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LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One) 

ý

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

For the fiscal year ended December 31, 20072009


OR

o

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

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

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

1025 Eldorado Boulevard, Broomfield, Colorado
(Address of principal executive offices)
 
80021-8869
(Zip code)

(720) 888-1000

(Registrant's telephone number including area code)

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

Common Stock, par value $.01 per share The NASDAQ Stock Market LLC

Securities registered pursuant to section 12(g) of the Act:

None

          Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý

          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 ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitiondefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý Accelerated filer o Non-accelerated filer o
(Do not check if a
smaller reporting company)		 Smaller reportingReporting company o

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

          As of June 30, 20072009 the aggregate market value of common stock held by non-affiliates of the registrant approximated $6.5$1.75 billion based upon the closing price of the common stock as reported on the NASDAQ Global Select Market as of the close of business on that date. Shares of common stock held by each executive officer and director and by each entity that owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

          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 1,545,421,1651,645,957,432 as of February 26, 200824, 2010

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 20082010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K

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 Page No.

Part I

    
 

Item 1

 

Business

 2
 

Item 1A

 

Risk Factors

 3937
 

Item 1B

 

Unresolved Staff Comments

 5351
 

Item 2

 

Properties

 5351
 

Item 3

 

Legal Proceedings

 5451
 

Item 4

 

Submission of Matters to a Vote of Security Holders

 5453

Part II

    
 

Item 5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 5554
 

Item 6

 

Selected Financial Data

 5857
 

Item 7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 61
 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 9588
 

Item 8

 

Financial Statements and Supplementary Data

 9688
 

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 9689
 

Item 9A

 

Controls and Procedures

 9689
 

Item 9B

 

Other Information

 9689

Part III

    
 

Item 10

 

Directors, Executive Officers and Corporate Governance

 9790
 

Item 11

 

Executive Compensation

 9790
 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 9790
 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 9790
 

Item 14

 

Principal Accounting Fees and Services

 9790

Part IV

    
 

Item 15.

 

Exhibits, Financial Statement Schedules

 9891
 

Index to Consolidated Financial Statements

 F-1

i

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        Unless the context otherwise requires, when we use the words "Level 3," "we," "us" or "our company" in this Form 10-K, we are referring to Level 3 Communications, Inc., a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to Level 3 Communications, Inc. In this Form 10-K, we may refer to our former subsidiary Software Spectrum, Inc. and its subsidiaries as "Software Spectrum."

        The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, Level 3 Communications, LLC, in the United States and other countries. All rights are reserved. This Form 10-K refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 10-K is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-K are the property of their respective owners.


Cautionary Factors That May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

        This Form 10-K contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us. When we use the words "anticipate", "believe", "plan", "estimate" and "expect" and similar expressions in this Form 10-K, as they relate to us or our management, we are intending to identify forward-looking statements. These statements reflect our current views 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, our actual results may vary materially from those described in this document. These forward-looking statements include, among others, statements concerning:

        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 us from achieving our stated goals include, but are not limited to, the effects on our business and our customers of the current economic turmoil and the disruptions in the financial markets as well as our failure to:

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        Except as required by applicable law and regulations, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Further disclosures that we make on related subjects in our additional filings with the SEC or Securities and Exchange Commission should be consulted. For further information regarding the risks and uncertainties that may affect our future results, please review the information set forth below under "ITEM 1A. RISK FACTORS."


Part I

ITEM 1.    BUSINESS

        Unless the context otherwise requires, when we use the words "Level 3," "we," "us" or "our company" in this Form 10-K, we are referring to Level 3 Communications, Inc., a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to Level 3 Communications, Inc. Throughout this Form 10-K we use various industry terms and abbreviations, which we have defined in the Glossary of Terms at the end of this description of our business.

        Through our operating subsidiaries, we engage primarily in the communications business.

        We are 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. We have created our communications network generally by constructing our own assets, but also through a combination of purchasing and leasing other companies and facilities. Our network is an advanced, international, facilities based communications network. We designed our network to provide communications services, which employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

        Market and Technology Opportunity.    We believe that ongoing technology advances in both optical and Internet Protocol technologies have been revolutionizing the communications industry. We also believe that these advances have, and will continue to, facilitate decreases in unit costs for communications service providers that are able to most effectively take advantage of these technology advances. Service providers that can effectively take advantage of technology improvements and reduce unit costs will be able to offer lower prices, which, we believe, will stimulate substantial increases in the demand for communications services. We believe there are two primary factors that are continuing to drive this market dynamic:


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Our Communications Services

Customer Focused Organization

        Beginning in August 2006, we realigned the customer interacting or customer facing aspects of our communications business into four groups to focus more effectively on the needs of our customers. These four groups are:

        This realignment was implemented to enable those employees in these customer facing roles to develop and deliver high quality communications services that are based on the needs of the customers that the group is seeking to serve. Each of these groups is supported by dedicated employees in sales and segment marketing. Each of the groups is also supported by centralized service or product management and development, general marketing, global network services, engineering, information technology, and corporate functions including legal, finance, strategy and human resources. It is through the Wholesale Markets, Business Markets, Content Markets and Europe groups that we offer a comprehensive range of communications services.

        Wholesale Markets Group.    The Wholesale Markets Group is focused on delivering communications services to meet the high bandwidth needs of many of the largest global communications services providers on a wholesale basis. The Wholesale Markets Group's customers integrate or package our services into their own products and services to offer voice, video and data services to their end-user customers.

        The market segments that the Wholesale Markets Group addresses include:

        Business Markets Group.    The Business Markets Group is focused on delivering communications services to meet the telecommunications needs of: small, medium and large enterprises; regional carriers; higher education institutions and academic consortia; and state and local governments. Local and regional carriers include ISPs, enhanced service providers, application service providers, wireless providers, mobile virtual network operators, VoIP providers as well as datacenters and hosting facilities. The Business Markets Group focuses on providing its targeted customers with the full suite of data, Internet, transport and voice services.

        Content Markets Group.    As we believe that one of the largest sources of future incremental demand for communications services will be derived from customers that are seeking to distribute their feature rich content or video over the Internet, the Content Markets Group focuses on offering a range



of end-to-end communications services building blocks to meet the content distribution needs of its customers. Customers that the Content Markets Group serves include:

        Europe.    The Europe group focuses on the communications needs of European customers and the European aspects of customers located outside of Europe. The Europe group target customers are similar to the target customers of the Wholesale Markets Group and the Content Markets Group.

Service Offerings

        We offer a comprehensivebroad range of communications services, which currently include the following services. All of these services are available to customersall of each of the customer facing groups,our customers, however their availability varies by location. The following is an overview description of some of the services that we offer.


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        For a discussion of certain geographic information regarding our revenue from external customers and long-lived assets, please see the notes to our Consolidated Financial Statements appearing elsewhere in this Form 10-K. For a discussion of our communications revenue, please also see Management's Discussion and Analysis of Financial Condition and Results of Operations appearing later in this Form 10-K. Our management continues to review our existing lines of business and service offerings to determine how those lines of business and service offerings assist with our focus on the delivery of communications services and meeting our financial objectives. This exercise takes place both with respect to integration activities and in the ordinary course of our business. To the extent that certain lines of business or service offerings are not considered to be compatible with the delivery of communications services or with obtaining our financial objectives, we may exit those lines of business or stop offering those services in part or in whole.

Distribution Strategy

        To implement our communications services strategy and reach our target customers, we use a combination of a direct sales force, an inside or call center based sales force, and indirect sales channels of third party agent partners. The specific elements that we use depends upon the nature of the customers that are being targeted.

        We use a direct sales force to target those customers with high bandwidth and/or voice requirements. These businesses include:

        We also use a direct sales force to target those business customers and other customers that make communications purchasing decisions on a local or regional basis. Smaller opportunities are serviced by an inside or call center based sales force generally selling pre-defined bundles of services. The customers that we target with this combination are generally those in the mid market, which we define


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as including medium enterprises that are generally outside the Fortune® 300, small regional service providers, educational institutions and some state governments. We also complement our direct and inside sales forces that targets these customers with an indirect sales channel of third party agent partners. During 2009, we launched an increased focus on using our existing metropolitan assets to target these opportunities with our direct sales force from a local presence. In 2009, we completed these efforts in a total of 31 markets, which were grouped into 15 general manager territories. We expect to continue expanding these efforts during 2010.

        Our sales functions are supported by dedicated employees in sales and customer target marketing. These sales functions are also supported by centralized service or product management and development, general or corporate marketing, network services, engineering, information technology, and corporate functions including legal, finance, strategy and human resources.

        We have implemented policies and procedures to review the financial condition of potential and existing customers. We apply these procedures to determine whether collectability of services billed is probable prior to the time that we begin delivering services to a customer. If the financial condition of an existing customer deteriorates to a point where payment for services is in doubt, we will not recognize revenue attributable to that customer until we receive cash. Based on these policies and procedures, we believe our exposure to collection risk within the communications business and the possible effect on our financial statements is limited. We may also experience the effects of the downturn in the economy and specifically the telecommunications industry; however, we believe the concentration of credit risk with respect to receivables is mitigated due to the dispersion of our customer base among geographic areas and remedies provided by terms of contracts and by law.

        For the year ended December 31, 2009, our top ten customers represented approximately 28% of our total communications revenue.

Our communications network

        Our network is an advanced, international, facilities based communications network. Today, we primarily provide services over our own facilities. At December 31, 2007,2009, our network encompasses:

        Terrestrial Intercity Networks.    Our approximately 67,000 mile fiber optic intercity network in North America, which we expect will be reduced to approximately 38,00042,000 miles, after we complete our integration of acquired companies, consists ofinclude the following:following characteristics.



•

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        During the first quarter of 2001, we completed our construction activities relating to our North AmericanOur intercity network. Also during 2001, we completed the migration of customer traffic from our original leased capacity network to our completed North America intercity network. Deploymentcovering approximately 12,000 miles across Europe incorporates a multiple conduit structure in approximately 4,000 miles and many of the North American intercity network was accomplished through simultaneous construction efforts in multiple locations,same characteristics as described above with different portions being completed at different times. In 2003, we added approximately 2,985 milesrespect to our North America intercity network as part of the Genuity transaction, and in 2005, we added approximately 30,000 miles (including IRUs) to our intercity network as part of the WilTel Communications transaction. In 2006 and January 2007, we added approximately 26,000 miles (including IRUs) to our North America intercity network as part of the various acquisitions during that period.

        In Europe, we have completed construction of our fiber optic intercity network with characteristics similar to those of the North American intercity network in a multiple ring architecture. During 2000, we completed the construction of Ring 1 and Ring 2 of our European network. Ring 1, which is approximately 1,900 miles, connects the major European cities of Paris, Frankfurt, Amsterdam, Brussels and London and was operational at December 31, 2000. Ring 2, which is approximately 1,650 miles, connects the major German cities of Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, and Munich. Ring 2 became operational during the first quarter of 2001. Subsequently, we created two additional rings generally through IRU acquisitions to connect to our expanded operations in Europe that are described below. The first ring is approximately 2,150 miles and connects Copenhagen, Stockholm and Oslo and the second ring is approximately 1,700 miles and connects Milan, Zurich and Geneva.

        During 2002, we completed an expansion of our European operations to seven additional cities. Our expansion to these additional locations was facilitated through the acquisition of available capacity from other carriers in the region. During 2003, we completed an expansion of our European operations to four additional cities. In addition, during 2004, we completed an expansion of our European operations to two cities. During 2005, we completed an expansion of our European operations to one city. During 2006, we obtained dark fiber primarily in those cities currently served by leased wavelength capacity and additionally in 2006 we completed an expansion of our European operations to 9 additional cities. During 2007, we obtained dark fiber in three cities that had been served by leased wavelength capacity and additionally in 2007 we completed an expansion of our European operations to 9 additional cities. In 2008, we expect to continue our European expansion to one additional city using leased wavelength capacity. We expect to use the dark fiber with appropriate transmission equipment to sell a full suite of transport and IP services.

        Our European network is linked to our North American intercity network by the Level 3 transatlantic 1.28 Tbps capable cable system, which was also completed and placed into service during 2000. The transatlantic cable system—which we refer to as the Yellow system—has a current capacity of 640 Gbps and was upgradeable to 1.28 Tbps when brought into service. The deployment of the Yellow system was completed pursuant to a co-build agreement announced in February 2000, whereby Global Crossing Ltd. participated in the construction of, and obtained a 50% ownership interest in, the Yellow system. Under the co-build agreement, Level 3 and Global Crossing Ltd. each now separately own and operate two of the four fiber pairs on the Yellow system. We also acquired additional capacity on Global Crossing Ltd.'s transatlantic cable, Atlantic Crossing 1, during 2000 to serve as redundant capacity for our fiber pairs on the Yellow system. We also own capacity in the TAT14 cable system. In connection with the WilTel acquisition, we have secured additional capacity on Global Crossing's transatlantic cable, Atlantic Crossing 1, and TAT-14. In 2006, we purchased 300 Gigabits of transatlantic



capacity with the right to purchase 300 Gigabits of additional capacity from Apollo Submarine Cable System Ltd. In January 2007 we purchased 150 Gigabits of the additional capacity available from Apollo Submarine Cable System Ltd, 300 Gigabits in May 2007 and an additional 100 Gigabits in November 2007. We are also an owner on the Japan-US, and China-US cable systems, an IRU holder on Southern Cross cable system as well as an owner on the Americas II cable and an IRU holder on the Arcos system.

        Local Market Infrastructure.    Our local facilities include fiber optic metropolitan networks connecting our intercity network and Gateways to buildings housing communications-intensivecommunications intensive end users, enterprise customers and traffic aggregation points—including ILEC and CLEC central offices, long distance carrier points-of-presence or POPs, cable head-ends, wireless providers' facilities and Internet peering and transit facilities. As of December 31, 2007, we had in the aggregate approximately 7,300 traffic aggregation points and buildings connected to our metropolitan networks. Our high fiber count metropolitan networks allow us to extend our services directly to our customers' locations at 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.

        We had secured approximately 6.9 million square feet of space for our Gateway and transmission facilities as of December 31, 2007,2009, and had completed the buildoutbuild out of approximately 4.6 million square feet of this space. Our initial Gateway facilities were designed to house local sales staff, operational staff, our transmission and Internet Protocol routing and Softswitch facilities and technical space to accommodate colocation services—that is, the colocation of equipment by high-volume Level 3 customers, in an environmentally controlled, secure site with direct access to Level 3's network generally through dual, fault tolerant connections. SomeAs a result of our acquisitions, some of our facilities are larger than our initial facilities and were designed to include a smaller percentage of total square feet for our transmission and Internet Protocol routing/Softswitch facilities and a larger percentage of total square feet to support the sale of colocation services. Availability of these services varies by location.

        As of December 31, 2007,2009, we had operational, facilities-based,facilities based, local metropolitan networks in 116 U.S. markets and 9 European markets.

        As of December 31, 2007,2009, we also had approximately 145 markets in service in North America and approximately 4245 markets in service in Europe.

        Transoceanic Networks.    Our European network is linked to our North American intercity network by leased capacity and by the Level 3 transatlantic cable system, which was completed and placed into service during 2000 and originally had a design capacity of 1.28 Tbps. The deployment of the system—which we refer to as the Yellow system—was completed pursuant to a co-build agreement announced in February 2000, whereby Global Crossing Ltd. participated in the construction of, and obtained a 50% ownership interest, in the Yellow system. Under the co-build agreement, Level 3 and Global


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Crossing Ltd. each now separately own two of the four fiber pairs on the Yellow system. The Yellow system was recently upgraded and our two fiber pairs have a current capacity of 900 Gbps, and we expect to further increase the capacity to 1.8 Tbps during the first half of 2010.

        We acquired additional capacity on Atlantic Crossing 1, to serve as redundant capacity for our fiber pairs on the Yellow system. We also own capacity in the TAT-14 cable system. In connection with our acquisition of WilTel Communications, LLC, or WilTel, we secured additional capacity on Atlantic Crossing 1 and on TAT-14. In 2006, we purchased 300 Gigabits of transatlantic capacity with the right to purchase 300 Gigabits of additional optional capacity from Apollo Submarine Cable System Ltd. In January 2007 we purchased 150 Gigabits of the additional optional capacity available from Apollo Submarine Cable System Ltd, 150 Gigabits in May 2007 and an additional 100 Gigabits in November 2007. We are also acquiring an additional 1 Terabit of capacity on the Apollo South cable system, which will be drawn down over a four year period. We are also an owner on the Japan-US, and China-US cable systems, an indefeasible right of use, or IRU, holder on Southern Cross cable system as well as an owner on the Americas II cable and an IRU holder on the Arcos system. We also own capacity on the Reliance-Globacom transatlantic system Flag Atlantic-1 and capacity on the Hibernia transatlantic cable system. In 2009, we also secured 30 Gigabits of additional capacity on the Atlantic Crossing I cable system.

Our Patent Portfolio

        Through acquisitions and through our own research and development, we have created an extensive patent portfolio, consisting of approximately 880885 patents and patent applications filed in the United States and around the world.world, as of December 31, 2009. Our patent portfolio includes patents filed in each of the last three decades covering technologies ranging from data and voice services to content distribution to transmission and networking equipment. Most of our issued patents are not scheduled to expire for more than ten years.

        In addition to the patents and patent applications we own, we have received licenses to patents held by others, including through a recently-announced cross-license agreement with IBM entered into in December, 2007, giving us access to technology covered by IBM's approximately (at that company's more than 40,000time) 42,000 patents covering many technologies relevant to our business. While patents give us the right to prevent others, particularly competitors, from using our proprietary technologies, patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patent that has been licensed to us.


        We have used our patent portfolio in a number of ways. First, developing or acquiring technologies and receiving the legal right to preclude others from using them may give us a competitive advantage. By way of example, at the end of 2007, we initiated a lawsuit against competitor Limelight Networks, Inc., alleging that that company infringes three of our patents relating to the distribution of content. That lawsuit is expected to go to trial before the end of 2008 and, if successful, could result in a court order prohibiting Limelight from using our patented technology in relevant service offerings. Second, the breadth and depth of our patent portfolio may deter others, particularly telecommunications operators, from bringing patent infringement claims against us for fear of counter-claim by us. There have been relatively fewMost of the patent infringementsinfringement suits brought against us to date. Most of thosedate have been initiated by patent-holding companies who do not operate telecommunications businesses and who are less likely to be subject to a counter-claim of infringement by us. Finally, the extensiveness of our patent portfolio allowsgives us the option to cross-license with others having similarly broad portfolios on terms acceptable to us, mitigating the risk that others will be ablewish to assert patent infringement claims against us.

        We will continue to file new patent applications as we enhance and develop products and services, we will continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing and we will continue to appropriately enforce our patents against infringement by others.


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Our Content Acquisition and Delivery NetworkNetworks

        We believe that our Vyvx and Content DeliveryDistribution Network, or CDN, assets combined with our other network infrastructure provide us with a competitive advantage in the content acquisition and distribution business. This belief is based on several factors.

CDN Applications

        There are an increasing number of applications for CDN, across many types of customers, particularly Internet-centric businesses and businesses that desire to accommodate increasingly larger file sizes for transmission over the Internet. The media and entertainment industries use CDN services to provide on-demand streaming and live streaming. Social Networking businesses require CDN to provide their customers with fast reliable music and video downloads. Likewise, through the use of CDN, software companies are able to provide software downloads for their customers. Online retailers and advertisers use CDN services to provide images and to download advertisements. Online gaming companies provide game downloads, applications updates and delivery of demos and trailers through CDN.

Content Acquisition and Distribution Services Architecture

        CDN describes a system of computers networked together across the Internet to provide content to users in the most efficient manner to enable an optimal user experience. In a CDN, nodes or groups of computers are deployed in multiple locations closer to the end user, also known as the "edge of the network" and cooperate with each other to satisfy requests for content by end users, transparently moving content behind the scenes to optimize the delivery process. Requests for content are directed intelligently through sophisticated software applications to nodes that provide optimal performance for end users.

        Our content delivery network is a unique configuration of our hosting and network assets located in approximately 17 countries, which is designed to improve the performance, reliability, and reach of web applications.

        We believe that as a result of the combination of our CDN assets and our other network infrastructure, we are strongly positioned to grow our market share in the CDN business. This belief is based on several factors.

CDN Applications

        There are an increasing number of applications for CDN, across many types of customers, particularly Internet-centric businesses and businesses that desire to accommodate increasingly larger



file sizes for transmission over the Internet. The media and entertainment industries use CDN services to provide on-demand streaming and live streaming. Social Networking businesses require CDN to provide their customers with fast reliable music and video downloads. Likewise, through the use of CDN, software companies are able to provide software downloads for their customers. Online retailers and advertisers use CDN services to provide images and flash files and to download advertisements. Online gaming companies provide for game downloads, applications updates and delivery of demos and trailers through CDN.

Content Distribution Services Architecture

        The CDNVyvx platform uses our existing physical network and infrastructure, and is composed of the Edge server or computer, which provides caching and streaming functions and the Global server, which provides load balancing—that is, a computer that directs the traffic to the most efficient server to meet the end users request. The Edge server enables the storage of popular content in a location that is closer to the end user and thereby reduces bandwidth requirements and improves client response times for content stored in the cache. The Global server or computer load balancing components of the CDN directs end user requests to the content source that is best able to serve the request of the particular end user, such as routing to the service noted that is closest to the end user or to the one with enough capacity to service the request of the end user.

        We also transmittransmits audio and video programming for our customers over our fiber-optic network and via satellite. We use our network to carry many live traditional broadcast and cable television events from the site of the event to the network control centers of the broadcasters of the event. These events include live sporting events of the major professional sports leagues. For live events where the location is not known in advance, such as breaking news stories in remote locations, we provide an integrated satellite and fiber-optic network based service to transmit the content to our customers. Most of our customers for these services contract for the service on an event-by-event basis; however, we have some customers who have purchased a dedicated point-to-point service, which enables these customers to transmit programming at any time.


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        We also distribute advertising spots to radioThe CDN platform directs network traffic across our existing physical network and television stations throughoutinfrastructure. The CDN platform is composed of the United States, both electronicallyedge server or computer that provides caching and in physical form. Customers for these services can utilizestreaming functions, and the global server that provides load balancing—that is, a network-based method for aggregating, managing, storing and distributing content for content owners and rights holders. On December 19, 2007, we announcedcomputer that our wholly owned subsidiaries, WilTel Communications, LLC, Level 3 Communications, LLC and Vyvx, LLC, asdirects the sellers, had entered into an Asset Purchase Agreement with DG FastChannel, Inc. Pursuanttraffic to the termsmost efficient edge server to meet the end user's request. The edge server enables the storage of popular content in a location that is closer to the end user and thereby reduces bandwidth requirements and improves response times for that stored content. The global server or computer load balancing components of the Purchase Agreement, the sellers will sell to DG FastChannel for cash certain assets relatingCDN directs end user requests to the Advertising Distribution Services business. Undercontent source that is best able to serve the termsrequest of the Purchase Agreement, we will receive $129 million in cash uponparticular end user, such as routing to the closingservice node that is closest to the end user or to the one with enough capacity to service the request of the transaction. The purchase price is subject to certain post closing working capital adjustments. Consummation of the transaction is subject to customary closing conditions, including receipt of applicable federal regulatory approvals.end user.

Distribution Strategy

        Our communications services sales strategy with respect to our Wholesale Markets Group and Europe is to utilize a direct sales force focused on companies with high bandwidth and/or voice requirements. These businesses include incumbent local exchange carriers, established next generation carriers, international carriers also known as PTTs, major ISPs, broadband cable television operators, major interexchange carriers, wireless carriers, systems integrators, governments, emerging VoIP service providers, calling card providers, conferencing providers and call centers.

        With respect to our Business Markets Group, medium to large enterprises will be serviced by a field based direct sales force. Smaller business opportunities are serviced by an inside sales force



generally selling pre-defined bundles of services. We also compliment our direct sales force with an indirect sales channel of agent partners.

        Our communications services sales strategy with respect to the Content Markets Group is also to utilize a direct sales force. Targeted customers include video distribution companies; providers of online gaming and mega-portals; software service providers; social networking providers; and traditional media distribution companies including broadcasters, television networks and sports leagues.

        We have in place policies and procedures to review the financial condition of potential and existing customers. We apply these procedures to determine whether collectability of services billed is probable prior to the time that we begin delivering services to a customer. If the financial condition of an existing customer deteriorates to a point where payment for services is in doubt, we will not recognize revenue attributable to that customer until we receive cash. Based on these policies and procedures, we believe our exposure to collection risk within the communications business and the possible effect on our financial statements is limited. We may also experience the effects of possible downturns in the economy and specifically the telecommunications industry; however, we believe the concentration of credit risk with respect to receivables is mitigated due to the dispersion of our customer base among geographic areas and remedies provided by terms of contracts and statutes.

        For the year ended December 31, 2007, our top ten customers represented approximately 34% of our consolidated total revenue. Revenue from our largest customer, AT&T Inc. and its subsidiaries, including SBC Communications, BellSouth and Cingular, (assuming those subsidiaries were wholly owned by AT&T for all of 2007), represented approximately 15% of our consolidated total revenue for 2007. The next largest customer accounted for approximately 5% of our consolidated total revenue and the remaining top ten customers each account for 3% or less of our consolidated total revenue.

        In connection with the acquisition of WilTel in December 2005, we acquired a large customer contract between WilTel and SBC Communications, a subsidiary of AT&T. We expect that the revenue generated under this contract will continue to decline over time as SBC Communications migrates its traffic from our network to the merged SBC and AT&T Communications network that SBC Communications acquired from the former AT&T.

Business Support Systems

        In order to pursue our sales and distributionbusiness strategies, we have developed and are continuing to develop and implement a set of integrated software applications designed to automate our operational processes. These development activities also relate to the integration of the systems that were used by the companies that we have acquired. Through the development of a robust, scalableour business support system,systems, we believe that we have the opportunity to develop a competitive advantage relative to traditional telecommunications companies. In addition, we recognize that for the success of certain of our services that some of our business support systems will need to be easily accessible and usable directly by our customers.

        We are currently deploying a unified set of simplified processes and systems that are streamlininghave been designed to streamline and synchronizingsynchronize our service, sales and operational functions through our "Unity" platform. Unity hasfunctions. These processes and systems have been designed to provide improved capability in service catalog management, sales opportunity management, customer management, quoting, order entry, order workflow, physical and logical network inventory management, service management, and financial management. We completed the foundation of this platform at the end of 2009, and we are now focused on operational efficiency improvements and data integrity and migration.

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


Our Employees

        As of December 31, 2007, we had approximately 6,680 employees. We believe that our success depends in large part on our ability to attract and retain substantial numbers of qualified employees.

Competition

        The communications industry has been and is highly competitive. A numberIn the late 1990s and the early 2000s, significant new capacity was deployed by both existing and new entrants. This oversupply led to a period of factors in recent years have increased the number of competitors in the market. First, the Telecommunications Act of 1996 created opportunities for non-incumbent providers to enter the marketplace. Second, the capital markets responded by making funding more available to newfinancial restructuring and existing competitors. Third, enthusiasm over the opportunities created by the rapid developments of the Internet led investors and market participants in general to overestimate the rate at which demand for communications services would grow. Finally, the emergence of new IP-based services has created prospects for new entrants with non-traditional business models to compete with legacy providers.

industry consolidation. We believe that a confluencethese occurrences have led to an improved industry structure. However, given the significant economies of these factors created an unsustainable level of competition in the market. We believe that this was evidenced by both the number of competitors vying for similar business and by the amount of inventory or capacity each brought to the market for many services. The result of these actions was an oversupply of capacity and an intensely competitive environment.

        While we believe the current industry structure has improved significantly, we believe that further restructuring is likely. With the growth of communications demand, excess capacity is increasingly being absorbed. Similarly, some form of industry consolidation will continue to occur based on underlying economics. Given the large ongoing fixed costs associated with operating a backbone network, we believe that the natural industry structure will continue to evolve to a more limited number of competitors with each having high traffic scale across their networks.

        While we believe that the long-run industry structure will evolve toward that described above, uncertainty surrounds how the existing competitive landscape will evolve toward this new structure. For example, while a number of next-generation and incumbent providers have been consolidated, we believe there are still a number of competitors operating fundamentally poor business models, are resource constrained, and are unlikely to be long-term survivors in their current forms. In addition, the ultimate effect of the completed acquisition transactions by AT&T and Verizon is yet to be known.

        We believe that each competitor's long-run success in the market will be driven by its available resources (for example, financial, personnel, marketing, customers) and the effectiveness of its business model (for example, service focus and mix, cost effectiveness, ability to adapt to new technologies, channel effectiveness). We recognize that many of our existing and potential competitorsinherent in the communications industry, have resources significantly greater than ours.we believe further consolidation may occur.


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        Our primary competitors are long distance carriers, incumbent local exchange carriers, competitive local exchange carriers, PTTs, Content Delivery Network companies, and other companies that provide communications services. The following information identifies some key competitors for each of our productservice offerings.

        Our key competitors for our voice service offerings are other providers of wholesale communications services including AT&T, Verizon, SprintQwest, Global Crossing and competitive local exchange carriers. Our key competitors for managed modem services are other providers of dial up Internet access including AT&T, Verizon and QwestPAETEC Communications.

        For our IP and Data services, we compete with companies that include Verizon, Sprint, AT&T, Qwest Communications, Global Crossing Cogent and XOCogent in North America, and Sprint, Verizon, France Telecom, Deutsche Telecom,TeliaSonera, Global Crossing and Cogent in Europe.

        For transport services, our key competitors in the United States are other facilities based communications companies including AT&T, Verizon, Sprint, Qwest, Communicationstw telecom, Abovenet and XO. In Europe, our key competitors are other carriers such as PTTs, Telia International, Colt, Telecom Group plc, Verizon,KPN, Belgacom and Global Crossing.

        Our key competitors for our colocation services are other facilities based communications companies, and other colocation providers such as web hosting companies and third party colocation companies. In the United States, these companies include AT&T,Equinix, Savvis, Equinix, Switch & Data and Qwest Communications.Internap. In Europe, competitors include Equinix, Global Switch, InterXion, Redbus, Telecity and Telehouse Europe.

        ForIn the enterprise services,market, our key competitors include incumbent local exchange carriers (such as AT&T, Verizon and Qwest), long distance services providers (such as Sprint), and competitive local exchange carriers (such as Time Warner Telecom and XO)tw telecom).

        For content distribution network or CDN services, our key competitors include Akamai Technologies and Limelight Networks.

        The communications industry is subject to rapid and significant changes in technology. For instance, recentperiodic 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 we plan on providing. Accordingly, in the future our most significant competitors may be new entrants to the communications industry, which—unlike the traditional incumbent carriers we also compete with—are not burdened by an installed base of outmoded or legacy equipment.

Regulation

        The Federal Communications Commission or the FCC has jurisdiction over interstate and international communications services, among other things.services. The FCC's regulation of common carriers without market power, such as us, is less stringent than its regulation of dominant incumbent local exchange carriers. We have obtained FCC approval to land our transatlantic cable in the United States. We have obtained FCC authorization to provide international services on a facilitiesfacilities- and resale basis.resale-basis as well as various wireless licenses. Under the Telecommunications Act of 1996 (the "1996 Act"), any entity, including cable television companies, electric and gas utilities, may enter any telecommunications market, subject to reasonable state regulation of safety, quality and consumer protection.

        The FCC has pending a Notice of Proposed Rulemaking ("NPRM") to initiate a comprehensive review of rules governing the pricing of special access service offered by ILECs subject to price cap regulation. Special access pricing by these carriers currently is subject to price cap rules, as well as



pricing flexibility rules which permit these carriers to offer volume and term discounts and contract tariffs (Phase I pricing flexibility) and/or remove from price caps regulation special access service in a defined geographic area (Phase II pricing flexibility) based on showings of competition. In the NPRM the FCC tentatively concludes to continue to permit pricing flexibility where competitive market forces are sufficient to constrain special access prices, but undertakes an examination of whether the current triggers for pricing flexibility accurately assess competition and have worked as intended. The NPRM also asks for comment on whether certain aspects of ILEC special access tariff offerings (e.g., basing discounts on previous volumes of service; tying nonrecurring charges and termination penalties to term commitments; and imposing use restrictions in connection with discounts), are unreasonable. At this time, we cannot predict the impact, if any, that a ruling on the NPRM will have on our network cost structure.

        Both AT&T and Verizon, in connection with large acquisitions, have agreed to abide by certain conditions that are enforceable by the FCC in connection with special access prices, terms and conditions. In December 2007, we filed a complaint against AT&T alleging, among other things, that AT&T had violated those commitments. At this stage, the proceeding is continuing and we intend to vigorously pursue our claims. We cannot at this time predict the outcome of that proceeding.

        As of August 1, 2001, our tariffs for interstate end user services were eliminated and our tariffs for international interexchange services were eliminated on January 28, 2002. Our rates must still be just and reasonable and nondiscriminatory. Our state tariffs remain in place. We have historically relied primarily on our sales force and marketing activities to provide information to our customers regarding these matters and expect to continue to do so. Further, in accordance with the FCC's orders we


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maintain a schedule of our rates, terms and conditions for our domestic and international private line services on our web site.

        Special Access Regulation.    Special access services are "lit" loop or transport facilities that support the transmission of data on a point-to-point basis, and may often also be referred to as "private lines." Level 3 purchases a substantial amount of special access services from ILECs and other telecommunications carriers to reach customer premises and, less frequently, to support interoffice transport requirements. In addition, Level 3 provides special access services to end user customers and to other carriers via its own network and/or through the resale of other carriers' special access services.

        In January 2005, the FCC commenced an examination of the regulatory framework governing the rates, terms, and conditions under which ILECs subject to "price cap" regulation provide interstate special access services. In this rulemaking, the FCC is reviewing both the price cap regime by which ILEC special access rates are set in most areas, as well as the "pricing flexibility" regime under which ILECs have obtained the ability to enter into more individualized relationships with customers based upon certain threshold showings of the presence of competitors in a specific geographic and product market. We have requested as a measure of interim relief that the FCC prohibit (or "freeze") any increases by ILECs in the rates applicable to special access services pending the gathering of data and adoption of final rules in this proceeding. Others have advocated for additional relief, including a revocation altogether of ILEC pricing flexibility and/or reduction of "price cap" ILEC interstate special access rates. The FCC has not yet ruled on Level 3's request for interim relief or the other pending requests. The FCC is reviewing the voluminous record in this proceeding, but we do not anticipate that the FCC will issue a comprehensive ruling in this rulemaking in 2010.

        In addition, as a condition to approval of the merger between AT&T and BellSouth, the FCC limited the ability of the merged company to increase prices for interstate special access services until December 2010. Another merger-related condition required AT&T to reduce its interstate special access rates in areas for which it had been granted pricing flexibility to the same level as those rates charged for services subject to price cap regulation; this condition expires as of July 2010. When these conditions expire, absent a grant of interim relief such as the pricing "freeze" requested by Level 3 in the FCC's special access proceeding, AT&T may be able to increase its prices for some of the interstate special access services that we buy. We cannot predict the impact of the outcome of the special access proceeding or the expiration of the merger conditions on the rates that we pay to ILECs for interstate special access services.

        National Broadband Plan.    As part of the American Recovery and Reinvestment Act of 2009, Congress mandated that the FCC, in coordination with the National Telecommunications and Information Administration (NTIA), develop a National Broadband Plan (the "Plan") to ensure that all people of the United States have access to broadband capability and to establish benchmarks for meeting that goal. The FCC is required to analyze the most effective and efficient mechanisms for ensuring broadband access by everyone, to provide a detailed strategy for achieving affordability and maximizing utilization of broadband infrastructure and services by the public, to evaluate the status of development of broadband services, and to plan to use broadband infrastructure and services for national purposes. The FCC has announced that it will present its Plan to Congress on March 17, 2010.

        As part of that effort, the FCC opened a proceeding in April 2009 and sought public input on numerous issues related to the development of its Plan. In thirty (30) Public Notices, and numerous public workshops and field hearings, the Commission sought public input on a range of policy, technical, economic and social issues related to nationwide broadband deployment. Among other issues, the FCC is considering what changes should be made to the Commission's policies with respect to middle mile transport, intercarrier compensation, the universal service fund, pole attachments and rights-of-way, spectrum allocation, and broadband adoption to further the Commission's goal of fostering nationwide broadband access.


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        We anticipate that the Plan will contain multiple recommendations for future actions that the Commission and Congress should take to further nationwide broadband access. Following the submission of the FCC's Plan to Congress, we anticipate that the FCC will propose rule changes consistent with the Plan and will seek additional comments before any final rules stemming from its effort are adopted. The development of the FCC's National Broadband Plan may lead to multiple changes in the legal and regulatory environment in which the Company operates. We cannot predict the nature and extent of the impact that the outcome of this proceeding will have on the Company and its operations.

        Network Neutrality.    In 2005, the FCC adopted itsInternet Policy Statement seeking to safeguard and promote unimpeded access to the Internet by announcing the following four general Internet policy principles that, subject to reasonable network management, would guide the FCC's interpretation of its statutory responsibilities to encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet. Specifically, consumers are entitled to:

        In 2008, the FCC issued an order finding that Comcast violated theInternet Policy Statement and engaged in "unreasonable network management practices" by blocking BitTorrent and other peer-to-peer Internet traffic. The FCC required Comcast to disclose details of its network management practices, commit to a plan to cease such practices, and provide details of a new nondiscriminatory network management practice. Comcast appealed the FCC's decision to the United States Court of Appeals for the District of Columbia Circuit arguing, among other things, that the FCC did not have legal authority to issue the ruling. The Court has not yet ruled in Comcast's appeal. We cannot predict the nature and extent of the impact that the outcome of this proceeding will have on the Company and its operations

        In October 2009, the FCC initiated a separate rulemaking proceeding to address interconnection, nondiscrimination and openness, the value of open networks (specifically the effect on investment, innovation and entrepreneurship, content, and competition) and affordability of broadband, among other things. The FCC also proposed to adopt two additional principles on nondiscrimination and transparency. The proposed nondiscrimination principle would require providers of broadband Internet access service to treat lawful content, applications, and services in a nondiscriminatory manner. The proposed transparency principle would require providers of broadband Internet access services to disclose such information concerning network management and other practices as is reasonably required for users and content, application, and service providers to enjoy the FCC's codified protections. The FCC is considering the thousands of initial comments on its net neutrality proposal and we do not anticipate the release of any rules or regulations until the third quarter of 2010 at the earliest. The development of net neutrality rules may create new rights and obligations and/or otherwise lead to change in the legal and regulatory environment in which the Company operates. We cannot predict the nature and extent of the impact that the outcome of the net neutrality proceeding will have on Company and its operations.

        Intercarrier compensation.    Telecommunications carriers compensate one another for traffic carried on each other's networks. Interexchange carriers pay access charges to local telephone companies for long distance calls that originate and terminate on local networks. Local telephone companies typically charge one another for local and Internet-bound traffic terminating on each other's networks. The entire methodology by which carriers compensate one another for exchanged traffic, whether it be for local, intrastate or interstate traffic, is under review at the FCC.


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        Apart from this comprehensive review of intercarrier compensation, individual compensation issues have been the subject of FCC and state commission rulings. Since 1997 the issue of compensation to be paid for calls dialed to Internet service providers or ISPs has been heavily litigated. Since 2004, the issue of compensation to be paid in connection with the exchange of Voice over Internet Protocol or VoIP calls has been also been the subject of much debate.

        WhileIn its decision on Nov. 5, 2008, the FCC has releasedresponded to a numbermandamus order from the United States Circuit Court of orders assertingAppeals for the District of Columbia concerning its 2001 ISP Remand Order. In that Mandamus Order, the FCC clarified that it had jurisdiction over ISP bound traffic pursuant to the reciprocal compensation provisions of the Telecommunications Act of 1996 regardless of whether the traffic was local or long distance. The FCC then decided to maintain the existing compensation regime it had established for ISP-bound traffic with a rate of $0.0007 per minute of use. The Court of Appeals for the United States in the District of Columbia upheld the FCC's order in January 2010.

        Level 3 maintains approximately 233 interconnection agreements with other telecommunications carriers. These agreements set out the terms and conditions under which the parties will exchange traffic. The largest agreements are with AT&T and Verizon. Level 3's agreement with AT&T expires on January 11, 2011. Level 3's agreement with Verizon expired on March 31, 2009. Upon expiration of the agreement, Level 3 and Verizon will continue to provide services until a successor agreement has been reached.

        As interconnection agreements expire, we will continue to negotiate new agreements but at this time cannot predict what the final terms will be, including compensation for ISP-bound traffic or VoIP traffic. In the event we initiate arbitration before a state commission to establish the terms of the interconnection agreement, we cannot predict what the final terms will be, including compensation for ISP-bound traffic or VoIP traffic

        Given the general uncertainty surrounding the effect of the FCC and state decisions and appeals, we may have to change (1) how we treat the compensation we receive for terminating calls bound for ISPs if the agreements under which compensation is paid provided for the incorporation of changes in FCC rules and regulations; (2) the manner in which we account for the compensation and costs of intercarrier compensation for ISP traffic, states such as California and Massachusetts have increasingly assumed the role of determining the compensation obligations as between the carrier serving the customer dialing the ISP and the carrier serving the ISP. RBOCs and other incumbent local exchange carriers typically assert that either they owe no compensation to the carrier serving the ISP or alternatively that they are owed compensation by such carrier.VOIP.

        There is also uncertainty in respect to intercarrier compensation for VoIP traffic. As in the ISP intercarrier compensation situation, the FCC has issued a number of rulings asserting its jurisdiction over such traffic, but to date it has not issued any rulings on the scope and rate of intercarrier compensation to be paid by carriers exchanging VoIP traffic. While carriers that serve VoIP providers such as Level 3 have typically asserted that VoIP traffic is local in nature and thereby subject to local compensation rates, the RBOCSRBOCs and other incumbents have taken the position that some or all of this traffic should be subject to higher intrastate or interstate rates. CurrentlyA number of carriers have filed petitions with the FCC has two forbearanceseeking a declaratory ruling on the treatment of VoIP traffic. These petitions before it requesting thathave either been withdrawn or rejected based on procedural grounds. In those cases, the FCC either forbear from subjecting VoIP todid not resolve the higher interstate



or intrastate rates, or alternatively to forbear from imposing rules that might be construed to requirequestion of the payment of access charges on VoIP traffic terminated to the PSTN.appropriate intercarrier compensation.

