8.00
----------
Balance December 31, 2000............. 10,388,708 $ .12--$84.75 $6.64$ 7.01
========== ============== ======
Options exercisable
December 27, 1997............. 2,590,538 $4.04--$ 4.95 $4.35
December 31, 1998.............1998................... 5,456,640 $ .12--$41.25 $4.67$ 4.67
December 31, 1999.............1999................... 6,291,624 $ .12--$41.25 $6.136.13
December 31, 2000................... 5,666,636 .12--$84.75 7.36

F-30F-32

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The weighted average remaining contractual life for the 14,078,563 options
outstanding on December 31, 1999 is 7.43 years.

Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Life Exercise as of Exercise
Prices 12/31/9900 (years) Price 12/31/9900 Price
- ---------------------- ----------- --------- -------- ----------- --------

$ 0.12--$ 0.12 118,361 8.10101,509 7.12 $ .12 68,38165,973 $ .12
0.90-- 0.90 20,347 4.40 .90 14,782 .90
1.76-- 1.79 39,303 8.1631,567 7.33 1.76 10,906 1.7711,287 1.76
4.04-- 5.43 9,519,226 7.41 5.14 4,963,292 4.906,828,329 6.69 5.36 4,011,329 5.32
6.20-- 8.50 3,775,620 8.052,877,675 7.05 6.94 1,123,664 6.95 911,396 7.01
17.50-- 25.03 197,364 3.69 18.44 178,086 17.80241,832 4.37 21.85 238,656 21.81
26.80-- 39.13 305,242 3.51 30.95 125,947 30.98244,362 2.54 30.70 182,674 30.66
40.38-- 51.83 56,500 3.69 41.21 18,834 40.3851.88 27,167 2.72 42.01 17,168 41.89
56.00-- 57.47 38,000 4.18 56.75 -- --29,667 3.26 56.74 12,585 56.67
61.75-- 84.75 8,600 4.27 79.40 -- --6,600 3.28 84.75 3,300 84.75
---------- ---------
14,078,563 7.43 $ 6.64 6,291,624 $ 6.1310,388,708 6.62 $7.01 5,666,636 $7.36
========== ========= ===========

Outperform Stock Option Plan

In April 1998, the Company adopted an outperform stock option ("OSO")
program that was designed so that the Company's stockholders would receive a
market return on their investment before OSO holders receive any return on
their options. The Company believes that the OSO program aligns directly
management's and stockholders' interests by basing stock option value on the
Company's ability to outperform the market in general, as measured by the
Standard & Poor's ("S&P") 500 Index. Participants in the OSO program do not
realize any value from awards unless the Common Stock price outperforms the S&P
500 Index. When the stock price gain is greater than the corresponding gain on
the S&P 500 Index (or less than the corresponding loss on the S&P Index), the
value received for awards under the OSO plan is based on a formula involving a
multiplier related to the level by which the Common Stock outperforms the S&P
500 Index. To the extent that the Common Stock outperforms the S&P 500, the
value of OSOs to a holder may exceed the value of non-
qualifiednonqualified stock options.

OSO grants are made quarterly to participants employed on the date of the
grant. Each award vests in equal quarterly installments over two years and has
a four-year life. Each award typically has a two-yeartwo year moratorium on exercising
from the date of grant. As a result, once a participant is 100% vested in the
grant the two year moratorium expires. Therefore, each grant has an exercise
window of two years. Level 3 granted 2.1 million OSOs to employees in December
2000. These OSOs vest 25% after six months with the remaining 75% vesting after
18 months. The OSOs are exercisable immediately upon vesting and have a four-
year life.

The fair value under SFAS No. 123 for the 3,241,5995,402,553 OSOs granted to
employees for services performed for the year ended December 31, 19992000 was $193$275
million. The Company recognized $111$189 million of compensation expense forin the
year ended December 31, 19992000 for OSOs granted in 1999 and 1998.to employees. In addition to the
expense recognized, $7$9 million of non-cash compensation was capitalized in 19992000
for employees directly involved in the construction of the Internet Protocol
network and development of business support systems. As of December 31, 1999,2000,
the Company had not yet recognized $111$168 million of unamortized compensation
costs for OSOs granted in 19981999 and 1999.2000. The Company recognized $111 million
and $24 million of compensation expense for the yearyears ended December 31, 1999
and 1998, for
OSOs outstanding at December 31, 1998.respectively. In addition to the expense recognized the Company
capitalized $7 million and $3 million of non-cash compensation.

F-31compensation for years ended
December 31, 1999 and 1998, respectively.

F-33

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Transactions involving stock awards granted under the OSO plan are
summarized below:

Weighted
Average
Option Price Option
Shares Per Share Price
---------- --------------- --------

Balance December 27, 1997................. -- $ -- $ --
Options granted......................... 2,139,075 29.78-- 37.13 34.85
Options cancelled....................... (46,562) 29.78-- 37.13 35.53
----------
Balance December 31, 1998................. 2,092,513 29.78-- 37.13 34.85
Options granted......................... 3,241,599 56.00-- 78.50 66.58
Options cancelled....................... (157,623) 29.78-- 78.50 51.31
Options exercised....................... (37,500) 29.78-- 37.13 34.64
----------
Balance December 31, 1999................. 5,138,989 29.78-- 78.50 54.15
Options granted......................... 5,402,553 26.87-- 113.87 52.96
Options cancelled....................... (262,545) 26.87-- 113.87 72.55
Options exercised....................... (214,409) 29.78-- 37.13 36.28
----------
Balance December 31, 2000................. 10,064,588 $26.87--$113.87 $53.50
========== =============== ======
Options vested but not exercisable as of
December 31, 1999....................... 2,098,337 $29.78--$ 78.50 $44.69
December 31, 2000....................... 2,488,866 56.00-- 113.87 71.68

OSOs Outstanding OSOs Exercisable
at December 31, 2000 at December 31, 2000
------------------------------ --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Life Option Number Option
Prices Outstanding (years) Price Exercisable Price
- -------- ----------- --------- -------- ----------- --------

$26.87--$37.12 4,899,611 3.11 $29.46 1,748,411 $34.12
56.00-- 78.50 3,709,678 2.74 68.69 -- --
87.23--113.87 1,455,299 3.49 96.56 -- --
---------- ---------
10,064,588 3.03 $53.50 1,748,411 $34.12
========== ========= ======

The fair value of the optionsOSOs and C-OSOs granted in 2000 was calculated by
applying the Black-
Scholes methoda modified Black-Scholes formula with an S&P 500 expected dividend
yield rate of 1.8%1.16% and an expected life of 2.5 years. The Company used a
blended volatility rate of 26%27% calculated as a blended rate between the S&P 500
expected volatility rate of 16% and the Level 3 Common Stock expected
volatility rate of 27.5%34%. The expected correlation factor of 0.40.65 was used to
measure the movement of Level 3 stock relative to the S&P 500.