        Until such time as the FCC acts in such a way as to either clarify its rulings on ISP compensation, VoIP compensation or rules on intercarrier compensation in its entirety, and such rules are final and non-appealable, the scope of intercarrier compensation obligations between carriers exchanging ISP or VoIP traffic is uncertain.

        Prior to 2004, we entered into agreements providing for payment of compensation for terminating ISP-bound traffic with Verizon, in its former Bell Atlantic operating territory, with SBC Corporation for the 13-state operating territory that includes its affiliates Pacific Bell, Southwestern Bell, Ameritech and Southern New England Telephone, and with BellSouth in its nine-state operating territory. We also entered into interconnection agreements with Qwest, Cincinnati Bell Telephone, and Sprint that reflect the intercarrier compensation rates adopted by the FCC in its ISP Remand Order.

        In late 2003, we reached an agreement with SBC, now AT&T, continuing payment for the exchange of ISP-bound traffic. In February 2005, we and SBC agreed to successor interconnection agreements which cover the payment for the exchange of ISP traffic and treating VoIP traffic as subject to dispute. The SBC agreement expired on December 31, 2006. Level 3 and SBC continue to provide services and exchange payments under that agreement until a successor agreement is reached.

        In May 2004, we reached a new interconnection agreement with Bell South, now AT&T, that incorporated terms contained in FCC orders relating to ISP-bound traffic. Level 3 and BellSouth agreed that compensation for VoIP traffic was disputed. BellSouth requested renegotiation of this agreement in early October 2006; the parties continue to provide services and exchange payments under the agreement until a successor agreement is reached.

        As a result of representations regarding the extension of interconnection agreements made by AT&T to the FCC in connection with its merger with BellSouth, we have requested that AT&T extend the BellSouth and SBC (now AT&T) interconnection agreements for a three-year period with an effective termination date of January 10, 2011. We are awaiting a response from AT&T.

        In September 2004, Level 3 and Verizon amended our existing interconnection agreements to establish intercarrier compensation terms. The compensation section of amendments to those agreements expired in August 2007. Level 3 and Verizon will continue to provide services under these agreements until successor agreements are executed.

        We are negotiating new agreements with each of these carriers but at this time cannot predict what the final terms will be, including compensation for ISP-bound traffic or VoIP traffic. Given the general uncertainty surrounding the effect of the FCC and state decisions and appeals, we may have to change (1) how we treat the compensation we receive for terminating calls bound for ISPs if the agreements under which compensation is paid provided for the incorporation of changes in FCC rules and regulations; (2) the manner in which we account for the compensation and costs of intercarrier compensation for VOIP.

        Universal Service.    Level 3 is subject to federal and state regulations that implement universal service support for access to communications services in rural, high-cost and low-income markets at reasonable rates; and access to advanced communications services by schools, libraries and rural health care providers. Currently, theThe FCC assesses Level 3 a percentage of interstate and international revenue it receives from retail customers as its contribution to the federalFederal Universal Service Fund. The FCC is currently


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considering changing the method by which our contributions are assessed to a flat-fee charge, such as a per-line or per-number charge. Any change in the assessment methodology may affect Level 3's revenues but at this time, it is not possible to predict the extent we would be affected, if at all.


        The 1996 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 pro-competitive measures. Because the implementation of the 1996 Act is subject to numerous state rulemaking proceedings on these issues, it is currently difficult to predict how quickly full competition for local services will be realized.

        State regulatory agencies have jurisdiction when our facilities and services are used to provide intrastate telecommunications services. A portion of our traffic may be classified as intrastate telecommunications and therefore subject to state regulation. We expect that we will offer more intrastate telecommunications services (including intrastate switched services) as our business and product lines expand. To provide intrastate services, we 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. We currently are authorized to provide telecommunications services in all fifty states and the District of Columbia. In addition, we will be required to obtain and maintain interconnection agreements with ILECs where we wish to provide service. We expect that we should be able to negotiate or otherwise obtain renewals or successor agreements through adoption of others' contracts or arbitration proceedings, although the rates, terms, and conditions applicable to interconnection and the exchange of traffic with certain ILECs could change significantly in certain cases. The degree to which the rates, terms, and conditions may change will depend not only upon the negotiation and arbitration process and availability of other interconnection agreements, but will also depend in significant part upon state commission proceedings that either uphold or modify the current regimes governing interconnection and the exchange of certain kinds of traffic between carriers. In May 2004, we reached agreement on new interconnection agreements with BellSouth in all nine of the BellSouth states. In September 2004, we reached new interconnection agreements with Verizon, and with SBC in February 2005.

        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.

        Our networks are 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 our own fiber optic transmission facilities, we need to obtain rights-of-way over privately and publicly owned land. Rights-of-way that are not already secured, or which may expire and not be renewed, may not be available to us on economically reasonable or advantageous terms.

        Due to the growing acceptance and deployment of VoIP services, the FCC and state public utility commissions are conducting regulatory proceedings that could affect the regulatory duties and rights of entities such as us or our affiliates that provide IP-based voice applications. There is regulatory uncertainty as to the imposition of access charges and other taxes, fees and surcharges on VoIP services that use the public switched telephone network. There is regulatory uncertainty as to the imposition of traditional retail, common carrier regulation on VoIP products and services.

        The rules respecting the payments made by carriers for the exchange of VoIP traffic have been subject to much debate. The FCC has not clarified whether VoIP traffic is to be subjected to the access charges regime that is applicable to traditional telecom service, or whether VoIP traffic is to be treated as an "information service" or "enhanced" and not subject to access charges. There are a number of


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petitions and proceedings pending before the FCC where this issue could be resolved. At this time, it is difficult to predict the outcome of any of these proceedings or the timing for their eventual resolution. As a result, we cannot predict the effect that any such rulings could have on our provision of VoIP services.

        The FCC has classified VoIP services as "interstate" services subject to FCC regulations, and has stated that states have limited authority to regulate the offering of VoIP services. On September 22, 2003, Vonage Holdings Corporation ("Vonage") filed a petition with the FCC requesting a declaration that its offerings, which originate on a broadband network in IP format and terminate on the PSTN, are interstate information services not subject to state regulation under the 1996 Act and existing FCC rules. On November 10, 2004, the FCC adopted an order (which was subsequently upheld on appeal) ruling that Vonage's service was an interstate service not subject to state regulation.

        On June 3, 2005, the FCC issued an order (which was subsequently upheld on appeal) requiring all interconnected VoIP providers to deliver enhanced 911 capabilities to their subscribers by no later than November 28, 2005. We have modified our service offerings to VoIP providers in order to assist them in complying with the FCC mandate.

        In 2007, the FCC imposed some regulatory requirements on VoIP providers that had previously been applicable only to traditional telecommunications providers. Specifically, theThe FCC (a) imposed obligations on VoIP providers to contribute to the federal universal service fund, and (b) required VoIP carriers to comply with regulations relating to local number portability (including contributing to the costs of managing number portability requirements). In addition, a number of state public utility commissions are conducting regulatory proceedings that could impact our rights and obligations with respect to IP-based voice applications. Specifically, some states have taken the position that the "local" component of VoIP service is subject to traditional regulations applicable to local telecommunications services, such as the obligation to pay intrastate universal service fees.

        We cannot predict the outcome of any of these petitions and regulatory proceedings or any similar petitions and regulatory proceedings pending before the FCC or state public utility commissions. Moreover, we cannot predict how their outcomes may affect our operations or whether the FCC or state public utility commissions will impose additional requirements, regulations or charges upon our provision of services related to IP communications.

        Unlike the United States which has a fracturedfederal-state regulatory scheme, with respect to VoIP services, the European Union has adopted a more systematic approach to the convergence of networks and VoIPthe regulation specifically.of telecommunications services. The European Commission will overseeoversees the implementation by its member-statesMember States of six newvarious directives developed to regulate electronic communications in a technology and platform neutral manner. Implementation of the directives has not been uniform across the Member States of the European Union and it is difficult to predict when they will be implemented at the national level. Even with harmonization, the national regulatory agencies will continue to be responsible for issuing general authorizations and specific licenses.

        The European Union's approach to the regulation of VoIP turns on whether VoIP is voice telephony. The European Commission has defined voice telephony to have four elements: (1) commercial offering as voice telephony; (2) provision to the public; (3) provision to and from the public switched telephone network termination points; and (4) direct speech transport and switching of speech in real time, particularly at the same level of reliability and speech quality as provided by the PSTN. In its "Communication from the Commission, Consultation on Voice on the Internet" in June 2000, the European Commission directed that "Member States should continue to allow Internet access providers to offer voice over Internet protocol under data transmission general authorizations, and that specific licensing conditions are not justified."


        The European Commission has subsequently redefined its definitions to suggest that some VoIP offerings are voice telephony. In its December 2000 communication, the European Commission noted that increasing quality and reliability as well as marketing of voice capabilities with bundled services, made certain kinds of "voice over Internet" much more like voice services. While the current European Commission directives do not mandate the treatment of VoIP as voice telephony, the commission will continue to reevaluate the regulation of VoIP as service quality becomes the equivalent of traditional voice telephony.

In February 2003, the European Union adopted a new regulatory framework for electronic communications that is designed to address in a technologically neutral manner the convergence of communications across telecommunications, computer and broadcasting networks. The directives address: (1) framework (2) interconnection and access, (3) authorization and licensing, (4) universal service and (5) privacy. These directives and an additional decision on radio spectrum replace the existing 20 directives on electronic communications. Under the framework, voice telephony providers will face additional obligations, including specific licensing and universal service obligations. Others will likely face new regulation. One example could be VoIP. If it is classified as an electronic communications service, rather than voice telephony, it would still be subject to additional regulations to achieve regulatory parity with other electronic communications.

        The United Kingdom was one of the first countries to fully implement the European Union's new framework for electronic communications, which it did by July 25, 2003. At that time, certain provisions of the United Kingdom's Telecommunications Act of 1984 were repealed. Pursuant to that framework, the licensing regime was replaced with a general authorization. Our existing licenses were canceled and replaced with a general authorization.

        UnderNotwithstanding a synchronized approach to regulation in Europe, the regime,implementation of the United Kingdom regulates VoIP as an electronic communication service. The degreedirectives has not been uniform across the Member States of regulation imposed on the service depends upon whetherEuropean Union and it is difficult to predict when they will be implemented at the service is considerednational level. Even with harmonization, the national regulatory agencies will continue to be a Publicly Available Telephone Service (PATS). A service is considered to be a PATS if the following conditions are met: it is marketed as a substituteresponsible for the traditional telephone service; the service appears to the customer to be a substitute for the traditional public telephone service over which they expect access to emergency services; or the service provides the customers sole meansissuing general authorizations and specific licenses.


Table of access to the traditional circuit switched public telephone network.Contents

        While the Ofcom, the United Kingdom regulator, has established technical standards and interconnection rights for VoIP service providers, it has recently opened a consultation to assess the appropriate allocation of phone numbers to VoIP providers. We cannot predict the result of this proceeding and how it will affect our ability to provide services.

        As we expand the deployment of our VoIP applications in Europe, we will have to consider the appropriate regulatory requirements for each nation before deploying services.

        The        Pursuant to theTelecommunications Act ("Act"), the Canadian Radio-television and Telecommunications Commission or the CRTC,("CRTC"), has jurisdiction to regulate long distance telecommunications servicescommunications and their service offerings in Canada.Canada (telecommunications is a Federal jurisdiction). Regulatory developments over the past several years have terminated the historic monopolies of the regional telephone companies,ILECs bringing significant competition 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 obligatedservices. On December 14, 2006, the Governor in Council (Federal Cabinet) for the first time exercised its statutory power to file tariffs, may not only provide transborder servicesissue a binding Policy Direction requiring the CRTC, in regulating the telecommunications industry, to rely on market forces to the U.S. by resellingmaximum extent possible, regulating only to the services provided by the regional companiesextent necessary and other entities but also may resell the services of the former monopoly international carrier, Teleglobe Canada or 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 fromthen in an efficient and a third country, the CRTC lifted this restriction.proportionate way. The Teleglobe monopoly on international services and undersea cable landing rights


terminated as of October 1, 1998, although the provision of Canadian domestic and international transmission facilities based services remains restricted to "Canadian carriers" with. These carriers must have majority ownership and control in fact by Canadians. OwnershipThere are no such Canadian ownership and control requirements for companies that resell the services and facilities of non-international transmission facilities are limited toa Canadian carriers but we can own international undersea cables landing in Canada. We cannot, under current law, enter the Canadian marketcarrier. Level 3 operates as a provider of transmission facilities based domestic services. In 2003, two committees of the Canadian House of Commons issued conflicting recommendations on whether to lift the foreign ownership restrictions that prohibit carriers like us from owning intra-Canadian transmission facilities.reseller in Canada. If the ownership restrictions are repealed, we anticipate that we will be able to expand our operations and service offerings in Canada. Recent CRTC rulings address issuesThe liberalization of Canadian carrier ownership and control is controversial and there are no immediate prospects for such as the framework for international contribution charges payable to the local 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.a change.

        While competition is permitted in virtually all other Canadian telecommunications market segments, we believe that the regional companiesILECs continue to retain a substantial majority of the local and calling card markets. Beginning in May 1997 and furthered by a Federal Government policy direction, the CRTC has 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.market. 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 havewithout universal service or customer tariff-filingtariff 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, are subject to price cap regulation in respect of their utility services 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 revenue. CLECs must pay an annual telecommunications fee based on their proportion of total CLEC operating revenue. 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.

        With respect to VoIP services, the CRTC ruled in Decision 2005-28 that it should forbear from regulating circuit switched VoIP services. As a result, ILECs are not required to file tariffs for the provision of long distance VoIP services. With respect to local VoIP services, the Governor in Council varied the CRTC decision to treat VoIP services as other local exchange services by making an exception for access independent VoIP services that do not include an ILEC-provided loop. Furthermore, the ILEC, Bell Canada, has received approval of its application to be relieved of the requirement to obtain pre-approval for price changes for its local VoIP services. Bell has been permitted to notify the CRTC two business days in advance of changes as long as the price is within an authorized range.

        In a March 3, 2008 decision, the CRTC established the regulatory framework for wholesale telecommunications services with rules for the regulation and pricing provided by ILECs to competitive service providers such as alternative local and long distance carriers, resellers and ISPs. The CRTC conducteddecision revised its definition of an "essential service", established a proceedingsix-category framework for the CRTC's regulation of wholesale telecommunications services, categorized various available wholesale services within these identified categories, and established the regulatory conditions associated with each service category, notably mandated access and pricing principles, as well as the process for the phase-out of regulation for certain services found to be non-essential. In its 1997 local competition decision, the CRTC had tied essential facilities to those provided on a monopoly basis. In the 2008 decision, non-monopoly facilities will have to be provided to competitors if the CRTC makes a determination that withdrawal of mandatory access would likely result in 2004a substantial lessening or


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prevention of competition. The CRTC classified wholesale services that are currently regulated into six categories: essential, conditional essential, conditional mandated non-essential, public good, interconnection, and non-essential subject to review issues relatingphase-out of regulation. Very few services were classified as essential. In the category of "conditional essential" wholesale services, the CRTC included wholesale services used for local telephony (primarily unbundled local loops), low-speed competitor digital network access services, DS-0 and DS-1 access facilities and ADSL access services used to provide high-speed Internet access services to residences and businesses. This essential conditional category classification will continue until it is demonstrated that wholesale alternatives functionally equivalent are sufficiently present such that withdrawing mandated access would not likely result in a substantial lessening or prevention of competition in the local exchange services market. Regarding network interconnection services, customer access facilities, and support structure services, the CRTC considers that these arrangements are technologically and competitively neutral to the introduction of VoIP technology.greatest extent possible, enable competition from new technologies, and do not artificially favor Canadian carriers or resellers.

        The CRTC has expressed a numberconditionally forborne from regulating the retail Internet services, but not the wholesale Internet services, of preliminary views about how it proposesCanadian carriers preserving its regulatory powers relating to regulate VoIP services including the viewunjust discrimination and undue preference or advantage. The CRTC has ruled (Telecom Decision 2008-108) that VoIP services (andBell Canada's application of its traffic shaping measures to its wholesale ADSL access service providers) should be regulated according to the CRTC's existing rules. If the preliminary views are confirmed, then the rules for VoIP-based services will depend on the category of service provider (ie., ILEC, CLEC or reseller), the natureknown as Gateway Access Service (GAS) were not in violation of the serviceAct. In Public Notice 2008-19, the CRTC noted that Decision 2008-108 dealt only with Bell Canada's practice of throttling P2P traffic at certain times of the day in relation to its GAS being provided to wholesale customers. In the Public Notice, the CRTC announced it would explore the current and potential Internet traffic management practices of all ISPs operating in Canada, examining both retail and wholesale services. In October 21, 2009, the geographic areaCRTC released a policy framework dealing with Internet Traffic Management Practices for Internet Service Providers. The policy requires ISPs to disclose their network management practices, to implement those practices in whicha manner that addresses only the service is provided.offending conduct; and must be competitively neutral. The CRTC said that it would implement its policy on a case-by-case review. At this time, the Company cannot predict the impact this policy might have on its operations.

Our Other Business

        Our 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, we invested a portion of the cash flow generated by our construction activities in a variety of other businesses. We entered the coal mining business in 1943, the telecommunications business in 1988, the information services



business in 1990 and the alternative energy business in 1991. We have also made investments in several development-stagedevelopment stage ventures.

        In December 1997, our stockholders ratified the decision of the Board to effect the split-off separating our historical construction business from the remainder of our operations. As a result of the split-off, which was completed on March 31, 1998, we no longer own any interest in the prior construction business. In conjunction with the split-off, we changed our name to "Level 3 Communications, Inc.," and the entity that held the prior construction business changed its name to "Peter Kiewit Sons', Inc."


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        On November 30, 2005, we completed the sale of our (i)Structure, LLC subsidiary to Infocrossing, Inc. Prior to the sale, (i)Structure provided computer operations outsourcing to customers located primarily in the United States.

On September 7, 2006, we completed the sale of 100% of the capital stock of our indirect, wholly owned subsidiary, Software Spectrum, Inc. ("Software Spectrum"), to Insight Enterprises, Inc. In connection with the transaction, we received total proceeds of approximately $351 million in cash. Prior to the sale, Software Spectrum was a leading direct marketer of software and provider of software licensing services to corporations. With the completion of the sale of Software Spectrum, we exited the information services business.

        We are engaged in coal mining through our subsidiary, KCP, Inc. or KCP. KCP has a 50% interest in two mines, which are operated by a subsidiary of Peter Kiewit Sons', Inc. or PKS. Decker Coal Company or Decker is a joint venture with Western Minerals, Inc., which is a subsidiary of Rio TintoCloud Peak Energy America Inc. Black Butte Coal Company or Black Butte is a joint venture with Bitter Creek Coal Company, a subsidiary of Anadarko Petroleum Corporation. The Decker mine is located in southeastern Montana and the Black Butte mine is in southwestern Wyoming. The coal mines use the surface mining method.

        The coal produced from the KCP mines is sold primarily to electric utilities, which burn coal to produce steam to generate electricity. Essentially all of the sales were made under long-term contracts. Approximately 36%contracts to a limited number of customers, including Pacificorp (Black Butte), 37% and 44% of KCP's revenue in 2007, 2006 and 2005, respectively, were derived from long-term contracts with Commonwealth Edison Company (with Decker) andIdaho Power (Black Butte), Sierra Pacific (Black Butte), The Detroit Edison Company (with Decker)(Decker), Virginia Power (Decker), Wolf Mountain (Decker) and Minnesota Power (Decker). KCP hasThe mines have commitments to deliver approximately 9.018.6 million tons of coal through 20122015 under contracts with Commonwealth EdisonPacificorp, Idaho Power and Detroit Edison. KCPSierra Pacific. The mines also hashave other sales commitments, including those with Sierra Pacific, Idaho Power, PacifiCorp,The Detroit Edison Company, Wolf Mountain and MinnesotaVirginia Power that provide for the delivery of approximately 6.82.5 million tons through 2011. Under a mine management agreement, KCP pays a subsidiary of PKS an annual fee equal to 30% of KCP's adjusted operating income. TheThere was no fee for 2007 was approximately $1 million.2009 as KCP had an adjusted operating loss.

        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 2006,2008, the most recent year for which information is available, KCP's production represented less than 1% 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 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. Because of these cost disadvantages, there is no assurance that KCP will be able to enter into additional long-term coal purchase contracts for Black Butte and Decker production. In addition, these cost disadvantages may adversely affect KCP's ability to compete for sales in the future.


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        We are 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, 20072009 was approximately $7$5 million. KCP's share of accrued estimated reclamation costs was $98$103 million at December 31, 2007.2009. We didwere not required to make significant capital expenditures for environmental compliance with respect to the coal business in 2007.2009. We believe our compliance with environmental protection and land restoration laws will not affect our competitive position since our 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 our accruals, could have an adverse effect on our business, results of operations, and financial condition.

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

ATM (asynchronous transfer mode)

 An information transfer standard that is one of a general class of packet technologies that relay traffic by way of an address contained within the first five bytes of a standard fifty-three byte long packet or cell. The ATM format can be used by many different information systems, including LANs, to deliver traffic at varying rates, permitting a mix of data, voice and video.

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.

caching

 A process by which a Web storage device or cache is located between Web servers (or origin servers) and a user, and watches requests for HTML pages and objects such as images, audio, and video, then saves a copy for itself. If there is another request for the same object, the cache will use its copy, instead of asking the origin server for it again.

capacity

 The information carrying ability of a telecommunications facility.

carrier

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

CDN

 Content Distribution Network or CDN describes a system of computers networked together across the Internet that cooperate transparently to deliver various types of content to end users. The delivery process is optimized generally for either performance or cost. When optimizing for performance, locations that can serve content quickly to the user are chosen. When optimizing for cost, locations that are less expensive to serve from may be chosen instead.

central office

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

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CLEC

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

co-carrier

 A relationship between a CLEC and an ILEC that affords each company the same access to and right on the other's network and provides access and services on an equal basis.

common carrier

 A government-definedgovernment defined group of private companies offering telecommunications services or facilities to the general public on a non-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 the networks of 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.

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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

 An amount of telecommunications capacity dedicated to a particular customer along predetermined routes.

LEC

 Local Exchange Carrier. A telecommunications company that provides telecommunications services in a geographic area. 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 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 standards-approvedstandards approved technology for speeding up network traffic flow and making it easier to manage. MPLS involves setting up a specific path for a given sequence of packets, identified by a label put in each packet, thus saving the time needed for a router or switch to look up the address to the next node to forward the packet to.

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 traffic with each other.

OC-3

 A data communications circuit capable of transmitting data at 155 bps.Mbps.

OC-12

 A data communications circuit capable of transmitting data at 622 Mbps.

OC-48

 A data communications circuit capable of transmitting data at approximately 2.45 Gbps.

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PBX

 Private Branch eXchange. A PBX, sometimes known as a phone switch or phone switching device, is a device that connects office telephones in a business with the PSTN. The functions of a PBX include routing incoming calls to the appropriate extension in an office, sharing phone lines between extensions, automated greetings for callers using recorded messages, dialing menus, connections to voicemail, automatic call distribution and teleconferencing.


peering

 The commercial practice under which ISPs exchange traffic with each other. Although ISPs are free to make a private commercial arrangement, there are generally two types of peering. With a settlement free peering arrangement the ISPs do not need to pay each other for the exchange of traffic. With paid peering, the larger ISP receives payment from the smaller ISP to carry the traffic of that smaller ISP. 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.

Public Safety Answering Point

 An answering location for 911 calls originating in a given area. PSAPs are typically a common bureau used to answer emergency calls and dispatch safety agencies such as police, fire, emergency medical, etc.

RBOCs

 Regional Bell Operating Companies. Originally, the seven local telephone companies established as a result of the AT&T Divestiture.

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.

selective router

 Telephone switch or functional equivalent, controlled by the relevant local exchange carrier (LEC), which determines the PSAP to which a 911 call should be delivered based on the location of the 911 caller.

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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 or equipment failure 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.

streaming

 Streaming is the delivery of media, such as movies and live presentations, over a network in real time. A computer (a streaming server) sends the media to another computer (a client computer), which plays the media as it is delivered.

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.

T-1

 A data communications circuit capable of transmitting data at 1.544 Mbps.

TDM

Time Division Multiplexing. A technology that transmits multiple signals simultaneously over a single transmission path.

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.

VoIP

 Voice over Internet Protocol

VPC

 VoIP Positioning Center. An entity that maintains an end user location database and manages the technology including query keys and routing number pools used to deliver 911 calls to the correct PSAP for emergency handling.

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 newnewer Digital Subscriber Line technologies. Some of these newnewer 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").

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Directors and Executive Officers

        Set forth below is information as of February 28, 2008,26, 2010, about our directors and our executive officers. Our executive officers have been determined in accordance with the rules of the SEC.

Name
 Age
 Position

Walter Scott, Jr. 

 7678 Chairman of the Board

James Q. Crowe

 5860 Chief Executive Officer and Director
Kevin J. O'Hara

Jeff K. Storey

 4749 President and Chief Operating Officer

Charles C. Miller, III

 5557 Vice Chairman, and Executive Vice President and Director

Sunit S. Patel

48Executive Vice President and Chief Financial Officer

Thomas C. Stortz

 5658 Executive Vice President, Chief Legal Officer and Secretary
Sunit S. Patel

Eric J. Mortensen

 46Group Vice President and Chief Financial Officer
John Neil Hobbs48Executive Vice President Sales and Operations of Level 3 Communications, LLC
Brady Rafuse44President Content Markets Group of Level 3 Communications, LLC and President and CEO of Europe Operations
Eric J. Mortensen4951 Senior Vice President and Controller

R. Douglas Bradbury

59Director(1)

Douglas C. Eby

 4850 DirectorDirector(1)

Admiral James O. Ellis, Jr.(3)

 6062 DirectorDirector(3)

Richard R. Jaros(2)Jaros

 5658 DirectorDirector(2)

Robert E. Julian(1)(2)Julian

70Director(1)

Michael J. Mahoney

59Director(2)

Rahul N. Merchant

53Director(1)

Arun Netravali

63Director(2)

John T. Reed

66Director(1)(3)

Michael B. Yanney

76Director(3)

Dr. Albert C. Yates

 68 Director
Michael J. Mahoney57Director
Arun Netravali(2)61Director
John T. Reed(1)(3)64Director
Michael B. Yanney(3)74Director
Dr. Albert C. Yates(1)66DirectorDirector(2)
(1)
Member of Audit Committee
(2)
Member of Compensation Committee
(3)
Member of Nominating and Governance Committee

Other Management

        Set forth below is information as of February 28, 2008,26, 2010, about the following members of senior management of Level 3 Communications, LLC, except as otherwise noted.LLC.

Name
 Age
 Position
Raouf F. Abdel

Sureel A. Choksi

 4037Chief Marketing Officer

Andrew Crouch

39President Wholesale Markets Group

James Heard

47President European Markets Group

Jeffrey Tench

37 President Business Markets Group
Sureel A. Choksi35Chief Marketing Officer
Andrew Crouch37President Wholesale Markets Group

John F. Waters, Jr. 

 4344 President Operations, Chief Technology Officer
Kevin T. Hart

Mark Martinet

 4143 Chief Information Officer
Margaret E. Porfido

Peter D. Neill

 5041 Chief Human Resources Officer
Donald H. Gips48GroupSenior Vice President Content Markets Group

        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 Peter Kiewit Sons', Inc. ("PKS") since the split-off in 1998. Mr. Scott is also a director of PKS, Berkshire Hathaway Inc., MidAmerican Energy Holdings Company ("MidAmerican"), and Valmont Industries, Inc. Mr. Scott is the Chairmanwas also previously a director of the BoardBurlington Resources Inc., Commonwealth Telephone Enterprises, Inc. ("Commonwealth") and RCN Corporation ("RCN").


Table of Directors.Contents

        James Q. Crowe has been the 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 July 2000. Mr. Crowe was President and Chief Executive Officer of MFS Communications Company, Inc. ("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 was also previously a director of Commonwealth and RCN.

        Kevin J. O'HaraJeff K. Storey has been President of the Company since July 2000President and Chief Operating Officer of the Company since March 1998.December 2008. From December 2005 until May 2008, Mr. O'HaraStorey, was also Executive Vice PresidentPresident—Leucadia Telecommunications Group of the Company from August 1997 until July 2000.Leucadia National Corporation, where he directed and managed Leucadia's investments in telecommunications companies. Prior to that, beginning in October 2002 Mr. O'Hara served asStorey was President and Chief Executive Officer of MFS Global Network Services, Inc. from 1995WilTel Communications Group, LLC until its sale to 1997, and asthe Company in December 2005. Prior to this position, Mr. Storey was Senior Vice PresidentPresident—Chief Operations Officer, Network for Williams Communications, Inc., where he had responsibility for all areas of MFSoperations for the company's communications network, including planning, engineering, field operations, service delivery 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").network management.

        Charles C. Miller, III has been Vice Chairman and Executive Vice President of the Company since February 15, 2001. Mr. Miller has also been a director of the Company since February 2009. Mr. Miller was alsopreviously a director from February 15, 2001 until May 18, 2004. Prior to that,joining the Company, Mr. Miller was President of Bellsouth International, a subsidiary of Bellsouth Corporation from 1995 until December 2000. Prior to that, Mr. Miller held various senior level officer and management position at BellSouth from 1987 until 1995.

        Sunit S. Patel has been Chief Financial Officer and an Executive Vice President of the Company since March 2008. Prior to that, Mr. Patel was Chief Financial Officer from May 2003 and a Group Vice President of the Company from March 2003 to March 2008. Prior to that, Mr. Patel was Chief Financial Officer of Looking Glass Networks, Inc., a provider of metropolitan fiber optic networks, from April 2000 until March 2003. Mr. Patel was Treasurer of WorldCom Inc. and MCIWorldcom Inc., each long distance telephone services providers from 1997 to March 2000. From 1994 to 1997, Mr. Patel was Treasurer of MFS.

        Thomas C. Stortz has been Executive Vice President, Chief Legal Officer and Secretary since February 2004. Prior to that, Mr. Stortz was Group Vice President, General Counsel and Secretary of the Company from February 2000 to February 2004. Prior to that, Mr. Stortz served as Senior Vice President, General Counsel and Secretary of the Company from September 1998 to February 1, 2000. Prior to that, he served as Vice President and General Counsel of Peter Kiewit Sons', Inc. and Kiewit Construction Group, Inc. from April 1991 to September 1998. He has served as a director of Peter Kiewit Sons', Inc.

        Sunit S. Patel has been Chief Financial Officer since May 2003 and a Group Vice President of the Company since March 13, 2003. Prior to that, Mr. Patel was Chief Financial Officer of Looking Glass Networks, Inc., a provider of metropolitan fiber optic networks, from April 2000 until March 2003. Mr. Patel was Treasurer of WorldCom Inc. and MCIWorldcom Inc., each long distance telephone services providers from 1997 to March 2000. From 1994 to 1997, Mr. Patel was Treasurer of MFS Communications Company Inc., a competitive local exchange carrier. On October 15, 2007, the Company announced that it has begun a search for a new Chief Financial Officer, and that Mr. Patel is expected to remain with the Company during the transition.

        John Neil Hobbs has been Executive Vice President Sales and Operations since January 2008. Mr. Hobbs has responsibility for our Wholesale Markets Group, Business Markets Group and Global Network Services. Prior to that, Mr. Hobbs was President Global Network Services from August 2006 to January 2008. Prior to that, Mr. Hobbs was Executive Vice President Sales and Marketing from January 2006 to August 2006. Prior to that, Mr. Hobbs was Group Vice President Global Sales from September 2000 to January 2006. 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.


        Brady Rafuse has been President Content Markets Group since August 2006 and President and CEO of our European operations since January 2006. Prior to this role, Mr. Rafuse was Group Vice President and President of our European operations from August 2001 to January 2006 and Senior Vice President of European Sales and Marketing from December 2000 to August 2001. Prior to that, Mr. Rafuse served as Head of Commercial Operations for Concert, a joint venture between AT&T and British Telecom, from September 1999 to December 2000, and in a variety of positions with British Telecom from 1987 until December 2000. His last position was as General Manager, Global Energy Sector which he held from August 1998 to September 1999 and prior to that he was Deputy General Manager, Banking Sector from April 1997 to August 1998.

        Eric J. Mortensen has been Senior Vice President and Controller of the Company since 2003. Prior to that, Mr. Mortensen was Vice President and Controller of the Company from 1999 to 2003 and was the Controller of the Company from 1997 to 1999. Prior to that, Mr. Mortensen was Controller and Assistant Controller of Kiewit Diversified Group for more than five years.

        R. Douglas Bradbury has been a director of the Company since February 2009. Mr. Bradbury is a private investor. Mr. Bradbury served as Vice Chairman of the Company from 2000 to 2003 and as Executive Vice President and Chief Financial Officer of the Company from 1997 to 2000. Mr. Bradbury was previously a member of the Company's Board from 1997 to 2003. Prior to joining Level 3, Mr. Bradbury was Executive Vice President and Chief Financial Officer of MFS until its purchase by WorldCom, Inc. in 1996. He currently serves on the board of directors of LodgeNet Interactive Corporation, a leading provider of media and connectivity solutions designed to meet the needs of hospitality, healthcare and other guest-based businesses. Mr. Bradbury is a member of the Audit Committee.


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Douglas C. Eby has been a director of the Company since August 2007. Mr. Eby ishas been a private investor since December 2009. Mr. Eby was previously chairman and CEO of TimePartners LLC, an investment advisory firm since 2004.from 2004 until December 2009. Prior to that, from April 1997 until September 2007, Mr. Eby was President of Torray LLC, ana registered investment advisory firm, having joined Torray LLC in 1992. Mr. Eby is also a member of the Board of Directors of Markel Corporation, CBREa specialty insurance company and chairman of the board of directors of Realty Finance Inc. and Suburban Healthcare System. Since July 2007,Corporation, a commercial real estate specialty finance company. Mr. Eby is also the Chairmana past member of the Board of Trustees and past Chairman of the Boys and Girls Clubs of Greater Washington, D.C.DC and a past trustee of Suburban Hospital Healthcare System, a member of The Johns Hopkins Health System Corporation. Mr. Eby is a member of the Audit Committee.

        Admiral James O. Ellis, Jr. U.S. Navy (ret.) has been a director of the Company since March 2005. Effective May 18, 2005, Admiral Ellis became the president and chief executive officer of the Institute of Nuclear Power Operations or INPO, a nonprofit corporation established by the nuclear utility industry in 1979 to promote the highest levels of safety and reliability in the operation of nuclear electric generating plants. Admiral Ellis most recently served as Commander, U.S. Strategic Command in Omaha, Nebraska, before retiring in July 2004 after 35 years of service in the U.S. Navy, as Commander of the Strategic Command. In his Naval career, he held numerous commands. A graduate of the U.S. Naval Academy, he also holds M.S. degrees in Aerospace Engineering from the Georgia Institute of Technology and in Aeronautical Systems from the University of West Florida. He served as a Naval aviator and was a graduate of the U.S. Naval Test Pilot School. Admiral Ellis is also a member of the Board of Directors of Lockheed Martin Corporation, a global security company and Inmarsat PLC.PLC, an owner and operator of geostationary satellites from which a wide range of voice and high-speed data services are provided. Admiral Ellis is the Chairman of the Nominating and Governance committee.

        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 has been a private investor for more than the past five years. 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. Mr. Jaros was previously a director of Commonwealth, MidAmerican and RCN. Mr. Jaros is the Chairman of the Compensation Committee.

        Robert E. Julian has been a director of the Company since March 1998. Mr. Julian has been a private investor for more than the past five years. From 1992 to 1995 Mr. Julian served as Executive Vice President and Chief Financial Officer of the Company. Mr. Julian is a member of the Audit Committee and the Compensation Committee.

        Michael J. Mahoney has been a director of the Company since August 2007. Mr. Mahoney ishas been a private investor since March 2007. From 2000 until March 2007, Mr. Mahoney was the president and chief executive officer of Commonwealth Telephone Enterprises.Commonwealth. Prior to that, from 1997 until 2000, Mr. Mahoney was president and chief operating officer of RCN Corporation.RCN. Mr. Mahoney also served as president and chief operating officer of C-TEC Corporation from 1993 until 1997. Mr. Mahoney is a member of the Board of Trustees of Wilkes University. Mr. Mahoney is a member of the Compensation Committee.

        Rahul N. Merchant has been a director of the Company since September 2009. Mr. Merchant has been a partner at Exigen Capital, a private equity firm based in New York City since 2008. From 2006 until 2008, Mr. Merchant was Executive Vice President, Chief Information Officer and Member of the Executive Committee at Fannie Mae. In this role, he led and transformed Technology and Operations groups. Prior to joining Fannie Mae, Mr. Merchant was Senior Vice President and Chief Technology Officer at Merrill Lynch & Co. In this role, Mr. Merchant managed the global technology organization from 2000 until 2006. Mr. Merchant has also held senior leadership positions at Cooper Neff and Associates, Lehman Brothers, Sanwa Financial Products and Dresdner Bank. Mr. Merchant serves as a


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member of the Board of Director at Fair Isaac Corporation (FICO), Collabera, Inc. and Netuitive, Inc. He also serves on the board of advisors to the American India Foundation. Mr. Merchant was previously a director of Sun Microsystems, Inc. Mr. Merchant is a member of the Audit Committee.

        Arun Netravali has been a director of the Company since April 2003. Mr. Netravali is currently the managing partner of OmniCapital Group LLC, a venture capital firm since November 2004. Mr. Netravali was a private investor from April 2003 until November 2004. Prior to that, Mr. Netravali was Chief Scientist for Lucent Technologies, working with academic and investment communities to identify and implement important new networking technologies from January 2002 to April 2003. Prior to that position, Mr. Netravali was President of Bell Labs as well as Lucent's Chief Technology Officer and Chief Network Architect from June 1999 to January 2002. Bell Labs serves as the research and development organization for Lucent Technologies. Mr. Netravali is a director of LSI Corporation.Corporation, a leading provider of innovative silicon, systems and software technologies. Mr. Netravali is a member of the Compensation Committee.

        John T. Reed has been a director of the Company since March 2003. Mr. Reed has been a private investor since February 2005. Mr. Reed is also a Director of and Chairman of the Audit Committee of First National BankNebraska, Inc. and a Director of Omaha.Investors Real Estate Trust, a real estate investment trust. Mr. Reed is also ChairmanChairman-Elect of the Board of Alegent Health, a health care system headquartered in Omaha, Nebraska and a member of the Board and Chairman of the Audit Committee of Father Flanagan's Boys' HomeBoys Town, located in Boys Town, Nebraska. Mr. Reed was Chairman of HMG Properties, the real estate investment banking joint venture of McCarthy Group, Inc. from 2000 until February 2005. Prior to that, he was Chairman of McCarthy & Co., the investment banking affiliate of McCarthy Group. Prior to joining McCarthy Group in 1997, Mr. Reed spent 32 years with Arthur Andersen LLP. Mr. Reed was also previously a director of Bridges Investment Fund, Inc., a mutual fund. Mr. Reed is the Chairman of the Audit Committee and a member of the Nominating and Governance Committee.

        Michael B. Yanney has been a director of the Company since March 1998. He has served as Chairman of the Board of The Burlington Capital Group, LLC (formerly known as America First Companies L.L.C.) for more than the last five years. Mr. Yanney also served as President and Chief Executive Officer of The Burlington Capital Group, LLC. Mr. Yanney was previously a director of Burlington Northern Santa Fe Corporation and RCN. Mr. Yanney is a member of the Nominating and Governance Committee.

        Dr. Albert C. Yates has been a director of the Company since March 2005. Dr. Yates retired after 13 years as president of Colorado State University in Fort Collins, Colorado in June 2003. He was also chancellor of the Colorado State University System until October 2003, and is a former member of the board of the Federal Reserve Board of Kansas City-Denver Branch and the board of directors of First Interstate Bank and Molson Coors Brewing Company. He currently serves as a director of CentennialGuaranty Bancorp, a bank holding company that operates 34 branches in Colorado through a single bank, Guaranty Bank Holdings, Inc.and Trust Company, and StarTek, Inc., a leading provider of high value business process outsourcing services to the communications industry. Dr. Yates is a member of the AuditCompensation Committee.

        Raouf F. Abdel has been President Business Markets Group since February 2007. Prior to that, Mr. Abdel was Group Vice President of Integration and Development Services from March 2006 to February 2007. Prior to those roles, Mr. Abdel was Senior Vice President of Integration and Development Services from November 2005 to March 2006, responsible for managing Level 3's integration and systems and process development. Prior to that, Mr. Abdel was Senior Vice President of Product Development from September 2003 to November 2005, responsible for developing and managing Level 3 product development activities. Prior to that, Mr. Abdel was Senior Vice President of M&A Integration from March 2002 to September 2003, responsible for managing the execution of Level 3's integration activities. From July 2000 until March 2002, Mr. Abdel was Senior Vice President of Network Deployment, and from September 1999 until July 2000, Mr. Abdel was Vice President of Colocation Services. Mr. Abdel joined Level 3 in February 1998 as Senior Director of Construction.

        Sureel A. Choksi has been Chief Marketing Officer since January 2008, responsible for product management and marketing. Prior to that, Mr. Choksi was President Wholesale Markets Group from August 2006 to January 2008. Prior to that, Mr. Choksi was Executive Vice President of Switched Services from January 2006 to August 2006. Prior to this role, Mr. Choksi was Executive Vice President of Services from November 2004 to January 2006, responsible for developing and managing Level 3's communications services. Prior to that, Mr. Choksi was Executive Vice President Softswitch Services from January 2004 and Group Vice President Transport and Infrastructure from May 2003 until



January 2004. Mr. Choksi was a Group Vice President and Chief Financial Officer of the Company from July 2000 to May 2003. Prior to that, Mr. Choksi was Group Vice President Corporate Development and Treasurer of the Company from February 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. Choksi was a Director of Finance at the Company from 1997 to 1998, an


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Associate at TeleSoft Management, LLC in 1997 and an Analyst at Gleacher & Company from 1995 to 1997.

        Andrew Crouch has been the President of the Wholesale Markets Group since January 2008, after serving as Group Vice President of Sales for the Wholesale Markets Group beginning in April 2006. Prior to that, Mr. Crouch served as the Senior Vice President of the Carrier Channel from January 2005 to April 2006, and Senior Vice President of the Enterprise Voice Services from January 2004 to January 2005. Mr. Crouch began his career at Level 3 in November 2001 as the Senior Vice President of Sales for the Cable and ISP Channel and held this position until December 2003. Before joining Level 3, Mr. Crouch served as the Deputy General Manager within the Corporate Clients Division at British Telecom. He also served as the Vice President of Commercial Operations for Concert Communications, a joint venture between British Telecom and AT&T from January 2000 to October 2001.

        Jeffrey Tench has been the President of the Business Markets Group since November 2008, after serving as Group Vice President for Product Management beginning earlier in 2008. Prior to that, Mr. Tench served as the Senior Vice President of Product Management for Enterprise Products from March 2007 to January 2008. Mr. Tench began his career at Level 3 in 1999, and has held a range of product management positions across the entire Level 3 portfolio, including two years as Senior Vice President of Product for Level 3's European Markets Group. Before joining the Company, Mr. Tench served in a range of sales and product management positions at US WEST Communications.

        James Heard has been the President of the European Markets Group since April 2008. Prior to that, Mr. Heard was Managing Director for the European Markets Group from March 2007 to April 2008. From 1996 until 2007, Mr. Heard worked for British Telecommunications, in a number of senior management roles, including serving as the General Manager, Financial Services Group within BT Global services. He also served as the Vice President of Commercial Operations, Global accounts for Concert Communications, a joint venture between British Telecom and AT&T from January 2000 to June 2002. Prior to British Telecommunications, Mr. Heard served as Regional Sales Manager for Olivetti UK from March 1990 until June 1996.

John F. Waters, Jr. has been President Operations, Chief Technology Officer since January 2008. Prior to that, Mr. Waters was Executive Vice President, Chief Technology Officer from January 2004 to January 2008. Prior to that, Mr. Waters was Group Vice President and Chief Technology Officer of the Company from February 2000 to January 2004. 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.

        Kevin T. HartMark Martinet has been Chief Information officerOfficer since January 2008.December 2009. Prior to that, Mr. HartMartinet was Group Vice President Global Systems Development and Chief Information Officer and Chief Technology Officer for BT Business, a part of BT Group plc. from January 2005 to 2008.September 2007 until December 2009. In this role, Mr. Martinet was responsible for improving cycle time, productivity and quality of information technology deliveries. Prior to that, Mr. HartMartinet was Vice Presidenta director of Telecommunications, Media & Entertainment at Capgemini (formerly Ernst & Young), a management consulting firms in Dallas, Texas,Strategy and Transformation for over nine years. In that role, he was responsible for the overall growth and direction of the organization's Communications Operations Support Systems, Billing/Business Support Systems and the Network Management Systems service offerings and delivery.BT Group from 2004 until September 2007. Prior to joining Capgemini's management consulting practice, heBT Group, Mr. Martinet held thevarious information technology positions of Director of Strategic Planning at International Paper and Manager of Operations at SBC Communications.with Qwest Communications Corporation from 2000 until 2004.

        Margaret E. PorfidoPeter D. Neill has been Chief Human Resources OfficerSenior Vice President Content Markets Group since May 2007.April 2009. Prior to that, Ms. Porfidofrom September 2006 to April 2009, Mr. Neill was Senior Vice President Executive Operations from February 2000, acting asWholesale Markets Offer Management for the chief of staff to Kevin J. O'Hara, Level 3's president and chief operating officer. Ms. Porfido joined Level 3 in September 1998 as Vice President Business Development.Company. Prior to joining Level 3, Ms. Porfido served as Chief of Staff and chief legal adviser to Colorado Governor Roy Romer. Prior to her government service, Ms. Porfido was an attorney in private practice.

        Donald H. Gips has been Group Vice President Corporate Strategy since January 2001. Prior to that, Mr. Gips was Group Vice President, Sales and Marketing of the Company, from February 2000. Prior to that, Mr. Gips served asNeill was Senior Vice President, Corporate Development from November 1998 to February 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 workingWireless Initiatives at the White House, Mr. Gips was at the Federal Communications Commission as the International Bureau Chief and Director of Strategic PolicyOdyssey Telecorp, a telecom company, from January 2005 until September 2006. From January 2005 until March 2006, Mr. Neill was also the founder and President of PT Wireless, Inc., an early stage company that was established to be a neutral host distributed antenna system network operator to design, build, and operate RF propagation platforms for traditional wireless mobility providers and wireless ISPs using WiFi and WiMax technologies. Prior


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to these positions, Mr. Neill held various engineering and operations positions with AT&T Wireless Services, Inc. from 1994 to April 1997. Prior to his government service, Mr. Gips was a management consultant at McKinsey and Company.until January 2005.

        At our 20082010 Annual Meeting of Stockholders, the term of office of all of our directors will expire. At each annual meeting of stockholders, successors to the directors whose term expires at that annual meeting will be elected for a one-year term.



Our officers are elected annually to serve until each successor is elected and qualified or until his or her death, resignation or removal.

        We believe that the members of the Audit Committee are independent within the meaning of the listing standards of The NASDAQ Stock Market, LLC. The Board has determined that Mr. John T. Reed, Chairman of the Audit Committee, qualifies as a "financial expert" as defined by the Securities and Exchange Commission. The Board considered Mr. Reed's credentials and financial background and found that he was qualified to serve as the "financial expert."

Our website

        Our website iswww.level3.com. We caution you that any information that is included in our website is not part of this Form 10-K.

Code of Ethics

        We have adopted a code of ethics that complies with the standards mandated by the Sarbanes-Oxley Act of 2002. The complete code of ethics is available on our website atwww.level3.com. At any time that the code of ethics is not available on our website, we will provide a copy upon written request made to Investor Relations, Level 3 Communications, Inc., 1025 Eldorado Blvd., Broomfield, Colorado 80021. We caution you that any information that is included in our website is not part of this Form 10-K. If we amend the code of ethics, or grant any waiver from a provision of the code of ethics that applies to our executive officers or directors, we will publicly disclose such amendment or waiver as required by applicable law, including by posting such amendment or waiver on our website atwww.level3.com or by filing a Form 8-K with the Securities and Exchange Commission or SEC.

SEC Filings

        Our Form 10-K, along with all other reports and amendments filed with or furnished to the SEC are publicly available free of charge on the investor relations section of our website as soon as reasonably practicable after we file such materials with, or furnish them to, the SEC. We caution you that the information on our website is not part of this or any other report we file with, or furnish to, the SEC.

Section 16(a)—Beneficial Ownership Reporting Compliance

        Except as described below, toTo our knowledge, no person that was a director, executive officer or beneficial owner of more than 10% of the outstanding shares of our common stock failed to timely file all reports required under Section 16(a) of the Securities Exchange Act of 1934. On one occasion, Dr. Albert C. Yates filed a late Form 4 to report an open market purchase of our common stock.

Employees

        As of December 31, 2007,2009, we had approximately 6,6805,200 total employees. We believe that our success depends in large part on our ability to attract and retain substantial numbers of qualified employees.


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Item ITEM 1A.    RISK FACTORS

Forward Looking Statements

        We, or our representatives, from time to time may make or may have made certain forward-looking statements, either orally or in writing, including without limitation statements made or to be made in this Form 10-K, our Quarterly Reports on Form 10-Q, information contained in other filings with the SEC, press releases and other public documents or statements. In addition, our



representatives, from time to time, participate in speeches and calls with market analysts, conferences with investors or potential investors in our securities and other meetings and conferences. Some of the information presented at these speeches, calls, meetings and conferences may include forward-looking statements. We use words like "plans," "estimates," "expects," "anticipates" or "believes" to identify forward-looking statements.

        We wish to ensure that all forward-looking statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, all forward-looking statements are qualified in their entirety by reference to, and are accompanied by, the following discussion of certain important factors that could cause actual results to differ materially from those projected in these forward-looking statements. We caution the reader that this list of important factors may not be exhaustive. We operate in a rapidly changing business, and new risk factors emerge from time to time.

        We cannot predict every risk factor, nor can we assess the effect, if any, of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Further, we undertake no obligation to update forward-looking statements after the date they are made to conform the statements to actual results or changes in our expectations.

        For more information about our results of operations and financial condition, you should see the discussion included underManagement's Discussion and Analysis of Financial Condition and Results of Operations, appearing later in this Form 10-K.

Risks Related to our Business

         Continued uncertainty in the global financial markets and the global economy may negatively affect our financial results.

        Continued uncertainty in the global financial markets and economy may negatively affect our financial results. A prolonged period of economic decline could have a material adverse effect on our results of operations and financial condition and exacerbate some of the other risk factors we have described below. Our Businessescustomers may defer or forego purchases of our services in response to tighter credit and negative financial news or reduce their demand for our services. Our customers may also not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us or ultimately cause the customer to file for protection from creditors under applicable insolvency or bankruptcy laws. If our customers are not able to make timely payments to us, our accounts receivable could increase.

        In addition, our operating results and financial condition could be negatively affected if as a result of economic conditions:

    •
    customers defer or forgo purchases of our services;

    •
    customers are unable to make timely payments to us;

    •
    the demand for, and prices of, our services are reduced as a result of actions by our competitors or otherwise;

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    key suppliers upon which we rely are unwilling or unable to provide us with the materials we need for our network on a timely basis or on terms that we find acceptable; or

    •
    our financial counterparties, insurance providers or other contractual counterparties are unable to, or do not meet, their contractual commitments to us.

         Recent disruptions in the financial markets could affect our ability to obtain debt or equity financing or to refinance our existing indebtedness on reasonable terms (or at all), and have other adverse effects on us.

        Widely documented commercial credit market disruptions have resulted in a tightening of credit markets worldwide. Liquidity in the global credit markets have been severely contracted by these market disruptions, making it costly to obtain new lines of credit or to refinance existing debt, when debt financing is available at all. The effects of these disruptions are widespread, and it is impossible to predict whether the improvement in the global credit markets that began in the latter part of 2009 will continue or when the credit contraction will stop. As a result of the ongoing credit market turmoil, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms (or at all), which could affect our strategic operations and our financial performance and force modifications to our operations.

    Communications Group

We need to not only increase but also maintain the network traffic and resulting revenue from the services that we offer to realize our targets for anticipated revenue growth, cash flow and operating performance.

        We must increase and maintain the network traffic and resulting revenue from our data, voice, content and infrastructure services at acceptable margins in order to realize our targets for anticipated revenue growth, cash flow and operating performance. If:

    •
    we do not maintain or improve our current relationships with existing key customers;

    •
    we do not develop new large volume and enterprise customers; or

    •
    our customers determine to obtain these services from either their own network or from one of our competitors;

we may not be able to increase or maintain our revenue at acceptable margins, which would adversely affect our ability to become and/or remain profitable.

Our financial condition and growth depends upon the continued successful integration of our acquired businesses. We may not be able to efficiently and effectively integrate acquired operations, and thus may not fully realize the anticipated benefits from such acquisitions.

        Achieving the anticipated benefits of the acquisitions that we have completed starting in December 2005 will depend in part upon whether we can integrate our businesses in an efficient and effective manner.

        Since December 2005, we have acquired, in chronological order, WilTel Communications Group, LLC, Progress Telecom, LLC, ICG Communications, Inc., TelCove, Inc., Looking Glass Networks Holding Co., Inc., Broadwing Corporation, the CDN services business of SAVVIS, and Servecast Limited. In the future we may acquire additional businesses in accordance with our business strategy. The integration of our acquired businesses and any future businesses that we may acquire involves a number of risks, including, but not limited to:

    •
    demands on management related to the significant increase in size after the acquisition;

    •
    the disruption of ongoing business and the diversion of management's attention from the management of daily operations to themanagement of integration activities;

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    failure to fully achieve expected synergies and costs savings;

    •
    unanticipated impediments in the integration of departments, systems, including accounting systems, technologies, books and records and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by the Sarbanes-Oxley Act of 2002, procedures and policies;

    •
    loss of customers or the failure of customers to order incremental services that we expect them to order;

    •
    failure to provision services that are ordered by customers during the integration period;

    •
    higher integration costs than anticipated; and


      •
      difficulties in the assimilation and retention of highly qualified, experienced employees, many of whom aremay be geographically dispersed.

            Successful integration of these acquired businesses or operations will depend on our ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage, obtain better terms from our vendors due to increased buying power, and eliminate redundant and excess costs to fully realize the expected synergies. Because of difficulties in combining geographically distant operations and systems which may not be fully compatible, we may not be able to achieve the financial strength and growth we anticipate from the acquisitions.

            We cannot be certain that we will realize our anticipated benefits from our acquisitions, or that we will be able to efficiently and effectively integrate the acquired operations as planned. If we fail to integrate the acquired businesses and operations efficiently and effectively or fail to realize the benefits we anticipate, we would be likely to experience material adverse effects on our business, financial condition, results of operations and future prospects.

    We         Our business requires the continued development of effective business support systems to implement customer orders and to provide and bill for services.

            Our business depends on our ability to continue to develop effective business support systems. In certain cases, the development of these business support systems is required to realize our anticipated benefits from our acquisitions. This is a complicated undertaking requiring significant resources and expertise and support from third-party vendors. Following the development of the business support systems, the data migration regarding network and circuit inventory must be completed for the full benefit of the systems to be realized. Business support systems are needed for:

      •
      quoting, accepting and inputting customer orders for services;

      •
      provisioning, installing and delivering these services; and

      •
      billing for these services.

            Because our business provides for continued rapid growth in the number of customers that we serve and the volume of services offered as well as the continued integration of acquired companies' business support systems, there is a need to continue to increase the volume of trafficdevelop our business support systems on our networka schedule sufficient to become profitable.

            We mustmeet proposed milestone dates. The failure to continue to increasedevelop effective unified business support systems or complete the volume of data voicemigration regarding network and content transmissions on our communications network at acceptable prices in order to realize our targets for anticipated revenue growth, cash flow, operating efficiencies and the cost benefits of our network. If we do not maintain or improve our current relationships with existing customers and develop new large volume and enterprise customers, we may not be able to substantially increase traffic on our network, which wouldcircuit inventory into these systems could materially adversely affect our ability to become profitable.implement our business plans, realize anticipated benefits from our acquisitions and meet our financial goals and objectives.


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    Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or subject us to expensive intellectual property litigation.

            If technology that is necessary for us to provide our services was determined by a court to infringe a patent held by another entity that is unwilling to grant us a license on terms acceptable to us, we could be precluded by a court order from using that technology and we would likely be required to pay a significant monetary damages award to the patent-holder. The successful enforcement of these patents, or our inability to negotiate a license for these patents on acceptable terms, could force us to cease using the relevant technology and offering services incorporating the technology. In the event that a claim of infringement was brought against us based on the use of our technology or against our customers based on their use of our services for which we are obligated to indemnify, we could be subject to litigation to determine whether such use or sale is, in fact, infringing. This litigation could be expensive and distracting, regardless of the outcome of the suit.

            While our own extensive patent portfolio may deter other operating companies from bringing such actions, patent infringement claims are increasingly being asserted by patent holding companies, which do not use technology and whose sole business is to enforce patents against operators, such as us, for monetary gain. Because such patent holding companies, commonly referred to as patent "trolls," do not provide services or use technology, the assertion of our own patents by way of counter-claim would be largely ineffective. We have already been the subject of time-consuming and expensive patent litigation brought by certain patent holding companies and we can reasonably expect that we will face further claims in the future, particularly if legislation now pendingdiscussed in Congress is not enacted in a way that will decrease the number and frequency of claims by patent trolls.


    Our business requires the continued development of effective business support systems to implement customer orders and to provide and bill for services.

            Our business depends on our ability to continue to develop effective business support systems. In certain cases, the development of these business support systems is required to realize our anticipated benefits from our acquisitions. This is a complicated undertaking requiring significant resources and expertise and support from third-party vendors. Business support systems are needed for:

      •
      accepting and inputting customer orders for services;

      •
      provisioning, installing and delivering these services; and

      •
      billing for these services.

            Because our business provides for continued rapid growth in the number of customers that we serve and the volume of services offered and requires the integration of acquired companies' business support systems, there is a need to continue to develop our business support systems on a schedule sufficient to meet proposed milestone dates. The failure to continue to develop effective unified business support systems could materially adversely affect our ability to implement our business plans, realize anticipated benefits from our acquisitions and meet our financial goals and objectives.

    Ourconsolidated revenue is concentrated in a limited number of communications customers.

            A significant portion of our communicationsconsolidated revenue is concentrated among a limited number of communications customers. For the year ended December 31, 2007,2009, our top ten communications customers represented approximately 34%28% of our consolidated total revenue. Revenue from our largest customer, AT&T Inc. and its subsidiaries, including SBC Communications, BellSouth and AT&T Mobility (assuming those subsidiaries were wholly owned by AT&T for all of 2007), represented approximately 15% of our consolidated total revenue for 2007. The next largest customer accounted for approximately 5% of our consolidated total revenue and most of the remaining top ten customers each account for 3% or less of our consolidated total revenue. If we lost one or more of our top five communications customers, or, if one or more of these major customers significantly decreased orders for our services, our business would be materially and adversely affected.

            In connection with the acquisition of WilTel in December 2005, we acquired a large customer contract between WilTel and SBC Communications, now known as AT&T. We expect that the revenue generated under this contract will continue to decline over time as SBC Communications migrates its traffic from our network to the merged SBC and AT&T Communications network that SBC Communications acquired when it purchased the former AT&T.

    We may lose customers if we experience system failures that significantly disrupt the availability and quality of the services that we provide. System failures may also cause interruptions to service delivery and the completion of other corporate functions.

            Our operations depend on our ability to avoidlimit and mitigate any interruptions or degradation in service or reduced capacity for customers. Interruptions in service or performance problems, for whatever reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones. In addition, because many of our services are critical to the businesses of many of our customers, any significant interruption or degradation in service could result in lost profits or other losses to customers. Although we generally limit our liability for service failures in our service agreements to limited service credits generally(generally in the form of free service for a short period of time,time) and generally exclude any liability for "consequential" damages such as lost profits, a court might not enforce these limitations on liability, which could expose us to financial loss. In addition, we often provide our customers with committed service levels. If we are unable to meet these service level commitments, as a result of service interruptions, we may be obligated to provide service credits or other compensation to our customers, which could negatively affect our operating results.


            The failure of any equipment or facility on our network, including our network operations control centers and network data storage locations, could result in the interruption of customer service and other corporate functions until necessary repairs are effected or replacement equipment is installed. NetworkIn addition, our business continuity plans may not be adequate to address a particular failure that we


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    experience. Delays, errors, network equipment or network facility failures, delaysincluding with respect to our network operations control centers and errorsnetwork data storage locations, could also result from natural disasters (including natural disasters that may increase in frequency as a result of the effects of climate change), disease, accidents, terrorist acts, power losses, security breaches, vandalism or other illegal acts, computer viruses, or other causes. TheseOur business could be significantly hurt from these delays, errors, failures or faults or errors could cause delays, including as a result of:

      •
      service interruptions, expose usinterruptions;

      •
      exposure to customer liability,liability;

      •
      the inability to install new service;

      •
      the unavailability of employees necessary to provide services;

      •
      the delay in the completion of other corporate functions such as issuing bills and the preparation of financial statements; or require

      •
      the need for expensive modifications that could significantly hurtto our business.

      systems and infrastructure.

    There is no guarantee that we will be successful in increasing sales of our content distribution service offering.

            As we believe that one of the largest sources of future incremental demand for our communications services will be derived from customers that are seeking to distribute their feature rich content, applications or video over the Internet, we purchased the content distribution network or CDN assets of SAVVIS, Inc. in January 2007 and we purchased Servecast Limited in July 2007. Although we have sold high speed Internet access, transport and colocation services since the late 1990's, we have only been selling our CDN services since January 2007. As a result, there are many difficulties that we may encounter, including customer acceptance, intellectual property matters, technological issues, developmental constraints and other problems that we may not anticipate. There is no guarantee that we will be successful in generating significant revenues from our CDN service offering.

    Failure to develop and introduce new services could affect our ability to compete in the industry.

            We continuously develop, test and introduce new communications services that are delivered over our communications network. These new services are intended to allow us to address new segments of the communications marketplace and to compete for additional customers. In certain instances, the introduction of new services requires the successful development of new technology. To the extent that upgrades of existing technology are required for the introduction of new services, the success of these upgrades may be dependent on reaching mutually-acceptable terms with vendors and on vendors meeting their obligations in a timely manner. In addition, new service offerings may not be widely accepted by our customers. If our new service offerings are not widely accepted by our customers, we may terminate those service offerings and we may be required to impair any assets or technology used to develop or offer those services. If we are not able to successfully complete the development and introduction of new services in a timely manner, our business could be materially adversely affected.

             There is no guarantee that we will be successful in increasing sales of our content distribution service offering.

            As we believe that one of the largest sources of future incremental demand for our communications services will be derived from customers that are seeking to distribute their video, feature rich content or applications over the Internet, we purchased our content distribution network or CDN assets in 2007. Although we have sold high speed Internet access, transport and colocation services since the late 1990's, we have only been selling our CDN services since January 2007. As a result, there are many difficulties that we may encounter, including customer acceptance, customer support system development issues, intellectual property matters, technological issues, developmental constraints and other problems that we may not anticipate. There is no guarantee that we will be successful in generating significant revenues from our CDN service offering.

    Rapid technological changes can lead to further competition.

            The communications industry is subject to rapid and significant changes in technology. In addition, the introduction of new services or technologies, as well as the further development of existing services and technologies may reduce the cost or increase the supply of certain services similar to those that we provide. As a result, our most significant competitors in the future may be new entrants to the communications industry. These new entrants may not be burdened by an installed base of outdated equipment or obsolete technology. Our future success depends, in part, on our ability to anticipate and


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    adapt in a timely manner to technological changes. Failure to do so could have a material adverse effect on our business.

    During our communications business operating history we have generated substantial net operating losses, and we expect to continue to generate net operating losses.

            The development of our communications business required,Our expenditures combined with non-cash compensation expense as well as depreciation and may continue to require, significant expenditures. These expendituresamortization expense could result in substantial negative cash flow from operating activities and substantial net losses for the near future. For the fiscal years ended December 31, 20072009 and December 31, 2006,2008, we incurred net losses from continuing operations of approximately $1.114 billion$618 million and $790$318 million, respectively. We expect to continue to experience net losses,



    and we may not be able to achieve or sustain operating profitability in the future. Continued operatingnet losses could limit our ability to obtain the cash needed to expand our network, make interest and principal payments on our debt, or fund other business needs.

            We will need to continue to expand and adapt our network in order to remain competitive, which may require significant additional funding. Additional expansion and adaptations of our communications network's electronic and software components will be necessary in order to respond to:

      •
      growing number of customers;

      •
      the development and launching of new services;

      •
      increased demands by customers to transmit larger amounts of data;

      •
      changes in customers' service requirements;

      •
      technological advances by competitors; and

      •
      governmental regulations.

            Future expansion or adaptation of our network will require substantial additional financial, operational and managerial resources, which may not be available at the time. If we are unable to expand or adapt our network to respond to these developments on a timely basis and at a commercially reasonable cost, our business will be materially adversely affected.

    The market prices for certain of our communications services have decreased in the past and may decrease in the future, resulting in lower revenue than we anticipate.

            Over the past few years, the market prices for certain of our communications services have decreased. These decreases resulted from downward market pressure and other factors including:

      •
      technological changes and network expansions which have resulted in increased transmission capacity available for sale by us and by our competitors;

      •
      some of our customer agreements contain volume-based pricing or other contractually agreed-upon decreases in prices during the term of the respective agreements; and

      •
      some of our competitors have been willing to accept smaller operating margins in the short term in an attempt to increase long-term revenues.

            In order to retain customers and revenue, we often must reduce prices in response to market conditions and trends. As our prices for some of our communications services decrease, our operating results may suffer unless we are unableable to either reduce our operating expenses or increase traffic volume from which we can derive additional revenue.

            We also expect revenue from our managed modem services to continue to decline primarily due to:

      •
      an increase in the numberas a result of subscribersend users migrating to broadband services;

      •
      continued pricing pressures; and

      •
      declining customer obligations under existing contractual arrangements.

    We may be liable for the information that content owners or distributers distribute over our network.

            The law relating to the liability of private network operators for information carried on or disseminated through their networks is still unsettled. We may become subject to legal claims relating to the content disseminated on our network, even though such content is owned or distributed by our customers or a customer of our customers. For example, lawsuits may be brought against us claiming that material distributed using our network was inaccurate, offensive, or violated the law or the rightsservices.


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    of others. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, the law remains unclear over whether content may be distributed from one jurisdiction, where the content is legal, into another jurisdiction, where it is not. Companies operating private networks have been sued in the past, sometimes successfully, based on the nature of material distributed, even if the content is not owned by the network operator and the network operator has no knowledge of the content or its legality. It is not practical for us to monitor all of the content which is distributed using our network. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively affected.

    The need to obtain additional capacity for our network from other providers increases our costs.

            We use network resources owned by other companies for portions of our network both in North America and in Europe.network. We obtain the right to use such network portions, including both telecommunications capacity and rights to use dark fiber, through operating leases and IRU agreements. In several of those agreements, the counter party is responsible for network maintenance and repair. If a counter party to a lease or IRU suffers financial distress or bankruptcy, we may not be able to enforce our rights to use these network assets or, even if we could continue to use these network assets, we could incur material expenses related to maintenance and repair. We could also incur material expenses if we were required to locate alternative network assets. We may not be successful in obtaining reasonable alternative network assets if needed. Failure to obtain usage of alternative network assets, if necessary, could have a material adverse effect on our ability to carry on business operations. In addition, some of our agreements with other providers require the payment of amounts for services whether or not those services are used.

            In the normal course of business, we need to enter into interconnection agreements with many domestic and foreign local telephone companies, but we are not always able to do so on favorable terms. Costs of obtaining local service from other carriers comprise a significant proportion of the operating expenses of long distance carriers. Similarly, a large proportion of the costs of providing international service consists of payments to other carriers. Changes in regulation, particularly the regulation of local and international telecommunication carriers, could indirectly, but significantly, affect our competitive position. These changes could increase or decrease the costs of providing our services.

    We may be unable to hire and retain sufficient qualified personnel; the loss of any of our key executive officers could adversely affect on our business.

            We believe that our future success will depend in large part on our ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional and technical personnel. We have experienced significant competition in attracting and retaining personnel who possess the skills that we are seeking. As a result of this significant competition, we may experience a shortage of qualified personnel.

            Our businesses are managed by a small number of key executive officers, including James Q. Crowe, Chief Executive Officer, Kevin J. O'Hara, President and Chief Operating Officer and Charles C. Miller, III, Vice Chairman and Executive Vice President.Officer. The loss of any of these key executive officers could have a material adverse effect on our business.

    We must obtain and maintain permits and rights-of-way to operate our network.

            If we are unable, on acceptable terms and on a timely basis, to obtain and maintain the franchises, permits and rights-of-way needed to expand and operate our network, our business could be materially adversely affected. In addition, the cancellation or non-renewal of the franchises, permits or



    rights-of-way that are obtained could materially adversely affect our business. Our communications operating subsidiaries are defendants in several lawsuits that, among other things, challenge the subsidiaries' use of rights-of-way. The plaintiffs have sought to have these lawsuits certified as class actions. It is possible that additional suits challenging use of our rights-of-way will be filed and that those plaintiffs also may seek class certification. The outcome of such litigation may increase our costs and adversely affect our operating results.

    Termination of relationships with key suppliers could cause delay and additional costs.

            Our business is dependent on third-party suppliers for fiber, computers, software, optronics, transmission electronics and related components as well as providers of network colocation facilities that are integrated into our network, some of which are critical to the operation of our business. If any of these critical relationships is terminated, a supplier either exits or curtails its business as a result of


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    the current economic conditions, a supplier fails to provide critical services or equipment, or the supplier is forced to stop providing services due to legal constraints, such as patent infringement, and we are unable to reach suitable alternative arrangements quickly, we may experience significant additional costs or we may not be able to provide certain services to customers. If that happens, our business could be materially adversely affected.

    AT&T and Verizon may not provide us local access services at prices whichthat allow us to effectively compete.

            We acquire a significant portion of our local access services, the connection between our owned network and the customer premises, from incumbent local exchange carriers or ILECs. With the recent acquisitions by AT&T and Verizon, the ILECs now compete directly with our business and may have a tendency to favor themselves and their affiliates to our detriment. Network access represents a very large portion of our total costs and if we face less favorable pricing and provisioning, we may be at a competitive disadvantage to the ILECs.

    The success of         We may be liable for the information that content owners or distributors distribute over our subscriber based VoIP services is dependent on the growth and public acceptance of VoIP telephony in general.network.

            The successlaw relating to the liability of private network operators for information carried on or disseminated through their networks is still unsettled. While we disclaim any liability for third party content in our services agreements, we may become subject to legal claims relating to the content disseminated on our network, even though such content is owned or distributed by our customers or a customer of our subscriber based VoIP servicescustomers. For example, lawsuits may be brought against us claiming that material distributed using our network was inaccurate, offensive, or violated the law or the rights of others. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, the law remains unclear over whether content may be distributed from one jurisdiction, where the content is dependent upon future demand for VoIP telephony services in generallegal, into another jurisdiction, where it is not. Companies operating private networks have been sued in the marketplace. In orderpast, sometimes successfully, based on the nature of material distributed, even if the content is not owned by the network operator and the network operator has no knowledge of the content or its legality. It is not practical for us to monitor all of the IP telephony market to continue to grow, several things maycontent which is distributed using our network. If we need to occur, including the following:

      •
      Telephone and cable service providers must continuetake costly measures to invest in the deployment of high speed broadband networksreduce our exposure to residential and commercial customers.

      •
      VoIP networks must continuethese risks, or are required to improve quality of service for real-time communications, managing effectsdefend ourselves against such as packet jitter, packet loss and unreliable bandwidth, so that toll-quality service canclaims, our financial results could be provided.

      •
      VoIP telephony equipment and services must achieve a similar level of reliability that users of the public switched telephone network have come to expect from their telephone service, including emergency calling features and capabilities.

      •
      VoIP telephony service providers must offer cost and feature benefits to their customers that are sufficient to cause the customers to switch away from traditional telephony service providers.

            If any or all of these factors fail to occur, our VoIP services business may not continue or grow as expected.negatively affected.

    We are subject to significant regulation that could change in an adverse manner.

            Communications services are subject to significant regulation at the federal, state, local and international levels. These regulations affect our business and our existing and potential competitors. Delays in receiving required regulatory approvals (including approvals relating to acquisitions or



    financing activities), completing interconnection agreements with incumbent local exchangeother carriers, or the enactment of new and adverse regulations or regulatory requirements may have a material adverse effect on our business. In addition, future legislative, judicial and regulatory agency actions could have a material adverse effect on our business.

            Federal legislation provides for a significant deregulation of the U.S. telecommunications industry, including the local exchange, long distance and cable television industries. This legislation remains subject to judicial review and additional Federal Communications Commission, or FCC, rulemaking. As a result, we cannot predict the legislation's effect on our future operations. Many regulatory actions are under way or are being contemplated by federal and state authorities regarding important issues. These actions could have a material adverse effect on our business.


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             Changes in regulations affecting commercial power providers may increase our costs.

            In the normal course of business, we need to enter into agreements with many providers of commercial power for our office, network and Gateway facilities. Costs of obtaining commercial power can comprise a significant component of our operating expenses. Changes in regulations that affect commercial power providers, particularly regulations related to the control of greenhouse gas emissions or other climate change related matters, could affect the costs of commercial power, which may increase the costs of providing our services and may adversely affect our operating results.

    The lawlaws in certain countries currently doesdo not permit us to offer services directly in those countries.

            Ownership of telecommunications facilities that originate or terminate traffic in certain countries, such as Canada and China, is currently limited to nationals of those countries. This restriction hinders our entry into those markets.

    Potential regulation of Internet service providers in the United States could adversely affect our operations.

            The FCC has, to date, treated Internet service providers as enhanced service providers. In addition, Congress has, to date, not sought to heavily regulate the provision of IP-based services. Both Congress and the FCC are considering proposals that involve greater regulation of IP-based service providers. Depending on the content and scope of any regulations, the imposition of such regulations could have a material adverse effect on our business and the profitability of our services.

    The communications industry is highly competitive with participants that have greater resources and a greater number of existing customers.

            The communications industry is highly competitive. Many of our existing and potential competitors have financial, personnel, marketing and other resources significantly greater than ours. Many of these competitors have the added competitive advantage of a larger existing customer base. In addition, significant new competition could arise as a result of:

      •
      the consolidation in the industry, led by AT&T and Verizon;industry;

      •
      allowing foreign carriers to more extensively compete in the U.S. market;

      •
      further technological advances; and

      •
      further deregulation and other regulatory initiatives.

            If we are unable to compete successfully, our business could be significantly affected.

    We may be unable to successfully identify, manage and assimilate future acquisitions, investments and strategic alliances, which could adversely affect our results of operations.

            We continually evaluate potential investments and strategic opportunities to expand our network, enhance connectivity and add traffic to our network. In the future, we may seek additional investments, strategic alliances or similar arrangements, which may expose us to risks such as:

      •
      the difficulty of identifying appropriate investments, strategic allies or opportunities on terms acceptable to us;

      •
      the possibility that senior management may be required to spend considerable time negotiating agreements and monitoring these arrangements;


        •
        potential regulatory issues applicable to the telecommunications business;

        •
        the loss or reduction in value of the capital investment;


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        •
        our inability to capitalize on the opportunities presented by these arrangements; and

        •
        the possibility of insolvency of a strategic ally.

              There can be no assurance that we would successfully overcome these risks or any other problems encountered with these investments, strategic alliances or similar arrangements.

      Other Operations

      Environmental liabilities from our historical operations could be material.

              There could be environmental liabilities arising from historical operations of our predecessors, for which we may be liable. Our operations and properties are subject to a wide variety of laws and regulations relating to environmental protection, human health and safety. These laws and regulations include those concerning the use and management of hazardous and non-hazardous substances and wastes. We have made and will continue to make significant expenditures relating to our environmental compliance obligations. Despite our best efforts, we may not at all times be in compliance with all of these requirements.

              In connection with certain historical operations, we have responded to or been notified of potential environmental liability at approximately 148150 properties as of February 15, 2008.2010. We are engaged in addressing or have liquidated environmental liabilities at 7074 of those properties. Of these: (a) we have formal commitments or other potential future costs at 1415 sites; (b) there are 10 sites with minimal future costs; (c) there are 1114 sites with unknown future costs and (d) there are 35 sites with no likely future costs. The remaining 78 properties have been dormant for several years. We could be held liable, jointly or severally, and without regard to fault, for such investigation and remediation. The discovery of additional environmental liabilities related to historical operations or changes in existing environmental requirements could have a material adverse effect on our business.

      Potential liabilities and claims arising from coal operations could be significant.

              Our coal operations are subject to extensive laws and regulations that impose stringent operational, maintenance, financial assurance, environmental compliance, reclamation, restoration and closure requirements. These requirements include those governing air and water emissions, waste disposal, worker health and safety, benefits for current and retired coal miners, and other general permitting and licensing requirements. Despite our best efforts, we may not at all times be in compliance with all of these requirements. Liabilities or claims associated with this non-compliance could require us to incur material costs or suspend production. Mine reclamation costs that exceed reserves for these matters also could require us to incur material costs.

               Increased regulation of greenhouse gas ("GHG") emissions may adversely affect demand for coal.

              Present and proposed regulation of GHG emissions on the state, regional, national, and international level has typically included requirements applicable to the utility sector and coal-fired power plants. Therefore, such regulation could adversely affect the demand for coal in coming years, particularly from our utility customers. This could have an adverse effect on our operating results.

      General

      If we are unable to comply with the restrictions and covenants in our debt agreements, there would be a default under the terms of these agreements, and this could result in an acceleration of payment of funds that have been borrowed.

              If we were unable to comply with the restrictions and covenants in any of our debt agreements, there would be a default under the terms of those agreements. As a result, borrowings under other


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      debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, there can be no assurance that we would be able to make necessary payments to the lenders and noteholders or that we would be able to find



      alternative financing. Even if we were able to obtain alternative financing, there can be no assurance that it would be on terms that are acceptable.

      We have substantial debt, which may hinder our growth and put us at a competitive disadvantage.

              Our substantial debt may have important consequences, including the following:

        •
        the ability to obtain additional financing for acquisitions, working capital, investments and capital or other expenditures could be impaired or financing may not be available on acceptable terms;

        •
        a substantial portion of our cash flowflows will be used to make principal and interest payments on outstanding debt, reducing the funds that would otherwise be available for operations and future business opportunities;

        •
        a substantial decrease in cash flows from operating activities or an increase in expenses could make it difficult to meet debt service requirements and force modifications to operations;

        •
        Wewe have more debt than certain of our competitors, which may place us at a competitive disadvantage; and

        •
        substantial debt may make us more vulnerable to a downturn in business or the economy generally.

              We had substantial deficiencies of earnings to cover fixed charges of approximately $1.068$617 million for the fiscal year ended December 31, 2009, $264 million for the fiscal year ended December 31, 2008, $1.1 billion for the fiscal year ended December 31, 2007. We had deficiencies of earnings to cover fixed charges of $7202007, $742 million for the fiscal year ended December 31, 2006, $634and $647 million for the fiscal year ended December 31, 2005, $409 million for the fiscal year ended December 31, 2004 and $681 million for the fiscal year 2003.2005.

      We may not be able to repay our existing debt; failure to do so or refinance the debt could prevent us from implementing our strategy and realizing anticipated profits.

              If we were unable to refinance our debt or to raise additional capital on acceptable terms, our ability to operate our business would be impaired. As of December 31, 2007, we had an2009, aggregate future maturities of approximately $6.864 billion ofour long-term debt, on a consolidated basiscapital leases and including current maturities,our commercial mortgage (after taking into account the issuance of the Level 3 Financing, Inc. 10% Senior Notes due 2018 issued in January 2010, the retirement of the Level 3 Financing, Inc. 12.25% Senior Notes due 2013 and excluding debt discounts, premiums and fair value adjustments) approximated $6.659 billion. Of this long-term debt, approximately $154 million is due to mature in 2010, approximately $377 million is due to mature in 2011 and approximately $1.07 billion of stockholders' equity.$298 million is due to mature in 2012, in each case excluding debt discounts, premiums and fair value adjustments.

              Our ability to make interest and principal payments on our debt and borrow additional funds on favorable terms depends on the future performance of the business. If we do not have enough cash flow in the future to make interest or principal payments on our debt, we may be required to refinance all or a part of our debt or to raise additional capital. We cannot be sure that we will be able to refinance our debt or raise additional capital on acceptable terms.


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      Restrictions and covenants in our debt agreements limit our ability to conduct our business and could prevent us from obtaining needed funds in the future.

              Our debt and financing arrangements contain a number of significant limitations that restrict our ability to, among other things:

        •
        borrow additional money or issue guarantees;

        •
        pay dividends or other distributions to stockholders;

        •
        make investments;

        •
        create liens on assets;

        •
        sell assets;


          •
          enter into sale-leaseback transactions;

          •
          enter into transactions with affiliates; and

          •
          engage in mergers or consolidations.

        If certain transactions occur with respect to our capital stock, we may be unable to fully utilize our net operating loss carryforwards to reduce our income taxes.

                As of December 31, 2007, we had net operating loss carry forwards of approximately $9.5 billion for federal income tax purposes, including $953 million of net operating loss carry forwards from acquired companies after limitations that existed at the date of acquisition or that resulted from the acquisitions or both. If certain transactions occur with respect to our capital stock that result in a cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a three-year period as determined under rules prescribed by the U.S. Internal Revenue Code and applicable regulations, annual limitations would be imposed with respect to our ability to utilize our net operating loss carry forwards and certain current deductions against any taxable income it achieves in future periods.

                We have entered into transactions over the last three years resulting in significant cumulative changes in the ownership of our capital stock. Additional transactions that we enter into, as well as transactions by existing 5% stockholders and transactions by holders that become new 5% stockholders that we do not participate in, could cause us to incur a 50 percentage point ownership change by 5% stockholders and, if we trigger the above-noted Internal Revenue Code imposed limitations, such transactions would prevent us from fully utilizing net operating loss carry forwards and certain current deductions to reduce income taxes.

        The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

                Our revenue and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause the price of our common stock to fluctuate. The primary factors, among other things, that may affect our quarterly results include the following:

          •
          Thethe timing of costs associated with the operation of our business and our integration activities with respect to our recently completed acquisitions;

          •
          demand for communications services;

          •
          loss of customers or the ability to attract new customers;

          •
          changes in pricing policies or the pricing policies of our competitors;

          •
          costs related to acquisitions of technology or businesses;

          •
          changes in regulatory rulings; and

          •
          general economic conditions as well as those specific to the communications and related industries.

                A delay in generating revenue or the timing of recognizing revenue and expenses could cause significant variations in our operating results from quarter to quarter. It is possible that in some future quarters our results may be below analysts and investors expectations. In these circumstances, the price of our common stock will likely decrease.

                 If certain transactions occur with respect to our capital stock, we may be unable to fully utilize our net operating loss carryforwards to reduce our income taxes.

                As of December 31, 2009, we had net operating loss carry forwards of approximately $5.2 billion for federal income tax purposes. If certain transactions occur with respect to our capital stock that result in a cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a three-year period as determined under rules prescribed by the U.S. Internal Revenue Code of 1986, as amended (the "Code") and applicable regulations, annual limitations would be imposed with respect to our ability to utilize our net operating loss carry forwards and certain current deductions against any taxable income we achieve in future periods.


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                We have entered into transactions over the applicable three year period that, when combined with other changes in ownership that are outside of our control, have resulted in cumulative changes in the ownership of our capital stock. Additional transactions that we enter into, as well as transactions by existing 5% stockholders and transactions by holders that become new 5% stockholders that we do not participate in, could cause us to incur a 50 percentage point ownership change by 5% stockholders and, if we trigger the above-noted Code imposed limitations, such transactions would prevent us from fully utilizing net operating loss carry forwards and certain current deductions to reduce income taxes.

        Increased scrutiny of financial disclosure, particularly in the telecommunications industry in which we operate, could adversely affect investor confidence, and any restatement of earnings could increase litigation risks and limit our ability to access the capital markets.

                Congress, the SEC, other regulatory authorities and the media are intensely scrutinizing a number of financial reporting issues and practices. Although all businesses face uncertainty with respect to how the U.S. financial disclosure regime may be affected by this process, particular attention has been focused recently on the telecommunications industry and companies' interpretations of generally accepted accounting principles.