F-34

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value recognized under SFAS No. 123 for the approximately 2 million
C-OSOs awarded to employees for services performed for the year ended December
31, 2000 was approximately $140 million. The Company recognized $17 million of
compensation expense for the year ended December 31, 2000 for C-OSOs awarded in
2000. In addition to the expense recognized, $1 million of non-cash
compensation was capitalized for the year ended December 31, 2000 for employees
directly involved in the construction of the network and development of
business support systems. As of December 31, 2000, the Company had not
reflected $120 million of unamortized compensation expense in its financial
statements for C-OSOs awarded in 2000.

Transactions involving stock awards granted under the OSOC-OSO plan are
summarized below:

Weighted
Average
Option Price Per Option
Shares Per Share Price
--------- ---------------- ----------------------- --------

Balance December 27, 1997................31, 1999.................. -- $ -- $ --
Options granted........................ 2,139,075 $ 29.78--$ 37.13 $34.85granted.......................... 1,965,509 26.87-- 87.23 56.67
Options cancelled...................... (46,562) 29.78-- 37.13 35.53
Options exercised...................... -- -- --cancelled........................ (25,522) 87.23 87.23
---------
Balance December 31, 1998................ 2,092,513 2000.................. 1,939,987 $26.87--$ 29.78--$ 37.13 $34.85
Options granted........................ 3,241,599 56.00-- 78.50 66.58
Options cancelled...................... (157,623) 29.78-- 78.50 51.31
Options exercised...................... (37,500) 29.78-- 37.13 34.64
---------
Balance December 31, 1999................ 5,138,989 $ 29.78--$ 78.50 $54.1587.23 $56.27
========= ============================== ======
Options vested but not exercisable as of
December 31, 1998...................... 234,305 $ 29.78--$ 37.13 $34.85
December 31, 1999...................... 2,098,337 $ 29.78--$ 78.50 44.692000......................... -- -- --

OptionsC-OSOs Outstanding OptionsC-OSOs Exercisable
----------------------------------- -----------------------at December 31, 2000 at December 31, 2000
------------------------------ --------------------
Weighted
Number
Average Weighted Weighted
Remaining Average Average
Number WeightedLife Option Number Option
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Life Option as of Option
Prices 12/31/99Outstanding (years) Price 12/31/99Exercisable Price
- -------------------------------------- ----------- --------- -------- ----------- --------

$29.78--$34.50 1,115,214 2.80 $32.26$26.87..................... 995,125 3.9 $26.87 -- $ --
37.00-- 56.00 1,459,383 2.70 44.58 -- --
59.75-- 78.50 2,564,392 3.66 69.12$--
87.23..................... 944,862 3.7 87.23 -- --
--------- ---
5,138,989 3.20 $54.151,939,987 3.8 $56.27 -- $ --$--
========= === =========== === ====

Restricted Stock

In 2000, 1999 and 1998, 115,567, 17,117 and 177,183 shares, respectively, of
restricted stock were granted to employees. The restricted stock shares were
granted to employees at no cost. The shares typically vest immediately;over a one to three
year period; however, the employees are restricted from selling these shares
for 3three years. The fair value of restricted stock granted in 2000, 1999 and
1998 of $7 million, $1 million and $7 million, respectively, was calculated
using the value of the Common Stock the day prior to the grant. The expense
recognized in 19992000 under SFAS No. 123 for restricted stock grants was $4
million. The expense recognized in 1999 and 1998 under SFAS No. 123 for
Restrictedrestricted stock grants was $4 million and $3 million.million respectively.

As of December 31, 1999,2000, the Company had not yet recognized $1$3 million of
compensation costs for Restricted Stockrestricted stock granted in 1998 and 1999.

F-32

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)since 1998.

Shareworks

Level 3 has designed its compensation programs with particular emphasis on
equity-based, long-term incentive programs. The Company has developed two plans
under its Shareworks program: the Match Plan and the Grant Plan.

F-35

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Match Plan--The Match Plan allows eligible employees to defer between 1% and
7% of their eligible compensation to purchase Common Stock at the average stock
price for the quarter. Any full time employee is considered eligible on the
first day of the calendar quarter after their hire. The Company matches the
shares purchased by the employee on a one-for-one basis. Stock purchased with
payroll deductions is fully vested. Stock purchased with the Company's matching
contributions vests three years after the end of the quarter in which it was
made.

The Company's quarterly matching contribution is amortized to compensation
expense over the vesting period of 36 months. In 1999,2000, the Company's matching
contribution was $10$14 million under the Match Plan. The compensation expense
recognized in 19992000 under this plan was $1$5 million. The non-cash compensation
expense recognized in 1999 and 1998 for the Match Plan was $1 million and less
than $1 million.million, respectively.

As of December 31, 2000, the Company had not reflected uamortized
compensation expense of $19 million related to the Company's matching
contributions.

Grant Plan--The Grant Plan enables the Company to grant shares of Common
Stock to eligible employees based upon a percentage of that employee's eligible
salary up to a maximum of 3%. Level 3 employees employed on December 31 of each
year, who are age 21 or older with a minimum of 1,000 hours credited service
are considered eligible. The shares granted are valued at the fair market value
as of the last business day of the calendar year. All prior and future grants
vest immediately upon the employees'employee's third anniversary of joining the
Shareworks Plan.

The annual grant is expensed in the year of the grant. Compensation expense
recorded for the Shareworks Grant Plan for 19992000 was approximately $3$11 million.
Approximately $3 million and $1 million of compensation expense was recorded
for the Shareworks Grant Plan for 1998.1999 and 1998, respectively.