        If we were required to restate our financial statements as a result of a determination that we had incorrectly applied generally accepted accounting principles or as a result of other factors or errors, that restatement could adversely affect our ability to access the capital markets or the trading price of our securities. The recent scrutiny regarding financial reporting has also resulted in an increase in litigation in the telecommunications industry.litigation. There can be no assurance that any such litigation against us would not materially adversely affect our business or the trading price of our securities.

        Terrorist attacks and other acts of violence or war may adversely affect the financial markets and our business.

                Since the September 11, 2001 terrorist attacks and subsequent events, there has been considerable uncertainty in world financial markets. The full effect on the financial markets of these events, as well as concerns about future terrorist attacks, is not yet known. They could, however, adversely affect our ability to obtain financing on terms acceptable to us, or at all.

                There can be no assurance that there will not be furtherfuture terrorist attacks against the United States or U.S. businesses. These attacks or armed conflicts may directly affect our physical facilities or those of our customers. These events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and world financial markets and economy. Any of these occurrences could materially adversely affect our business.

        Our international operations and investments expose us to risks that could materially adversely affect the business.

                We have operations and investments outside of the United States, as well as rights to undersea cable capacity extending to other countries, that expose us to risks inherent in international operations. These include:

          •
          general economic, social and political conditions;

          •
          the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;

          •
          tax rates in some foreign countries may exceed those in the U.S.;

          •
          foreign currency exchange rates may fluctuate, which could adversely affect our results of operations and the value of our international assets and investments;

          •
          foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;

          •
          difficulties and costs of compliance with foreign laws and regulations that impose restrictions on our investments and operations, with penalties for noncompliance, including loss of licenses and monetary fines;


            •
            difficulties in obtaining licenses or interconnection arrangements on acceptable terms, if at all; and

            •
            changes in U.S. laws and regulations relating to foreign trade and investment.

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            Additional issuances of equity securities by us would dilute the ownership of our existing stockholders.

                    We may issue equity in the future in connection with acquisitions or strategic transactions, to adjust our ratio of debt to equity, including through repayment of outstanding debt, to fund expansion of our operations or for other purposes. To the extent we issue additional equity securities, the percentage ownership of our existing stockholders would be reduced.

                     Anti-takeover provisions in our charter and by-laws could limit the share price and delay a change of management.

                    Our restated certificate of incorporation and by-laws contain provisions that could make it more difficult or even prevent a third party from acquiring us without the approval of our incumbent board of directors. These provisions, among other things:

              •
              prohibit stockholder action by written consent in place of a meeting;

              •
              limit the right of stockholders to call special meetings of stockholders;

              •
              limit the right of stockholders to present proposals or nominate directors for election at annual meetings of stockholders; and

              •
              authorize our board of directors to issue preferred stock in one or more series without any action on the part of stockholders.

                    In addition, the terms of most of our long term debt require that upon a "change in control," as defined in the agreements that contain the terms and conditions of the long term debt, we make an offer to purchase the outstanding long term debt at either 100% or 101% of the aggregate principal amount of that long term debt.

                    These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and significantly impede the ability of the holders of our common stock to change management. Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock.

            If a large number of shares of our common stock is sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

                    We cannot predict what effect, if any, future issuances by us of our common stock will have on the market price of our common stock. In addition, shares of our common stock that we issue in connection with an acquisition may not be subject to resale restrictions. The market price of our common stock could drop significantly if certain large holders of our common stock, or recipients of our common stock in connection with an acquisition, sell all or a significant portion of their shares of common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could impair our ability to raise capital through the sale of additional common stock in the capital markets.

            Anti-takeover provisions in our charter and by-laws could limit the share price and delay a change of management.

                    Our restated certificate of incorporation and by-laws contain provisions that could make it more difficult or even prevent a third party from acquiring us without the approval of our incumbent board of directors. These provisions, among other things:

              •
              prohibit stockholder action by written consent in place of a meeting;

              •
              limit the right of stockholders to call special meetings of stockholders;

              •
              limit the right of stockholders to present proposals or nominate directors for election at annual meetings of stockholders; and

              •
              authorize our board of directors to issue preferred stock in one or more series without any action on the part of stockholders.

                    In addition, the terms of most of our long term debt require that upon a "change of control," as defined in the agreements that contain the terms and conditions of the long term debt, we make an offer to purchase the outstanding long term debt at either 100% or 101% of the aggregate principal amount of that long term debt.

                    These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and significantly impede the ability of the holders of our common stock to change management. Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock.


            The market price of our common stock has been volatile and, in the future, the market price of our common stock may fluctuate substantially due to a variety of factors.

                    The market price of our common stock has been subject to volatility and, in the future, the market price of our common stock may fluctuate substantially due to a variety of factors, including:

              •
              the depth and liquidity of the trading market for our common stock;

              •
              quarterly variations in actual or anticipated operating results;

              •
              changes in estimated earnings by securities analysts;


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              •
              market conditions in the communications and information services industry;industries;

              •
              announcement and performance by competitors;

              •
              regulatory actions; and

              •
              general economic conditions.

                    In addition, in recent months the stock market generally has experienced significant price and volume fluctuations. Those market fluctuations could have a material adverse effect on the market price or liquidity of our common stock.

            ITEM 1B.    UNRESOLVED STAFF COMMENTS

                    None.

            ITEM 2.    PROPERTIES

                    Our headquarters are located on 46 acres in the Interlocken Advanced Technology Environment within the City and County of Broomfield, Colorado. The campus facility, which is owned by our wholly owned subsidiary HQ Realty, Inc., encompasses approximately 850,000 square feet of office space.

                    Additionally, we lease approximately 121,180120,000 square feet of office and technical space in a building located at 180 Peachtree Street, NW in Atlanta, Georgia. We also lease approximately 213,594143,000 square feet of office and technical space in the building known as One Technology Center located at 100 South Cincinnati Avenue in Tulsa, Oklahoma andOklahoma. We also use approximately 54,0008,900 square feet of office space in the Southpointe office park in Canonsburg, Pennsylvania, comprised of approximately 42,500 square feetthat we own in the building located at 121 Champion Way and approximately an additional 11,300 square feet in the building located at 601200 Technology Drive.Drive, Pittsburgh, Pennsylvania. We also lease approximately 130,000128,000 square feet of office space in a building located at 1122 South Capital of Texas Highway in Austin, Texas. In Europe, we have approximately 211,000 square feet of office space in the United Kingdom and approximately 3,0005,000 square feet of office space in France.

                    Properties relating to our network operations in the communications business are described under "ITEM 1. BUSINESS—Our Communications Network" above.

                    Our Gateway facilities are designed to house local sales staff, operational staff, our transmission and IP routing/switching facilities and technical space to accommodate colocation of equipment by high-volume Level 3 customers. We ended 20072009 with approximately 6.9 million square feet of space for our Gateway and transmission facilities and have completed construction on approximately 4.6 million square feet of this space. Our Gateway space is either owned by us or is held pursuant to long-term lease agreements.

                    We have entered into various agreements regarding our unused office and technical space in order to reduce our ongoing operating expenses regarding such space.


                    Properties relating to our coal mining segment are described under "ITEM 1. BUSINESS—Our Other Businesses" above. In connection with certain existing and historical operations, we are subject to environmental risks.

            ITEM 3.    LEGAL PROCEEDINGS

                    In April 2002, Level 3 Communications, Inc., and twocertain of its subsidiaries were named as defendants inBauer, et. al. v. Level 3 Communications, LLC, et al.,(the "companies") are parties to a number of purported class action covering 22 states, filedlawsuits involving the companies' right to install fiber optic cable network in state courtrailroad right-of-ways adjacent to plaintiffs' land. The only lawsuit in Madison County, Illinois. In July 2001, Level 3 was named aswhich a defendantclass has been certified against the companies occurred inKoyle, et. al. v. Level 3 Communications, Inc., et. al.al., a purported two state class action filed in the U.S. District Court for the District of Idaho. In November of 2005, the court granted class certification only for the state of Idaho. In September 2002, Level 3 Communications, LLC and Williams Communications, LLC were named as defendantsThe companies have defeated motions for class certification inSmith et. al. v. Sprint Communications Company, L.P., et al., a purported nationwide class action filednumber of these actions but expect that plaintiffs in the United States District Court for the Northern Districtpending


            Table of Illinois. In April 2005, the Smith plaintiffs filed a Fourth Amended Complaint which did not include Level 3Contents


            lawsuits will continue to seek certification of statewide or Williams Communications, Inc. as a party, thus ending both companies' involvement in the Smith case. On February 17, 2005, Level 3 Communications, LLC and Williams Communications, LLC were named as defendants inMcDaniel, et. al., v. Qwest Communications Corporation, et al., a purported class action covering 10 states filed in the United States District Court for the Northern District of Illinois. These actions involve the companies' right to install its fiber optic cable network in easements and right-of-ways crossing the plaintiffs' land.multi-state classes. In general, the companies obtained the rights to construct their networks from railroads, utilities, and others, and have installed their networks along the rights-of-way so granted. Plaintiffs in the purported class actions assert that they are the owners of lands over which the companies' fiber optic cable networks pass, and that the railroads, utilities, and others who granted the companies the right to construct and maintain their networks did not have the legal authority to do so. The complaints seek damages on theories of trespass, unjust enrichment and slander of title and property, as well as punitive damages. The companies have also received, and may in the future receive, claims and demands related to rights-of-way issues similar to the issues in these cases that may be based on similar or different legal theories. To date, other than as noted above,

                    The companies negotiated a series of class settlements affecting all adjudicated attemptspersons who own or owned land next to have class action status granted on complaints filed againstor near railroad rights of way in which the companies or anyhave their fiber optic cable network. The United States District Court for the District of their subsidiaries involving claimsMassachusetts inKingsborough v. Sprint Communications Co. L.P. granted preliminary approval of the proposed settlement, however, on September 10, 2009, the court denied a motion for final approval of the settlement on the basis that the court lacked subject matter jurisdiction and demands related to rights-of-way issues have been denied.dismissed the case.

                    It is still too early for the Company to reach a conclusion as to the ultimate outcome of these actions. However, management believes that the Company and its subsidiariescompanies have substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future), and intends to defend them vigorously if a satisfactory form of settlement is not ultimately negotiated and approved. Additionally, management believes that any resulting liabilities for these actions, beyond amounts reserved, will not materially affect the Company's financial condition or future results of operations, but could affect future cash flows.

                    In February 2009, Level 3 Communications, Inc., certain of its current officers and a former officer were named as defendants in purported class action lawsuits filed in the United States District Court for the District of Colorado, which have been consolidated asIn re Level 3 Communications, Inc. Securities Litigation (Civil Case No. 09-cv-00200-PAB-CBS). The Plaintiffs in each complaint allege, in general, that throughout the purported class period specified in the complaint that the defendants failed to disclose material adverse facts about the Company's integration activities, business and operations. The complaints seek damages based on purported violations of Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934. On May 4, 2009, the Court appointed a lead plaintiff in the case, and on June 29, 2009, the lead plaintiff filed a Consolidated Class Action Complaint (the "Complaint"). On July 29, 2009, the Company and the other defendants named in the Complaint filed a motion to dismiss the Complaint with prejudice which is pending before the court.

                    It remains too early for the Company to reach a conclusion as to the ultimate outcome of these actions. However, management believes that the Company has substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future) and intends to defend these actions vigorously.

                    During March 2009, Level 3 Communications, Inc., as a nominal defendant, certain of its directors and its current officers, and a former officer, were named as defendants in purported stockholder derivative actions in the District Court, Broomfield County, Colorado, which have been consolidated asIn re Level 3 Communications, Inc. Derivative Litigation (Lead Case No. 2009CV59). On December 11, 2009, Level 3 Communications, Inc., as a nominal defendant, certain of its directors and current officers, and a former officer, were named as defendants in purported stockholder derivative action in the United States District Court for the District of Colorado inIron Workers District Council Of Tennessee Valley & Vicinity Pension Plan v. Level 3 Communications, Inc., et. al. The Plaintiffs allege that


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            during the period specified in the complaints the named defendants failed to disclose material adverse facts about the Company's integration activities, business and operations. The complaints seek damages on behalf of the Company based on purported breaches of fiduciary duties for disseminating false and misleading statements and failing to maintain internal controls; unjust enrichment; abuse of control; gross mismanagement; waste of corporate assets; and, with respect to certain defendants, breach of fiduciary duties in connection with the resignation of Kevin O'Hara, our former President and Chief Operating Officer. The parties have agreed to a temporary stay of all activities in these actions pending the outcome of the motion to dismiss or other relevant time periods in the securities litigation described above.

                    It remains too early for the Company to reach a conclusion as to the ultimate outcome of these derivative actions. However, management believes that the complaints have numerous deficiencies including that each plaintiff failed to make a demand on the Company's Board of Directors before filing the suit.

                    In March 2009, late April 2009 and early May 2009, Level 3 Communications, Inc., the Level 3 Communications, Inc. 401(k) Plan Committee and certain current and former officers and directors of Level 3 Communications, Inc. were named as defendants in purported class action lawsuits filed in the U.S. District Court for the District of Colorado inWalter v. Level 3 Communications, Inc., et. al.,Dagres v. Level 3 Communications, Inc., et. al. andFragale v. Level 3 Communications, Inc., et. al. The complaints allege breaches of fiduciary and other duties under the Employee Retirement Income Security Act ("ERISA") with respect to investments in the Company's common stock held in individual participant accounts in the Level 3 Communications, Inc. 401(k) Plan. The complaints claim that those investments were imprudent for reasons that are similar to those alleged in the securities and derivative actions described above. A motion to consolidate the three actions and specify lead counsel is pending before the court.

                    It remains too early for the Company to reach a conclusion as to the ultimate outcome of these ERISA actions. However, management believes that the Company has substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future) and intends to defend these actions vigorously.

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


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            Part II

            ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

                    Market Information.    Our common stock is traded on the NASDAQ Global Select Market of The NASDAQ Stock Market LLC under the symbol "LVLT." As of February 26, 2008,24, 2010, there were 7,890approximately 7,800 holders of record of our common stock, par value $.01 per share. The table below sets forth, for the calendar quarters indicated, the high and low per share closing salesales prices of our common stock as reported by the NASDAQ Global Select Market of The NASDAQ Stock Market LLC.

            Year Ended December 31, 2007
            		 High
            		 Low
            First Quarter $6.76 $5.57
            Second Quarter  6.26  5.26
            Third Quarter  6.41  4.46
            Fourth Quarter  5.04  2.82

            Year Ended December 31, 2006
            		 High
            		 Low
            Year Ended December 31, 2009
            		 High Low 
            First Quarter $5.60 $2.73 $1.65 $0.60 
            Second Quarter 5.72 3.78 1.77 0.87 
            Third Quarter 5.46 3.44 1.72 1.11 
            Fourth Quarter 6.02 4.93 1.54 1.16 

            Year Ended December 31, 2008
            		 High Low 

            First Quarter

            		 $3.53 $1.68 

            Second Quarter

            		  4.48  1.96 

            Third Quarter

            		  3.90  2.44 

            Fourth Quarter

            		  2.75  0.57 

                    We have only one equity compensation plan—The 1995 Stock Plan, as amended—under which we may issue shares of our common stock to employees, officers, directors and consultants. This plan has been approved by our stockholders. The following table provides information about the shares of our common stock that may be issued upon exercise of awards under the 1995 Stock Plan as of December 31, 2007.2009.

            Plan Category
            		 Number of
            securities to be
            issued upon
            exercise of
            outstanding
            options,
            warrants
            and rights
            		 Weighted-average
            exercise price of
            outstanding options,
            warrants and rights
            		 Number of
            securities
            remaining available
            for future
            issuance
            under equity
            compensation plans
            Equity compensation plans approved by stockholders 38,503,698†$4.45†‡91,780,820
            Equity compensation plans not approved by stockholders 0 $0.00 0

            Plan Category
            		 Number of securities to
            be issued upon exercise
            of outstanding options,
            warrants and rights            		 Weighted-average
            exercise price of
            outstanding options,
            warrants and rights            		 Number of securities
            remaining available for
            future issuance under
            equity compensation plans            		 

            Equity compensation plans approved by stockholders

            		  38,254,129†$2.95†‡ 68,645,765 

            Equity compensation plans not approved by stockholders

            		  0 $0.00  0 
            †
            Includes awards of nonqualified stock options, restricted stock, restricted stock units and outperform stock options or outperform stock appreciationappreciate units ("OSOs"). For purposes of this table, OSOsthese securities are considered to use a single share of our common stock from the total number of shares reserved for issuance under the 1995 Stock Plan.

            ‡
            Includes weighted-average exercise price of outstanding nonqualified stock options and OSOs at the date of grant. The exercise price of an OSO is subject to change based upon the performance of our common stock relative to the performance of the S&P 500®500® Index from the time of the grant of the award until the award has been exercised.

                    Recipients of OSOs do not realize any value from these awards unless our common stock price outperforms the S&P 500® Index during the lifeare currently designed to provide recipients of the grant. Whenawards with the stockincentive to maximize stockholder value and to reward recipient employees only when the price gain is greater than the corresponding gain on the S&P 500® Index (or less than the corresponding loss on the S&P 500® Index for grants awarded before September 30, 2005), the value received for awards under the OSO program is based on a formula involving a multiplier related to the level by which our common stock outperforms the S&P 500® Index. To the extent thatof our common stock outperforms the S&P 500® Index between the date of grant and the date that the OSO is exercised or settled. For the OSOs granted beginning in April 2007, OSOs have a three-year life and vest 100% on the third anniversary of the date of the award and will fully settle on that date. In other words,


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            recipients of these OSOs will not be able to voluntarily exercise the OSOs as they will settle automatically with value on the third anniversary of the date of the award or expire without value on that date. This type of instrument is sometimes referred to as a "European style option." For OSOs granted prior to April 2007, the OSOs generally have a four-year life and vest 50% at the end of the first year after grant, with the remaining 50% vesting in four equal quarterly installments so that the OSOs are fully vested by the end of the second year after grant.

                    OSOs have an initial strike price that is equal to the closing market price of our common stock on the trading day immediately prior to the date of grant. This initial strike price is referred to as the "Initial Price." On the settlement date or the date that an employee elects to exercise an OSO, the Initial Price is adjusted—as of that date—by a percentage that is equal to the aggregate percentage increase or decrease in the S&P 500® Index over the period beginning on the date of grant and ending on the trading day immediately preceding the settlement or exercise date. The Initial Price, however, cannot be adjusted below the closing price of our common stock on the day that the OSO was granted.

                    The value of all OSOs will increase as the price of our common stock increases relative to the performance of the S&P® 500 Index over time. This increase in value is attributable in part to the use of a "success multiplier."

                    The mechanism for determining the value of an individual OSO units to a holder may exceed the value of nonqualified stock options.

            award is described below: The initial strike price, as determined on the day prior to the OSO grant date,Initial Price is adjusted over time which we refer to as the Adjusted(the "Adjusted Strike Price,Price") until the settlement or exercise date or the vesting date, as the case may be.date. The adjustment is an amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the date of exercise or vesting, as the case may be. Beginning on April 1, 2007, OSO units are awarded monthly to employees in mid-management level and higher positions, have a three year life, will vest 100 percent on the third anniversary of the date of the award and will fully settle on thatsettlement date. Recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007.

            The value of the OSO increases for increasing levels of outperformance. OSO unitsOSOs have a multiplier range from zero to four depending upon the performance of our common stock relative to the S&P 500® Index as shown in the following table.

            If Level 3 Stock Outperforms the S&P 500® Index by:
            		 Then the Pre-multiplier Gain Is Multiplied by
            a Success Multiplier of:
            0% or Less 0.00
            More than 0% but Less than 11% Outperformance percentage multiplied by4/11
            11% or More 4.00

                    The Pre-multiplierpre-multiplier gain is our common stock price minus the Adjusted Strike Price on the date ofsettlement or exercise or the vesting date, as the case may be. Unlike the exercise of a non-qualified stock option, in the situation where the outperformance is 11 percent or greater, the number of shares of our common stock issued upon exercise or vesting of an OSO may be up to four times the number of OSOs awarded.date.

                    Dividend Policy.    Our current dividend policy, in effect since April 1, 1998, is to retain future earnings for use in our business. As a result, our directors and management do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. In addition, under certain of our debt covenants we may be restricted from paying cash dividends on shares of our common stock.


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              Performance Graph.

                    The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, except to the extent that the company specifically incorporates such information by reference, and shall not otherwise be deemed filed under such acts.

                    The graph compares the cumulative total return of our common stock for the five year period from 20032005 through 20072009 with the S&P® 500 Index and the Nasdaq Telecommunications Index. The graph assumes that the value of the investment was $100 on December 31, 2002,2004, and that all dividends and other distributions were reinvested.


            Comparison of Five Year Cumulative Total Return
            Among Our Common Stock, the S&P® 500 Index
            and the Nasdaq Telecommunications Index

             
            		 12/02
            		 12/03
            		 12/04
            		 12/05
            		 12/06
            		 12/07
            Level 3 Common Stock 100.00 116.33 69.18 58.57 114.29 62.04
            S&P 500® Index 100.00 128.68 142.69 149.70 173.34 182.87
            NASDAQ Telecommunications 100.00 188.26 199.05 192.21 244.42 253.15

             
            		 12/04 12/05 12/06 12/07 12/08 12/09 

            Level 3 Common Stock

            		  100.00  84.66  165.19  89.68  20.65  45.13 

            S&P 500® Index

            		  100.00  104.91  121.48  128.16  80.74  102.11 

            NASDAQ Telecommunications

            		  100.00  91.66  119.67  132.55  77.09  107.17 

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            ITEM 6.    SELECTED FINANCIAL DATA

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

             
            		 Fiscal Year Ended(1)
            		 
             
            		 2007
            		 2006
            		 2005
            		 2004
            		 2003
            		 
             
            		 (dollars in millions, except per share amounts)

            		 
            Results of Operations:                
             Revenue $4,269 $3,378 $1,719 $1,776 $2,027 
             Loss from continuing operations(2)  (1,114) (790) (707) (478) (695)
             Income (loss) from discontinued operations(3)  —  46  69  20  (21)
             Net loss  (1,114) (744) (638) (458) (711)
            Per Common Share:                
             Loss from continuing operations(2)  (0.73) (0.79) (1.01) (0.70) (1.23)
             Income (loss) from discontinued operations(3)  —  0.05  0.10  0.03  (0.04)
             Net loss  (0.73) (0.74) (0.91) (0.67) (1.26)
             Dividends(4)  —  —  —  —  — 
            Financial Position:                
             Total assets  10,245  9,994  8,277  7,544  8,302 
             Current portion of long-term debt(5)  32  5  —  143  124 
             Long-term debt, less current portion(5)  6,832  7,357  6,023  5,067  5,249 
             Stockholders' equity (deficit)(6)  1,070  374  (476) (157) 181 

             
            		 Fiscal Year Ended(1),(2) 
             
            		 2009 2008 2007 2006 2005 
             
            		 (dollars in millions, except per share amounts)
            		 

            Results of Operations:

            		                
             

            Revenue

            		 $3,762 $4,301 $4,269 $3,378 $1,719 
             

            Loss from continuing operations(3)

            		  (618) (318) (1,146) (812) (720)
             

            Income from discontinued operations(4)

            		  —  —  —  46  69 
             

            Net loss

            		  (618) (318) (1,146) (766) (651)

            Per Common Share:

            		                
             

            Loss from continuing operations(3)

            		  (0.38) (0.20) (0.76) (0.81) (1.03)
             

            Income (loss) from discontinued operations(4)

            		  —  —  —  0.05  0.10 
             

            Net loss

            		  (0.38) (0.20) (0.76) (0.76) (0.93)
             

            Dividends(5)

            		  —  —  —  —  — 

            Financial Position:

            		                
             

            Total assets

            		  9,062  9,634  10,249  9,987  8,272 
             

            Current portion of long-term debt(6)

            		  705  186  32  5  — 
             

            Long-term debt, less current portion(6)

            		  5,755  6,245  6,631  7,122  5,873 
             

            Stockholders' equity (deficit)(7)

            		  491  1,021  1,266  602  (331)
            (1)
            The financial information for the periods of 2008 and prior have been adjusted for the retrospective application of Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) which has been codified into the guidance relating to Debt with Conversion and Other Options.

            (2)
            The operating results of Software Spectrum, Inc. ("Software Spectrum"), which was sold in 2006, and (i)Structure, LLC ("(i)Structure"), which was sold in 2005, the Midwest Fiber Optic Network business acquired from Genuity, Inc. in 2003 and sold in 2003 are included in discontinued operations for all periods presented for which Level 3 owned each business.


            The Company purchased substantially all of the assets and operations of Genuity, Inc. in February 2003. The Company also purchased Telverse Communications, Inc. in July 2003.


            The Company acquired the managed modem businesses of ICG Communications, Inc. and Sprint Communications Company, L.P. on April 1, 2004 and October 1, 2004, respectively.


            The Company purchased WilTel Communications Group, LLC ("WilTel") on December 23, 2005, and recorded approximately $38 million of revenue attributable to this business in 2005.


            The Company purchased Progress Telecom, LLC ("Progress Telecom") on March 20, 2006; ICG Communications, Inc. ("ICG Communications") on May 31, 2006; TelCove, Inc. ("TelCove") on July 24, 2006 and Looking Glass Networks Holding Co., Inc. ("Looking Glass") on August 2, 2006. The WilTel, Progress Telecom, ICG Communications, TelCove and Looking Glass results of operations and financial position are included in the consolidated financial statements from the respective dates of their acquisition. During 2006, the Company recorded revenue attributable to Progress Telecom of $49 million, ICG Communications of $46 million, TelCove of $166 million and Looking Glass of $33 million.


            The Company purchased Broadwing Corporation ("Broadwing") on January 3, 2007; the Content Delivery Network services business of SAVVIS, Inc. (the "CDN Business") on January 23, 2007 and Servecast Limited on July 11, 2007. During 2007, the Company recorded revenue attributable to Broadwing of $946 million, the CDN Business of $17 million and Servecast of $3 million.

            (2)
            In 2003,

            On June 5, 2008, Level 3 completed the Company recognized approximately $346 millionsale of terminationits Vyvx advertising distribution business to DG FastChannel, Inc. and settlement revenue, $45 million of impairment and restructuring charges, a gainreceived gross proceeds at closing of approximately $70$129 million in cash. Net proceeds from the sale of "91 Express Lanes" toll road assets, $200approximated $121 million of induced conversion expenses


              after deducting transaction-related costs. Revenue attributable to the exchangeVyvx advertising distribution business totaled $15 million in 2008 through the date of the Company's convertible debt securities,sale, $36 million in 2007 and a gain of $41$35 million as a result of the early extinguishment of long-term debt.


            In 2004,in 2006. The Vyvx businesses were acquired by the Company recognized a gainat the end of $197 million as a result2005 in the WilTel acquisition.


            Table of the early extinguishments of certain long-term debt and $113 million of termination revenue.

            Contents


            (3)
            In 2005, the Company recognized $133 million of termination revenue and approximately $23 million of impairment and restructuring charges.


            In 2006, the Company recognized $11 million of termination revenue, approximately $13 million of impairment and restructuring charges, and a loss on early extinguishment of debt of $83 million as a result of the amendment and restatement of its senior secured credit facility and certain debt exchanges and redemptions.


            In 2007, the Company recognized $10 million of termination revenue, approximately $12 million of impairment and restructuring charges, and a loss on the early extinguishment of debt of $427 million as a result of the refinancing of its senior secured credit agreement and certain debt exchanges, redemptions and repurchases. The Company also recognized a gain of $37 million on the sale of marketable equity securities and a tax benefit of $23 million related to certain state tax matters.

            In 2008, the Company recognized approximately $25 million of impairment and restructuring charges, $36 million of induced debt conversion expenses, net, attributable to the exchange of certain of the Company's convertible debt securities, a gain on the early extinguishment of debt of $125 million as a result of certain debt repurchases, and a $99 million gain on the sale of the Company's Vyvx advertising distribution business and the sale of certain of its smaller long distance voice customers. The Company also revised its estimates of the amounts and timing of its original estimate of undiscounted cash flows related to certain future asset retirement obligations in the fourth quarter of 2008. As a result, the Company reduced its asset retirement obligations liability by $103 million with an offsetting reduction to property, plant and equipment of $21 million, selling, general and administrative expenses of $86 million, depreciation and amortization of $11 million and an increase to goodwill of $15 million.

            In 2009, the Company recognized a gain of approximately $14 million as a result of debt repurchases and exchanges of certain of the Company's debt securities and $9 million of restructuring charges.

            (3)(4)
            In 2005, the Company sold (i)Structure and recognized a gain on the sale of $49 million. For fiscal years 2005 and 2004, (i)Structure revenue approximated costs. The loss from operations was $17 millioncosts in 2003 for (2005.i)Structure.


            In 2006, the Company sold Software Spectrum and recognized a gain on the sale of $33 million. The income (loss) from the operations of Software Spectrum including the contact services business sold in 2003 werewas $13 million and $20 million $20 millionfor 2006 and $(16) million for the fiscal years 2006, 2005, 2004 and 2003, respectively.

            (4)(5)
            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 cash dividends on shares of common stock in the foreseeable future. In addition, the Company is restricted under certain debt-related covenants from paying cash dividends on shares of its common stock.

            (5)(6)
            In 2003, the Company received net proceeds of $848 million from the issuance of $374 million of 2.875% Convertible Senior Notes due 2010 and the issuance by its wholly owned subsidiary of $500 million of 10.75% Senior Notes due 2011. The Company completed a debt exchange whereby the Company issued $295 million (face amount) of 9% Convertible Senior Discount Notes due 2013 and common stock in exchange for $352 million (book value) of long-term debt. In addition, Level 3 using cash on hand, restricted cash and the proceeds from the issuance of the 10.75% Senior Notes due 2011, repaid in full, the $1.125 billion purchase money indebtedness outstanding under the Senior Secured Credit Facility. Also in 2003, the Company repurchased, using common stock, approximately $1.007 billion face amount of its long-term debt and recognized a gain of approximately $41 million as a result of the early extinguishment of debt.


            In 2004, the Company received net proceeds of $987 million from the issuance of a $730 million Senior Secured Term Loan due 2011 and the issuance of $345 million of 5.25% Convertible Senior Notes due 2011. The Company used the net proceeds to repay portions of its 9.125% Senior Notes due 2008, 11% Senior Notes due 2008, 10.5% Senior Discount Notes due 2008 and 10.75% Senior Euro Notes due 2008. The Company repurchased portions of the outstanding notes at prices ranging from 83 percent to 89 percent of the repurchased principal balances. The net gain on the early extinguishment of the debt, including transaction costs, realized foreign currency losses and unamortized debt issuance costs, was $50 million for these transactions. Also in 2004, the Company paid approximately $54 million and assumed certain obligations to extinguish a Genuity capital lease obligation and recognized a gain of $147 million on the transaction.


            In 2005, the Company received net proceeds of $877 million from the issuance of $880 million of 10% Convertible Senior Notes due 2011. Also in 2005, a wholly owned subsidiary of the Company received net proceeds of $66 million from the completion of a refinancing of the mortgage of its corporate headquarters. The subsidiary entered into a new mortgage loan of $70 million at an initial fixed rate of 6.86% through 2010.


            In 2006, the Company received net proceeds of $142 million from the issuance by its wholly owned subsidiary of $150 million of Floating Rate Senior Notes due 2011, net proceeds of $538 million from the issuance of $550 million of 12.25% Senior Notes due 2013, net proceeds of $326 million from its issuance of $335 million of 3.5% Convertible Senior Notes due 2012 and net proceeds of $1.239 billion (excluding prepaid interest) from the issuance by its wholly owned subsidiary of $1.250 billion of 9.25% Senior Notes due 2014. Also in 2006, the Company exchanged a portion of its outstanding 9.125% Senior Notes due 2008, 11% Senior Notes due 2008 and 10.5% Senior Discount Notes due 2008 for $46 million of cash and $692 million aggregate principal of new 11.5% Senior Notes due 2010. In addition, the Company redeemed the remaining outstanding 9.125% Senior Notes due 2008 totaling $398 million, 10.5% Senior Discount Notes due 2008


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              totaling $62 million and repurchased 99.3% of its wholly owned subsidiary's 10.75% Senior Notes due 2011 totaling $497 million.


              In 2007, the Company received net proceeds of $982 million from the issuance by its wholly owned subsidiary of 8.75% Senior Notes due 2017 and Floating Rate Senior Notes due 2015 and net proceeds of $1.382 billion for the refinancing of its senior secured credit agreement. In connection with the refinancing of the senior secured credit agreement the borrower repaid its $730 million Senior Secured Term Loan due 2011. In 2007, the Company redeemed $488 million of its outstanding 12.875% Senior Notes due 2010, $96 million of outstanding 11.25% Senior Notes due 2010 and $138 million (€104 million) of outstanding 11.25% Senior Euro Notes due 2010. Also in 2007, the Company's wholly owned subsidiary repurchased $144 million of its outstanding Floating Rate Senior Notes due 2011, the Company repurchased $59 million of its outstanding 11% Senior Notes due 2008, $677 million of its outstanding 11.5% Senior Notes due 2010 and $61 million (€46 million) of its outstanding 10.75% Senior Euro Notes due 2008. The Company also completed the exchange of $605 million of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of common stock during 2007. The Company also converted or repurchased $180 million of Broadwing's outstanding 3.125% Convertible Senior Debentures due 2026 through the issuance of 17 million shares of common stock and the payment of $106 million in cash in 2007.

              (6)

              In 2003,2008, the Company received proceeds of $400 million from the issuance of its 15% Convertible Senior Notes due 2013. In connection with the issuance of the 15% Convertible Senior Notes due 2013, the Company completed tender offers and repurchased $163 million of its 2.875% Convertible Senior Notes due 2010, $173 million of its 6% Convertible Subordinated Notes due 2010 and $124 million of its 6% Convertible Subordinated Notes due 2009. In 2008, the Company completed exchanges with holders of various issues of its convertible debt in which the Company issued approximately 21648 million shares of the Company's common stock valued at approximately $953 million, in exchange for long-term debt. Included$18 million of its 6% Convertible Subordinated Notes due 2009, $47 million of its 10% Convertible Senior Notes due 2011, $19 million of its 2.875% Convertible Senior Notes due 2010, $15 million of its 5.25% Convertible Senior Notes due 2011 and $9 million of its 3.5% Convertible Senior Notes due 2012. Also in 2008, the valueCompany repurchased $39 million aggregate principal amount of common stock issued, are induced conversion premiumsits 6% Convertible Subordinated Notes due 2009 and $32 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2010. The Company also repaid at maturity the remaining $20 million of its outstanding 11% Senior Notes due 2008 and approximately $6 million (€4 million) of its outstanding 10.75% Senior Euro Notes due 2008.

              In 2009, the Company received net proceeds of $274 million as a result of amending and restating its existing senior secured credit facility to increase the borrowings through the creation of a $280 million Tranche B Term Loan. The Company exchanged $142 million of its 6% Convertible Subordinated Notes due 2010 and $140 million of its 2.875% Convertible Senior Notes due 2010 for $200 million for convertible debt securities.


              of 7% Convertible Senior Notes due 2015 and $78 million of cash. In 2004,2009, the Company realized $95received net proceeds of $274 million from the issuance of its 7% Convertible Senior Notes due 2015, Series B. Also in 2009, the Company repurchased $126 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2009, $55 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2010, $13 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010, $131 million aggregate principal amount of its 5.25% Convertible Senior Notes due 2011, $56 million aggregate principal amount of its 10% Convertible Senior Notes due 2011, and $31 million aggregate principal amount of its 3.5% Convertible Senior Notes due 2012. The Company also redeemed the remaining $13 million of foreign currency losses onits 11.5% Senior Notes due 2010, repurchased the repurchaseremaining $6 million aggregate principal amount of its Euro denominated debt.

              Floating Rate Notes due 2011 and repaid at maturity the remaining $55 million of its outstanding 6% Convertible Subordinated Notes due 2009.


            (7)
            In 2005, the Company issued 115 million shares of common stock, valued at approximately $313 million, as the stock portion of the purchase price paid to acquire WilTel.



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              In 2006, the Company issued approximately 125 million shares of common stock in a public offering, valued at approximately $543 million.


              In 2006, the Company issued 20 million shares of common stock, valued at approximately $66 million, as the stock portion of the purchase price paid to acquire Progress Telecom; 26 million shares of common stock, valued at approximately $131 million, as the stock portion of the purchase price paid to acquire ICG Communications; 150 million shares of common stock, valued at approximately $623 million, as the stock portion of the purchase price paid to acquire TelCove;


                and 21 million shares of common stock, valued at approximately $84 million, as the stock portion of the purchase price paid to acquire Looking Glass.


              In 2007, the Company issued 197 million shares of common stock in exchange for $605 million of its 10% Convertible Senior Notes due 2011. The Company also issued 123 million shares of common stock, valued at approximately $688 million, as the stock portion of the purchase price to acquire Broadwing Corporation. Also in 2007, the Company issued 17 million shares of common stock in connection with the conversion of $179 million of Broadwing's outstanding 3.125% Convertible Senior Debentures due 2026.

              In 2008, the Company issued approximately 48 million shares of common stock in exchange for $108 million aggregate principal amount of various issues of its convertible debt.


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            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", "plan", "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.

                    The following discussion should be read in conjunction with the Company's consolidated financial statements (including the notes thereto), included elsewhere herein.

                    Level 3 Communications, Inc., through its operating subsidiaries, is primarily engaged in the communications business, with additional operations in coal mining.

            Communication ServicesCommunications Business

                    The Company is a facilities-basedfacilities based provider of a broad range of communications services. Revenue for communications services is recognized on a monthly basis as these services are provided. For contracts involving private line, wavelengths and dark fiber services, Level 3 may receive up-front payments for services to be delivered for a period of generally up to 20 years. In these situations, Level 3 defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract. At December 31, 2007,2009, for contracts where up-front payments were received for services to be delivered in the future, the Company's weighted average remaining contract period was approximately 1412 years.

                    The Company separates its communications services into three separate categories:Communications revenue consists of:

              1)
              Core Communications Services, which includes Core Network Services and Wholesale Voice Services:

              •
              Core Communications Services;Network Services includes revenue from transport, infrastructure, data and local and enterprise voice communication services.

              •
              Wholesale Voice Services includes revenue from long distance voice services, including domestic voice termination, international voice termination and toll free services.

              •2)
              Other Communications Services;Services includes revenue from managed modem and

              •
              its related reciprocal compensation services and SBC Contract Services.Services, which includes revenue from the SBC Master Services Agreement, which was obtained in the acquisition of WilTel.

                    Each categoryThe two categories of Communications revenue isare in a different phasephases of the service life cycle, requiring different levels of investment and focus, and providing different contributions to the Company's Communications Adjusted EBITDA. Management of Level 3 believes that growth in revenue from its Core Communications Services is critical to the long-term success of its communications business. At the same time, theThe Company also believes it must continue to effectively manage effectively the positive cash flows from its SBC ContractOther Communications Services. Core Communications Services includes revenue from Core Network Services and Wholesale Voice Services. Core Network Services revenue represents higher margin services and Wholesale Voice Services represents lower margin services. The Company believes that trends in its communications business are best gauged by looking at revenue trends in Core Network Services. The Company manages Wholesale Voice Services performance based on gross margin contribution rather than revenue growth. Core Network Services includes revenue from


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            transport, infrastructure, data and local and enterprise voice communication services. Wholesale Voice Services includes revenue from long distance voice services, including domestic voice termination, international voice termination and toll free services. Other Communications Services including the Company's mature managed modem business and its related reciprocal compensation. For 2007, the Core Communications Services category included revenue from transport and infrastructure, IP and data services, voice and Level 3 Vyvx video and advertising distribution services. The Other Communications Services category


            includes revenue from managed modem and its related reciprocal compensation services and the legacy managed IP service business. The SBC Contract Services, categorywhich includes allrevenue from the revenue related to the SBC"SBC Master Services Agreement,Agreement", which was includedobtained in the December 2005 acquisition of WilTelWilTel.

            Core Communications Group, LLC ("WilTel").Services

                    The Company's transport and infrastructure services include metropolitan and intercity wavelengths, private line, ethernet private line, dark fiber, colocation services, professional services and transoceanic services. Growth in transport and infrastructure revenue is largely dependent on increased demand for bandwidth services and available capital of companies requiring communications capacity for their own use or in providing capacity as a service provider to their customers. These expenditures may be in the form of monthly payments or up-front payments or monthly payments for primarily private line, wavelength or dark fiber services. The Company is focused on providing end-to-end transport services to its customers to directly connect customer locations with a private network. Pricing for end-to-end services has been stable. For metropolitan transport services, prices have been relatively stable. For intercity transport services, the Company continues to experience pricing pressure for point-to-point locations, particularly in locations where a large number of carriers co-locate their facilities. An increase in demand may be partially offset by declines in unit pricing.

                    IP and dataData services primarily include the Company's high-speedhigh speed Internet access service, dedicated Internet access ("DIA") service, ATM and frame relay services, IP and ethernet virtual private network ("VPN") services, and content delivery network ("CDN") services, which includes streamingand Vyvx broadcast services. Level 3's high-speed Internet access service is a high quality and high-speed Internet access service offered in a variety of capacities. The Company's VPN services permit businesses of any size to replace multiple networks with a single, cost-effective solution that greatly simplifies the converged transmission of voice, video, and data. This convergence to a single platform can be obtained without sacrificing the quality of service or security levels of traditional ATM and Frame Relayframe relay offerings. VPN services also permit customers to prioritize network application traffic so that high priority applications, such as voice and video, are not compromised in performance by the flow of low priority applications such as email.

                    The Company believes that one of the largest sources of future incremental demand for the Company's Core Communications Services will be from customers that are seeking to distribute their feature rich content or video over the Internet. Revenue growth in this area is dependent on the continued increase in usage by both enterprises and consumers and the pricing environment. An increase in the reliability and security of information transmitted over the Internet and declines in the cost to transmit data have resulted in increased utilization of e-commerce or web based services by businesses. ThisAlthough the pricing for data services is currently stable, the IP market is currentlygenerally characterized by significant price compression and very high levels of unit growth rates resulting in growth in absolute revenue.depending upon the type of service. The Company experiencedcontinued to experience price compression in the high-speed IP market of over 30% in 20072009 and expects that its pricing for its high-speed IP services will continue to decline in 2008 at similar rates.

                    The Company continues to experience pricing pressure for those transport and infrastructure customers that require simple, low quality, point-to-point services, as certain competitors aggressively pursued this business. However, Level 3 believes that competitors are less willing to discount these services if it requires investment in incremental capacity to meet the customer's requirements. For those customers that provide high quality content or require a combination of transport, IP and voice solutions on a regional or national platform, Level 3 is seeing moderate price compression and, in some cases, prices are increasing.

                    The Company offers voice services that target large and existing markets. The revenue potential for voice services is large; however, the revenue and margins are expected to continue to decline over time as a result of the new low-cost IP and optical-based technologies. In addition, the market for voice services is being targeted by many competitors, several of which are larger and have more financial resources than the Company.2010.

                    The Company, through its Level 3 Vyvx business, provides transport services for the audio and video programming forof its customers over the Company's fiber-optic network and via satellite. It uses the Company's fiber-optic network to carry live traditional broadcast and cable television events from the site of the event to the network control centers of the broadcasters of the event.


                    For live events where the location is not known in advance, such as breaking news stories in remote locations, the Company provides an integrated satellite and fiber-optic network-based service to transmit the content to its customers. Most of Level 3's3 Vyvx's customers for these services contract for


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            the service on an event-by-event basis; however, there are some customers who have purchased a dedicated point-to-point service which enables these customers to transmit programming at any time.

                    On June 5, 2008, Level 3 completed the sale of its Vyvx also distributes advertising spotsdistribution business to radioDG FastChannel, Inc. and television stations throughout the U.S., both electronically andreceived gross proceeds at closing of approximately $129 million in physical form. Customers for these services can utilize a network-based method for aggregating, managing, storing and distributing content for content owners and rights holders.

                    On December 19, 2007,cash. Level 3 announced that it had reachedhas retained ownership of Vyvx's core broadcast business, including the Vyvx Services Broadcast Business' content distribution capabilities.

                    The financial results of the Vyvx advertising distribution business are included in the Company's consolidated results of operations through the date of sale on June 5, 2008.

                    Level 3 recognized a definitive agreement to sellgain on the sale of the Vyvx advertising distribution business of Vyvx, LLC ("Vyvx Ads") to DG FastChannel, Inc. for $129$96 million in cash.2008. The salegain is expected to closepresented in the second quarter of 2008. Revenue from the Vyvx Ads business totaled approximately $36 million, $35 million and less than $1 million for the years ended December 31, 2007, 2006 and 2005, respectively. The resultsconsolidated statements of operations for the Vyvx Adsas "Gain on sale of business are included in continuing operations from when it was acquired as part of the WilTel transaction in December 2005. The pending disposal of the Vyvx Ads business does not meet the criteria under Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") for presentation as discontinued operations since the business is not considered an asset group as defined in SFAS No. 144.groups, net."

                    The Company expects to continue to develop itshas developed content distribution services through the acquisition of the Content Delivery Network ("CDN") services business (the "CDN("CDN Business") of SAVVIS, which it purchased onin January 23, 2007, from SAVVIS, Inc. for approximately $133 million in cash (including transaction costs) and the acquisition of Dublin, Ireland based Servecast Limited, which it purchased onLtd. in July 11, 2007, for approximately $46 million in cash (including transaction costs).2007. The Company believes that the addition of the CDN Business with its strong, broad portfolio of patents will help the Company secure its commercial efforts in the heavily patented CDN market, in which a number of competitors have significant, patented intellectual property. In early 2007 we embarked on a strategy to refine our capabilities to address the communications needs of those organizations that produce the content that individuals want to view over the Internet. This service offering includes high speed IP services, colocation services and services that cost effectively distribute the content that is produced for consumption over the Internet. We believeLevel 3 believes that one of the largest sources of future incremental demand for communications services will be derived from customers that are seeking to distribute their feature rich content or video over the Internet.

                    The Company's Core Network Services includes local and enterprise voice services. Local voice services are primarily components that enable other service providers to deliver business or consumer ready voice products to their end customers. Enterprise voice services are business grade voice services that the Company sells directly to its business customers.

                    The Company offers Wholesale Voice Services that target large and existing markets. The revenue potential for Wholesale Voice Services is large; however, the pricing and margins are expected to continue to decline over time as a result of the new low-cost IP and optical-based technologies. In addition, the market for Wholesale Voice Services is being targeted by many competitors, several of which are larger and have more financial resources than the Company.

            Core Communications Services Market Groups

                    In order to serve the changing needs of customers in growing markets and to drive growth across the Communications organization, sales efforts for Core Communications Services are also disaggregated into four customer-facing market groups as follows:

              •
              The Wholesale Markets Group targets customers that include the largest national and global service providers, including carriers, cable companies, wireless companies, voice service providers, systems integrators and the federal government. These customers typically integrate Level 3 services into their own products and services to offer to their end user customers.

              •
              The Business Markets Group targets enterprise customers and regional carriers who value a local, professional sales force. Specific customer markets include medium and large businesses, local and regional carriers, state and local government entities, and higher education institutions and consortia.

              •
              The Content Markets Group targets media and content companies with large and growing bandwidth needs. Customers in this market include video distribution companies, providers of gaming, mega-portals, software service providers, social networking providers, as well as more traditional media distribution companies such as broadcasters, satellite companies, television networks and sports leagues.

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              •
              The European Markets Group targets large European consumers of bandwidth, including the largest European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors.

                    The Company believes that the alignment of Core Communications Services around customer markets allowed it to drive growth while enabling it to better focus on the needs of its customers. Each of these groups is supported by dedicated employees in sales and marketing. Each of these groups is also supported by non-dedicated, centralized service or product management and development, corporate marketing, global network services, engineering, information technology, and corporate functions including legal, finance, strategy and human resources.

                    Core Communications Services revenue from customers targeted by each customer-facing market group was as follows:

             
            		 Year Ended December 31, 
            (dollars in millions)
            		 2009 2008 2007 

            Wholesale Markets Group

            		 $1,987 $2,177 $2,045 

            Business Markets Group

            		  855  959  941 

            Content Markets Group

            		  336  398  380 

            European Markets Group

            		  325  326  256 
                    
             

            Total Core Communications Services

            		 $3,503 $3,860 $3,622 
                    

                    The classification of customers within each customer-facing market group can change based upon sales team assignments, merger and acquisition activity by customers and other factors. There were no material re-classification changes in revenue by market group during the three years ended December 31, 2009.

                    Beginning in the first quarter of 2010, Level 3 has announced that it will modify its revenue disclosure. Instead of using the customer-facing market groups, Level 3 will discuss its Core Network Services revenue in terms of wholesale, large enterprise and federal, mid-market, and European customers.

              •
              Wholesale will include revenue from international and domestic carriers, cable companies, wireless companies, voice service providers and the vast majority of former content market group customers.

              •
              Large enterprise and Federal will include Fortune 300 and other large enterprises that purchase communications services in a manner similar to carriers, including financial services, healthcare and systems integrators, Federal Government agencies and academic consortia, plus certain large former Content Markets Group customers.

              •
              Mid-market will include medium enterprises generally outside the Fortune 300, regional service providers, certain academic institutions and some state and local governments.

              •
              European is unchanged from the 2009 presentation. The European revenue includes the largest European consumers of bandwidth, including the largest European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors.

            Other Communications Services

                    The Company's Other Communications Services are mature services that are not critical areas of emphasis for the Company. Other Communications Services currently includeincludes revenue from managed modem


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            and its related reciprocal compensation services and legacy managed IP services.

            SBC Contract Services, which includes revenue derived under the SBC Master Services Agreement that was obtained in the WilTel acquisition. The Company and its customers continue to see consumers migrate from narrow band dial-up services to higher speed broadband services as the narrow band market matures. Additionally, America Online, a primary consumer of the Company's dial-up services,The Company expects ongoing declines in Other Communications revenue similar to what has been implementing a strategic change in its approach to its dial-up internet access businessexperienced over the past 18 months that has accelerated the loss of its dial-up subscribers. During 2007, America Online's strategy accelerated the decline in Level 3 managed modem revenue and is expected to contribute to further declines in managed modem revenue in 2008.several years.

                    The Company recognized approximately $179 million of managed modem revenue in 2007, an approximate 37% decline from the $286 million of managed modem revenue recognized in 2006. The declines in managed modem revenue from America Online in 2007 have been offset to some extent by an increase in market share as a result of certain competitors exiting segments of this business in the second half of 2006 and the full year 2007. Level 3 believes that



            the low-cost structure of its network will enable it to compete aggressively for new business in the declining, but still significant, managed modem market.

                    Level 3 receives compensation from other carriers when it terminates traffic originating on those carriers' networks. This reciprocal compensation is based on interconnection agreements with the respective carriers or rates mandated by the FCC. The Company has interconnection agreements in place for the majority of traffic subject to reciprocal compensation. In addition, a majority of the Company's existing reciprocal compensation revenue is associated with agreements that are in effect through 2009 or beyond. The Company continues to negotiate new interconnection agreements or amendments to its existing interconnection agreements with local carriers as needed. The Company earns the majority of its reciprocal compensation revenue from providing managed modem services.services, which are declining. The Company also began to receive increasing amounts ofreceives reciprocal compensation from its voice services, during 2007.which is reported within Core Network Services revenue.

                    Legacy managed IP services primarily include low-speed services over ATM technologyCommunications Business Strategy and frame technology, as well as managed security services. The Company's legacy Internet access business consists primarily of a business that was acquired in the Genuity transaction in 2003. To date, the Company has elected not to pursue additional customers and to limit the capital invested in this component of its business.Objectives

                    The SBC Master Services Agreement was an agreement between SBC Services Inc. and WilTel ("SBC Contract Services Agreement") and was obtained in the WilTel acquisition. SBC Services Inc. became a subsidiary of AT&T Inc., (together "SBC"). WilTel and SBC amended their agreement in June 2005 to run through 2009. The Company recognized $303 million of revenue under the SBC Contract Services Agreement during 2007. The agreement provides a gross margin purchase commitment of $335 million from December 2005 through the end of 2007, and $75 million from January 2008 through the end of 2009 and stipulates that originating and terminating access charges paid to local phone companies get passed through to SBC in accordance with a formula that approximates costs and do not count against the gross margin purchase commitment. SBC fully satisfied the $335 million gross margin purchase commitment during the third quarter of 2007. As a result of satisfying the initial gross margin purchase commitment, SBC's purchases of services that exceed the original $335 million gross margin purchase commitment now count toward the $75 million gross margin purchase commitment for the period from January 2008 through the end of 2009. As of December 31, 2007, SBC had satisfied $39 million of the $75 million gross margin purchase commitment. Level 3 expects that based on SBC's current level of spending, SBC will satisfy the remaining $36 million of gross margin purchase commitment in the first half of 2008.

                    Additionally, the SBC Contract Services Agreement provides for the payment of $50 million from SBC if certain performance criteria are met by Level 3. The Company met the required performance criteria and recorded annual revenue of $25 million in both 2006 and 2007 under the agreement. Of the annual amounts, 50% was based on monthly performance criteria and the remaining 50% was based on performance criteria for the full years. The performance-based incentive provisions of the agreement ended on December 31, 2007. Level 3 will not earn performance-based incentives in 2008 under the SBC Contract Services Agreement.

                    As a result of the reductions in SBC Contract Services revenue and the overall increase in revenue from acquisition activity, concentration of revenue among a limited number of customers has decreased compared to previous periods. Level 3's top ten customers, including the SBC Contract Services revenue, represented 61% of total communications revenue in the first quarter of 2006, dropping to 36% of total communications revenue in the fourth quarter of 2007. Excluding the SBC Contract Services revenue, Level 3's top ten customers represented 39% of total communications revenue in the first quarter of 2006, dropping to 31% of total communications revenue in the fourth quarter of 2007. The Company expects the concentration of revenue from its top ten customers to continue to decline moderately in 2008 as the SBC Contract Services revenue continues to decline. However, if Level 3 would lose one or more major customers, or if one or more major customers significantly decreased its orders for Level 3 services, the Company's communications business would be materially and adversely affected.


                    Level 3's management continues to review all of the Company's existing lines of business and service offerings to determine how those lines of business and service offerings assist withenhance the Company's focus on the delivery of communications services and meetingmeet its financial objectives. To the extent that certain lines of business, business segmentsgroups or service offerings are not considered to be compatible with the delivery of the Company's services or with obtainingmeet its financial objectives, Level 3 may exit those lines of business segments or stop offering those services.

                    The Company is focusing its attention on the following operational and financial objectives:

              •
              growing revenue in Core Communications Services;increasing sales improving the customer experience to increase customer retention and reducing customer churn;

              •
              growing Core Network Services revenue;

              •
              achieving sustainable generation of positive cash flows from operations in excess of capital expenditures;

              •
              reducing network costs and operating expenses;

              •
              continuing to show improvements in Adjusted EBITDA as a percentage of revenue;

              •
              achieving sustainable generation of free cash flow;continuing to implement its "go local" metro network strategy; including leveraging its existing network assets to expand its addressable market;

              •
              localizing certain decision making and interaction with its mid-market enterprise customers;

              •
              completing the integration of acquired businesses;

              •
              managing Wholesale Voice Services revenue for margin contribution;

              •
              growing its content delivery network services; and

              •
              continuing to implementrefinancing its metro network strategy; and

              •
              managing cash flows provided by its Other Communications Services and SBC Contract Services.future debt maturities.

                    Management of Level 3The Company's management believes the introduction of new services or technologies, as well as the further development of existing technologies, may reduce the cost or increase the supply of certain services similar to those provided by Level 3. The ability of the Company to anticipate, adapt and invest in these technology changes in a timely manner may affect the Company's future success.


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                    The Company completedstrategically expanded its presence in metropolitan markets and expanded its offering of services to enterprise customers through its Business Markets Group. This strategy allowed the initial planned deploymentCompany to terminate traffic over its owned facilities rather than paying third parties to terminate the traffic. The expansion into new metro markets also provided additional opportunities to sell services to bandwidth intensive businesses on the Company's national and international networks. In order to expedite the expansion of the next generation of optical transport technologyits metro business, Level 3 acquired Progress Telecom, ICG Communications, TelCove and Looking Glass in its North American2006 and European networks in the fourth quarter of 2005 and earlyBroadwing in the first quarter of 2006, respectively. The Company decided to deploy the technology for additional routes in North America and Europe and completed the deployments on these routes in 2006. The Company completed an upgrade of its IP backbone technology in the fourth quarter of 2005.2007. Level 3 believes that this deployment of new equipment to the existingalso strategically expanded its content delivery network equipment will allow the Company to optimize the amount of traffic it carries over the network and lower its cost of providing its services.

                    To expand its service offerings in Europe, the Company invested approximately $20 million for a dark fiber based expansion in Europe. During 2006, the Company obtained dark fiber primarily in those cities currently served by leased wavelength capacity and additionally in 2006 the Company completed an expansion of our European operations to nine additional cities. During 2007, the Company obtained dark fiber in three cities that had been served by leased wavelength capacity and additionally in 2007 the Company completed an expansion of its European operations to nine additional cities. In 2008, the Company expects to continue its European expansion to one additional city using leased wavelength capacity. The Company expects to use the dark fiber with appropriate transmission equipment to sell a full suite of transport and IP services.

                    The communications industry continues to consolidate. Level 3 has participated in this processservices with the acquisitions of WilTel in 2005; Progress Telecom, LLC ("Progress Telecom"); ICG Communications, Inc. ("ICG Communications"); TelCove, Inc. ("TelCove") and Looking Glass Networks Holding Co., Inc. ("Looking Glass") in 2006; and Broadwing Corporation ("Broadwing"); the CDN Business in the first quarter of 2007 and Servecast in the third quarter of 2007.

                    Level 3 will continue to evaluate consolidationacquisition opportunities and could make additional acquisitions in the future.


                    The successful integration of acquired businesses into Level 3 is important to the success of Level 3. The Company must continue to identify synergies and integrate theacquired networks and support organizations, while maintaining the service quality levels expected by customers in order to realize the anticipated benefits of these acquisitions. Successful integration of these acquired businesses willcontinues to depend on the Company's ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage.coverage, and to eliminate redundant and excess costs to fully realize the expected synergies. If the Company is not able to efficiently and effectively continue to integrate the acquired businesses or operations, the Company may experience material negative consequences to its business, financial condition or results of operations.

                    During the secondThe Company has taken steps to improve its existing processes and third quarters of 2007, the Company'ssystems to reduce service activation times increased as a result of the following issues.

              •
              Continuingand improve its service management. The Company continues to use the multiple order entry and provisioning systems and processes that were operated by the acquired companies to provision end-to-end services.

              •
              Insufficient training on the multiple systems for employees performing service activation functions.

              •
              Lack of sufficient staffing levels in some service activation areas.

              •
              Identifying and fixing service activation throughput issues was challenging as a result of decentralizing service activation functions across the customer facing groups.

                    This increase in service activation cycle time had a negative effect on the Company's service installation intervals and the rate of Core Communications Services revenue growth during the second, third and fourth quarters of 2007. During this same period, the Company also experienced challengesrealize improvements in its service management processes that resultedand believes it has implemented sufficient improvements in longer response times to resolve customers' network service issues. As a result of consolidating key operational functions and organizations as part of the integration effort, the Company's operating environment became more complex in the first half of 2007.

                    During the second and third quarters, the Company implemented certain process and organizational changes that were expected to improve service activation times and allow itcapabilities to achieve its previously forecasted revenue and Adjusted EBITDA growth. However these changes were not adequatematch installation capacity to address the breadth of the problems encountered during the third quarter. As a result of these service activation and service management issues, the growth in Communications Services Revenue and Adjusted EBITDA was lower than expectedcustomer demand for the full year 2007 and is expected to be lower than originally forecasted in 2007 for the full year 2008.services.

                    The Company has ongoing process and system development work that is being implemented as part of the integration efforts that ishave and are expected to addressfurther improve the full spectrum of the customer experience, including service activation, and service management issues described aboveand customer billing as well as provide significant overall improvements to operations.various operational efficiency improvements. The Company completed the foundation of its processes and systems under development remain largelyobjectives in 2008 and remains focused on track with certain components deployed beginning in October 2007auditing and additional deployments scheduled through the end of 2008. While the operational benefits vary by each project, the Company expectsmigrating network inventory data from legacy applications to realize meaningful improvements in its operating environment during the second half of 2008. In addition, the Company is taking steps to improve its existing processes and systems to address the increase in service activation times and improve its service management. During the fourth quarter of 2007, the Company improved its provisioning capability by both increasing resources and through process improvement. The Company believes that its customers' experiences with Level 3 have improved and the Company continues to make process and organizational changes to improve its capabilities in 2008.central applications.

                    Level 3 has embarked on a strategy to expand its current metro presence. The strategy allowsRecent changes in the economic environment and uncertainty in the global financial markets have required the Company to increasingly terminate traffic overcontinue to manage its owned metro facilities rather than paying third parties to terminate the traffic. Level 3's ability to provide high-speed bandwidth directly to customer



            facilities is expected to be a competitive advantage. The Company intends to offer a broad range of services in these marketscost structure and concentrate its sales efforts on the bandwidth intensive businesses. The expansion into new metro markets should also provide additional opportunities to sell services on the Company's national and international networks. This metro strategy included the acquisitions of Progress Telecom, ICG Communications, TelCove and Looking Glass. As part of its metro strategy and as a result of the acquisition of TelCove in 2006 and Broadwing in 2007, the Company is also targeting enterprise customers directly through its Business Markets Group described in more detail below. With the acquisition of the CDN Business and Servecast in 2007, Level 3 embarked on a strategy to expand its content delivery network services in both the United States and Europe.

                    The change in the composition of the Company's revenue requires the Company to manage operating expenses carefully and to concentrate its capital expenditures on those technologies and assets that enable the Company to further develop its Core Communications Services further and replace the decline in revenue and earnings from Other Communications ServicesServices. In addition, the Company's operating results and SBC Contract Services.

                    In the third quarterfinancial condition could be negatively affected, if as a result of 2006, Level 3 announced the formation of four customer-facing groups to better serve the changing needs of customers in growing markets and drive growth across the organization:economic conditions:

              •
              The Wholesale Markets Group services customers defer or forgo purchases of services;

              •
              customers are unable to make timely payments;

              •
              the communications needsdemand for, and prices of, the largest national and global service providers, including carriers, cable companies, wireless companies, and voice service providers. These customers typically integrate Level 3Company's services into their own products and services to offer to their end user customers. Revenue from the Wholesale Markets Group represented 56%are reduced as a result of Core Communications Services revenue for 2007.actions by its competitors or otherwise;

              •
              The Business Markets Group targets enterprise customers and regional carriers who valuekey suppliers upon which the Company relies are unable to provide the materials needed for its network on a local, professional sales force. Specific customer markets include small, medium, and large businesses, local and regional carriers, state and local government entities, and higher education institutions and consortia. Revenue from the Business Markets Group represented 26% of Core Communications Services revenue for 2007.timely basis; or

              •
              The Content Markets Group focuses on serving mediathe Company's financial counterparties, insurance providers or other contractual counterparties are unable to, or do not meet, their contractual commitments.

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                    For example, the Company's revenue and content companies with large and growing bandwidth needs. Customers in this market include video distribution companies, providers of gaming, mega-portals, software service providers, social networking providers, as well as more traditional media distribution companies such as broadcasters, television networks and sports leagues. Revenue from the Content Markets Group represented 11% of Core Communications Service revenue for 2007.

            •
            The European Markets Group serves large European consumers of bandwidth, including the European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors. Revenue from the European Markets Group represented 7% of Core Communications Services revenue for 2007.

                    The Company believes that the alignment around customer markets should allow it to drive growth while enabling it to better focus on the needs of its customers. Beginningoperating results were negatively affected in 2008 the Company will disclose Core Communications Services revenue in dollars and 2009 as a percentageresult of total Core Communications Services revenue for each of its market groups, Wholesale, Business, Content and Europe.the recent macroeconomic environment.

                    In addition to the operational objectives mentioned above, the Company has also been focused on improving its liquidity, and financial condition, including efforts to extendand extending the maturity dates of certain debt and lowering the effective interest rate on its outstanding debt.


                    In January 2007, in two separate transactions, the Company completed the exchangefourth quarter of $6052009, Level 3 Communications, Inc. issued $275 million aggregate principal amount of outstanding principal of its 10%7% Convertible Senior Notes due 20112015, Series B, for a totalnet proceeds of 197 million shares of Level 3's common stock. The Company recognized a $177 million loss on$274 million. In addition, during the exchanges in the firstfourth quarter of 2007.2009, the Company repurchased approximately $73 million aggregate principal amount primarily consisting of convertible notes maturing in 2010, 2011 and 2012.

                    In February 2007,the third quarter of 2009, $55 million of outstanding aggregate principal of the Company's 6% Convertible Subordinated Notes due 2009 matured and was repaid. In addition, during the third quarter of 2009, the Company repurchased approximately $39 million aggregate principal amount of various issues of its convertible debt. The third quarter 2009 debt repurchases consisted of $11 million in 2010 maturities and $28 million in 2011 maturities.

                    During the second quarter of 2009, Level 3 Financing, Inc. ("Level 3 Financing"), a wholly owned subsidiary of Level 3 ("Level 3 Financing") issued $700the Company, amended and restated its existing senior secured credit facility to increase the borrowings through the creation of a $280 million Tranche B Term Loan that matures on March 13, 2014 with a current interest rate of LIBOR plus 8.50% per annum, with LIBOR set at a minimum of 3.00%.

                    During the second quarter of 2009, the Company exchanged approximately $142 million aggregate principal amount of its 8.75%6% Convertible Subordinated Notes due 2010 and approximately $140 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2017 and $3002010 for $200 million aggregate principal amount of its Floating Ratethe Company's 7% Convertible Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt$78 million in cash, plus accrued and to fund the cost of construction, installation, acquisition, lease, development or improvement of other assets to be used in Level 3's communications business.

                    In March 2007, Level 3 Financing refinanced its senior secured credit agreement and received net proceeds of $1.382 billion. The proceeds from this transaction were used to repay the existing $730 million senior secured credit agreement and other debt. The effect of this transaction was to increase the amount of senior secured debt from $730 million to $1.4 billion, reduce the interest rate on that debt from the London Interbank Offering Rate ("LIBOR") plus 3.00% to LIBOR plus 2.25% and extend the final maturity from 2011 to 2014. The Company recognized a $10 million loss on the extinguishment of the existing $730 million Senior Secured Term Loan due 2011 due to recognition of the remaining unamortized debt issuance costs.unpaid interest.

                    During the firstsecond quarter of 2007,2009, the Company redeemed the entire outstanding principal of the following debt issuances totaling $722 million:

              •
              $488 million of 12.875% Senior Notes due 2010 at a price equal to 102.146 of the principal amount;

              •
              $96 million of 11.25% Senior Notes due 2010 at a price equal to 101.875 of the principal amount; and

              •
              $138 million (€104 million) of 11.25% Senior Euro Notes due 2010 at a price equal to 101.875 of the principal amount.

                    Also during the first quarter of 2007, the respective issuers repurchased through tender offers, $941 million of the outstanding principal amounts of the following debt issuances:

              •
              $144 million of its outstanding Floating Rate Senior Notes due 2011 at a price equal to $1,080 per $1,000 principal amount of the notes, which included $1,050 as the tender offer consideration and $30 as a consent payment;

              •
              $59 million of its outstanding 11% Senior Notes due 2008 at a price equal to $1,054.28 per $1,000 principal amount of the notes, which included $1,024.28 as the tender offer consideration and $30 as a consent payment;

              •
              $677 million of its outstanding 11.5% Senior Notes due 2010 at a price equal to $1,115.26 per $1,000 principal amount of the notes, which included $1,085.26 as the tender offer consideration and $30 as a consent payment; and

              •
              $61 million (€46 million) of its outstanding 10.75% Senior Euro Notes due 2008 at a price equal to €1,061.45 per €1,000 principal amount of the notes, which included €1,031.45 as the tender offer consideration and €30 as a consent payment.

                    The Company recognized a $240 million loss associated with the redemptions and repurchases in the first quarter of 2007. The cash portion of the loss on redemptions and tenders totaled $165 million and the remaining $75 million consisted of unamortized debt issuance costs and unamortized discounts.


                    In the first quarter of 2007, for total cash consideration of $106 million and equity consideration of 17 million shares of common stock (valued at $97 million) all of Broadwing's outstanding $180approximately $301 million aggregate principal amount of 3.125% Convertible Senior Debentures due 2026 were retired. These debentures were issued by Broadwing prior to Level 3's acquisitionvarious issues of Broadwing on January 3, 2007. There was no gain or loss recognized due toits convertible debt. The second quarter 2009 debt repurchases consisted of $121 million in 2009 maturities, $50 million in 2010 maturities, $106 million in 2011 maturities and $24 million in 2012 maturities.

                    In addition, during the fact that, under purchase accounting,second quarter of 2009, the liability for the notes was valuedCompany redeemed at the total cost to retire the obligation.par $13 million aggregate principal amount in 2010 maturities.

                    The Company will continue to look for opportunities to improve its financial position and focus its resources on growing revenue and managing costs for the communications business.

            Coal Mining

                    Level 3, through its two consolidated 50% owned joint-venture surface mines, one each in Montana and Wyoming, sells coal primarily through long-term contracts with public utilities. The long-term contracts for the delivery of coal establish the price, volume, and quality requirements of the coal to be delivered. Revenue under these and other contracts is generally recognized when coal is shipped to the customer.

            Information ServicesCritical Accounting Policies and Estimates

                    On November 30, 2005, the Company sold its wholly owned subsidiary, (i)Structure, LLC, which provided computer outsourcing services primarily to small        The Company's discussion and medium-sized businesses. The Company also completed the dispositionanalysis of its remaining subsidiary in the information services business, Software Spectrum, Inc. on September 7, 2006. Thefinancial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and financial positionjudgments that affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the


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            circumstances, the results of which form the basis for (i)Structuremaking judgments about the carrying values of assets and Software Spectrumliabilities that are reflected as discontinued operations for all periods presented in this report.

            Critical Accounting Policiesnot readily apparent from other sources. The Company evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

                    TheWhile the Company has other accounting policies that involve estimates such as the allowance for doubtful accounts, accruals for estimated tax and legal liabilities, cost of revenue valuation allowance for deferred tax assets, and unfavorable contracts recognized in purchase accounting, management has identified the policies below, which require the most significant judgments and estimates to be made in the preparation of the consolidated financial statements, as critical to its business operations and the understanding of its results of operations. The effect of any associated risks related to these policies on the Company's business operations is discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations where these policies affect the Company's reported and expected financial results.

            Revenue

                    Revenue for communications services, including transport, infrastructure, data, voice private line, wavelengths, colocation, Internet access,and managed modem, data services, video and dark fiber revenue is recognized monthly as the services are provided. Communications services are provided either on a usage basis, which can vary period to period, or at a contractually committed amount.

                    Reciprocal compensation revenue is recognized when an interconnection agreement is in place with another carrier, or if an agreement has expired, when the parties have agreed to continue operating under the previous agreement until a new agreement is negotiated and executed; or at rates mandated by the FCC. Periodically, the Company will receive payment for reciprocal compensation services in excess of FCC rates and before an agreement is in place. These amounts are included in other current liabilities on the consolidated balance sheetsheets until a final agreement has been reached and the necessary regulatory approvals have been received at which time the reciprocal compensation revenue is recognized. These amounts were insignificant to the Company in 20072009, 2008 and 2006.2007.

                    Revenue attributable to leases of dark fiber pursuant to indefeasible rights-of-use agreements ("IRUs") that qualifyqualified for sales-type lease accounting and were entered into prior to June 30, 1999, waswere recognized at the time of delivery and acceptance of the fiber by the customer. Certain sale and long-term 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. This accounting treatment results in the deferral of revenue for the cash that has been received and the recognition of revenue ratably over the term of the agreement (currently(generally up to 20 years).

                    Termination revenue is recognized when a customer disconnects service prior to the end of the contract period and for which Level 3 had previously received consideration and for which revenue recognition was deferred. Termination revenue is also recognized when customers make termination penalty payments to Level 3 to settle contractually committed purchase amounts that the customer no longer expects to meet or when a customer and Level 3 renegotiate a contract under which Level 3 is no longer obligated to provide product or services for consideration previously received and for which revenue recognition has been deferred. Termination revenue is reported in the same manner as the original product or service provided.

                    Accounting practice and guidance with respect to the accounting treatment of revenue continues to evolve. Any changes in the accounting treatment could affect the manner in which the Company accounts for revenue within its communications and coal businesses.

            Revenue Reserves

                    The Company establishes appropriate revenue reserves at the time services are rendered based on an analysis of historical credit activity to address, where significant, situations in which collection is not reasonably assured as a result of credit risk, potential billing disputes or other reasons. The Company's significant estimates are based on assumptions and other considerations, including payment history, credit ratings, customer financial performance, history of billing disputes, industry financial performance and aging analysis.


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            Cost of Revenue Disputes for Communications Services

                    The Company disputes incorrect billings from its suppliers of network services. The most prevalent types of disputes include disputes for circuits that are not disconnected by its supplier on a timely basis and usage bills with incorrect or inadequate information. Depending on the type and complexity of the issues involved, it may and often does take several quarters to resolve the disputes. The Company establishes appropriate cost of revenue reserves for disputed supplier billings based on an analysis of its historical experience in resolving disputes with its suppliers.

            Non-Cash Compensation

                    The Company adopted SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R") effective January 1, 2006. SFAS No. 123R requires thatrecognizes stock-based compensation expense for all share-based payment awards in accordance with fair value recognition provisions. Under the fair value recognition provisions, the Company recognizes stock-based compensation expense net of an estimated forfeiture rate, recognizing compensation cost relatingfor only those awards expected to share-based payment transactions be recognized invest over the financial statements based onrequisite service period of the awards. Determining the appropriate fair value model and calculating the fair value of equity or liability instruments issued.share-based payment awards require subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company adoptedestimates the expense recognition provisionsstock price volatility using a combination of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),historical and implied volatility as Level 3 believes it is consistent with the approach most marketplace participants would consider using all available information to estimate expected volatility. The Company has determined that expected volatility is more reflective of market conditions and provides a more accurate indication of volatility than using solely historical volatility. In reaching this conclusion, the Company has considered many factors including the extent to which its future expectations of volatility over the respective term is likely to differ from historical measures, the absence of actively traded options and the Company's ability to review volatility of its publicly traded convertible debt with similar terms and prices to the options the Company is valuing. The Company issues outperform stock options in 1998. Therefore,which the value received is based on a formula involving a multiplier related to the level by which the Company's common stock outperforms the S&P 500® Index. The Company utilizes a modified Black-Scholes model due to the additional variables required to calculate the effect of applying the success multiplier for its outperform stock options, including estimating the expected volatility of the S&P 500® Index. As a result of the Company's stock price performance, the aggregate intrinsic value of outstanding outperform stock options was $5 million as of December 31, 2009.

                    The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If actual forfeiture rates are materially different from the original provisions of SFAS No. 123 onCompany's estimate, stock-based compensation expense could be significantly different from what the Company's financial position or results of operations was insignificant. AlthoughCompany has recorded in 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, though generally permitted to be settled in cash, are typically settled through the issuance of common stock, which would have a dilutive effect upon earnings per share, if and when such options are exercised. The determination of the estimated fair value used to record the compensation or professional expenses associated with the equity or liability instruments issued requires management to make a number of assumptions and estimates that can change or fluctuate over time.current period.

            Valuation of Long-Lived Assets

                    Property, plant and equipment is stated at cost, reduced by provisions to recognize economic impairment in value when management determines that events have occurred that require an analysis of potential impairment. Costs associated directly with network expansions and the development of business support systems, primarily employee-related costs, are capitalized. The Company capitalized $102 million, $72 million and $51 millionperforms an assessment of cost, primarily direct labor and related employee benefits, in 2007, 2006 and 2005, respectively.

                    Intercity network segments, gateway facilities, local networks and operating equipment that have been placed in service are being depreciated over their estimated useful lives, primarily ranging from 2-40 years. The total cost of a business support system is amortized over a useful life of three years. The useful lives of the Company'sits long-lived assets, are estimates and actual in-service periodsincluding finite-lived acquisition-related intangible assets, for specific assets could differ significantly from these estimates. Due toimpairment when events or changes in technology and the competitive environment, these estimates require a significant amount of judgment. Management monitors and evaluates these estimates on an annual basis or as circumstances changeindicate that may indicate a change in estimate is required. During 2006 the Company extended the useful lives of its existing fiber assets from seven to 12 years, its existing transmission equipment from five to seven years and its existing IP equipment from three to four years.


                    The Company at least annually, or as events or circumstances change that could affect the recoverability of the carrying value of its long-lived assets conducts a comprehensive review of the carrying value of its assets to determine if the carrying amount of the assets are recoverable in accordance with SFAS No. 144.or asset groupings may not be recoverable. This review requires the identification of the lowest level of identifiable cash flows for purposes of grouping assets subject to review. The estimate of undiscounted cash flows includes long-term forecasts of revenue growth, gross margins and capital expenditures.operating expenses. All of these items require significant judgment and assumptions. The impairment analysis of long-lived assets also requires the Company to make certain subjective assumptions and estimates regarding the expected future use of certain additional conduits and the expected future use of certain empty conduits. An impairment loss may exist when the estimated


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            undiscounted cash flows attributable to the assets are less than their carrying amount. If an asset is deemed to be impaired, the amount of the impairment loss recognized represents the excess of the long-lived asset's carrying value as compared to its estimated fair value, based on management's assumptions and projections.

                    The Company assessed its communicationsconducted a long-lived assets forasset impairment analysis in the fourth quarter of 2007,2009 and determinedconcluded that an impairment charge wasits long-lived assets, including finite-lived acquisition-related intangible assets, were not required. The communications network includes network equipment, fiber, multiple conduits, customer premise equipmentimpaired. To the extent that future changes in assumptions and colocation facilities. The impairment analysis is based onestimates cause a long-termchange in estimates of future cash flow forecast to assessflows that indicate the recoverycarrying amount of the communicationsCompany's long-lived assets, overincluding finite-lived acquisition-related intangible assets, may not be recoverable, the Company may incur impairment charges in the future to write-down the carrying amount of the Company's long-lived assets to their estimated useful lives.fair value.

            Useful Lives of Long-Lived Assets

                    Level 3 also assessesThe Company performs periodic internal reviews to determine depreciable lives of its property, plant and equipment. Due to rapid changes in technology and the carryingcompetitive environment, selecting the estimated economic life of telecommunications property, plant, and equipment requires a significant amount of judgment. The Company's internal reviews take into account input from the Company's global network services personnel regarding actual usage, physical wear and tear, replacement history, and assumptions regarding the benefits and costs of implementing new technology that factor in the need to meet the Company's financial objectives.

            Valuation of Goodwill and Acquired Indefinite-Lived Intangible Assets

                    The Company performs an assessment of its goodwill for impairment annually at the end of the fourth quarter, or more frequently if the Company determines that indicators of impairment exist. The Company's impairment review process compares the fair value of each reporting unit to its carrying value. The Company's reporting units are consistent with the reportable segments identified in Note 14 to the Consolidated Financial Statements. Goodwill assigned to the Communications reportable segment totaled $1.4 billion at both December 31, 2009 and 2008. There was no goodwill on an annual basis in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets." (SFAS No. 142). The carryingassigned to the Coal Mining reportable segment at December 31, 2009 or 2008. If the fair value of the reporting unit exceeds its carrying value, goodwill is compared to its fair value.not impaired and no further testing is performed. If the fair value does not exceed the carrying value of the reporting unit an analysis isexceeds its fair value, then a second step must be performed, to determine if an impairment charge shouldand the implied fair value of the reporting unit's goodwill must be recorded. The Company also evaluates intangible assets with indefinite lives individually on an annual basis, or as events or circumstances change that could affect the recoverability ofdetermined and compared to the carrying value of the asset,reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded.

                    The Company considers the use of multiple valuation techniques in accordance with SFAS No. 142. The Company did not record charges for the impairment of long-lived assets or goodwill in 2007, 2006 or 2005.

                    Management'sFair Value Measurements and Disclosures guidance to estimate of the future cash flows attributable to its long-lived assets and the fair value of its businesses involvereporting units and has consistently applied a market approach as the primary valuation technique as part of its impairment assessment process. During 2008, the Company had also utilized the income approach (discounted cash flows) as a secondary measurement of fair value, as the Company believed the use of another valuation technique should be considered given the circumstances resulting from the difficult economic environment and extreme volatility in the financial markets during 2008. The use of the income approach as an additional valuation technique in 2008 resulted in a measurement that management believes was equally representative of the fair value of the reporting units obtained using the primary value derived with the market approach.

                    Under the market approach, the Company estimates the fair value using an in-exchange valuation premise based upon the market capitalization of Level 3 using quoted market prices, adds an estimated control premium, and then assigns that fair market value to the reporting units. The most significant uncertainty. Thoseestimates and assumptions utilized in its valuations with the market approach involved estimating an


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            appropriate control premium and allocating the estimated enterprise fair value to each of its reporting units.

                    The Company concluded that using 20% as a control premium would be reasonable in its market approach valuation for purposes of performing its goodwill impairment test based on historical control premiums offered for comparable transactions in the communications industry, the availability of financing, and number of potential buyers. Level 3 allocated the calculated market value using the Company's quoted market price valuation to each of its two reporting units based on their relative percentage of Adjusted EBITDA, as this is a key external and internal valuation metric.

                    Based on the results of the Company's market approach valuation, the estimated fair value of the Communications reporting unit was well above its carrying value at the date of Level 3's impairment test.

                    Under the income approach, the Company calculated the fair value of a reporting unit based on the present value of estimated future cash flows which was then compared to the carrying value of invested capital for the Communications reporting unit. The most significant estimates and assumptions utilized in the Company's discounted cash flow valuation involved estimating unlevered cash flows, discount rates, period of cash flows and determination of terminal value.

                    The cash flow forecasts used in the Company's discounted cash flow analyses were based upon upside, midpoint and downside scenarios and considered the effects of the continued weakening of the economy in 2008.

                    The Company utilized a discount rate commensurate with its estimated weighted average cost of capital based on Level 3's target capitalization structure. The Company estimated its cost of debt primarily based on quoted market prices of its publicly traded debt and its cost of equity using historical equity beta, risk free rate of return and a market risk premium. The Company's discount rate increased significantly primarily as a result of pricing in the debt markets in 2008. Level 3 believed the discount rate utilized in its discounted cash flow analysis to be representative of a market participant rate.

                    The Company calculated the terminal value assuming a constant growth rate based on historical growth rates used in recent valuations of companies acquired by Level 3. The present value of Level 3's discounted cash flows was well above the Communications reporting unit carrying value of invested capital, which represents the carrying value of the reporting unit plus the carrying value of debt, as the Company's discounted cash flow analysis was performed using unlevered cash flows.

                    As indicated above, the Company has considered the use of multiple valuation techniques to estimate the fair value of its reporting units as part of Level 3's impairment assessment process and had utilized the income approach (discounted cash flows) as a secondary measurement of fair value given the circumstances resulting from the difficult economic environment and extreme volatility in the financial markets during 2008.

                    The Company conducted its goodwill impairment analysis at the end of the fourth quarter of 2009 and concluded that its goodwill was not impaired.

                    The Company also performs an assessment of its indefinite-lived acquisition-related intangible assets annually at the end of the fourth quarter, or more frequently if the Company determines that indicators of impairment exist. The Company's impairment review process compares the fair value of the indefinite-lived acquisition-related intangible assets to their respective carrying values. If the fair value of the indefinite-lived acquisition-related intangible assets exceeds their carrying values, then the indefinite-lived acquisition-related intangible assets are not impaired.

                    The Company's fair value methodology primarily consists of a discounted cash flow analysis that includes estimates of revenue, costs, growth rates and an appropriate discount rate and market


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            comparable estimates. These estimates are based on historical data, various internal estimates and management's assumptionsexpectations of future results, growth trendstrends.

                    The Company conducted its indefinite-lived acquisition-related intangible asset impairment analyses at the end of the fourth quarter of 2009 and industry conditions. The impairment analysis of long-lived assets also requires management to make certain subjectiveconcluded that there was no impairment.