In addition to the compensation expense recognized, the Company capitalized
$2 million of non-cash compensation costs related to the Shareworks Plans for
employees directly involved in the construction of the IP network and the
development of the business support systems in 2000 and 1999 and less than $1
million of non-cash compensation costs in 1998.

Foreign subsidiaries of the Company adopted Shareworks programs in 2000.
These programs primarily include a grant plan and a stock purchase plan whereby
employees may purchase Level 3 Common Stock at 80% of the share price at the
beginning of the plan year.

The Company recorded approximately $5 million of non-cash compensation
expense for stock issued to employees during the year ended December 31, 2000.
The non-cash compensation charge was based on the Company's stock price on the
day prior to the grant date.

401(k) Plan

The Company and its subsidiaries offer its qualified employees the
opportunity to participate in a defined contribution retirement plan qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee was eligible to contribute, on a tax deferred basis, a portion of
annual earnings not to exceed $10,000$10,500 in 1999.2000. The Company does not match
employee contributions and therefore does not incur any compensation expense
related to the 401(k) plan.

F-33F-36

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(12)(13) Income Taxes

An analysis of the income tax (provision) benefit attributable to earnings
(loss) from continuing operations before income taxes for the three years ended
December 31, 19992000 follows:

2000 1999 1998
1997
--------- ---- ----
(dollars in
millions)

Current:
U.S. federal.................................................United States Federal....................................... $ 50 $161 $(15)
$(54)
State........................................................State....................................................... (1) 3 (10)
(1)----- ---- ----
----49 164 (25)
(55)
Deferred:
U.S. federal................................................. $United States Federal....................................... 255 56 50
103
State........................................................State....................................................... -- -- --
----- ---- ----
----255 56 50
103Valuation Allowance........................................... (255) -- --
----- ---- ----
----Income Tax Benefit............................................ $ 49 $220 $ 25
$ 48
========= ==== ====

The United States and foreign components of earnings (loss) from continuing
operations before income taxes follows:

2000 1999 1998
1997------- ----- ----- ----
(dollars in
millions)

United States................................................States............................................ $ (995) $(578) $(142)
$35
Foreign......................................................Foreign.................................................. (509) (129) (11)
--------- ----- -----
---$(1,504) $(707) $(153)
$35======= ===== ===== ===

A reconciliation of the actual income tax (provision) benefit and the tax
computed by applying the U.S. federal rate (35%) to the earnings (loss) from
continuing operations, before income taxes for the three years ended December
31, 19992000 follows:

2000 1999 1998
1997
--------- ---- ----
(dollars in
millions)

Computed Tax at Statutory Rate............................... $ 526 $247 $ 53
$(12)
State Income Taxes........................................... (1) 2 (7) (1)
Write-off of In Process Research & Development............... -- -- (11) --
Coal Depletion............................................... 2 2 32
Goodwill Amortization........................................ (17) (12) (5) --
Tax Exempt Interest.......................................... -- -- 2
Prior Year Tax Adjustments................................... -- -- 62
Compensation Expense Attributable to Options................. -- -- (7)
Taxes on Unutilized Losses of Foreign Operations............. (35) (9) (4) --
Foreign Tax Credits.......................................... -- (10) --
--
Other........................................................ (1) -- (3)
1Valuation Allowance.......................................... (425) -- --
----- ---- ----
----Income Tax Benefit........................................... $ 49 $220 $ 25
$ 48
========= ==== ====

During the year ended December 27, 1997,For federal income tax reporting purposes, the Company settled a numberhas approximately
$638 million of disputednet operating loss carryforwards, net of previous carrybacks,
available to offset future Federal taxable income. The net operating loss
carryforwards expire in 2020 and are subject to examination by the tax
issues related to prior years that have been included in prior
year tax adjustments.

F-34authorities.

F-37

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Internal Revenue Code contains provisions which may limit the net
operating loss carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes in ownership
interests.

For federal income tax reporting purposes, the Company has approximately $19
million of alternative minimum tax credits available to offset future regular
federal income tax. The credits can be carried forward until fully utilized.

The components of the net deferred tax liabilitiesassets (liabilities) for the years
ended December 31, 19992000 and 19981999 were as follows:

2000 1999
1998
--------- ----
(dollars
in
millions)

Deferred Tax Liabilities:
Investments in securities..........................................securities....................................... $ 218 $ 2
Investments in joint ventures......................................ventures................................... 4 15 27
Asset bases--accumulated depreciation..............................depreciation........................... 38 122
83
Coal sales.........................................................sales...................................................... 32 32
Other..............................................................Provision for estimated expenses................................ 12 --
Other........................................................... 22 3
20
--------- ----
Total Deferred Tax Liabilities.......................................Liabilities.................................... 126 174 164
Deferred Tax Assets:
Compensation--andNet operating loss carryforwards................................ 223 --
Compensation and related benefits.................................benefits............................... 154 76 35
Investment in subsidiaries.........................................subsidiaries...................................... 11 1411
Provision for estimated expenses...................................expenses................................ 94 27
14
Other..............................................................Investment in joint ventures.................................... 69 --
Other........................................................... 12 13
----12
----- ----
Total Deferred Tax Assets............................................Assets......................................... 563 126
76
--------- ----
Net Deferred Tax Liabilities.........................................Assets/(Liabilities)............................. 437 (48)
Valuation Allowance Components:
Net Deferred Tax Assets......................................... (410) --
Stockholders' Equity (primarily tax benefit from option
exercises)..................................................... (92) --
----- ----
Net Deferred Tax Liabilities after Valuation Allowance............ $ 48 $ 88
====(65) $(48)
===== ====

(13)The 2000 current net deferred tax assets are $15 million after a current
valuation allowance of $86 million and the non-current deferred tax liabilities
are ($80) million after non-current valuation allowance of $416 million.

(14) Stockholders' Equity

On February 29, 2000, the Company raised $2.4 billion, after underwriting
discounts and offering expenses, from an offering of 23 million shares of its
common stock through an underwritten public offering. In March 9, 1999, the
Company closedraised $1.5 billion, after underwriting discounts and offering
expenses, from the saleoffering of 28.75 million shares of its Common Stockcommon stock through
an underwritten public offering. The net proceeds from the
offering of approximately $1.5 billion after underwriting discounts and
offering expensesboth offerings are being
used for working capital, capital expenditures, acquisitions and other general
corporate purposes in connection with the implementation of the Company's
Business Plan.