                    To the extent that future changes in the Company's assumptions and estimates regardingcause a change in the expected future use of certain additional conduits evaluated for impairment separately fromrelated fair value estimates that indicate the network asset group. Management will continue to assess the Company's assets for impairment as events occur or as industry conditions warrant. Given the significant uncertainty, judgment and assumptions involved in developing the estimates of future cash flows and the number of years of remaining useful life of certaincarrying amount of the Company's goodwill and indefinite-lived acquisition-related intangible assets it is possible thatmay not be recoverable, the Company may determine that anincur impairment charge is requiredcharges in the future due to changes in these assumptionswrite-down the carrying amount of the Company's goodwill and estimates.indefinite-lived acquisition-related intangible assets to their estimated fair value.

            Use of EstimatesDerivative Financial Instruments

                    The preparationCompany uses derivative financial instruments, primarily interest rate swaps, to manage its exposure to fluctuations in interest rate movements. The Company's primary objective in managing interest rate risk is to decrease the volatility of financial statementsits earnings and cash flows affected by changes in conformitythe underlying rates. The Company has designated its interest rate swap agreements as a cash flow hedge. In a cash flow hedge, a borrower of variable interest debt agrees with generally accepted accounting principles requires managementanother party to make estimatesfixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of variability in the borrower's overall cash flows. The Company has designated these derivatives as a cash flow hedge on the date on which Level 3 entered into the derivative instrument. The change in the fair value of the interest rate swap agreements are reflected in other comprehensive income (loss) due to the fact that the interest rate swap agreements are designated as an effective cash flow hedge. The Company then reclassifies these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, the Company recognizes those amounts immediately in the consolidated statements of operations. The Company evaluates quarterly whether each derivative is highly effective in offsetting changes in cash flows of the hedged item or whether its initial assumption of no ineffectiveness is still valid. If the Company determines that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or its assumption of no ineffectiveness is no longer valid, then the Company discontinues hedge accounting with respect to that derivative prospectively. The Company also has equity conversion rights associated with debt instruments, which are considered derivative instruments as of December 31, 2009 and assumptions2008. The derivative instruments had to be classified as a liability during 2009 and 2008. The change in fair value of any derivatives that affectare not designated as hedges are immediately recorded in earnings. Gains from these derivative instruments were $14 million in 2009, and zero in 2008 and 2007. The Company does not use derivative financial instruments for speculative purposes.

                    The Company is exposed to credit related losses in the reported amountsevent of assets and liabilities and disclosure of contingent assets and liabilities at the datenon-performance by counterparties. The counterparties to any of the financial statementsderivatives the Company enters into are major institutions with investment grade credit ratings. The Company evaluates counterparty credit risk before entering into any hedge transaction, and continues to closely monitor the financial market and the reported amountsrisk that it's counterparties will default on their obligations. This credit risk is generally limited to the unrealized gains, if any, in such contracts, should any of revenue and expenses during the reporting period.these counterparties fail to perform as contracted.

            Asset Retirement Obligations

                    The most critical estimates and assumptions are made in determining the allowance for doubtful accounts, revenue reserves, recovery of long-lived assets, useful lives of long-lived assets, accruals for estimated tax and legal liabilities, cost of revenue disputes for communications services, unfavorable contracts recognized in purchase accounting andCompany's asset retirement obligations. Actual results could differ from those estimatesobligations consist of legal requirements to remove certain of its network infrastructure at the expiration of the underlying right-of-way ("ROW") term, restoration requirements for leased facilities and assumptions.reclamation requirements in the coal mining business to


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            remediate previously mined properties. The initial and subsequent measurement of the Company's asset retirement obligations require the Company to make significant estimates regarding the eventual costs and probability or likelihood that the Company will be required to remove certain of its network infrastructure, restore certain of its leased properties and remediate certain of its previously mined properties. In addition, the Company must estimate the periods over which these costs will be incurred and present value the total of such costs using the Company's estimate of its credit-adjusted risk-free interest rate.

                    The Company periodically evaluates its asset retirement obligations to determine if the amount and timing of its cash flow estimates continue to be appropriate based on current facts and circumstances.

                    As a result of indicators suggesting that the estimated cash flows underlying the Company's ROW asset retirement obligations were too high, the Company revised its assessment during the fourth quarter of 2008. Network infrastructure relocations indicated that the Company is not being required to physically remove its underground network infrastructure at rates consistent with the Company's previous estimates. Other internal and external information corroborated these lower rates. As a result, during the fourth quarter of 2008, the Company revised its probability assessment related to its requirement to physically remove its underground network infrastructure at the end of the underlying ROW terms, which caused a significant reduction to the related estimated cash flows that the Company believes will be required to settle its ROW asset retirement obligations. The Company reduced its asset retirement obligation liability accordingly during the fourth quarter of 2008.

                    As part of the ROW asset retirement obligation change in estimate, the Company determined that certain of its asset retirement obligations for acquired entities should have been higher at the acquisition date. As a result, the Company increased goodwill by approximately $15 million as of December 31, 2008.

                    The Company also determined that its estimates of restoration costs for its leased facility asset retirement obligations were too high based on current costs to restore. As a result, during the fourth quarter of 2008, the Company reduced its estimates of the cash flows that it believes will be required to settle its leased facility asset retirement obligations at the end of the respective lease terms, which resulted in a reduction to the Company's asset retirement obligation liability.

                    As a result of the aforementioned revisions in the estimated amount and timing of cash flows for asset retirement obligations, the Company reduced its asset retirement obligation liability by $103 million with an offsetting reduction to property, plant and equipment of $21 million, general and administrative expenses of $86 million, depreciation and amortization of $11 million and an increase to goodwill of $15 million in 2008. The Company reduced property, plant and equipment to the extent of the carrying amount of the related long-lived asset initially recorded when the asset retirement obligation liability was established. The remaining amount of the reduction to the asset retirement obligation was recorded as a reduction to depreciation expense, to the extent of historical depreciation of the related long-lived asset, and selling, general and administrative expense.

                    There were no significant changes made to the Company's assumptions or estimates used in determining the asset retirement obligations in 2009.

            Recently Issued Accounting Pronouncements

                    In June 2006,December 2007, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109" ("FIN No. 48"), which was effective for Level 3 starting January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN No. 48 providesrevised guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods and disclosure. The Company's policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense inbusiness combinations, which replaces the consolidated statements of operations. The adoption of FIN No. 48 did not have an effect on the Company's consolidated results of operations or financial condition as of and for the year ended December 31, 2007.

                    In June 2006, the FASB ratified the consensus on EITF Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement" ("EITF No. 06-3"), which was effective for Level 3 starting January 1, 2007. The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund ("USF") contributions and some excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies". If such taxes are significant and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company records USF contributions on a gross basis in its consolidated statements of operations, but records sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. Communications revenue on the consolidated statements of operations includes USF contributions totaling $45 million, $19 million and $7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The adoption of EITF No. 06-3 did not have a material effect on the Company's consolidated results of operations or financial condition for year ended December 31, 2007, as the policy followed was consistent before and after adoption.

                    In September 2006, the FASB issued Statements of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but providesexisting guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within that fiscal year.business combinations. The adoption of SFAS No. 157 is not expected to have a material effect on the Company's consolidated results of operations or financial condition upon adoption on January 1, 2008.

                    In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces SFAS No. 141, "Business Combinations." SFAS No.141Rrevised guidance retains the underlying concepts of SFAS No. 141the existing guidance in that all business combinations are stillan entity is required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-datetheir fair value with limited exceptions. SFAS No. 141R will changeon the acquisition date. The revised guidance changes the accounting treatment for certain specific acquisition related items including:to


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            require: (1) expensing acquisition related costs as incurred; (2) expensing changes in deferred tax asset valuation allowances and income tax



            uncertainties after the acquisition date; (3) valuing noncontrolling interests at fair value at the acquisition date; and (4) generally expensing restructuring costs associated with an acquired business. SFAS No. 141Rbusiness; (5) capitalizing in-process research and development assets acquired; and (6) measuring acquirer shares issued in consideration for a business combination at fair value on the acquisition date as opposed to the announcement date. The revised guidance also includes a substantial number of new disclosure requirements. SFAS No. 141RThe revised guidance is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The effect of adopting this guidance on the Company's consolidated results of operations and financial condition will be largely dependent on the size and nature of any business combinations completed on or after January 1, 2009.

                    In December 2007,April 2009, the FASB issued SFAS No. 160, "Noncontrolling Interestsadditional guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No.160 requires noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity and applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date except that comparative period information must be restated to classify noncontrolling interests in equity, attributed net income and other comprehensive income to noncontrolling interests, and provide other disclosures required by SFAS No. 160.business combination. This statementguidance is effective for assets or liabilities arising from contingencies in business combinations for which the Company beginningacquisition date is on or after January 1, 2009. The effect of adopting this guidance on the Company's consolidated results of operations and financial condition will be largely dependent on the size and nature of any business combinations completed on or after January 1, 2009.

                    In October 2009, the FASB issued a new accounting standard that provides revenue recognition guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management's best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. This guidance is generally expected to result in revenue recognition for more delivered elements than under the current rules. Level 3 is required to adopt this guidance prospectively for new or materially modified agreements as of January 1, 2011. The Company is evaluating the effect of this guidance, but does not expect adoption to have a material effect on its consolidated results of operations or financial condition.

                    In June 2009, the FASB issued a new accounting standard that changes the consolidation rules as they relate to variable interest entities. The new standard makes significant changes to the model for determining who should consolidate a variable interest entity, and also addresses how often this assessment should be performed. The standard is effective for Level 3 effective January 1, 2010. The Company is currently assessingevaluating the potential effect thatof this guidance, but would not expect it to have a material effect on the adoption of SFAS No. 160 will have on itsCompany's consolidated results of operations or financial condition.


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            Results of Operations 20072009 vs. 20062008

             
            		 Years Ended
            		 
            (dollars in millions)
            		 December 31,
            2007
            		 December 31,
            2006
            		 Change
            %
            		 
            Revenue:         
             Communications $4,199 $3,311 27%
             Coal mining  70  67 4%
              
            		 
            		 
            		 
              Total revenue  4,269  3,378 26%

            Costs and Expenses: (exclusive of depreciation and amortization shown separately below)
             
             
             
             
             
             
             
             
             
             Cost of revenue:         
              Communications  1,769  1,460 21%
              Coal mining  64  57 12%
              
            		 
            		 
            		 
             Cost of revenue  1,833  1,517 21%
             
            Depreciation and amortization
             
             
            942
             
             
            730
             
            29
            %
             Selling, general and administrative  1,723  1,258 37%
             Restructuring and non-cash impairment charges  12  13 (8)%
              
            		 
            		 
            		 
              Total costs and expenses  4,510  3,518 28%
              
            		 
            		 
            		 

            Operating Loss
             
             
            (241
            )
             
            (140
            )
            (72
            )%

            Other Income (Expense):
             
             
             
             
             
             
             
             
             
             Interest income  54  64 (16)%
             Interest expense  (577) (648)11%
             Loss on extinguishment of debt, net  (427) (83)(414)%
             Other, net  55  19 189%
              
            		 
            		 
            		 
              Total other income (expense)  (895) (648)(38)%
              
            		 
            		 
            		 

            Loss from Continuing Operations Before Income Taxes
             
             
            (1,136
            )
             
            (788
            )
            (44
            )%
            Income Tax Benefit (Expense)  22  (2)1,200%
              
            		 
            		 
            		 
            Loss from Continuing Operations  (1,114) (790)(41)%
            Income from Discontinued Operations  —  46 (100)%
              
            		 
            		 
            		 
            Net Loss $(1,114)$(744)(50)%
              
            		 
            		 
            		 

             
            		 Year Ended 
            (dollars in millions)
            		 December 31,
            2009            		 December 31,
            2008            		 Change
            %            		 

            Revenue:

            		          
             

            Communications

            		 $3,695 $4,226  (13)%
             

            Coal Mining

            		  67  75  (11)%
                    
              

            Total Revenue

            		  3,762  4,301  (13)%

            Costs and Expenses: (exclusive of depreciation and amortization shown separately below)

            		          
             

            Cost of Revenue:

            		          
              

            Communications

            		  1,499  1,740  (14)%
              

            Coal Mining

            		  66  69  (4)%
                    
               

            Total Cost of Revenue

            		  1,565  1,809  (13)%
             

            Depreciation and Amortization

            		  915  931  (2)%
             

            Selling, General and Administrative

            		  1,338  1,505  (11)%
             

            Restructuring and Impairment Charges

            		  9  25  (64)%
                    
              

            Total Costs and Expenses

            		  3,827  4,270  (10)%
                    

            Operating Income (Loss)

            		  (65) 31  — 

            Other Income (Expense):

            		          
              

            Interest income

            		  2  15  (87)%
              

            Interest expense

            		  (595) (570) (4)%
              

            Gain (loss) on extinguishment of debt, net

            		  14  89  (84)%
              

            Gain on sale of business groups, net

            		  —  99  — 
              

            Other, net

            		  27  24  13%
                    
               

            Total Other Income (Expense)

            		  (552) (343) (61)%
                    

            Loss Before Income Taxes

            		  (617) (312) (98)%

            Income Tax Expense

            		  (1) (6) 83%
                    
             

            Net Loss

            		 $(618)$(318) (94)%
                    

            Communications Revenue is separated into three categories:revenue consists of:

              •1)
              Core Communications Services, (including Transportwhich includes Core Network Services and InfrastructureWholesale Voice Services:

              •
              Core Network Services includes revenue from transport, infrastructure, data and local and enterprise voice communications services.

              •
              Wholesale Voice Services includes revenue from long distance voice services, IPincluding domestic voice termination, international voice termination and Data services, Voice services and Level 3 Vyvx services);toll free services.

              •2)
              Other Communications Services (including Managed Modemincludes revenue from managed modem and its related reciprocal compensation services and legacy Managed IP services); and

              •
              SBC Contract Services.Services, which includes revenue from the SBC Master Services Agreement, which was obtained in the December 2005 acquisition of WilTel.

              RevenueTable of Contents

                      Communications revenue attributable to each of these service categoriesservices is provided in the following table:as follows:

               
              		 Year Ended
              		 
              (dollars in millions)
              		 December 31,
              2007
              		 December 31,
              2006
              		 Change
              %
              		 
              Core Communications Services:         
               Transport and Infrastructure $1,716 $1,014 69%
               IP and Data  584  301 94%
               Voice  1,182  536 121%
               Level 3 Vyvx  140  122 15%
                
              		 
              		 
              		 
                 3,622  1,973 84%
              Other Communications Services:         
               Managed Modem  179  286 (37)%
               Reciprocal Compensation  73  102 (28)%
               Managed IP  22  57 (61)%
                
              		 
              		 
              		 
                 274  445 (38)%
              SBC Contract Services  303  893 (66)%
                
              		 
              		 
              		 
               Total Communications Revenue $4,199 $3,311 27%
                
              		 
              		 
              		 

               
              		 Year Ended
              December 31,              		 
              (dollars in millions)
              		 2009 2008 

              Core Communications Services:

              		       
               

              Core Network Services

              		 $2,843 $3,147 
               

              Wholesale Voice Services

              		  660  713 
                    

              Total Core Communications Services

              		  3,503  3,860 

              Other Communications Services

              		  192  366 
                    

              Total Communications Services Revenue

              		 $3,695 $4,226 
                    

                      The 84% increaseCommunications Revenue decreased 13% in 2009 compared to 2008. Contributing to this decline in Communications revenue was a decrease in Core Communications Services revenue, for 2007 compared to 2006 is due to growthwhich included declines in the Company's Core Network Services and Wholesale Voice Services revenue, from existingand is generally the result of macroeconomic conditions driving increased customer monthly recurring revenue churn, usage revenue declines, customers delaying the purchase of communications services, as well as revenue from the Progress Telecom, ICG Communications, TelCove, Looking Glass, Broadwing, CDN Businesscustomers self-serving and Servecast acquisitions. The Company purchased Progress Telecom in March 2006, ICG Communications in May 2006, TelCove in July 2006 and Looking Glass in August 2006. The Company purchased Broadwingoptimizing their own networks for communications services and the CDN Business in January 2007 and Servecast in July 2007. From a financial reporting perspective, the Company integrated into the Level 3 business the operationslag effect of WilTel, Progress Telecom, ICG Communications, TelCove and Looking Glass in 2006, and Broadwing and the CDN Business in the first half of 2007. As a result, separate revenue information by revenue categoryprior customer experience issues, particularly for these acquired companies is no longer reported other than for the SBC Contract Services revenue acquired from WilTel.mid-market enterprise customers.

                      As described earlier, the growth in Core Communications Services revenue was lower than expected during the second, third and fourth quarters of 2007 as a result of an increase in service activation times and challenges in service management processes. Service activation times increased during the second and third quarters as a result of the following issues.

                •
                Continuing to use the multiple order entry and provisioning systems and processes that were operated by the acquired companies to provision end-to-end services.

                •
                Insufficient training on the multiple systems for employees performing service activation functions.

                •
                Lack of sufficient staffing levels in some service activation areas.

                •
                Identifying and fixing service activation throughput issues was challenging as a result of decentralizing service activation functions across the customer facing groups in the third quarter of 2006.

                      The Company has ongoing process and systems development work that is being implemented as part of the integration efforts that is expected to address the service activation and service management issues described above and provide significant overall improvements to operations. The processes and systems under development remain largely on track with certain components deployed beginningexperienced declines within Core Network Services in October 2007 and additional deployments scheduled through the end of 2008. While the operational



              benefits vary by each project, the Company expects to realize meaningful improvements in its operating environment during the second half of 2008. In addition, the Company is taking steps to improve its existing processes and systems to address the increase in service activation times and improve its service management. With respect to the latter, the Company has seen improvements in its service response times in the fourth quarter of 2007 and expects to see further improvements in the future.

                      Transport and infrastructure revenue increased 69% for 20072009 compared to 2006.2008, including transport, Vyvx broadcast data services, local voice and enterprise voice services. The increase wasdecrease in transport revenue is primarily the result of growthmacroeconomic conditions causing customers to optimize their own networks as opposed to utilizing the Company's network and delays in existingcustomer sales cycles. The decrease in Vyvx broadcast data services is primarily the result of macroeconomic conditions causing lower usage as customers generally cut back on the number of broadcasting events they covered. The decrease in local voice and enterprise voice services is primarily the result of macroeconomic conditions causing lower voice usage. In addition, revenue associated with the Vyvx advertising distribution business declined in 2009 compared to 2008 as, on June 5, 2008, the Company completed the sale of the Vyvx advertising distribution business and therefore did not record any Vyvx advertising distribution revenue subsequent to the date of sale. Revenue attributable to the Vyvx advertising distribution business was $15 million in 2008. Partially offsetting the decreases in transport, Vyvx broadcast data services, Vyvx advertising distribution services and the recognition of a full year oflocal voice and enterprise voice revenue were increases in infrastructure revenue in 20072009 compared to 2008. The Company continues to experience favorable demand for Progress Telecom, ICG Communications, TelCove and Looking Glass acquisitions completed in 2006, as well as the revenue from the Broadwing acquisition completed in January 2007. Increased demand in the cable and wireless market segmentsinfrastructure services for complex nationwide solutions and colocation capacity in large markets contributed to the revenue growth in existing services in 2007 as compared to 2006.markets.

                      IP and dataThe decrease in Wholesale Voice Services revenue increased 94% for 2007 compared to 2006. The increase was the result of growth in existing services and the recognition of a full year of revenue in 2007 for Progress Telecom, ICG Communications, TelCove and Looking Glass acquisitions completed in 2006, as well as a full year of revenue from the Broadwing acquisition completed in early January 2007. IP and data revenue also increased in 2007 as a result of the CDN Business acquisition completed in January 2007 and the Servecast acquisition completed in July 2007. IP and data revenue also increased due to traffic growth in North America from new and existing customers that exceeded the rate of price compression experienced in 2007. During the second quarter of 2007, the Company also implemented new, reduced pricing under the terms of a contract renewal for its largest IP and data customer which partially offset the overall growth of IP and data revenue in the last half of 2007. Continued revenue growth in the Company's VPN service also contributed to the increase in IP and data revenue during 2007.

                      Level 3's voice revenue increased 121% for 2007 compared to 2006. The increase is primarily attributable to the operations acquireda decrease in the TelCove and Broadwing acquisitions, particularly domestic and international voice termination services, which was caused by price declines and growthlower usage. Partially offsetting the decrease in Level 3's existing wholesaledomestic and VoIP-related services includinginternational voice termination local inbound, enhanced local andrevenue was an increase in toll free services.

                      Level 3 Vyvx revenue increased 15%due to higher traffic attributable to conferencing provider customers. The Company continues to concentrate its sales efforts on maintaining incremental gross margins in the 30% range for 2007 compared to 2006.these services. The increase wasCompany may experience volatility in revenue as a result of an increase in advertising distribution revenue and the continued demand for high-definition broadcast services in sports, news and entertainment.this strategy.

                      CoreOther Communications Services revenue for 2007declined to $192 million in 2009 from $366 million in 2008. The decrease is primarily the result of an expected decline related to SBC contract services and 2006 includes $8 million and $9 million of termination revenue, respectively. The Company expects to recognize termination revenuea decline in the future if customers desire to renegotiate contracts or are required to terminate service. The Company is not able to estimate the specific value of these types of transactions until they occur, but does not currently expect to recognize significant termination revenue for the foreseeable future.

                      Managedmanaged modem revenue declined 37% to $179 million for 2007 compared to 2006 as a result of the continued migration from narrow band dial-up services to higher speed broadband services by end user customers, especially in large metropolitan areas. This change has resulted in a decline inIn addition, the demand forCompany renewed contracts with certain of its managed modem ports. In addition tocustomers during the port cancellation provisions, the contracts with America Online contain market-pricing provisions that have the effect of lowering revenue as Level 3 is obligated to provide America Online ayear at reduced per port rate if Level 3 offers another customer better pricing for a lower volume of comparable services. The declines in managed modem revenue from America Online have been partially offset by increases in market share as a result of certain competitors exiting segments of the managed modem business in the first half of 2007.prices. The Company expects managed modem revenue to continue to decline in the future primarily due to an increase in the number of subscribers migrating to broadband services and potential pricing concessions as contracts are renewed.services.


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                      Also contributing to the decrease in Other Communications revenue was lower SBC Contract Services revenue as a result of the migration of the SBC traffic to the AT&T network and the satisfaction by SBC of its gross margin commitment under the SBC Master Services Agreement in the first half of 2008. During the second quarter of 2008, the gross margin commitment on the SBC Master Services Agreement was satisfied; however AT&T, Inc. ("AT&T"), which merged with SBC in 2005, continues to purchase services from Level 3 under the SBC Master Services Agreement as it continues to migrate the services provided under the agreement to its own network facilities. The SBC Master Services Agreement was an agreement between SBC Services Inc. and WilTel and was obtained in the WilTel acquisition.

                      Reciprocal compensation revenue from managed modem services also declined 28% to $73 million for 2007in 2009 compared to 20062008 as a result of the continuing decline in demand for managed modem services. The Company has historically earned the majority of its reciprocal compensation revenue from managed modem services. Level 3 has interconnection agreements in place for the majority of traffic subject to reciprocal compensation. The majority of the Company's interconnection agreements provided rate structures through 2007. Level 3 continues to negotiate new interconnection agreements or amendments to its existing interconnection agreements with local carriers. As a result of the Company's acquisitions of WilTel, TelCove and Broadwing,services, although the Company has startedcontinues to generate a portion of its reciprocal compensation revenue from voice services. For the full year ending December 31, 2007, the Company recognized $26 million of reciprocal compensation revenue earned from voice services, which are included inis reported within Core CommunicationsNetwork Services revenue. To the extent that the Company is unable to sign new interconnection agreements or signs new agreements containing lower rates, or there is a significant decline in the Company's managed modem dial-up business, or FCC or state regulations change such that carriers are not required to compensate other carriers for terminating ISP-bound traffic, reciprocal compensation revenue may decline significantlyexperience further declines over time.

                      Managed IP services revenue declined 61% to $22 million for 2007 compared to 2006. As discussed earlier, to date the Company has not invested in this service and the decline in revenue is attributable to the disconnection of service by existing customers. The Company's legacy managed IP services business consists primarily of a business that was acquired in 2003. The Company expects this trend to continue in 2008.

                      SBC Contract ServicesCoal mining revenue decreased 66% to $303$67 million for 2007 compared to 2006in 2009 from $75 million in 2008 primarily as expected due to the migration of the SBC traffic to the AT&T network. The SBC Contract Services agreement was obtained in December 2005 as part of the WilTel acquisition. Under the terms of the agreement, SBC has gross margin purchase commitments through 2009. SBC fully satisfied the $335 million gross margin purchase commitment for the period from December 2005 through December 2007 during the third quarter of 2007. As a result of satisfying the initial gross margina long-term supply contract that enabled a customer to buyout future coal purchase commitment, SBC's purchases of services that exceed the original $335 million gross margin purchase commitment now count toward the $75 million gross margin purchase commitment for the period from January 2008 through the end of 2009. As of December 31, 2007, SBC had satisfied $39 million of the $75 million gross margin purchase commitment. Level 3 expects that, based on SBC's current level of spending, the remaining $36 million of gross margin purchase commitment will be satisfied by SBC in the first half of 2008.

                      Additionally, the SBC Contract Services Agreement provided for the payment of $50 million from SBC if certain performance criteria were met by Level 3. The Company met the required performance criteria and recorded annual revenue of $25 million in both 2006 and 2007 under the agreement. Of the annual amounts, 50% was based on monthly performance criteria and the remaining 50% was based on performance criteria for the full year. The Company is no longer eligible for performance bonuses under the SBC Contract Services agreement after December 31, 2007. The Company expects SBC revenue to continue to decline in 2008. However, SBC must still complycommitments with the minimum gross margin commitments under the terms of the contract unless satisfied sooner.

                      BeginningCompany in the first quarter of 2008,2008. The Company did not have any further obligations with respect to future coal commitments under the Company will changecontract, and therefore recognized the way it reports Core Communications Servicestransaction as revenue and will aggregate revenue from Transport and Infrastructure, IP and Data, non-wholesale Voice and Level 3 Vyvx services and report those results as Core Network Services revenue. Domestic voice termination, international voice termination and toll free services will be



              totaled and reported as Wholesale Voice Services revenue. Using this categorization, quarterly and full year 2007 Communications Services revenue would have been reported as shown in the table below:

               
              		 Quarter Ended
              		  
              (dollars in millions)
              		 March 31,
              2007
              		 June 30,
              2007
              		 September 30,
              2007
              		 December 31,
              2007
              		 Year Ended
              December 31,
              2007
              Communications Services Revenue:               
               Core Network Services $720 $735 $756 $783 $2,994
               Wholesale Voice Services  150  153  153  172  628
                
              		 
              		 
              		 
              		 
              Total Core Communications Services  870  888  909  955  3,622

              Other Communications Services
               
               
              84
               
               
              71
               
               
              63
               
               
              56
               
               
              274

              SBC Contract Services
               
               
              83
               
               
              76
               
               
              71
               
               
              73
               
               
              303
                
              		 
              		 
              		 
              		 

              Total Communications Services Revenue
               
              $
              1,037
               
              $
              1,035
               
              $
              1,043
               
              $
              1,084
               
              $
              4,199
                
              		 
              		 
              		 
              		 

                      Core Network Services revenue represents higher margin servicesfirst quarter of 2008. Also contributing to the decrease are the lower contractual selling prices with customers based on their purchasing volumes. Partially offsetting this decrease is a customer buyout of future coal purchase commitments under its contract which was completed and Wholesale Voice Services represents lower margin services. The Company believes that given the increasing substitutability between Transport and Infrastructure services and IP and Data services, trendsrecognized in the communications business are best gauged looking at revenue trends in Core Network Services.2009.

                      Coal mining revenue increased 4% to $70 million in 2007 compared to 2006. The increase was attributable to an increase in the tons of coal sold from the Black Butte mine, partially offset by a decrease in the tons of coal sold from the Decker mine. Overall, the price per ton for coal from both mines was up slightly in 2007 compared to 2006.

              Cost of Revenue for the communications business includes leased capacity, right-of-way costs, access charges, satellite transponder lease costs, and other third party costs directly attributable to the network, but excludes depreciation and amortization and related impairment expenses. Prior to the sale of the Vyvx advertising distribution business, the Company included in communications cost of revenue package delivery costs and the blank tape media costs associated with this business.

                      Cost of revenue for the communications business, as a percentage of communications revenue, for 2007 and 2006 was 42% and 44%, respectively.40.6% in 2009 compared to 41.2% in 2008. The decrease in the 2007communications cost of revenue as a percentage of communications revenue is primarily attributable tothe result of the Company deriving synergies from acquisitions which eliminate duplicate network costs. In addition, the continued decreasereduction in SBC Contract Services revenue from 2006 to 2007. Thehas improved communications cost of revenue as a percentage of communications revenue, as the gross margins for SBC Contract Services revenue are lower than the gross margins earned on other components included infor Core and Other Communications Services revenue. Also contributing to the decreasePartially offsetting this downward trend in 2007communications cost of revenue as a percentage of communications revenue are cost of revenue synergy savings that have been achieved as a result of acquisition integration efforts. The Company believes that cost ofincreases in Wholesale Voice Services revenue synergy savings of $80 million on an annualized basis have been achieved through integration efforts in 2007. The Company expects cost of revenue for the communications business, as a percentage of total communications revenue and lower managed modem revenue. The incremental gross margins for Wholesale Voice Services revenue are in the 30% range versus an 80% range for Core Network Services revenue, and the gross margin for managed modem revenue is generally higher than for Core Network Services revenue. Cost of revenue as a percentage of communications revenue could increase in periods in which revenue volumes are lower as fixed costs would become dilutive to decrease slightlygross margin.

              Coal mining cost of revenue decreased to $66 million in 2008 as2009 from $69 million in 2008. Coal mining cost of revenue approximated 99% of coal mining revenue in 2009 compared to 2007.92% in 2008.


                      CoalTable of Contents


              This increase in coal mining cost of revenue as a percentage of coal mining revenue increased to 91% for 2007 compared to 85%is the result of the buyout by a coal customer of future coal purchase commitments resulting in 2006. The increase in costthe recognition of revenue as a percentage of revenue,with no associated costs in 2007 as compared to 2006 was due to planned equipment maintenance costs at one mine and higher costs related to overburden removal at another mine.2008.

              Depreciation and Amortization expense increased 29%decreased 2% to $942$915 million for 2007 compared to 2006. The increase isin 2009 from $931 million in 2008. This decrease was primarily attributable to the increased depreciation and amortization expense recognized on communications tangible and intangible assets that were acquired through acquisitions completed in 2006 and 2007, as well asreduced depreciation expense on the approximately $241 million increase in capital expenditures for 2007 compared to 2006.

                      In addition, during the second quarter of 2007, the Company reviewed and adjusted the estimated useful lives used for amortization of customer-related intangibleassociated with shorter-lived fixed assets for the ICG Communications, TelCove and Looking Glass acquisitions effective June 1, 2007. This resulted in increased amortization expense of $9 million during the year ended December 31, 2007.


                      During the fourth quarter of 2007, the Company finalized the purchase price allocation for the Broadwing acquisition which resulted in reduced amortization expense related to intangible assets for the Broadwing acquisition from the date of acquisition totaling approximately $18 million, as comparedbecoming fully depreciated. Also contributing to the total amortization expense that would have been recognized for 2007 prior to the changedecrease was a reduction in the valuation of the intangible assets.

                      The increase in depreciation expense for 2007 was partially offset by a $44 million decrease in depreciation expense compared to the same period in 2006 attributable to the increase in estimated useful lives for network fiber and IP and transmission equipment implemented in the second and third quarters of 2006.

                      The Company expects depreciation and amortization expense to decrease in 2008 to a range of $880 million to $920 million compared to 2007 due to the offsetting effects of increased depreciation expense on incremental capital expenditures, overall reduced amortization expense on intangible assets as a resultdue to the disposal of $22 million of carrying value of amortizable intangible assets in the Vyvx advertising distribution sale and certain of the useful lives changes and valuation changes described above and reduced depreciation and amortization expense associated with shorter-lived tangible andCompany's amortizable intangible communications assets that were placed in service in prior years that are expected to becomebecoming fully depreciated or amortized in 2008.

              Selling, General and Administrative expenses increased 37%include salaries, wages and related benefits (including non-cash, stock based compensation expenses), property taxes, travel, insurance, rent, contract maintenance, advertising, accretion expense on asset retirement obligations and other administrative expenses. Selling, general and administrative expenses also include certain network related expenses such as network facility rent, utilities and maintenance costs.

                      Selling, general and administrative expenses decreased 11% to $1.723$1.3 billion in 2007 compared to 2006. This increase is2009 from $1.5 billion in 2008. The decreases are primarily attributable to a reduction in employee compensation and related costs due to a lower average headcount, which decreased approximately 6% in 2009 compared to 2008. Also contributing to the reduction in employee compensation and related costs were lower bonus expenses, associated withas a result of the operations acquiredreduction in the Progress Telecom, ICG Communications, TelCoveCompany's revenue and Looking Glass transactions during 2006;Adjusted EBITDA performance. Offsetting the Broadwingdecrease in the change in selling, general and CDN Business transactionsadministrative expenses is an $86 million benefit that was the result of a revision in January 2007; and the Servecast transactionCompany's estimate of its asset retirement obligations liability in July 2007. Specifically, increases in compensation, bonus and employee related costs, network related costs and facility-based expenses all contributed to the increasefourth quarter of 2008.

                      The decrease in selling, general and administrative expenses in 2007. Offsetting2009 compared to 2008 was also the increases discussed above were selling, general and administrative expense synergy savingsresult of synergies that have been achieved due to acquisition integration efforts and the Company's focus on reducing operating expenses, which resulted in decreases in professional fees and vendor services, and network related administrative expenses. Also contributing to the decrease is a reduction in the accretion on asset retirement obligations in 2009 compared to 2008 as a result of acquisition integration efforts. Asthe reduction in the estimate of the end of 2007, the Company believes that it has achieved annualized run rate synergies in selling, general and administrative expenses totaling approximately $105 million. Also offsetting the increase in selling, general and administrative expenses in 2007 compared to 2006 was a reduction in incentive-based compensation expense of $32 million as a result of lower than expected financial performance in 2007.

                      Selling, general and administrative expenses for 2006 included a $7 million property tax benefit related to the Company's facilities in the United Kingdom.asset retirement obligation recorded on December 31, 2008.

                      Included in selling, general and administrative expenses for 2007 and 2006 were $122in 2009 was $59 million and $84 million, respectively, of non-cash, stock-based compensation expenseexpenses related to grants of outperform stock options and restricted stock units and restricted stock shares. The increaseThis compares to $78 million of non-cash, stock-based compensation expenses recognized in 2008. This decrease in non-cash, stock-based compensation expense in 2007 compared to 2006, is primarily due to an increase inlower headcount, higher estimated forfeiture rates given the number of restricted stock unitsCompany's continued organizational structure optimization efforts and restricted stock shares issued to employees as a result of an increase in the number of employees eligible in 2007 compared to 2006, an increase in the 401(k) employee match and annual discretionary grant made to the 401(k) plan and an increase in non-cash compensation expense for those employees eligible for accelerated vesting of stock awards at retirement; with the overall increase partially offset by a reduction in the numberCompany's 401(k) stock-based matching contribution, as effective March 6, 2009, the Company matches 100% of outperform stock options and units issuedemployee contributions up to 3% of eligible earnings or applicable regulatory limits. Prior to March 6, 2009, the Company matched 100% of employee contributions up to 7% of eligible earnings or applicable regulatory limits.

              Restructuring Charges decreased to $9 million in 2007 compared to 2006. The number of employees eligible to participate2009 from $25 million in the Company's stock-based long-term incentive plan increased significantly from 2006 to 20072008 primarily as a result of the employees of acquired companies becoming eligible to participate in the long-term incentive plan at the beginning of 2007.

                      In 2007, the Company recognized additional non-cash stock-based compensation expense totaling approximately $11 million for those employees eligible for accelerated vesting of stock awards at retirement. The Company provides accelerated vesting of stock awards at the date an employee retires if the employee meets certain age and years of service requirements and certain other requirements. Under SFAS No. 123R, the fair value of stock-based employee awards are expensed over the minimum



              service period, which is from the grant date to the earliest vesting date. Therefore, the Company is required to fully expense at the grant date the value of stock awards made to those employees that already meet both the age and years of service requirements for accelerated vesting at retirement at the date of grant. If the employee will meet the age and years of service requirements for accelerated vesting at retirement sooner than the normal vesting period for the stock awards, then the Company is required to use that shorter period for recognition of the non-cash compensation expense associated with the grant.

                      Included in the 2006 non-cash compensation expense of $84 million was $6 million related to the revaluation of the October 2005 and January 2006 grants using May 15, 2006 as the revised grant date, in accordance with SFAS No. 123R. As stated in the Company's proxy materials for its 2006 Annual Meeting of Stockholders, over the course of the years since April 1, 1998, the compensation committeetiming of the Company's Board of Directors had administered the 1995 Stock Plan under the belief that the actionworkforce reduction activities. See Note 8 of the Company's Board of DirectorsNotes to amend and restate that plan effective April 1, 1998 had the effect of extending the original term of the Plan to April 1, 2008. After a further review of the terms of the plan, however, the compensation committee determined that an ambiguity could exist as to the date of the expiration of the plan. To remove any ambiguity, the Board of Directors sought the approval of the Company's stockholders to amend the plan to extend the term of the plan by five years to September 25, 2010. This approval was obtained at the 2006 Annual Meeting of Stockholders held on May 15, 2006.

                      After taking into account the $6 million increase in 2006 non-cash compensation expenseConsolidated Financial Statements for the grants revalued using a May 15, 2006 grant date and the $11 million increase in 2007 non-cash compensation expense for the employees that are eligible for accelerated vesting at retirement as discussed above, non-cash compensation increased $33 million for 2007 compared to 2006.

                      As part of a comprehensive review of its long-term compensation program completed in the first quarter of 2007, beginning with awards made on or after April 1, 2007, outperform stock options ("OSO") units are awarded monthly to employees in mid-management level and higher positions, have a three year life, will vest 100% on the third anniversary of the date of the award and will fully settle in net shares on that date. OSO units awarded beginning April 1, 2007 have exercise prices and are valued for non-cash compensation purposes based on the closing price of Level 3 common stock on the last day of each month. Recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007, thus the expected life of all such OSO units is three years.

                      The Company expects selling, general and administrative expenses to decrease in 2008 on an overall basis compared to 2007. The expected reduction in overall 2008 selling, general and administrative expenses is a result of reduced selling, general and administrative expenses for integration activities, reductions in headcount related to continuing integration activities and the deployment of improved business processes and systems during 2008, offset by an increase in incentive-based compensation compared to 2007.

                      Restructuring and Non-Cash Impairment Charges declined 8% to $12 million in 2007 compared to 2006. The Company recognized severance charges of $11 million in 2007 and $5 million in 2006, related to workforce reductions in the communications business in North America. The workforce reductions completed in 2007 were primarily related to the integration of companies acquired by Level 3 in 2006 and January 2007. As of December 31, 2007, the Company had remaining obligations of approximately $4 million.more details.

                      The Company recognized non-cash impairment charges of $1 million and $8 million in 2007 and 2006, respectively. The non-cash impairment charge of $1 million in 2007 and $4 million of the 2006 charge were primarily related to previously capitalized costs of certain information technology development projects no longer used by the Company. The costs incurred for these projects, including capitalized labor, were impaired as the Company did not expect to utilize the assets in the future. The


              remaining $4 million non-cash impairment charge in 2006 was related to excess land of the communications business deemed available for sale in Germany. This charge resulted from the difference between the recorded carrying value and the estimated market value of the land. During the third quarter of 2007, the Company reclassified the excess land in Germany to property, plant and equipment due to the fact the land had not been sold and was no longer being actively marketed for sale.

                      The Company expects to continue to recordmay experience further restructuring charges in 2008 in connection with the continued integration of businesses acquired in 2006 and 2007 and2010 as a result of the deployment of improved business processes and systems during 2008 that should result in reduced headcount.

                      The Companyit continues to periodically conduct comprehensive reviews of the long-lived assets ofoptimize its businesses, specifically communication assets deployed along its intercity and metro networks and in its gateway facilities. It is possible that assets may be identified as impaired and impairment charges may be recorded to reflect the realizable value of these assets in future periods.cost structure if revenue performance does not improve.

              Adjusted EBITDA, as defined by the Company, is net income (loss) from the consolidated statements of operations before (1) gain (loss) from discontinued operations, (2) income taxes, (3)(2) total other income (expense), (4)(3) non-cash impairment charges included within restructuring and impairment charges, as reported in the consolidated statements of operations, (5)(4) depreciation and amortization and (6)(5) non-cash stock compensation expense included within selling, general and administrative expenses onin the consolidated statements of operations.


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                      Adjusted EBITDA is not a measurement under accounting principles generally accepted in the United StatesGAAP and may not be used in the same way by other companies. Management believes that Adjusted EBITDA is an important part of the Company's internal reporting and is a key measure used by management to evaluate profitability and operating performance of the Company and to make resource allocation decisions. Management believes such measures aremeasurement is especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA to compare the Company's performance to that of its competitors. Management uses Adjusted EBITDAcompetitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses.

                      Adjusted EBITDA excludes non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense, income taxes and gain (loss) on extinguishment of debt, net and income taxes because these items are associated with the Company's capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impacteffect of capital investments which management believes should be evaluated through consolidated free cash flow.flow measures. Adjusted EBITDA excludes totalnet other income (expense) because these items are not related to the primary operations of the Company.

                      There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from the Company's calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income taxes, depreciation and amortization, non-cash impairment charges, non-cash stock compensation expense, gain (loss) on early extinguishment of debt, net and total other income (expense)., net. Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

                      Note 1914 of the consolidated financial statementsNotes to Consolidated Financial Statements provides a reconciliation of net income (loss) to Adjusted EBITDA for each of the Company's reportable operating segments.

                      Adjusted EBITDA for the communications business was $823 million and $677$910 million in 2007 and 2006, respectively.2009 compared to $1.039 billion in 2008. The increasedecrease in Adjusted EBITDA for the communications business is primarily attributable to the Adjusted EBITDA contribution from the



              operations acquireda reduction in the Progress Telecom, ICG Communications, TelCove, Looking Glass, Broadwing, CDN Business and Servecast acquisitions, growth in the Company's Core Communications Servicescommunications revenue andpartially offset by the benefits of cost of revenue andcontinued operating expense synergies realized in 2007 from integration activities, partially offset by declines in other communications services revenue, SBC Contract Services revenue and costs of integration incurred during 2007 as compared to 2006.reductions.

                      Adjusted EBITDA for the coal mining business decreased to $5 million in 2007 from $8 million in 2006. The decrease is primarily attributable to an increase in the amount of coal sold from the Black Butte mine which has higher stripping ratios that result in higher overall costs and a planned increase in maintenance costs for mining equipment in 2007.

                      The Company expects Adjusted EBITDA to increase in 2008 compared to 2007 to a range of $950 million to $1.1 billion. The expected increase in Adjusted EBITDA is based on continued growth in Core Communications Services revenue, expected improvements in service delivery times, and the benefit of integration synergies in cost of revenue and selling, general and administrative expenses realized from the Broadwing acquisition.

              Interest Income decreased 16% to $54$2 million in 2007 compared to 2006.2009 from $15 million in 2008. The decrease in interest income wasis primarily due to a decrease in the average invested balancereturn on the Company's cash and cash equivalents and restricted cash and securities balances, partially offset by an increase in the average return on the portfolio. The Company's average return on its portfolio increased to 4.8% in 2007invested balance during 2009 as compared to 4.3% in 2006. Thethe average portfolioinvested balance decreased to $1.0 billion in 2007 compared to $1.5 billion in 2006.during 2008.

                      Pending the utilization of cash and cash equivalents, theThe Company invests its funds primarily in government and government agency securities, money market funds and commercial paper.paper depending on liquidity requirements. The Company's investment strategy generally provides lower yields on the funds than would be obtained on alternative investments, but reduces the risk to principal in the short term prior to these funds being used in the Company's business.

              Interest Expense decreased 11%increased 4% to $577$595 million in 2007 compared to 2006.2009 from $570 million in 2008. Interest expense decreasedincreased primarily as a result of the refinancing activities that were completed by the Companyincreases in the firstaverage debt balance and average interest rate in 2009 as compared to 2008. See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding the Company's financing activities.

                      The Company expects annual interest expense in 2010 to approximate $585 million based on the Company's outstanding debt as of December 31, 2009, taking into consideration the January 2010 tender of the $550 million 12.25% Senior Notes, the January 2010 issuance of $640 million of 10%


              Table of Contents


              Senior Notes, expected continued execution of liability management initiatives and the current interest rates on the Company's variable rate debt.

              Gain on Sale of Business Groups, Net totaled $99 million in 2008 compared to zero in 2009. On June 5, 2008, Level 3 completed the sale of its Vyvx advertising distribution business to DG FastChannel, Inc. and recognized a net gain on the sale of $96 million in the second quarter of 2007.2008. In addition, in the fourth quarter of 2008, Level 3 completed the sale of certain of its smaller long distance voice customers and recognized a gain on the sale of approximately $3 million. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding the Company's disposition activities.

              Gain on Extinguishment of Debt, Net totaled $14 million in 2009 and $89 million in 2008. The overall reduction in interest expense is a2009 net gain on extinguishment of debt of $14 million was the result of the offsetting interest expense effects attributablecertain debt repurchases prior to the followingmaturity. The 2008 net gain on extinguishment of debt issuances, debt for equity exchanges, debt redemptions and debt repurchase transactions.

                      Interest expense increasedconsisted of a gain of $125 million as a result of the following debt issuances:

                •
                $1.250 billion of 9.25% Senior Notes due 2014 issued in October and December 2006;

                •
                $1 billion of Senior Notes issued in February 2007 consisting of $700 million of 8.75% Senior Notes due 2017 and $300 million of Floating Rate Senior Notes due 2015; and

                •
                $1.4 billion Senior Secured Term Loan due 2014 entered into in March 2007 to refinance the previously existing $730 million Senior Secured Term Loan due 2011.

                      The increase in interest expense from debt issuances described above was more than offset by the following debt for equity exchanges, debt redemptions andcertain debt repurchases completed during the fourth quarter of 2006 and the first quarter of 2007:

                •
                $497 million of 10.75% Senior Notes due 2011 repurchased in December 2006;

                •
                $605 million of 10% Convertible Senior Notes due 2011 exchanged in January 2007 for 197 million shares of common stock;

                •
                $488 million of 12.875% Senior Notes due 2010 redeemed in March 2007;

                •
                $96 million of 11.25% Senior Notes due 2010 redeemed in March 2007;

                  •
                  $138 million (€104 million) of 11.25% Senior Euro Notes due 2010 redeemed in March 2007;

                  •
                  $144 million of Floating Rate Notes due 2011 repurchased in March 2007;

                  •
                  $59 million of 11% Senior Notes due 2008 repurchased in March 2007;

                  •
                  $677 million of 11.5% Senior Notes due 2010 repurchased in March 2007; and

                  •
                  $61 million (€46 million) of 10.75% Senior Euro Notes due 2008 repurchased in March 2007.

                        Level 3 expects quarterly interest expense in 2008prior to be consistent with the level of interest expense in the second and third quarters of 2007 of $138 million per quarter based on outstanding debt balances as of December 31, 2007.

                        Loss on Extinguishment of Debt was $427 million in 2007 compared to $83 million in 2006. The loss on extinguishment of debt for 2006 was primarily the result of a $54 million loss from the repurchase of certain debt and a $55 million loss on the amendment and restatement of Level 3 Financing's Senior Secured Term Loan due 2011,maturity, partially offset by a $27 million gain realized on a debt exchange. The loss on extinguishment of debt for 2007 resulted from the following transactions.

                  •
                  $177$36 million loss recognized forattributable to induced debt conversion expenses related to the January 2007 exchange of $605 million of 10% Convertible Senior Notes due 2011 for approximately 197 million sharescertain of the Company's common stock. The loss included $1 million of unamortizedconvertible debt issuance costs.

                  •
                  $10 million loss recognized for the March 2007 refinancingsecurities. See Notes 11 and 17 of the Notes to Consolidated Financial Statements for additional information regarding the Company's $730 million Senior Secured Term Loan due 2011 into a $1.4 billion Senior Secured Term Loan due 2014. The loss consisted of unamortized debt issuance costs associated with the previous $730 million Senior Secured Term Loan due 2011.

                  •
                  $54 million loss recognized on the redemption of $722 million of outstanding debt consisting of the following debt issuances:

                  financing activities.
                  •
                  $12 million loss on the redemption of $488 million of outstanding 12.875% Senior Notes due 2010 consisting of a $10 million cash loss and $2 million in unamortized debt issuance costs.

                  •
                  $3 million loss on the redemption of $96 million of outstanding 11.25% Senior Notes due 2010 consisting of a $2 million cash loss and $1 million in unamortized debt issuance costs.

                  •
                  $39 million loss on the redemption of $138 million (€104 million) of outstanding 11.25% Senior Euro Notes due 2010 consisting of a $38 million cash loss and $1 million of unamortized debt issuance costs.

                  •
                  $186 million loss recognized on the repurchase through tender offers of $941 million of outstanding debt consisting of the following debt issuances:

                  •
                  $18 million loss on the repurchase of $144 million of outstanding Floating Rate Senior Notes due 2011 consisting of a $12 million cash loss and $6 million in unamortized debt issuance costs and unamortized discount.

                  •
                  $3 million loss on the repurchase of $59 million of outstanding 11% Senior Notes due 2008 consisting of a $3 million cash loss and less than $1 million in unamortized debt issuance costs.

                  •
                  $141 million loss on the repurchase of $677 million of outstanding 11.5% Senior Notes due 2010 consisting of a $78 million cash loss and $63 million in unamortized debt issuance costs and unamortized discount.

                    •
                    $24 million loss on the repurchase of $61 million (€46 million) of outstanding 10.75% Senior Euro Notes due 2008 consisting of a $24 million cash loss and less than $1 million in unamortized debt issuance costs.

                        The Company may enter into additional transactions in the future to repurchase or exchange existing debt that may result in gains or losses on the extinguishment of debt.

                Other, net increased 189% to $55was $27 million in 20072009 compared to $19$24 million in 2006.2008. Other, net is primarily comprised of realized foreign currency gains and losses, gains and losses on the sale of marketable securities and non-operating assets realized foreign currency gains and losses and other income. The increase

                Income Tax Expense was $1 million in 20072009 compared to 2006 is primarily due to a gain of $37$6 million recognized in the fourth quarter of 2007 on the sale of 80% of the Company's holdings of Infinera common stock.

                        Income Tax Benefit (Expense) was a $22 million benefit in 2007 and was a $2 million expense in 2006.2008. The income tax benefit for 2007 wasexpense in all periods presented primarily the result of reversing $23 million of the valuation allowance against the Company's deferred tax asset for certainrelates to state net operating loss carry forwards ("NOLs"). These state tax NOLs were converted to a state tax credit carry forward associated with a change in the state tax law that replaced the tax on netand foreign income with a tax on gross margin. The Company now expects it will be able to use this state tax credit carry forward against current and future state taxable gross margin.taxes.

                        The Company incurs income tax expense attributable to income in various Level 3 subsidiaries, including the coal business, that are required to file state or foreign income tax returns on a separate legal entity basis. The Company also recognizes accrued interest and penalties in income tax expense related to contingentuncertain tax benefits that have not been recognized in income tax expense, but have been recognized in the Company's tax returns.financial statements.

                        As of December 31, 2007, Level 3 had net operating loss carry forwards of approximately $9.5 billion for federal incomeThe difference between the Company's effective tax purposes, including $953 million of net operating loss carry forwards from acquired companies after limitations that existed at the date of acquisition or that resulted from the acquisitions or both. If certain transactions occur with respect to Level 3's capital stock that result in a cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a three-year period as determined under rules prescribed byrate and the U.S. Internal Revenue Code ("IRC") and applicable regulations, annual limitations would be imposed with respectstatutory rate was primarily due to the Company's abilitycontinuing to utilizemaintain a full valuation allowance against its net operating loss carry forwardsFederal and certain current deductions against any taxable income Level 3 achieves in future periods. Level 3 has entered into transactions over the last three years resulting in significant cumulative changes in the ownership of its capital stock. Additional transactions could cause the Company to incur a 50 percentage point ownership change by 5-percent stockholders and, if the Company triggers the above-noted IRC imposed limitations, could prevent it from fully utilizing net operating loss carry forwards and certain current deductions to reduce income taxes.state deferred tax assets.

                        Income (Loss) from Discontinued Operations in 2006 of $46 million was related to the discontinued operations of the Company's Information Services segment. The Company sold Software Spectrum, Inc. ("Software Spectrum") to Insight Enterprises, Inc. ("Insight") in September 2006. There were no gains or losses from discontinued operations recognized in 2007. Software Spectrum, Inc.'s results of operations resulted in income from discontinued operations of $13 million in 2006. In addition, Level 3 recognized a gain on the sale of Software Spectrum to Insight in 2006 of $33 million.


                  Results of Operations 2006 vs. 2005

                 
                		 Years Ended
                		 
                (dollars in millions)
                		 December 31,
                2006
                		 December 31,
                2005
                		 Change
                %
                		 
                Revenue:         
                 Communications $3,311 $1,645 101%
                 Coal mining  67  74 (9)%
                  
                		 
                		 
                		 
                  Total revenue  3,378  1,719 97%

                Costs and Expenses: (exclusive of depreciation and amortization shown separately below)
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Cost of revenue:         
                  Communications  1,460  463 215%
                  Coal mining  57  53 8%
                  
                		 
                		 
                		 
                 Cost of revenue  1,517  516 194%
                 
                Depreciation and amortization
                 
                 
                730
                 
                 
                647
                 
                13
                %
                 Selling, general and administrative  1,258  769 64%
                 Restructuring and non-cash impairment charges  13  23 (43)%
                  
                		 
                		 
                		 
                  Total costs and expenses  3,518  1,955 80%
                  
                		 
                		 
                		 

                Operating Loss
                 
                 
                (140
                )
                 
                (236
                )
                41
                %

                Other Income (Expense):
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Interest income  64  35 83%
                 Interest expense  (648) (530)(22)%
                 Loss on extinguishment of debt, net  (83) — 100%
                 Other, net  19  29 (34)%
                  
                		 
                		 
                		 
                  Total other income (expense)  (648) (466)(39)%
                  
                		 
                		 
                		 

                Loss from Continuing Operations Before Income Taxes
                 
                 
                (788
                )
                 
                (702
                )
                (12
                )%
                Income Tax Expense  (2) (5)60%
                  
                		 
                		 
                		 
                Loss from Continuing Operations  (790) (707)(12)%
                Income from Discontinued Operations  46  69 (33)%
                  
                		 
                		 
                		 
                Net Loss $(744)$(638)(17)%
                  
                		 
                		 
                		 

                Table of Contents

                Results of Operations 2008 vs. 2007

                 
                		 Year Ended 
                (dollars in millions)
                		 December 31,
                2008                		 December 31,
                2007                		 Change
                %                		 

                Revenue:

                		          
                 

                Communications

                		 $4,226 $4,199  1%
                 

                Coal Mining

                		  75  70  7%
                        
                  

                Total Revenue

                		  4,301  4,269  1%

                Costs and Expenses (exclusive of depreciation and amortization shown separately below):

                		          
                 

                Cost of revenue:

                		          
                  

                Communications

                		  1,740  1,769  (2)%
                  

                Coal Mining

                		  69  64  8%
                        
                   

                Total Cost of Revenue

                		  1,809  1,833  (1)%
                 

                Depreciation and Amortization

                		  931  942  (1)%
                 

                Selling, General and Administrative

                		  1,505  1,723  (13)%
                 

                Restructuring and Impairment Charges

                		  25  12  108%
                        
                  

                Total Costs and Expenses

                		  4,270  4,510  (5)%
                        

                Operating Income (Loss)

                		  31  (241) 113%

                Other Income (Expense):

                		          
                 

                Interest income

                		  15  54  (72)%
                 

                Interest expense

                		  (570) (609) 6%
                 

                Gain (loss) on extinguishment of debt, net

                		  89  (427) 121%
                 

                Gain on sale of business groups, net

                		  99  —  — 
                 

                Other, net

                		  24  55  (56)%
                        
                  

                Total Other Income (Expense)

                		  (343) (927) 63%
                        

                Loss Before Income Taxes

                		  (312) (1,168) 73%

                Income Tax (Expense) Benefit

                		  (6) 22  — 
                        
                 

                Net Loss

                		 $(318)$(1,146) 72%
                        

                Communications Revenue for 2006 and 2005 is summarized as follows:consists of the following:

                 
                		 Year Ended
                		 
                (dollars in millions)
                		 December 31,
                2006
                		 December 31,
                2005
                		 Change
                %
                		 
                Core Communications Services:         
                 Transport and Infrastructure $1,014 $653 55%
                 IP and Data  301  186 62%
                 Voice  536  120 347%
                 Level 3 Vyvx  122  3 3,967%
                  
                		 
                		 
                		 
                   1,973  962 105%
                Other Communications Services:         
                 Managed Modem  286  396 (28)%
                 Reciprocal Compensation  102  100 2%
                 Managed IP  57  83 (31)%
                 DSL Aggregation  —  79 (100)%
                  
                		 
                		 
                		 
                   445  658 (32)%
                SBC Contract Services  893  25 3,472%
                  
                		 
                		 
                		 
                 Total Communications Revenue $3,311 $1,645 101%
                  
                		 
                		 
                		 

                 
                		 Year Ended
                December 31,                		 
                (dollars in millions)
                		 2008 2007 

                Core Communications Services:

                		       
                 

                Core Network Services

                		 $3,147 $2,994 
                 

                Wholesale Voice Services

                		  713  628 
                      

                Total Core Communications Services

                		  3,860  3,622 

                Other Communications Services

                		  366  577 
                      

                Total Communications Services Revenue

                		 $4,226 $4,199 
                      

                        The Company'sCommunications Revenue increased 1% in 2008 compared to 2007. Contributing to this increase in Communications revenue was an increase in Core Communications Services revenue increased 105% in 20062008 compared to 2005. The2007. This increase in Core Communications Services revenue is the result of a combination of growth in the Company's existingCore Network Services and Wholesale Voice Services.


                Table of Contents

                        The Company experienced growth across several services as well as the acquisitions of WilTel, Progress Telecom, ICG Communications, TelCovewithin Core Network Services in 2008 compared to 2007, including infrastructure, transport, colocation, data, IP, including CDN services, and Looking Glass contributed to the increase. During 2006, theVyvx broadcast services. The Company recorded revenue, from the date of acquisition, attributable to Progress Telecom of $49 million, ICG Communications of $46 million, TelCove of $166 millionexperienced strong demand for infrastructure and Looking Glass of $33 million. During 2006, the Company integrated a significant portion of WilTel into the business. As a result, separate revenue information for former WilTel customers is no longer available other than for SBC Contract Services.

                        Transport and infrastructure revenue increased 55% in 2006 primarily due to the acquisitions of WilTel, Progress Telecom, ICG Communications, TelCove and Looking Glass. In addition, increased demandtransport services for complex nationwide solutions and colocation capacity in large markets contributedmarkets. Vyvx broadcast revenue increased primarily as a result of the proliferation of high definition sports, news and entertainment programming. Partially offsetting the increase in Core Network Services revenue was lower Vyvx advertising distribution revenue. On June 5, 2008, the Company completed the sale of the Vyvx advertising distribution business and therefore only recorded Vyvx advertising distribution revenue in 2008 from January 1, 2008 through June 5, 2008. Revenue attributable to the Vyvx advertising distribution business was $15 million in 2008 compared to $36 million in 2007.

                        Wholesale Voice Services revenue increased as a result of an increase in voice termination and toll free voice services. The growth in 2006. Termination revenue related to transport and infrastructure services decreased approximately $129 million from $131 million in 2005 to $2 million in 2006. Thevoice termination revenue in 2005 was primarily attributable to the termination of dark fiber lease agreements with twoan increase in demand from wireless carrier customers.

                        IP and data Toll free revenue increased 62% in 2006 primarily due to customers obtained in the acquisitions of WilTel, Progress Telecom, ICG Communications, TelCove and Looking Glass. IP and data revenue also increased due tohigher traffic growth in North America from new and existing customers that exceeded the approximately 25% rate of price compression in 2006. Traffic growth was mitigated by one customer's migration of traffic to its own network which was acquired via a merger with another carrier. Improved market acceptance of the Company's VPN service and the continued growth of previously awarded contracts also contributed to the increase in IP and data revenue. IP and data revenue includes $7 million of termination revenue in 2006.

                        Level 3's voice revenue increased 347% in 2006. The increase is primarily attributable to the operations acquired in the WilTel, TelCove and ICGconferencing provider customers.

                        Other Communications acquisitions, particularly domestic and international voice termination services, and growth in Level 3's existing wholesale and VoIP-related services including voice termination, local inbound, enhanced local and toll free services. On a combined basis, voice services experienced a 321% increase in minutes of use in the fourth quarter of 2006 comparedRevenue declined to the same period in 2005.


                        Level 3 Vyvx revenue increased to $122$366 million in 2006 as a2008 from $577 million in 2007. The decrease was primarily the result of including a full year of Level 3 Vyvx revenuedecline in the Company's results. Vyvx was acquired in December 2005 as part of the WilTel acquisition.

                        Managedmanaged modem revenue declined 28% in 2006 as a result of the continued migration from narrow band dial-up services to higher speed broadband services by end user customers. This change has resultedcustomers, especially in large metropolitan areas.

                        Reciprocal compensation revenue from managed modem services also declined in 2008 compared to 2007 as a result of the continued decline in the demand for managed modem ports. Managed modem revenue also declined in 2006 as a result of certain contracts being renewed or renegotiated at prices lower than were in effect in 2005. The declines in managed modem revenue have been partially offset by increases in market share as a result of certain competitors exiting segments of the managed modem business in the second half of 2006.

                        The Company did not recognize DSL aggregation revenue in 2006 due to the fact that the Company's primary DSL aggregation customer completed the migration of its DSL subscribers to its own network in the third quarter of 2005. In addition, the Company's other DSL contracts expired in 2005 and were not renewed.

                        Reciprocal compensation revenue increased $2 million in 2006.services. The Company has historically earned the majority of its reciprocal compensation revenue from managed modem services. Level 3 has interconnection agreementsservices, although the Company continued to generate a portion of its reciprocal compensation revenue from voice services, which is reported within Core Network Services revenue.

                        Also contributing to the decrease in place for the majority of traffic subject to reciprocal compensation.

                Other Communications revenue was lower SBC Contract Services revenue increased significantly in 2006 as a result of including a full year of SBC Contract Services revenue in the Company's results. The SBC Contract Services agreement was acquired in December 2005 as partmigration of the WilTel acquisition. UnderSBC traffic to the termsAT&T network and the satisfaction by SBC of the agreement, SBC has gross margin purchase commitments through 2009. As of December 31, 2006, the remaining minimumits gross margin commitment under the SBC Master Services Agreement in 2008. During the second quarter of 2008, the gross margin commitment on the SBC Master Services Agreement was satisfied; however AT&T, Inc., which merged with SBC in 2005, continues to purchase services from Level 3 under the SBC Master Services Agreement as it continues to migrate the services provided under the agreement to be utilizedits own network facilities. The SBC Master Services Agreement was an agreement between SBC Services Inc. and WilTel and was obtained in the WilTel acquisition. WilTel and SBC amended their agreement in June 2005 to run through 2009. The Company recognized $201 million and $303 million of revenue under the SBC Contract Services Agreement during 2008 and 2007, was approximately $67respectively. The agreement provided a gross margin purchase commitment of $335 million from December 2005 through the end of 2007 and $75 million from January 2008 through the end of 2009 and stipulated that originating and terminating access charges paid to local phone companies get passed through to SBC in accordance with a formula that approximates costs and do not count against the gross margin purchase commitment. SBC fully satisfied the $335 million gross margin purchase commitment during the third quarter of 2007. As a result of satisfying the initial gross margin purchase commitment, SBC's purchases of services that exceeded the original $335 million gross margin purchase commitment counted toward the $75 million gross margin purchase commitment for the period from January 2008 through the end of 2009. SBC satisfied $39 million of the $75 million gross margin purchase commitment in 2007 with the remaining $36 million satisfied in 2008.

                        Additionally, the SBC Contract Services agreement providesAgreement provided for the payment of $50 million by SBC if certain performance criteria arewere met by Level 3. Level 3 was eligible to earn $25 million in 2006 andThe performance-based incentive provisions of the agreement ended on December 31, 2007. Of the annual amount, 50% is based on monthly performance and the remaining 50% is based on performance criteria for the full year. The Company met the required performance criteria and earnedrecorded annual revenue of $25 million in 2006.both 2006 and 2007 under the agreement.


                Table of Contents

                        Coal mining revenue decreasedincreased to $67$75 million in 2006 compared to $742008 from $70 million in 2005.2007, primarily as a result of a long-term supply contract that enabled a customer to buyout future coal purchase commitments with the Company. The declineCompany does not have any further obligations with respect to future coal commitments under the contract, and therefore recognized the transaction as revenue in revenue for 2006 is attributable to a decline in the average price per ton2008. Partially offsetting this increase was lower volumes of coal sold partially offset by a slight increase in tons shipped. The price decline is attributable2008 compared to coal sold under a contract that was renewed in 2005 and contained lower price per ton than the original contract.2007.

                Cost of Revenue for the communications business, as a percentage of communications revenue, was 41% in 2008 compared to 42% in 2007. This decrease was primarily attributable to the synergies derived from acquisitions. During 2007 and the first part of 2008, the Company eliminated some of the costs associated with duplicate network costs. Also contributing to the decrease was the continued reduction in Other Communications Services revenue, in particular, SBC Contract Services revenue. The gross margins for 2006SBC Contract Services revenue were lower than the gross margins for Core Communications Services revenue and 2005 was 44%managed modem and 28%, respectively.reciprocal compensation from managed modem revenue. Partially offsetting this decrease in costs as a percentage of revenue were increases in Wholesale Voice Services revenue as a percentage of total communications revenue and lower managed modem revenue. The incremental gross margins for Wholesale Voice Services revenue are in the 30% range versus 80% for Core Network Services revenue and the gross margin for managed modem revenue is generally higher than for Core Network Services revenue.

                Coal mining cost of revenue approximated 92% of coal mining revenue in 2008 and 91% in 2007. The increase in 2006coal mining cost of revenue as a percentage of coal mining revenue isin 2008 was the result of an increase in fuel costs to mine the coal partially offset by the buyout by a coal customer of future coal purchase commitments resulting in the recognition of revenue with no associated costs in 2008.

                Depreciation and Amortization expense decreased 1% to $931 million in 2008 from $942 million in 2007. The decrease was primarily attributable to the recognition$11 million reduction to depreciation and amortization expense resulting from the Company revising its estimates of termination revenue in 2005, with no corresponding cost of revenue, and the significant voice and SBC Contract Services revenue obtainedits asset retirement obligations liability in the WilTel acquisition. The margins forfourth quarter of 2008. Also contributing to the voicedecrease was reduced amortization expense on intangible assets due to the disposal of $22 million of carrying value of amortizable intangible assets in the Vyvx advertising distribution sale and SBC Contract Services revenue are lower thancertain of the margins earnedCompany's amortizable intangible assets becoming fully amortized in early 2008. These decreases in depreciation and amortization were partially offset by higher accelerated depreciation in 2008 on other components included in Core and Other Communications Services revenue. Partially offsetting the lower WilTel marginsnetwork infrastructure assets that were the margins earned by Progress Telecom, ICG Communications, TelCove and Looking Glass. Margins for these businesses were slightly higher in 2006 than those reported byabandoned as a result of the Company in 2005. In 2005, the Company recognized $133 millionrelocating small scale portions of termination revenue with no corresponding cost of revenue, favorably affecting the cost of revenue percentage. Excluding the termination revenue, cost of revenue as a percentage of revenue would have been 31% in 2005.

                        Cost of revenue as a percentage of revenue for the coal mining business increased to 85% in 2006 from 72% in 2005. The increase in cost of revenue as a percentage of revenue for the coal mining business is due to a declineits network and reductions in the average price per tonuseful lives of coal sold in 2006 compared to 2005 and due to increased product costs in 2006 related to changes in stripping ratios and increased tire and fuel



                costs. In addition,certain of the Company's amortizable intangible assets in the second quarter of 2005, the Company was able to favorably resolve certain production tax issues. The resolution of this matter resulted in a $5 million reduction in cost of revenue. Cost of revenue as a percentage of revenue for 2005 was 78% after excluding the effect of the $5 million reduction in cost of revenue for the period.

                        Depreciation and Amortization expense was $730 million in 2006, a 13% increase from 2005 depreciation and amortization expense of $647 million. The increase is primarily attributable to the communications tangible and intangible assets that were acquired in the WilTel acquisition in December 2005, the Progress Telecom acquisition in March 2006, the ICG Communications acquisition in May 2006, the TelCove acquisition in July 2006 and the Looking Glass acquisition in August 2006. This increase was partially offset by an $80 million decrease in depreciation expense attributable to the increase in estimated useful lives for network fiber and IP and transmission equipment.2007.

                Selling, General and Administrative expenses increased 64%decreased 13% to $1.258$1.5 billion in 2006 from $769 million2008 compared to $1.7 billion in 2005. This increase is2007. The decrease was primarily attributable to the inclusion$86 million reduction to selling, general and administrative expenses resulting from the Company revising its estimates of expenses associated with the operations acquiredits asset retirement obligations liability in the WilTel, Progress Telecom, ICG Communications, TelCovefourth quarter of 2008. Also contributing to the decrease were synergies that have been achieved as a result of acquisition integration efforts and Looking Glass transactionsthe Company's focus on reducing operating expenses. Specifically, decreases in December 2005, March 2006, May 2006, July 2006employee compensation and August 2006, respectively. Specifically, increases in compensation, bonus and employee related costs, network related costsprofessional fees and facility-basedvendor services, and facilities based expenses all contributed to the increasedecrease in selling, general and administrative expenses in 2006.2008 compared to 2007.

                        Included in operatingselling, general and administrative expenses for 2006in 2008 and 20052007 were $84$78 million and $51$122 million, respectively, of non-cash, stock-based compensation and professional expenses recognized under SFAS No. 123R and SFAS No. 123, respectively, related to grants of outperform stock options warrants and other stock-based compensation awards.restricted stock units and restricted stock shares. The $33 million increasedecrease in non-cash, stock-based compensation expense in 2006 is2008 compared to 2007, was primarily attributabledue to an increasethe Company not making a discretionary grant to its 401(k) plan. The Company made a discretionary contribution to the 401(k) plan in the number of outperform stock options granted to employees and an increase in the value of the options granted to employees associated with the increasing price of Level 3 common stock for the year ended December 31, 2007 of $16 million. Non-cash, stock-based compensation also decreased in 2006. These increases were partially offset by2008 compared to 2007 for those


                Table of Contents


                employees eligible for accelerated vesting of stock awards at retirement and as a reduction in the amountresult of a lower weighted-average fair value of restricted stock and restricted stock unitsawards granted in 20062008 compared to 2005.2007.

                        In addition, during the second quarter of 2006, the October 2005 and January 2006 outperform stock option grants were revalued using May 15, 2006 as the grant date, in accordance with SFAS No. 123R, and resulted in a $6 million increase in non-cash compensation expense during the second quarter of 2006. As stated in the Company's proxy materials for its 2006 Annual Meeting of Stockholders, over the course of the years since April 1, 1998, the compensation committee of the Company's Board of Directors had administered the 1995 Stock Plan under the belief that the action of the Company's Board of Directors to amend and restate that plan effective April 1, 1998 had the effect of extending the original term of the Plan to April 1, 2008. After a further review of the terms of the plan, however, the compensation committee determined that an ambiguity could have existed that may have resulted in an interpretation that the expiration date of the plan was September 25, 2005. To remove any ambiguity, the Board of Directors sought the approval of the Company's stockholders to amend the plan to extend the term of the plan by five years to September 25, 2010. This approval was obtained at the 2006 Annual Meeting of Stockholders held on May 15, 2006 which resulted in a final measurement date of May 15, 2006 for the outperform options granted in October 2005 and January 2006.

                Restructuring and Impairment Charges were $13increased to $25 million in 2006 and $232008 from $12 million in 2005. In 2006, the Company recognized $5 million2007 as a result of restructuring charges related to workforce reductionsan increase in the communications business in North America. The employees impacted by this workforce reduction were Level 3 employees affected by the integration of companies acquired in 2005 and 2006. As of December 31, 2006, the Company had remaining obligations of less than $1 million.costs associated with employee terminations.


                        In 2005, the Company recognized $15 million related to the workforce reductions in the communications business in North America and Europe. The employees affected by this workforce reduction provided support functions or worked directly on mature services. All obligations attributable to the 2005 restructuring activities were paid by December 31, 2005.

                        The Company recognized non-cash impairment charges of $4 million in 2006 and $9 million in 2005 resulting from the decision to terminate projects for certain voice services and IT projects in the communications business. In addition, 2005 included a $1 million reduction in expected lease impairment obligations. These projects have identifiable costs which Level 3 can evaluate separately for impairment. The costs incurred for these projects, including capitalized labor, were impaired as the Company did not expect to utilize the assets in the future. In addition, during the second quarter of 2006, Level 3 recognized $4 million of non-cash impairment charges related to excess land of the communications business deemed available for sale in Germany. This charge resulted from the difference between the recorded carrying value and the estimated market value of the land.

                Adjusted EBITDA for the communications business was $677$1.04 billion in 2008 compared to $823 million and $458 million for 2006 and 2005, respectively.in 2007. The increase isin Adjusted EBITDA for the communications business was primarily attributable to the Adjusted EBITDA contribution from the operations acquired in the WilTel, Progress Telecom, ICG Communications, TelCove and Looking Glass transactions and growth in the Company's Core Communications Services revenue and the benefits of continued operating expense reductions from integration activities, partially offset by related costs. Partially offsetting these increases was a $122 million reductiondeclines in termination and settlement revenue from 2005Other Communications Services revenue. Also contributing to 2006.

                the increase in Adjusted EBITDA for the coal miningcommunications business decreasedin 2008 was the $86 million reduction to $8 million in 2006selling, general and administrative expenses resulting from $16 million in 2005. The decrease is primarily attributable to the favorable resolutionCompany revising its estimates of certain production tax issues, which resulted in a $5 million decreasethe amounts of its asset retirement obligations liability in the cost of revenue for the mining business in the secondfourth quarter of 2005 and a decline in the average price per ton of coal sold in 2006 compared to 2005.2008.

                Interest Income was $64decreased to $15 million in 2006, increasing $29 million2008 from $35$54 million in 2005.2007. The increasedecrease in interest income was primarily due to an increasea decrease in the Company's average invested cash balances and a decrease in the average return on the portfolio. The Company's average return on its portfolio decreased to 4.3%2.0% in 20062008 compared to 2.8%4.8% in 2005.2007. The average portfolio balance was $1.5 billion and $1.2decreased to $735 million in 2008 compared to $1.0 billion in 2006 and 2005, respectively.2007.

                Interest Expense increased by $118 milliondecreased 6% to $648$570 million in 2006 compared to 2005.2008 from $609 million in 2007. Interest expense increaseddecreased primarily as a result of a decrease in interest rates on the Company's unhedged variable rate debt. Interest rates on the Company's unhedged variable rate debt approximated 6% in 2008 and 8% in 2007. Interest expense attributablealso decreased as a result of the debt for equity exchanges, debt redemptions, debt repurchases and debt repayment transactions that were completed by the Company in 2007 and 2008.

                Gain on Sale of Business Groups totaled $99 million in 2008 compared to zero 2007. On June 5, 2008, Level 3 completed the issuancesale of $880its Vyvx advertising distribution business to DG FastChannel, Inc. and recognized a gain on the sale of $96 million of 10% Convertible Senior Notes due 2012 issued in the second quarter of 2005, $550 million of 12.25% Senior Notes due 2013 issued in the first half of 2006, $150 million of Floating Rate Senior Notes due 2011 issued on March 14, 2006 and $335 million of 3.5% Convertible Senior Notes due 2012 issued on June 13, 2006 and $1.250 billion of 9.25% Senior Notes due 2014 issued2008. In addition, in the fourth quarter of 2006. In addition,2008 Level 3 completed the Company exchanged portionssale of certain of its 9.125% Senior Notes due 2008, 11% Senior Notes due 2008smaller long distance voice customers and 10.5% Senior Discount Notes due 2008 for new 11.5% Senior Notes due 2010 during the first quarter of 2006, thereby increasing the effective interest expense on this debt. The increase in interest expense from new debt issuances was partially offset by the July 13, 2006 redemption of the 9.125% Senior Notes due 2008 and 10.5% Senior Discount Notes due 2008 andrecognized a 400 basis-point reduction in the interest rategain on the $730 million Senior Secured Term Loan due 2011 subsequent to its amendment in late Junesale of 2006.approximately $3 million.

                        LossGain (Loss) on Extinguishment of Debt was $83a gain of $89 million in 2006 and zero2008 compared a loss of $427 million in 2005. In the fourth quarter2007. The 2008 gain on extinguishment of 2006, the Company realizeddebt consisted of a $54gain of $125 million loss from the repurchaseas a result of the $497 million principal amount of Level 3 Financing's 10.75% Senior Notes due 2011 and in the second quarter of 2006, Level 3 realized a $55 million loss on the amendment and restatement of Level 3 Financing's Senior Secured Term Loan due 2011. These losses werecertain debt repurchases prior to maturity, partially offset by a $36 million loss attributable to induced debt conversion expenses related to the $27exchange of certain of the Company's convertible debt securities. The 2007 loss on extinguishment of debt consisted of a loss of $427 million gain realized onas a result of the refinancing of the Company's senior secured credit agreement and certain debt exchange in the first quarter of 2006.exchanges, redemptions and repurchases prior to maturity.


                Other, net was $24 million in 2008 and $55 million in 2007. Other, net is primarily comprised of gains and losses on the sale of non-operating assets, marketable securities, and non-operating assets, realized foreign currency gains and losses and other income.

                        Income Tax Expense Included in Other, net in 2007 was $2a gain of $37 million in 2006 compared to $5 million in 2005.

                        Income from Discontinued Operations was $46 million for 2006 and is comprised of $13 million from the operations of Software Spectrum and a $33 million gain from the sale of Software Spectrum to Insight in September, 2006. Income from discontinued operations was $69 million for 2005 and is comprised of $20 million from Software Spectrum and a $49 million gain from the sale of (i)Structure to Infocrossing.

                        Income from Discontinued Operations declined in 2006 versus the same period in 2005 due to the sale of Software Spectrum on September 7, 2006. Software Spectrum earns a disproportionate share of its revenue at the end of the quarter but incurs operating expenses ratably during the quarter. As a result of the sale in September 2006, operating expenses for Software Spectrum exceeded the gross profits earned on sales through the transaction date due to the cyclical nature of the Software Spectrum business.

                        Software Spectrum increased its sales and marketing efforts and resources targeting mid-market businesses over the last 18 months of its ownership by the Company resulting in higher revenue and profits for the period ending September 7, 2006 compared to the twelve months ended December 31, 2005. The increase in gross profits was partially offset by an increase in operating expenses, primarily for employee related costs, and the disproportionate level of operating expenses recognized for the partial third quarter of 2006.

                        Level 3 received gross proceeds of approximately $353 million and recognized a gain on the sale of Software Spectrum, after transaction costs,80% of approximately $33the Company's holdings of Infinera common stock.

                Income Tax Benefit (Expense) was a $6 million expense in 2008 and was a $22 million benefit in 2007. The income tax expense for 2008 was primarily the result of state income taxes. The income tax benefit for 2007 was primarily the result of reversing $23 million of the valuation allowance against the Company's deferred tax asset for certain state net operating losses. These state net operating losses were converted to a state tax credit carry forward associated with a change in the third quarterstate tax law that replaced the tax on net income with a tax on gross margin. The Company expects it will be able to use this state tax carry forward against current and future state taxable gross margin.


                Table of 2006. DuringContents

                        The difference between the fourth quarter of 2006, Level 3 paid $2 millionCompany's effective tax rate and the U.S. statutory rate was primarily due to Insight asthe Company continuing to maintain a final post-closing working capital adjustment.full valuation allowance against its net Federal and state deferred tax assets.

                Financial Condition—December 31, 20072009

                        Cash flows provided by (used in) operating activities, of continuing operations, investing activities and financing activities for the yearyears ended December 31, 20072009 and 2006,2008, respectively are summarized as follows (dollars in millions):follows:

                 
                		 Years Ended
                		 
                (dollars in millions)
                		 December 31,
                2007
                		 December 31,
                2006
                		 Change
                		 
                Net Cash Provided by Operating Activities of Continuing Operations $231 $221 $10 
                Net Cash Used in Investing Activities  (961) (648) (313)
                Net Cash (Used in) Provided by Financing Activities  (243) 1,689  (1,932)
                Net Cash (Used in) Provided by Discontinued Operations  —  (43) 43 
                Effect of Exchange Rates on Cash and Cash Equivalents  6  10  (4)
                  
                		 
                		 
                		 
                 Net Change in Cash and Cash Equivalents $(967)$1,229 $(2,196)
                  
                		 
                		 
                		 

                 
                		 Year Ended 
                (dollars in millions)
                		 December 31,
                2009                		 December 31,
                2008                		 Change 

                Net Cash Provided by Operating Activities

                		 $357 $413 $(56)

                Net Cash Used in Investing Activities

                		  (307) (321) 14 

                Net Cash Provided by (Used In) Financing Activities

                		  16  (34) 50 

                Effect of Exchange Rates on Cash and Cash Equivalents

                		  2  (4) 6 
                        
                 

                Net Change in Cash and Cash Equivalents

                		 $68 $54 $14 
                        

                Operating Activities of Continuing Operations

                        Cash provided by operating activities of continuing operations increaseddecreased by $10$56 million in 20072009 compared to 2006.2008. The increasedecrease in cash provided by operating activities of continuing operations was primarily due to an increasethe Company's net loss, which increased by $300 million in Adjusted EBITDA generated by the communications business in 2007 as compared to 2006,2009. This decline was partially offset by fluctuationslower interest payments of $14 million and a reduction in working capital balances which resultedof $14 million in an



                incremental use of cash of $153 million for working capital items2009. The favorable change in 2007 compared to 2006. The increase in cash used for working capital items is primarily due to the changes inreduced accounts receivable accounts payable and increased deferred revenue, partially offset by a change in other current liabilities partially offset by an increase in deferred revenue. The Company expects that cash provided by operating activities of continuing operations will increase over the course of 2008.2009.

                Investing Activities

                        Cash used in investing activities increaseddecreased by $313$14 million in 20072009 compared to 2006. The increase2008. A $136 million decline in cash usedcapital expenditures in investing activities was2009, primarily due to the fact that 2006 includedlower success-based capital, and a decreased use of cash totaling $325for restricted securities of $10 million, related towere partially offset by a reduction in proceeds from the sale of the Software Spectrum business in September 2006. Cash used for acquisitions decreased $73 million to $676 million in 2007 compared to $749 million for 2006. Cash used for acquisitions during 2007 includes the acquisitions of Broadwing for $492 million (net of cash acquired of $257 million), the CDN business for $133 million, Servecast for $45 million (net of cash acquired of $1 million) and a minority investment in a private company for $6 million. In addition, capital expenditures increased $241 million from $392 million in 2006 to $633 million in 2007.businesses. The increase in capital expenditures was primarily for success based capital related to new customer installations and integration activities in the communications business. During 2007, $288 million of marketable securities held by the Company matured, the Company received in 2008 net proceeds of $45$124 million from the sale of approximately 80% of its investment in InfineraVyvx advertising distribution business and restricted securities decreased by $12 million. During 2006, the Company had net purchases of marketable securities totaling $182 million. In 2007, an arbitrator ruled that Level 3 owed Infocrossing approximately $2 million for working capital adjustments pertaining to the sale of (i)Structure completedcertain of its smaller long distance voice customers in 2005.2008. The Company did not enter into any of these types of sale transactions in 2009.

                Financing Activities

                        Cash provided by financingFinancing activities decreased $1.932 billion to a $243generated an incremental $50 million use of cash in 2007 compared to 2006. Included in cash flows from financing activities is $2.349 billion of net2009 as proceeds from the issuance of:

                  •
                  $300debt offerings exceeded payments on long term debt in 2009 by $16 million and payments and repurchases of Floating Rate Senior Notes due 2015 in February 2007;

                  •
                  $700 million of 8.75% Senior Notes due 2017 in February 2007; and

                  •
                  $1.4 billion Senior Secured Term Loan due 2014 in March 2007.