F-35

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)business plan.

Issuances of Common Stock, for sales, conversions, option exercises and
acquisitions, and repurchases of common shares for the three years ended
December 31, 19992000 are shown below. Prior to the Split-off, the

F-38

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company was obligated to repurchase Class D shares from stockholders. The Level
3 Stock Plan permits option holders to tender shares to the Company to cover
income taxes due on option exercises.

December 28, 1996.................................................. 231,802,430
Shares Issued.................................................... 21,589,100
Shares Repurchased............................................... (29,610)
Issuances for Class C Stock Conversions.......................... 13,035,430
Option Activity.................................................. 4,636,930
-----------
December 27, 1997.................................................. 271,034,280
Shares Issued.................................................... 2,240,467
Shares Repurchased............................................... (30,506)
Issuances for Class C Stock Conversions.......................... 20,934,244
Issuances for Class R Stock Conversions.......................... 5,084,568
Option Activity.................................................. 2,506,079
Shares Issued for Acquisition.................................... 6,105,574
-----------
December 31, 1998.................................................. 307,874,706
Shares Issued.................................................... 28,750,000
Option and Shareworks Activity................................... 4,371,578
Shares Issued for Acquisition.................................... 396,379
6% Convertible Notes Converted to Shares......................... 4,064
-----------
December 31, 1999.................................................. 341,396,727
Shares Issued.................................................... 23,000,000
Option and Shareworks Activity................................... 3,202,760
6% Convertible Notes Converted to Shares......................... 383
-----------
December 31, 2000.................................................. 367,599,870
===========

(14)(15) Industry and Geographic Data

In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise for which separate financial information is
available and which is evaluated regularly by the Company's chief operating
decision maker, or decision making group, in deciding how to allocate resources
and assess performance. Operating segments are managed separately and represent
strategic business units that offer different products and serve different
markets.

The Company's reportable segments include: communications, and information
services, (including communications, computer outsourcing and systems
integration segments), and coal mining. Other primarily includes CPTC, equity investments,
and other corporate assets and overhead not attributable to a specific segment.

Industry and geographic data for the Company's 1998 discontinued
construction and energy operations are not included.

EBITDA, as defined by the Company, consists of earnings (loss) before
interest, income taxes, depreciation, amortization, non-cash operating expenses
(including stock-based compensation and in-process research and development
charges) and other non-operating income or expense. The Company excludes non-
cash compensation due to its adoption of the expense recognition provisions of
SFAS No. 123. EBITDA is commonly used in the communications industry to analyze
companies on the basis of operating performance. EBITDA is not intended to
represent operating cash flow for the periods presented and is not a concept
supported by generally accepted accounting principles ("GAAP").

The information presented in the tables following includes information for
twelve months ended December 31, 2000, 1999 and 1998 for all income statement
and cash flow information presented, and as of December 31, 2000 and 1999 for
all balance sheet information presented. F-36Revenue and the related expenses are
attributed to foreign countries based on where services are provided.

F-39

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In 1999, 1998,Industry and 1997 Commonwealth Edison Company, a coal mining customer,
accounted for 22%, 34%, and 43% of Level 3's revenues.

Industrygeographic segment financial information follows. Certain prior
year information has been reclassified to conform with the 19992000 presentation.

Communications & Information Services
--------------------------------------
Computer Systems Coal
Communications Outsourcing IntegrationServices Mining Other Total
-------------- ----------- ----------- ------ ----------- ------
(dollars in millions)

2000
Revenue:
North America................. $ 744 $103 $190 $ 22 $1,059
Europe........................ 113 12 -- -- 125
Asia.......................... 1 -- -- -- 1
------ ---- ---- ---- ------
$ 858 $115 $190 $ 22 $1,185
====== ==== ==== ==== ======
EBITDA:
North America................. $ (335) $ 2 $ 86 $ 7 $ (240)
Europe........................ (247) 4 -- -- (243)
Asia.......................... (37) -- -- -- (37)
------ ---- ---- ---- ------
$ (619) $ 6 $ 86 $ 7 $ (520)
====== ==== ==== ==== ======
Capital Expenditures:
North America................. $4,625 $ 11 $ 2 $-- $4,638
Europe........................ 1,122 1 -- -- 1,123
Asia.......................... 183 -- -- -- 183
------ ---- ---- ---- ------
$5,930 $ 12 $ 2 $-- $5,944
====== ==== ==== ==== ======
Depreciation and Amortization:
North America................. $ 437 $ 18 $ 5 $ 6 $ 466
Europe........................ 112 2 -- -- 114
Asia.......................... 4 -- -- -- 4
------ ---- ---- ---- ------
$ 553 $ 20 $ 5 $ 6 $ 584
====== ==== ==== ==== ======
1999
Revenue.................Revenue:
North America................. $ 145 $122 $207 $ 19 $ 493
Europe........................ 14 8 -- -- 22
Asia.......................... -- -- -- -- --
------ ---- ---- ---- ------
$ 159 $67 $ 63$130 $207 $ 19 $ 515
EBITDA..................====== ==== ==== ==== ======
EBITDA:
North America................. $ (390) 19 (10)$ 8 $ 81 $ 6 $ (295)
Europe........................ (88) 1 -- -- (87)
Asia.......................... (5) -- -- -- (5)
------ ---- ---- ---- ------
$ (483) $ 9 $ 81 $ 6 $ (387)
Identifiable Assets..... 5,001 61 30 345 3,467 8,904====== ==== ==== ==== ======
Capital Expenditures.... 3,299 11Expenditures:
North America................. $2,583 $ 12 $ 3 $ 1 $2,599
Europe........................ 833 -- -- -- 833
Asia.......................... 4 -- -- -- 4
------ ---- ---- ---- ------
$3,420 $ 12 $ 3 122 3,436$ 1 $3,436
====== ==== ==== ==== ======
Depreciation and Amortization........... 151Amortization:
North America................. $ 176 $ 12 $ 5 $ 9 6$ 202
Europe........................ 24 2 -- -- 26
Asia.......................... -- -- -- -- --
------ ---- ---- ---- ------
$ 200 $ 14 $ 5 57$ 9 $ 228
1998
Revenue................. $ 24 $63 $ 57 $228 $ 20 $ 392
EBITDA.................. (139) 14 (23) 92 (44) (100)
Identifiable Assets..... 1,072 59 42 362 3,987 5,522
Capital Expenditures.... 818 25 4 2 61 910
Depreciation and
Amortization........... 37 8 3 5 13 66
1997
Revenue................. $ -- $50 $ 45 $222 $ 15 $ 332
EBITDA.................. -- 13 1 88 (18) 84
Identifiable Assets..... -- 42 19 499 921 1,481
Capital Expenditures.... -- 9 5 3 9 26
Depreciation and
Amortization........... -- 6 2 5 7 20====== ==== ==== ==== ======

F-37F-40

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table presents a geographic breakout for revenue, EBITDA, and
identifiable assets:

19991998
Revenue:
United States.........North America............... $ 14523 $120 $228 $ 6720 $ 63 $207 $ 19 $ 501
Europe................ 14391
Europe...................... 1 -- -- -- -- 14
Other.................1
Asia........................ -- -- -- -- --
--
------------- ---- ----- ---- ------ ------
$ 159 $ 67 $ 63 $207 $ 19 $ 515
====== ==== ===== ==== ====== ======
EBITDA:
United States......... $ (297) $ 19 $ (11) $ 81 $ (87) $ (295)
Europe................ (86) -- 1 -- -- (85)
Other................. (7) -- -- -- -- (7)
------ ---- ----- ---- ------ ------
$ (390) $ 19 $ (10) $ 81 $ (87) $ (387)
====== ==== ===== ==== ====== ======
Identifiable Assets:
United States......... $3,935 $ 61 $ 20 $345 $3,467 $7,828
Europe................ 723 -- 10 -- -- 733
Other................. 343 -- -- -- -- 343
------ ---- ----- ---- ------ ------
$5,001 $ 61 $ 30 $345 $3,467 $8,904
====== ==== ===== ==== ====== ======
1998
Revenue:
United States......... $ 23 $ 62 $ 56 $228 $ 20 $ 389
Europe................ 1 -- -- -- -- 1
Other................. -- 1 1 -- -- 2
------ ---- ----- ---- ------ -------------
$ 24 $ 63 $ 57$120 $228 $ 20 $ 392
============= ==== ===== ==== ====== =============
EBITDA:
United States.........North America............... $ (128)(186) $ 14 $ (23)(9) $ 92 $ (44)9 $ (89)
Europe................ (9)(94)
Europe...................... (6) -- -- -- -- (9)
Other................. (2) -- -- -- -- (2)
------ ---- ----- ---- ------ ------
$ (139) $ 14 $ (23) $ 92 $ (44) $ (100)
====== ==== ===== ==== ====== ======
Identifiable Assets:
United States......... $ 959 $ 59 $ 42 $362 $3,987 $5,409
Europe................ 60 -- -- -- -- 60
Other................. 53 -- -- -- -- 53
------ ---- ----- ---- ------ ------
$1,072 $ 59 $ 42 $362 $3,987 $5,522
====== ==== ===== ==== ====== ======
1997
Revenue:
United States......... $ -- $ 50 $ 45 $222 $ 15 $ 332
Europe................(6)
Asia........................ -- -- -- -- --
------- ---- ---- ------ -------
$ (192) $ (9) $ 92 $ 9 $ (100)
======= ==== ==== ====== =======
Capital Expenditures:
North America............... $ 782 $ 29 $ 2 $ 1 $ 814
Europe...................... 96 -- Other.................-- -- 96
Asia........................ -- -- -- -- --
--
------------- ---- ----- ---- ------ -------------
$ --878 $ 5029 $ 45 $222 $ 15 $ 332
====== ==== ===== ==== ====== ======
EBITDA:
United States......... $ -- $ 132 $ 1 $ 88910
======= ==== ==== ====== =======
Depreciation and
Amortization:
North America............... $ (18)38 $ 84
Europe................11 $ 5 $ 11 $ 65
Europe...................... 1 -- -- -- 1
Asia........................ -- -- -- -- --
------- ---- ---- ------ -------
$ 39 $ 11 $ 5 $ 11 $ 66
======= ==== ==== ====== =======
Identifiable Assets
December 31, 2000
North America............... $ 8,091 $ 78 $310 $4,009 $12,488
Europe...................... 2,095 9 -- Other.................122 2,226
Asia........................ 192 -- -- 13 205
------- ---- ---- ------ -------
$10,378 $ 87 $310 $4,144 $14,919
======= ==== ==== ====== =======
December 31, 1999
North America............... $ 3,699 $ 81 $336 $3,751 $ 7,867
Europe...................... 993 8 -- 18 1,019
Asia........................ 18 -- -- 2 20
------- ---- ---- ------ -------
$ 4,710 $ 89 $336 $3,771 $ 8,906
======= ==== ==== ====== =======
Long-Lived Assets
December 31, 2000
North America............... $ 7,548 $ 49 $217 $ 15 $ 7,829
Europe...................... 1,852 3 -- -- 1,855
Asia........................ 190 -- -- -- 190
------- ---- ---- ------ -------
$ 9,590 $ 52 $217 $ 15 $ 9,874
======= ==== ==== ====== =======
December 31, 1999
North America............... $ 3,344 $ 56 $ 43 $ 560 $ 4,003
Europe...................... 956 5 -- -- 961
Asia........................ 4 -- -- -- ------4
------- ---- ----- ---- ------ -------------
$ --4,304 $ 1361 $ 143 $ 88560 $ (18) $ 84
======4,968
======= ==== ===== ==== ====== ======
Identifiable Assets:
United States......... $ -- $ 42 $ 19 $499 $ 921 $1,481
Europe................ -- -- -- -- -- --
Other................. -- -- -- -- -- --
------ ---- ----- ---- ------ ------
$ -- $ 42 $ 19 $499 $ 921 $1,481
====== ==== ===== ==== ====== =============

F-38F-41

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Product information for the Company's communications segment follows:

Reciprocal Dark Fiber, Trans-oceanic
Services Compensation Conduit, IRUs IRUs Total
-------- ------------ ------------- ------------- -----
(dollars in millions)

Communications Revenue:
2000
North America......... $427 $55 $209 $ 53 $744
Europe................ 61 -- -- 52 113
Asia.................. 1 -- -- -- 1
---- --- ---- ---- ----
$489 $55 $209 $105 $858
==== === ==== ==== ====
1999
North America......... $ 84 $24 $ 35 $ 2 $145
Europe................ 14 -- -- -- 14
Asia.................. -- -- -- -- --
---- --- ---- ---- ----
$ 98 $24 $ 35 $ 2 $159
==== === ==== ==== ====
1998
North America......... $ 1 $22 $-- $-- $ 23
Europe................ 1 -- -- -- 1
Asia.................. -- -- -- -- --
---- --- ---- ---- ----
$ 2 $22 $-- $-- $ 24
==== === ==== ==== ====

The majority of North American revenue consists of services and products
delivered within the United States. The majority of European revenue consists
of services and products delivered within the United Kingdom. Trans-oceanic
revenue for 2000 is allocated equally between North America and Europe as it
represents services provided between these two regions.

In 1999 and 1998 Commonwealth Edison Company, a coal mining customer,
accounted for 22% and 34% of total revenue.

The following information provides a reconciliation of EBITDA to earnings
(loss)loss from
continuing operations for the three years ended December 31, 1999:2000:

2000 1999 1998
1997------- ----- ----- ----
(in millions)

EBITDA......................................................EBITDA.................................................. $ (520) $(387) $(100) $ 84
Depreciation and Amortization Expense.......................Expense................... (584) (228) (66)
(20)
Non-Cash Compensation Expense...............................Expense........................... (241) (126) (39)
(21)
Write-off of In ProcessIn-Process Research and Development............Development........ -- -- (30)
--------- ----- -----
----
Earnings (Loss)Loss from Operations...........................Operations.................................. (1,345) (741) (235) 43
Other Income (Expense)........................................................................ (159) 34 82
(8)
Income Tax Benefit..........................................Benefit...................................... 49 220 25
48------- ----- -----
----
Earnings (Loss)Loss from Continuing Operations..................Operations......................... $(1,455) $(487) $(128)
$ 83
============ ===== =========

(15)(16) Commitments and Contingencies

On April 23, 1999, Level 3 announced that it had contracted with Tyco
Submarine Systems, Ltd. to design and build a transatlantic terabit cable
system from Long Island, New York to North Cornwall, UK. The cable system is
expected to be in service by September 2000 and is expected to cost between
$600 to $800 million. The total cost will depend on how the cable is upgraded
over time. Level 3 has prefunded the purchase of significant amounts of
undersea capacity as part of the Business Plan, but may require additional
funding depending on the cable's ultimate structure, pre-construction sales and
ownership.

Level 3 announced on April 29, 1999 that it had finalized contracts relating
to construction of Ring 1 of its European network in France, Belgium, the
Netherlands, Germany and the United Kingdom. Ring 1, which is approximately
1,800 miles, will connect Paris, Frankfurt, Amsterdam, Brussels and London. The
network is expected to be ready for service by September 2000. Ring 1 is part
of the approximately 4,750 mile intercity network. This European network will
be linked to the Level 3 North American intercity network by the Level 3
transatlantic terabit cable system currently under development, also expected
to be ready for service by September, 2000.

On July 26,In August 1999, the Company announced two important developments of its
European network build with agreements with Eurotunnel and Alcatel. Eurotunnel
will install and supplywas named as a defendant in Schweizer vs. Level
3 with multiple cross-Channel cables betweenCommunications, Inc. et. al., a purported national class action, filed in the
United KingdomDistrict Court, County of Boulder, State of Colorado which involves the
Company's right to install its fiber optic cable network in easements and
France throughright-of-ways crossing the high-security service tunnel. The first
of these cables will be completed byplaintiff's land. In general, the first quarter of 2000. Subsequent
cables will be installedCompany obtained
the rights to upgrade and expand theconstruct its network as and when required
or when new fiber technology becomes available. Alcatel will design, develop,
and install an undersea cable to link the Level 3 network between the United
Kingdom and Belgium. The cable system is already under development and will be
completed by the end of the first half of 2000.

On May 4, 1999, Level 3 and COLT Telecom Group plc announced an agreement to
share costs for the construction of European networks. The agreement calls for
Level 3 to share construction costs of COLT's planned 1,600 mile intercity
German network linking Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich
and Stuttgart. In return, COLT will share construction costs of Ring 1 of Level
3's planned European network.

On June 23, 1999, Level 3 announced a minimum four year, $250 million
strategic agreement with Lucent Techologies to purchase Lucent systems,
including new software switches or "softswitches." The minimum purchase
commitment is subject to certain conditions and has the potential to grow to $1
billion over five years.

F-39from railroads,

F-42

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Underutilities, and others, and is installing its network along the rights-of-way so
granted. Plaintiffs in the purported class action assert that they are the
owners of the lands over which the Company's fiber optic cable network passes,
and that the railroads, utilities and others who granted the Company the right
to construct and maintain its network did not have the legal ability to do so.
The action purports to be on behalf of a national class of owners of land over
which the Company's network passes or will pass. The complaint seeks damages on
theories of trespass, unjust enrichment and slander of title and property, as
well as punitive damages. The Company may in the future receive claims and
demands related to the rights-of-way issues similar to the issues in the
Schweizer litigation that may be based on similar or different legal theories.
Although it is too early for the Company to reach a conclusion as to the
ultimate outcome of this nonexclusive agreement, Lucent will providelitigation, management believes the Company has
substantial defenses to the claims asserted in the Schweizer action (and any
similar claims which may be named in the future), and intends to defend them
vigorously.

The Company is involved in various other lawsuits, claims and regulatory
proceedings incidental to its business. Management believes that any resulting
liability for legal proceedings beyond that provided should not materially
affect the Company's financial position, future results of operations or future
cash flows.

On August 24, 2000 the Company announced that it had signed a letter of
intent to purchase more than 2 million cabled fiber kilometers of third
generation LEAF fiber from Corning Inc. Level 3 plans to begin installing the
fiber in its Lucent
Technologies Softswitch, a software switch for Internet Protocol networks that
is intended to combinesecond conduit in the reliabilityfirst quarter of 2001 and features that customers expect from
the public switched telephone network with the cost effectiveness and
flexibility of Internet Protocol technology. With the Lucent Softswitch, Level
3 expects to provide a full rangebe
substantially complete by the end of Internet Protocol based communications
services similar in quality and ease of use to services on traditional circuit
voice networks. In addition, the companies also agreed to collaborate on future
enhancements of softswitches and gateway products to support next-generation
broadband services for business and consumers thatyear. Corning's LEAF fiber will
combine high-quality
voice and video communications with Internet-style web data services.significantly increase Level 3's network capacity.

Operating Leases

The Company is leasing rights of way, communications capacity and premises
under various operating leases which, in addition to rental payments, require
payments for insurance, maintenance, property taxes and other executory costs
related to the lease. Certain leases provide for adjustments in lease cost
based upon adjustments in the consumer price index and increases in the
landlord's management costs. The lease agreements have various expiration dates
through 2019.

In addition to the items described above, future minimum payments for the
next five years, under the non-cancelable operating leases with initial or
remaining terms of one year or more, consist of the following at December 31,
19992000 (in millions):

2000................................................................2001.................................................................. $ 67
2001................................................................ 43
2002................................................................ 36
2003................................................................ 35
2004................................................................ 35
Thereafter.......................................................... 21166
2002.................................................................. 63
2003.................................................................. 60
2004.................................................................. 58
2005.................................................................. 58
Thereafter............................................................ 374
----
Total............................................................... $679
====

Rent expense under non-cancellable lease agreements was $60 million in 2000,
$41 million in 1999 and $18 million in 1998 and $1 million in 1997.

(16)1998.

(17) Related Party Transactions

Peter Kiewit Sons', Inc. ("Kiewit") acted as the general contractor on
several significant projects for the Company in 2000, 1999 and 1998. These
projects include the Phoenix Data Center, the U.S. intercity network, certain
local loopsmetro networks and certain gatewayGateway sites, and the Company's new corporate
headquarters in Colorado and a new data
center in Tempe, Arizona.Colorado.

F-43

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Kiewit provided approximately $1,764 million, $1,024 million and $130 million
of construction services related to these projects in 2000, 1999, and 1998
respectively.

Level 3 also receives certain mine management services from Kiewit. The
expense for these services was $29 million for 2000, $33 million for 1999, and
$34 million for 1998, and
$32 million for 1997, and is recorded in selling, general and administrative
expenses.

In September 2000, the Company sold its entire interest in Walnut Creek
Mining Company to Kiewit for cash of $37 million. The revenue earned by Peter Kiewit Sons', Inc.sale resulted in 1997a pre-
tax gain of $21 million to the Company, which is included in discontinuedgain on sale of
assets in the accompanying consolidated statement of operations.

(17)In 2000, Level 3 and RCN entered into joint build arrangements for the
construction of certain network facilities. Under these agreements Level 3
provided approximately $10 million of construction services to RCN in 2000. RCN
also purchased $2 million and $1 million of telecommunications services from
the Company in 2000 and 1999, respectively.

(18) Other Matters

In August 1999 the Company was named as a defendant in Schweizer vs.On February 17, 2000, Level 3 Communications, Inc. et. al.,announced a purported national class action, filedco-build agreement whereby Global
Crossing Ltd. participated in the District Court, Countyconstruction of Boulder, Stateand obtained a 50% ownership
interest in the previously announced Level 3 transatlantic fiber optic cable.
Under the co-build agreement, Level 3 and Global Crossing Ltd. each separately
owns and operate two of Colorado which involves the Company's rightfour fiber pairs on the transatlantic cable. Level
3 also acquired additional capacity on Global Crossing Ltd.'s transatlantic
cable, Atlantic Crossing 1, during 2000. The transatlantic cable was completed
in November 2000.

On April 12, 2000, Level 3 signed an agreement with Viatel Inc. whereby
Viatel Inc. agreed to install itspurchase an ownership interest, in one fiber pair on
Level 3's transatlantic fiber optic cable network in easementssystem installed by Level 3. As a
result of this agreement, both companies own and right-of-ways crossingoperate one fiber pair on the
plaintiffs' land. In general,transatlantic cable. The Company recognized revenue of $94 million on this
contract during the fourth quarter of 2000, with the remainder being recognized
over the term of the contract.

On December 29, 2000, the Company obtainedsigned an agreement to collaborate with
FLAG Telecom on the rightsdevelopment of the Northern Asia submarine cable system
connecting Hong Kong, Japan, Korea and Taiwan. The system will include Level
3's previously announced eastern link connecting Hong Kong, Taiwan and Japan
and a new western link that FLAG Telecom will build to construct its network from railroads, utilities,connect Hong Kong, Korea
and others, and
is installing its network alongJapan. The Company expects the rights-of-way so granted. PlaintiffsHong Kong to Japan segment of the eastern
link to be in service in the purported

F-40

LEVELsecond quarter of 2001, with the eastern link's
Taiwan segment to follow in late 2001. The Company expects the entire western
link to be ready for service in early 2002. Level 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

class action assert that they areand FLAG Telecom will each
own three fiber pairs throughout the ownersnew system. The total cost of the lands over which the
Company's fiber optic cable network passes, and that the railroads, utilities
and others who granted the Company the right to construction and maintain its
network did not have the legal ability to do so. The action purportsentire
Northern Asia system is estimated to be on
behalfapproximately $900 million. Level 3's
share of a national class of owners of land over which the Company's network
passes or will pass. The complaint seeks damages on theories of trespass,
unjust enrichment and slander of title and property, as well as punitive
damages. Although the Companycost is not aware of any additional similar claims,
the Company may in the future receive claims and demands related to the rights
of way issues similar to the issues in the Schweizer litigation that may be
based on similar or different legal theories. Although it is too early for the
Company to reach a conclusion as to the ultimate outcome of this litigation,
management believes that the Company has substantial defenses to the claims
asserted in the Schweizer action (and any similar claims which may be named in
the future), and intends to defend them vigorously.

It is customary in Level 3's industries to use various financial instruments
in the normal course of business. These instruments include items such as
letters of credit. Letters of credit are conditional commitments issued on
behalf of Level 3 in accordance with specified terms and conditions. As of
December 31, 1999,2000, Level 3 had outstanding letters of credit of approximately
$35$47 million. The Company does not believe it is practicable to estimate the
fair value of the letters of credit and does not believe exposure to loss is
likely.

Level 3 filed with the Securities and Exchange Commission a "universal"
shelf registration statement covering up to $3.5 billion of common stock,
preferred stock, debt securities and depositary shares that became effective
February 17, 1999. On March 9, 1999 the Company received approximately $1.5
billion from the sale of 28.75 million shares of Common Stock and on September
14, 1999 the Company sold $823 million aggregate principal amount of its 6%
Convertible Subordinated Notes under the "universal" shelf registration
statement.

On December 10, 1999, Level 3 filed with the SEC a second "universal" shelf
registration covering up to $2.375 billion of common stock, preferred stock,
debt securities and depositary shares. Combined with remaining availability
under the initial universal shelf registration statement, Level 3 may offer an
aggregate of up to $3.5 billion of securities.

Prior to the Split-off, as of January 1 of each year, holders of Class C
Stock had the right to convert Class C Stock into Class D Stock, subject to
certain conditions. In January 1998, holders of Class C Stock converted 2.3
million shares, with a redemption value of $122 million, into 21 million shares
of Class D Stock (now known as Common Stock).

(18) Subsequent Events

On January 24, 2000, Level 3 announced the expansion of its business plan to
increase the amount of gateway space it intends to secure to approximately 6.5
million square feet. Level 3 currently has secured approximately 3.4 million
square feet of gateway space. The Company has completed the buildout of
approximately 1.3 million square feet of space.

Also on January 24, 2000, Level 3 announced plans to construct a high speed,
broadband undersea cable system connecting Hong Kong and Tokyo. The 2.56
terabit system is expected to be completed in the second quarter of 2001. The
Hong Kong-Tokyo cable is intended to be the first stage in the Company's
construction of an undersea network in the region. The Company plans to share
construction and operating expenses of the Northern Asia cable loop with one or
more industry partners.

F-41likely nor material.

F-44

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(19) Subsequent Events

On February 2, 2000,January 18, 2001, Level 3 announced that in order to provide the company
with additional flexibility in funding its business plan, it filed a
series of separate securities
offerings. As of"universal" shelf registration statement with the date of the initial filing of the Company's Annual Report
on Form 10-K for the year ended December 31, 1999, the Company is offering 15
million sharesSecurities and Exchange
Commission relating to $3.0 billion of common stock, preferred stock, debt
securities, warrants, stock purchase agreements and $500 milliondepositary shares. The
registration statement, (declared effective by the Securities and Exchange
Commission on January 31, 2001), allows Level 3 to publicly offer these
securities from time to time at prices and terms to be determined at the time
of convertible subordinated
notes in separate registered offerings pursuantthe offering. When combined with the remaining availability under its
existing effective universal shelf registration statement, the availability
under the registration statements allows Level 3 to offer an effective registration
statement. It is also offering senior notes and senior discount notes that will
generate aggregate grossof up to
$3.156 billion of securities.

Level 3 currently intends to use the net proceeds of $1 billion, and 400 millionany offering of euro-
denominated (approximately $391 million) senior notes. The dollar-denominated
and euro-denominated senior notes will not be registered under the Securities
Act of 1933 and may not be sold in the United States absent registration or an
applicable exemption from the registration requirements. Each of the offerings
is being made pursuant to a separate prospectus supplement or offering
memorandum. No offering is conditioned on the closing of any other. The Company
may not complete any of the offerings. In addition, the size of each offering
is subject to change. The Company will use the proceeds from these
offeringssecurities for working capital, capital expenditures, acquisitions, and other
general corporate purposes in connectionpurposes. Consistent with this approach, Level 3 may use the
implementation of the Company's
Business Plan.

(19)net proceeds for additions or expansions to its currently funded business plan.

(20) Unaudited Quarterly Financial Data

March June September December
------------ ------------ ------------ ------------------------- ---
2000 1999 19982000 1999 19982000 1999 19982000 1999 1998
----- ----- ----- ----- ----- ----- ----------- -----
(in millions except per share data)
Revenue................. $ 177 $ 102 $ 87234 $ 106 $ 103341 $ 134 $ 106433 $ 173 $ 96
Loss from Operations.... (277) (126) (9)(308) (183) (41)(320) (207) (52)(440) (225)
(133)
Net Earnings (Loss).....Loss................ (271) (105) 926(281) (44) (34)(351) (147) (49)(552) (191)
(39)
Earnings (Loss)Loss per Share (Basic
and Diluted):
Continuing
Operations........... $(.77) $(.33) $(.02)$(.77) $(.13) $(.11)$(.96) $(.43) $(.16)$(1.50) $(.56) $(.13)
Discontinued
Operations Excluding
Construction
Operations........... -- 3.19 -- -- -- -- -- --
Net Earnings Excluding
Construction
Operations............. (.33) 3.17 (.13) (.11) (.43) (.16) (.56) (.13)
Net Earnings Excluding
Gain On Split-Off of
Construction Group..... (.33) 1.09 (.13) (.11) (.43) (.16) (.56) (.13)

Earnings (loss)Loss per share was calculated for each three-month period on a stand-alone
basis. As a result of allstock transactions during the stock transactions,periods, the sum of the
earnings (loss)loss per share for the four quarters of each year may not equal the earnings (loss)loss per
share for the twelve month periods.

The earnings (loss) per share amounts above are those of Level 3 Common
Stock.

On January 2, 1998 the Company completed the sale of its energy assets to
MidAmerican, as discussed in Note 3, and recognized an after-tax gain on the
disposition of $324 million.

The Company recognized $111 million of gains related to RCN stock
transactions in the second quarter of 1999.

On March 31, 1998, as a result of the Split-off as discussed in Note 2, the
Company recognized a gain of $608 million equal to the difference between the
carrying value of the Construction Group and its fair value in accordance with
Financial Accounting Standards Board Emerging Issues Task Force Issue 96-4. No
taxes were provided on this gain due to the tax-free nature of the Split-off.
The Company reflected the fair value of the Construction Group as a
distribution to the Class C stockholders.

F-42F-45