                        The Company useddebt exceeded proceeds from thesedebt offerings along with cash on hand to retire or refinance approximately $2.497 billion aggregate principal amount of debt. Total cash consideration paid to retire or refinance this debt was $2.618 billion. Financing activities also include proceeds of $26 million from the exercise of warrants associated with the Broadwing transaction and other equity-based instruments. During 2006, the Company raised $543by $36 million in net proceeds from an equity offering, raised $2.256 billion in net proceeds from long-term debt offerings and repaid $1.110 billion of debt.

                        The Company also issued approximately 214 million shares of its common stock, valued at $879 million, to retire $702 million of debt.2008.

                Liquidity and Capital Resources

                        The Company incurred operating losses from continuing operationsa net loss of $1.114 billion and $790$618 million in 20072009 and 2006, respectively.$318 million in 2008. The Company used $402$313 million for capital expenditures and $171generated $357 million in cash flows from operating activities in 2009. This compares to $449 million of cash used for capital expenditures and $413 million of cash flows provided by operating activities in 2008.

                        Cash interest payments are expected to increase slightly to $538 million in 2010 from the $517 million made in 2009 based on current debt outstanding, estimated interest rates on the Company's variable rate debt, expected continued execution of liability management initiatives and the


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                financing transactions completed in early 2010. Capital expenditures for 2010 are expected to be higher than the $313 million in 2009 as the Company expects success-based capital to increase in 2010. The Company invests in base capital expenditures (estimated capital required to keep the network operating efficiently and new service development) with the remaining capital expenditures expected to be project based (where capital is required to expand the network prior to a specific customer revenue opportunity) or success-based, which is tied to incremental revenue. As of December 31, 2009, the Company had long-term debt contractual obligations adjusted for the financing transactions completed in 2007early 2010, including capital lease and 2006, respectively.commercial mortgage obligations and excluding premium and discounts on debt issuance and fair value adjustments of approximately $154 million that mature in 2010, $377 million that mature in 2011 and $298 million that mature in 2012. The Company expects thatis reflecting the communications business will consume cash$68 million commercial mortgage obligation as maturing in 2008,2015 as it intends to elect to extend the maturity to 2015.

                        In early 2010, Level 3 Financing, Inc. issued $640 million aggregate principal amount of 10% Senior Notes due 2018 in a private offering. In conjunction with a concurrent tender offer and consent solicitation, the largest useproceeds from this issuance were used to repurchase $547 million of cash occurringaggregate principal amount of its 12.25% Senior Notes due 2013. The remaining $3 million of aggregate principal amount of the 12.25% Senior Notes due 2013 are expected to be redeemed in the first quarter of 2008 as a result of reduced Adjusted EBITDA and increased use of cash for working capital in the quarter. The Company expects that the use of cash by the communications



                business will be modest in subsequent quarters and decline overall by the end of 2008. The Company expects that the communications business will generate cash for the full year 2009.

                        The Company expects that to the extent it does consume cash in 2008, it will be primarily due to interest payments and capital expenditures. The Company expects Adjusted EBITDA to improve in 2008 to a range of $950 million to $1.1 billion primarily as a result of a full year of benefit from the integration related synergies associated with the acquisitions completed in 2006 and 2007, as well as moderate growth in Core Communications Services revenue that is expected to be partially offset by reductions in Other Communications Services and SBC Contract Services revenue. Interest payments are expected to be slightly lower than the $545 million incurred in 2007 based on current debt outstanding and the financing and other capital markets transactions completed in 2007. Capital expenditures for 2007 are expected to be in the range of 12% to 14% of revenue and significantly lower than the $633 million incurred in 2007 due to much lower integration-related capital expenditures. The majority of the Company's ongoing capital expenditures are expected to be success-based, or tied to incremental revenue. The Company does not have any significant principal amounts due on its outstanding debt until 2010. As of December 31, 2007, the Company had debt of $32 million and $366 million that matures in 2008 and 2009, respectively.

                        Level 3 has approximately $723had $836 million of cash and cash equivalents and marketable securities on hand at December 31, 2007.2009. In addition, $124$125 million of current and non-current restricted cash and securities are used to collateralize outstanding letters of credit, long-term debt obligations, certain operating obligations of the Company orand certain reclamation liabilities associated with the coal mining business. Based on information available at this time, management of the Company believes that the Company'sits current liquidity and anticipated future cash flows from operations will be sufficient to fund its business for at least the next twelve months.

                        The Company may elect to secure additional capital in the future, at acceptable terms, to improve its liquidity or fund acquisitions. In addition, in an effort to reduce future cash interest payments, as well as future amounts due at maturity or to extend debt maturities, Level 3 or its affiliates may, from time to time, issue new debt, enter into debt for debt, debt for equity or cash, or other transactions to purchase its outstanding debt securities in the open market or through privately negotiated transactions. Level 3 will evaluate any such transactions in light of then existing market conditions and the possible dilutive effect to stockholders.conditions. The amounts involved in any such transaction, individually or in the aggregate, may be material.

                        In January 2007, in two separate transactions, the Company completed the exchange of $605 million of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3's common stock. The Company recognized a $177 million loss on the exchanges in the first quarter of 2007.

                        In February 2007, Level 3 Financing issued $700 million of its 8.75% Senior Notes due 2017 and $300 million of its Floating Rate Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt and to fund the cost of construction, installation, acquisition, lease, development or improvement of other assets to be used in Level 3's communications business.

                        In March 2007, Level 3 Financing refinanced its senior secured credit agreement and received net proceeds of $1.382 billion. The proceeds from this transaction were used to repay the existing $730 million Senior Secured Term Loan due 2011 and other debt. The effect of this transaction was to increase the amount of senior secured debt from $730 million to $1.4 billion, reduce the interest rate on that debt from LIBOR plus 3.00% to LIBOR plus 2.25% and extend the final maturity from 2011 to 2014. The Company recognized a $10 million loss on this transaction related to unamortized debt issuance costs.


                        During the first quarter of 2007, the Company redeemed the outstanding principal amount See Note 11 of the following debt issuances totaling $722 million:

                  •
                  $488 million of 12.875% Senior Notes due 2010 at a price equal to 102.146 ofConsolidated Financial Statements for more details regarding the principal amount;

                  •
                  $96 million of 11.25% Senior Notes due 2010 at a price equal to 101.875 of the principal amount;Company's 2009 and

                  •
                  $138 million (€104 million) of 11.25% Senior Euro Notes due 2010 at a price equal to 101.875 of the principal amount.

                        Also during the first quarter of 2007, the respective issuers repurchased, through tender offers, $941 million of the outstanding principal amounts of the following debt issuances:

                  •
                  $144 million of outstanding Floating Rate Senior Notes due 2011 at a price equal to $1,080 per $1,000 principal amount of the notes, which included $1,050 as the tender offer consideration and $30 as a consent payment;

                  •
                  $59 million of outstanding 11% Senior Notes due 2008 at a price equal to $1,054.28 per $1,000 principal amount of the notes, which included $1,024.28 as the tender offer consideration and $30 as a consent payment;

                  •
                  $677 million of outstanding 11.5% Senior Notes due 2010 at a price equal to $1,115.26 per $1,000 principal amount of the notes, which included $1,085.26 as the tender offer consideration and $30 as a consent payment; and

                  •
                  $61 million (€46 million) of outstanding 10.75% Senior Euro Notes due 2008 at a price equal to €1,061.45 per €1,000 principal amount of the notes, which included €1,031.45 as the tender offer consideration and €30 as a consent payment.

                        The Company recognized a $240 million loss associated with the redemptions and repurchases in the first quarter of 2007. The cash portion of the loss on redemptions and tenders totaled $165 million and the remaining $75 million consisted of unamortized debt issuance and discounts.

                        In the first quarter, for total cash consideration of $106 million and equity consideration of 17 million shares of common stock (valued at $97 million) all of Broadwing's outstanding $180 million aggregate principal amount of 3.125% Convertible Senior Debentures due 2026 were retired. These debentures were issued by Broadwing prior to Level 3's acquisition of Broadwing on January 3, 2007. There was no gain or loss recognized due to the fact that under purchase accounting, the liability for the notes was valued at the total cost to retire the obligation.financing transactions.

                        In addition to raising capital through the debt and equity markets, the Company may sell or dispose of existing businesses, investments or other non-core assets. In 2005 and 2006, the CompanyFor example, in 2008, Level 3 completed the sale of its two businesses that comprisedVyvx advertising distribution business and the sale of certain of its Information Services segment for totalsmaller long distance voice customers and received aggregate net cash proceeds of $433 million and common stock from one$124 million.

                        Consolidation of the purchasers valued at $3 million.

                        On December 19, 2007, Level 3 announced that it had reached a definitive agreement to sell the advertising distribution business of Vyvx, LLC ("Vyvx Ads") to DG FastChannel, Inc. for $129 million in cash. The sale is expected to close in the second quarter of 2008. Revenue from the Vyvx Ads business totaled approximately $36 million, $35 million and less than $1 million for the years ended December 31, 2007, 2006 and 2005, respectively. The results of operations for the Vyvx Ads business are included in continuing operations from when it was acquired as part of the WilTel transaction in December 2005.

                        The communications industry continues to consolidate. Level 3 has participated in this process with the acquisitions of several companies in 2006, as well as Broadwing, the CDN Business and Servecast



                during 2007.may continue. Level 3 will continue to evaluate consolidation opportunities and could make additional acquisitions in the future.

                        On January 3, 2007, Level 3 acquired Broadwing, a publicly held provider of optical network communications services. Under the terms of the merger agreement dated October 16, 2006, Level 3 paid $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing. In total, Level 3 initially paid approximately $753 million of cash (including transaction costs) and issued approximately 123 million shares of Level 3 common stock, valued at $688 million. As part of the transaction, approximately 4 million previously issued Broadwing warrants (valued at approximately $4 million) became exercisable into approximately 5 million shares of Level 3 common stock. In the second quarter of 2007, the Company subsequently reduced the total consideration paid by $4 million for insurance proceeds received in June 2007 that related to the settlement of an insurance claim that occurred prior to acquisition. In the fourth quarter of 2007, the Company incurred additional transaction costs of $2 million related to the transaction.

                        On January 23, 2007, the Company acquired the Content Delivery Network services business of SAVVIS, Inc. Under the terms of the agreement, Level 3 paid $133 million in cash (including transaction costs) to acquire certain assets, including network elements, customer contracts, and intellectual property used in the CDN Business.

                        On July 11, 2007, Level 3 acquired Servecast Limited, a Dublin, Ireland based provider of live and on-demand video management services for broadband and mobile platforms. Level 3 paid approximately €34 million, or $46 million, including $1 million of transaction costs, in cash to complete the acquisition of Servecast.

                Off-Balance Sheet Arrangements

                  Level 3 has not entered into off-balance sheet arrangements that have had, or are likely to have, a current or future material effect to its results of operations or its financial position.arrangements.

                Contractual Obligations

                        The following table summarizes the contractual obligations and commercial commitments of the Company at December 31, 2007,2009, as further described in the notesNotes to Consolidated Financial Statements. The contractual obligations for long-term debt, including current portion has been adjusted


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                to reflect the consolidated financial statements.financing transactions completed in early 2010. See Note 17, "Subsequent Event," of the Consolidating Financial Statements.

                Payments Due by Period

                 
                		 Total
                		 Less than
                1 Year
                		 1 - 3
                Years
                		 4 - 5
                Years
                		 After
                5 Years
                Contractual Obligations               
                 Long-Term Debt, including current portion $6,857 $32 $1,337 $968 $4,520
                 Interest Expense Obligations  3,075  532  1,002  849  692
                 Asset Retirement Obligations  231  4  18  18  191
                 Operating Leases  727  126  193  147  261
                 Right of Way Agreements  1,352  101  176  157  918
                 Purchase Obligations  285  285  —  —  —
                Other Commercial Commitments               
                 Letters of Credit  36  9  3  —  24

                 
                		 Total Less than
                1 Year                		 1 - 3
                Years                		 4 - 5
                Years                		 After 5
                Years                		 

                Contractual Obligations

                		                
                 

                Long-Term Debt, including current portion

                		 $6,659 $154 $675 $3,632 $2,198 
                 

                Interest Obligations

                		  2,779  538  1,026  801  414 
                 

                Asset Retirement Obligations

                		  165  9  16  27  113 
                 

                Operating Leases

                		  1,004  160  285  219  340 
                 

                Right of Way Agreements

                		  1,250  121  189  173  767 
                 

                Purchase Obligations

                		  163  160  3  —  — 

                Other Commercial Commitments

                		                
                 

                Letters of Credit

                		  25  1  —  —  24 

                        The Company's debt instruments contain certain covenants which, among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates. If the Company should fail to comply with these covenants, amounts due under the instruments may be accelerated at the note holder's discretion after the declaration of an event of default. The Company's debt instruments do not have covenants that require the Company or its subsidiaries to maintain certain levels of financial performance or other financial measures such as total leverage or minimum revenues. These types of covenants are commonly referred to as "maintenance covenants."


                        The Company is unable to reliably estimate the future cash flows of the derivatives included in Other Non-Current Liabilities presented in Note 9, "Fair Value," of the Notes to Consolidated Financial Statements, therefore such amounts are excluded from this table.

                        Due to uncertainty regarding the completion of tax audits and possible outcomes, the remaining estimate of the timing of payments related to uncertain tax positions and interest cannot be made. See Note 13, "Income Taxes," of the Notes to Consolidated Financial Statements for additional information regarding the Company's uncertain tax positions.

                        Long-term debt obligations reflect only amounts recorded on the balance sheet as of December 31, 2007 and exclude issue discounts and premiums and fair value adjustments.

                        Interest expense obligations assume interest rates on variable rate debt do not change from December 31, 2007.2009. In addition, interest is calculated based on debt outstanding as of December 31, 20072009, and on existing maturity dates.

                        Certain right of way agreements include provisions for increases in payments in future periods based on the rate of inflation as measured by the consumervarious price index.indexes. The Company has not included estimates for theseunknown increases in future periods in the amounts included above.

                        Certain non-cancelable right of way agreements provide for automatic renewal on a periodic basis. Payments due under these agreements with automatic renewal options have been included in the table above for a period of 16 years from January 1, 2010, which approximates the economic remaining useful life of the Company's conduit. In addition, certain other right of way agreements are cancellable or can be terminated under certain conditions. However,conditions by the Company. The Company includes the payments under such cancelable right of way agreements in most cases cancellation or terminationthe table above for a period of 1 year from January 1, 2010, if the Company does not consider it likely that it will cancel the right of way agreement requires removal ofwithin the Company's network. Because the Company considers it unlikely that it would cancel or terminate its right of way agreements and remove its network, the payments due under these agreements have been included in the table above. Certain of these right of way agreements provide for automatic renewal on a periodic basis. For purposes of presenting future payment commitments under these agreements, the Company has included 18 years of future payments from January 1, 2008 in the table above.next year.

                        Purchase obligations represent all outstanding purchase order amounts of the Company as of December 31, 2007.2009.


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                        The table above does not include other long-term liabilities, such as reservesliabilities recorded for legal matters and income taxes that are not contractual obligations by nature. The Company cannot determine with any degree of reliabilitycertainty the years in which these liabilities might ultimately be paid.

                ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                Interest Rate Risk

                        Level 3 is subject to market risks arising from changes in interest rates and foreign exchange rates. As of December 31, 2007,2009, the Company had borrowed a total of $1.706$2.0 billion primarily under a Senior Secured Term Loan due 2014 Floating Rate Senior Notes due 2015 and Floating Rate Senior Notes due 20112015 that bear interest at LIBOR rates plus an applicable margin. As the LIBOR rates fluctuate, so too doeswill the interest expense on amounts borrowed under the debt instruments. The weighted average interest rate on the variable rate instruments at December 31, 20072009, was approximately 7.80%4.1%.

                        OnIn March 13, 2007, Level 3 Financing, Inc., the Company's wholly owned subsidiary, entered into two interest rate swap agreements to hedge the interest payments on $1 billion notional amount of floating rate debt. The two interest rate swap agreements are with different counterparties and are for $500 million each. The interest rate swap agreements arewere effective beginning April 13,in 2007 and mature onin January 13, 2014. Under the terms of the interest rate swap agreements, Level 3 Financing, Inc. receives interest payments based on rolling three month LIBOR terms and pays interest at the fixed rate of 4.93% under one arrangement and 4.92% under the other. Level 3 has designated the interest rate swap agreements as a cash flow hedges on the interest payments for $1 billion of floating rate debt.

                        For theThe remaining, or unhedged, variable rate debt of approximately $1 billion has a weighted average interest rate of 5.7% at December 31, 2009. A hypothetical increase in the variable portion of the weighted average interest rate by 11% point (i.e. a weighted average rate of 8.80%6.7%) would increase the Company's annual interest expense of the Company by approximately $7$10 million. At December 31, 2007,2009, the Company had $5.150$4.6 billion (excluding discounts)fair value adjustments, discounts and premiums) of fixed rate debt bearing a weighted average interest rate of 7.84%9.1%. A decline in interest rates in the future will not benefit the Company with respect to the fixed rate debt due to the terms and conditions of the loan agreementsindentures relating to that debt that would require the Company to repurchase the debt at specified premiums if redeemed early.

                        The Company's business plan includes operating telecommunications network businesses in Europe. As of December 31, 2007, the Company had invested significant amounts of capital in the



                region for its communications business. The Company does not make use of financial instruments to minimize its exposure to foreign currency fluctuations.

                        Indicated changes in interest rates are based on hypothetical movements and are not necessarily indicative of the actual results that may occur. Future earnings and losses will be affected by actual fluctuations in interest rates and foreign currency rates.

                Foreign Currency Exchange Rate Risk

                        The Company conducts a portion of its business in currencies other than the U.S. dollar, the currency in which the Company's consolidated financial statements are reported. Correspondingly, the Company's operating results could be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. The Company's European subsidiaries use the local currency as their functional currency, as the majority of their revenue and purchases are transacted in their local currencies. Although the Company continues to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, the Company will likely recognize gains or losses from international transactions. Changes in foreign currency rates could adversely effect the Company's operating results.

                ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                        Financial statements and supplementary financial information for Level 3 Communications, Inc. and Subsidiaries begin on page F-1.


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

                        None.

                ITEM 9A.    CONTROLS AND PROCEDURES

                Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

                        UnderThe Company's Chief Executive Officer and Chief Financial Officer have evaluated the supervision and witheffectiveness of the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of ourCompany's disclosure controls and procedures, as such term is defined under Rulein Rules 13a-15(e) promulgatedand 15d-15(e) under the Securities Exchange Act of 1934, as amended ("(the "Exchange Act"), as of December 31, 2009. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective and are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act"). Based on this evaluation, ourAct is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and our principal financial officer, concludedas appropriate to allow timely decisions regarding required disclosure.

                Changes in Internal Control Over Financial Reporting

                        There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that our disclosure controls and procedures were effective asoccurred during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the end of the period covered by this annual report.Company's internal control over financial reporting.

                Management's Report on Internal Control Over Financial Reporting

                        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of ourits management, including ourthe Company's principal executive officer and principal financial officer, management assessed the effectiveness of internal controls over financial reporting as of December 31, 20072009 based on the guidelines established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

                        Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

                Based on ourthe Company's assessment, management believeshas concluded that ourthe Company's internal control over financial reporting was effective as of December 31, 2007. The results of management's assessment have been reviewed with the Audit Committee of the Company's Board of Directors.2009.

                        The Company's independent registered public accounting firm, KPMG LLP, has issued an auditattestation report on itsthe effectiveness of the assessment of the Company's internal control over financial reporting atas of December 31, 2007.2009. This report appears on page F-3.

                Changes in Internal Control over Financial Reporting.

                        There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

                ITEM 9B.    OTHER INFORMATION

                        None.


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                Part III

                ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

                        The information required by this Item 10 is incorporated by reference to our definitive proxy statement for the 20082010 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."

                ITEM 11.    EXECUTIVE COMPENSATION

                        The information required by this Item 11 is incorporated by reference to our definitive proxy statement for the 20082010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

                ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

                        For information as of December 31, 2007,2009, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, please see "Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES" above.

                        The information required by this Item 12 is incorporated by reference to our definitive proxy statement for the 20082010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

                ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

                        The information required by this Item 13 is incorporated by reference to our definitive proxy statement for the 20082010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

                ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

                        The information required by this Item 14 is incorporated by reference to our definitive proxy statement for the 20082010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.


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                Part IV

                ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

                  (a)
                  Financial statements and financial statement schedules required to be filed for the registrant under Items 8 or 15 are set forth following the index page at page F-l. Exhibits filed as a part of this report are listed below. Exhibits incorporated by reference are indicated in parentheses.

                (a)Financial statements and financial statement schedules required to be filed for the registrant under Items 8 or 15 are set forth following the index page at page F-l. Exhibits filed as a part of this report are listed below. Exhibits incorporated by reference are indicated in parentheses.

                3.1
                3.1.1
                 
                Restated Certificate of Amendment to theIncorporation of Level 3 Communications, Inc. Certificate of Incorporation and the Level 3 Communications, Inc. Restated Certificate of Incorporation. (Exhibit 33(i) to the Registrant's Current Reports on Form 8-K filed on May 27, 2005 and May 17, 2006)23, 2008).

                3.2
                3.1.2
                 
                Certificate of Amendment of Restated Certificate of Incorporation of Level 3 Communications, Inc. (incorporated by reference to Exhibit 3.2 of Level 3 Communications, Inc.'s Registration Statement on Form S-3 (SEC File No. 333-160493) filed with the Securities and Exchange Commission on July 9, 2009).


                3.2

                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).


                3.3
                 
                Amended and Restated By-laws of Level 3 Communications, Inc. (Exhibit 3(ii) to the Registrant's Current Report on Form 8-K dated August 17, 2007)filed on May 23, 2008).

                4.1.1
                4.1
                 
                Form of SeniorSubordinated Debt Securities Indenture (incorporated by reference to Exhibit 4.14.2 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).

                4.1.2
                4.2
                 
                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).

                4.1.3

                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).

                4.2
                4.3
                 
                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).

                4.3

                Indenture, dated as of February 29, 2000, between the Registrant and The Bank of New York as Trustee relating to the Registrant's 103/4% Senior Euro Notes due 2008 (Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 File No. 333-37364).

                4.4

                Amended and Restated Indenture dated as of July 8, 2003, by and between the Company and The Bank of New York, as successor to IBJ Whitehall Bank & Trust Company, as trustee (amends and restates the Senior Debt Indenture, a Form of which was filed as an Exhibit to the Company's Registration Statement on Form S-3-File No. 333-68887) (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed July 8, 2003).

                4.5
                4.4
                 
                First Supplemental Indenture, dated as of July 8, 2003, by and between the Company and The Bank of New York, as successor to IBJ Whitehall Bank & Trust Company, as Trustee (Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed July 8, 2003).

                4.6
                4.5
                 
                Indenture, dated as of October 1, 2003, by and between Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc. as Issuer and The Bank of New York as Trustee relating to the Level 3 Financing, Inc. 10.75% Senior Notes due 2011 (Exhibit 4.11 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 2003).


                4.7.1

                Indenture, dated as of October 24, 2003, by and between the Registrant and The Bank of New York as Trustee relating to the Registrant's 9% Convertible Senior Discount Notes due 2013 (Exhibit 4.12 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 2003).

                4.7.2
                4.6
                 
                First Supplemental Indenture, dated as of February 7, 2005, by and between the Company and The Bank of New York, as Trustee relating to the Registrant's 9% Convertible Senior Discount Notes due 2013. (Exhibit 4.12.2 to the Registrant's Annual Report on Form 10-K for the year ending December 31, 2005).

                4.8
                4.7
                 
                Supplemental Indenture, dated as of October 20, 2004, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of October 1, 2003, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 10.75% Senior Notes due 2014. (Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed October 22, 2004).

                4.9

                Supplemental Indenture, dated as of October 20, 2004 among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of October 1 2003, among Level 3 Financing, Inc. as Issuer, Level 3 Communications, Inc. as Guarantor and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 10.75% Senior Notes due 2011. (Exhibit 99.1 to the Registrant's Current Report on Form 8-K/A-1 filed October 22, 2004).

                4.10

                Indenture, dated December 2, 2004, among Level 3 Communications, Inc. and The Bank of New York. (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed December 7, 2004).

                4.11
                4.8
                 
                Supplemental Indenture, dated December 1, 2004, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York, as Trustee, relating to the Level 3 Financing 10.75% Senior Notes due 2011. (Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed December 7, 2004).

                4.12

                Second Supplemental Indenture dated as of April 4, 2005, by and between Level 3 Communications, Inc. and the Bank of New York, as trustee (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed April 8, 2005).

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                4.13
                4.9
                Indenture, dated as of January 13, 2006, among Level 3 Communications, Inc. as Issuer and The Bank of New York, as Trustee relating to the 11.50% Senior Notes Due 2010 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 17, 2006).

                4.14

                Indenture, dated as of March 14, 2006, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer and The Bank of New York, as Trustee, relating to the Floating Rate Senior Notes due 2011 of Level 3 Financing, Inc. (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 16, 2006).

                4.15

                Indenture, dated as of March 14, 2006, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer and The Bank of New York, as Trustee, relating to the 12.25% Senior Notes due 2013 of Level 3 Financing, Inc. (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 16, 2006).

                4.16

                Third Supplemental Indenture between Level 3 Communications, Inc. and The Bank of New York, as Trustee, relating to up to $345,000,000 aggregate principal amount of 3.5% Convertible Senior Notes due 2012, dated as of June 13, 2006 supplement to the Amended and Restated Indenture dated as of July 8, 2003 (Senior Debt Securities) (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated June 13, 2006).



                4.17
                4.10
                 
                Supplemental Indenture, dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes due 2011 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated October 17, 2006).

                4.18

                Supplemental Indenture, dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, Supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes due 2011 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated October 17, 2006).

                4.19

                Supplemental Indenture, dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 12.25% Senior Notes due 2013 (Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated October 17, 2006).

                4.20

                Supplemental Indenture, dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 12.25% Senior Notes due 2013 (Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated October 17, 2006).

                4.21

                Indenture, dated as of October 30, 2006, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York, as Trustee, relating to the 9.25% Senior Notes due 2014 of Level 3 Financing, Inc. (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated October 30, 2006).

                4.22
                4.11
                 
                Supplemental Indenture, dated as of December 27, 2006, among Level 3 Communications, Inc., Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of October 1, 2003, among Level 3 Financing, Inc., as Issuer, Level 3 Communications, Inc., as Guarantor, and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 10.75% Senior Notes due 2011 2014 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated December 28, 2006).

                4.23

                Indenture, dated as of February 14, 2007, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer and The Bank of New York, as Trustee, relating to the Floating Rate Senior Notes due 2015 of Level 3 Financing, Inc. (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 20, 2007).

                4.24
                4.12
                 
                Indenture, dated as of February 14, 2007, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer and The Bank of New York, as Trustee, relating to the 8.75% Senior Notes due 2017 of Level 3 Financing, Inc. (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated February 20, 2007).


                4.25
                4.13
                 
                Supplemental Indenture, dated as of February 23, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC, Broadwing Financial Services, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., as Issuer, Level 3 Communications, Inc., as Guarantor, and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 12.25% Senior Notes due 2013 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed February 26, 2007).

                4.26

                Supplemental Indenture, dated as of March 1, 2007, among Level 3 Communications, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of February 29, 2000, among Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Communications, Inc.'s 11% Senior Notes Due 2008 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 2, 2007).

                4.27

                Supplemental Indenture, dated as of March 1, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC, Broadwing Financial Services, Inc., together with Level 3 Communications, Inc. and Level 3 Communications, LLC, as Guarantors and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of October 12, 2006, by and among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, and the supplemental Indenture dated as of January 4, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC, Broadwing Financial Services, Inc. and The Bank of New York as Trustee relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes Due 2011 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 2, 2007).

                4.28

                Supplemental Indenture, dated as of March 6, 2007, among Level 3 Communications, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of February 29, 2000, among Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Communications, Inc.'s 103/4% Senior Euro Notes Due 2008 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 7, 2007).

                4.29

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, and the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes Due 2011 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 16, 2007).



                4.30

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Broadwing Financial Services, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, and the supplemental Indenture dated as of January 4, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC, Broadwing Financial Services, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes Due 2011 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                4.31

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, and the supplemental Indenture dated as of October 12, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 12.25% Senior Notes Due 2013 (Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                4.32

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Broadwing Financial Services, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of March 14, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, and the supplemental Indenture dated as of January 4, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC, Broadwing Financial Services, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 12.25% Senior Notes Due 2013 (Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                4.33

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated as of October 1, 2003, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of October 20, 2004 among Level 3 Financing, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, and the supplemental Indenture dated December 1, 2004, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 10.75% Senior Notes Due 2011 (Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated March 16, 2007).


                4.34

                Amended and Restated Supplemental Indenture, dated as of March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Broadwing Financial Services, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of October 30, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, the supplemental Indenture dated as of January 4, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, and the supplemental Indenture dated as of January 4, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 9.25% Senior Notes Due 2014 (Exhibit 4.6 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                4.35
                4.14
                 
                Supplemental Indenture, dated as of March 13, 2007, among Level 3 Communications, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated as of January 13, 2006, among Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Communications, Inc.'s 11.5% Senior Notes Due 2010 (Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                4.36

                Supplemental Indenture, dated as of April 9, 2007, among Level 3 Communications, LLC, Level 3 Communications, Inc., Level 3 Financing, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated October 30, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 9.25% Senior Notes Due 2014 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated April 11, 2007).

                4.37
                4.15
                 
                Supplemental Indenture, dated as of April 9, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated October 30, 2006, among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 9.25% Senior Notes Due 2014 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated April 11, 2007).

                4.38
                4.16
                 
                Supplemental Indenture, dated as of January 4, 2007, among Broadwing Financial Services, Inc., Level 3 Communications, Inc., Level 3 Financing, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated October 30, 2006 among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 9.25% Senior Notes Due 2014 (Exhibit 4.2 to the Registrant's Registration StatementCurrent Report on Form S-4/A File No. 333-139123-01)dated May 14, 2007).

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                4.39
                4.17
                		Supplemental Indenture, dated as of May 29, 2007, among Level 3 Communications, LLC, Level 3 Communications, Inc., Level 3 Financing, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated February 14, 2007 among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 8.75% Senior Notes Due 2017 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated May 31, 2007).

                4.40
                4.18
                 
                Supplemental Indenture, dated as of May 29, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated February 14, 2007 among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s 8.75% Senior Notes Due 2017 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated May 31, 2007).



                4.41
                4.19
                 
                Supplemental Indenture, dated as of May 29, 2007, among Level 3 Communications, LLC, Level 3 Communications, Inc., Level 3 Financing, Inc. and The Bank of New York as Trustee, supplementing the Indenture dated February 14, 2007 among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes Due 2015 (Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated May 31, 2007).

                4.42
                4.20
                 
                Supplemental Indenture, dated as of May 29, 2007, among Level 3 Financing, Inc., Level 3 Communications, Inc., Level 3 Communications, LLC and The Bank of New York as Trustee, supplementing the Indenture dated February 14, 2007 among Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York as Trustee, relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes Due 2015 (Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated May 31, 2007).

                10.1
                4.21
                 
                Indenture, dated as of December 24, 2008, among Level 3 Communications, Inc. and The Bank of New York Mellon as Trustee, relating to Senior Debt Securities (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated December 24, 2008).


                4.22

                First Supplemental Indenture, dated as of December 24, 2008, among Level 3 Communications, Inc. and The Bank of New York Mellon as Trustee, relating to Level 3 Communications, Inc.'s 15% Convertible Senior Notes due 2013 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated December 24, 2008).


                4.23

                Indenture, dated as of June 26, 2009, among Level 3 Communications, Inc. and The Bank of New York Mellon, relating to 7% Convertible Senior Notes Due 2015 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated July 2, 2009).


                4.24

                Second Supplemental Indenture, dated as of October 15, 2009, among Level 3 Communications, Inc. and The Bank of New York Mellon, relating to 7% Convertible Senior Notes Due 2015, Series B (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated October 15, 2009).


                4.25

                Indenture, dated as of January 20, 2010, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon, as Trustee, relating to the 10% Senior Notes due 2018 of Level 3 Financing, Inc. (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 21, 2010)


                4.26

                Registration Agreement, dated as of January 20, 2010, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Banc of America Securities LLC, Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated (as representatives of the initial purchasers of the 10% Senior Notes due 2018), relating to Level 3 Financing, Inc.'s 10% Senior Notes due 2018 (Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 21, 2010).

                Table of Contents

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


                10.2
                 
                Amendment No. 1 to Separation Agreement, dated March 18, 1997, by and among Peter Kiewit Sons', Inc., 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
                 
                Form of Aircraft Time-Share Agreement (Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001).


                10.4
                 
                Warrant Agreement, dated as of April 15, 2002, between the Registrant and Walter Scott, Jr. (Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for 2002).

                10.5

                Confirmation of OTC Convertible Note Hedge, dated December 2, 2004, from Merrill Lynch International to Level 3 Communications, Inc. (Exhibit 10.8 to the Registrant's Current Report on Form 8-K filed December 7, 2004).

                10.6

                Confirmation of OTC Warrant, dated December 2, 2004, from Merrill Lynch International to Level 3 Communications, Inc. (Exhibit 10.9 to the Registrant's Current Report on Form 8-K filed December 7, 2004).

                10.7

                Securities Purchase Agreement, dated as of February 18, 2005, among Level 3 Communications, Inc. and the Investors named therein (Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed February 22, 2005).

                10.8
                10.5
                 
                1995 Stock Plan of Level 3 Communications, Inc. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated December 20, 2007).

                10.9.1
                10.6.1
                 
                Outperform Stock Option Amended and Restated Master Award Agreement of Level 3 Communications, Inc. (Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated December 20, 2007).

                10.9.2
                10.6.2
                 
                Form of OSO Master Award Agreement of Level 3 Communications, Inc. (Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated December 20, 2007).

                10.10
                10.7
                 
                Form of Amended Master Deferred Issuance Stock Agreement of Level 3 Communications, Inc. (Exhibit 10.4 to the Registrant's Current Report on Form 8-K dated December 20, 2007).


                10.11
                10.8
                 
                Form of Amended and Restated Deferred Issuance Stock Agreement (Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2008 dated May 12, 2008).


                10.9

                Purchase Agreement by and among Level 3 Communications, LLC, PT Holding Company LLC, Progress Telecommunications Corporation, EPIK Communications Incorporated, Florida Progress Corporation, Odyssey Telecorp, Inc. and Level 3 Communications, Inc. dated as of January 25, 2006 (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated January 30, 2006).


                10.10

                Form of Registration Rights and Transfer Restriction Agreement by and among Level 3 Communications, Inc., PT Holding Company LLC, Progress Telecommunications Corporation, Caronet, Inc., and EPIK Communications Incorporated to be entered into on the closing of the transaction contemplated by the Purchase Agreement 2006 (Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated January 30, 2006).

                10.12
                10.11
                 
                Agreement and Plan of Merger by and among Level 3 Communications, Inc., Eldorado Acquisition Three, LLC and TelCove, Inc. dated as of April 30, 2006. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated April 19, 2006).


                10.12

                Registration Rights and Transfer Restriction Agreement, dated May 31, 2006, by and among Level 3 Communications, Inc., MCCC ICG Holdings LLC, Columbia Capital Equity Partners III(QP),  L.P., Columbia Capital Partners III (Cayman), L.P., Columbia Capital Equity Partners III (AI), L.P., Columbia Capital Investors III, L.L.C., Columbia Capital Employees Investors III, L.L.C., M/C Venture Partners V, L.P., M/C Venture Investors, L.L.C., Chestnut Venture Partners, L.P., and Bear Investments, LLLP. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated June 1, 2006).

                Table of Contents


                		10.13
                 
                Stock Purchase Agreement, dated July 20, 2006, among Level 3 Communications, Inc., Technology Spectrum, Inc. and Insight Enterprises, Inc. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated July 26, 2006).


                10.14
                 
                Registration Rights Agreement, dated as of August 2, 2006, between Level 3 Communications, Inc. and Cheshire Holding Corp., as agent for the security holders of Looking Glass Networks Holding Co.,  Inc. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated August 3, 2006).


                10.15
                 
                Consent, dated asAgreement and Plan of August 7, 2006, by Level 3 Communications, Inc. relating to that certain Securities Purchase Agreement, dated as of February 18, 2005, by andMerger among Level 3 Communications, Inc., Level 3 Services, LLC, Level 3 Colorado, Inc. and the Investors named on Exhibit A TheretoBroadwing Corporation, dated as of October 16, 2006 (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated August 7,October 17, 2006).


                10.16
                 
                Registration Agreement and Plan of Merger, dated as of October 30,16, 2006, as Amended by the First Amendment to Agreement and Plan of Merger Dated as of November 21, 2006, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Credit Suisse Securities (USA)Services, LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets, LLC relating to Level 3 Financing,Colorado, LLC (n/k/a Level 3 Colorado, Inc.'s 9.25% Senior Notes due 2014) and Broadwing Corporation (attached as Annex A to the proxy statement/prospectus included in the registrant's Registration Statement on Form S-4 (333-138462) (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 (333-138462)). (Exhibit 4.210.1 to the Registrant's Current Report on Form 8-K8-K/A dated October 30,November 27, 2006).


                10.17
                 
                Registration Agreement, dated December 28, 2006, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and Wachovia Capital Markets, LLC relating to Level 3 Financing, Inc.'s 9.25% Senior Notes due 2014 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated December 28, 2006).

                10.18

                Exchange Agreement, dated as of January 11, 2007, among Level 3 Communications, Inc., Southeastern Asset Management, Inc., on behalf of its investment advisory clients, and Legg Mason Opportunity Trust, a series of Legg Mason Investment Trust, Inc. (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated January 17, 2007).

                10.19
                10.18
                 
                Registration Agreement, dated February 14, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and Wachovia Capital Markets, LLC relating to Level 3 Financing, Inc.'s Floating Rate Senior Notes due 2015 (Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated February 20, 2007).



                10.20

                Registration Agreement, dated February 14, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and Wachovia Capital Markets, LLC relating to Level 3 Financing, Inc.'s 8.75% Senior Notes due 2017 (Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated February 20, 2007).

                10.21

                Credit Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch Capital Corporation (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.22
                10.19
                 
                Guarantee Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.23
                10.20
                 
                Collateral Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.24
                10.21
                 
                Indemnity, Subrogation and Contribution Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Subsidiaries of Level 3 Communications,  Inc. and Merrill Lynch Capital Corporation (Exhibit 10.4 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.25
                10.22
                 
                Omnibus Offering Proceeds Note Subordination Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., Level 3 Communications, LLC, the Subsidiaries (Exhibit 10.5 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.26
                10.23
                 
                Supplement No. 1 to Omnibus Offering Proceeds Note Subordination Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Communications, LLC, Level 3 Financing, Inc., the Subsidiaries (Exhibit 10.6 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                Table of Contents


                10.27
                10.24
                Amended and Restated Loan Proceeds Note, dated March 13, 2007, issued by Level 3 Communications, LLC to Level 3 Financing, Inc. (Exhibit 10.7 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.28

                Amended and Restated Loan Proceeds Note Collateral Agreement, dated March 13, 2007, among Level 3 Financing, Inc., Level 3 Communications, LLC and Merrill Lynch Capital Corporation (Exhibit 10.8 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.29

                Amended and Restated Loan Proceeds Note Guarantee Agreement, dated March 13, 2007, among Broadwing Financial Services, Inc., and Level 3 Financing, Inc. (Exhibit 10.9 to the Registrant's Current Report on Form 8-K dated March 16, 2007).

                10.30
                10.25
                 
                Retention Agreement, dated October 15, 2007, by and between Level 3 Communications, LLC and Sunit S. Patel (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated October 17, 2007).

                10.31

                StandstillSecurities Purchase Agreement, dated November 19, 2007, by and between17, 2008, among Level 3 Communications, Inc. and Southeastern Asset Management, Inc.the Investors named therein (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November 19, 2007)18, 2008).

                12
                10.26
                 
                Amendment No. 1 to Securities Purchase Agreement, dated December 16, 2008, among Level 3 Communications, Inc. and the Investors named therein (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated December 16, 2008).


                10.27

                Amendment No. 2 to Securities Purchase Agreement, dated December 24, 2008, among Level 3 Communications, Inc. and the Investors named therein (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated December 24, 2008).


                10.28

                Amendment Agreement to the March 13, 2007 Credit Agreement, dated April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., Merrill Lynch Capital Corporation (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated April 17, 2009).


                10.29

                Amended and Restated Loan Proceeds Note, dated as of April 16, 2009, issued by Level 3 Communications, LLC to Level 3 Financing, Inc. (Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated April 17, 2009).


                10.30

                Amended and Restated Loan Proceeds Note Collateral Agreement, dated as of March 13, 2007, as amended and restated as of April 16, 2009, among Level 3 Financing, Inc., Level 3 Communications,  LLC and Merrill Lynch Capital Corporation (Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated April 17, 2009).


                10.31

                First Amendment, dated as of May 15, 2009, to the Amended and Restated Credit Agreement dated as of April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., and Merrill Lynch Capital Corporation (Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 15, 2009).


                12

                Statements re computation of ratios.



                21
                 
                List of subsidiaries of the Company.


                23
                 
                Consent of KPMG LLP.


                31.1
                 
                Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.


                31.2
                 
                Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.


                32.1
                 
                Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.


                32.2
                 
                Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.


                SIGNATURES

                        Pursuant to the requirementsTable 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 29th day of February, 2008.

                LEVEL 3 COMMUNICATIONS, INC.



                By:
                /s/                  JAMES Q. CROWE      
                Name:James Q. Crowe
                Title: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.

                /s/  WALTER SCOTT, JR.      
                Walter Scott, Jr.                		Chairman of the BoardFebruary 29, 2008

                /s/                  JAMES Q. CROWE      
                James Q. Crowe

                Chief Executive Officer and Director

                February 29, 2008

                /s/                  SUNIT S. PATEL      
                Sunit S. Patel

                Group Vice President and Chief Financial Officer (Principal Financial Officer)

                February 29, 2008

                /s/                  ERIC J. MORTENSEN      
                Eric J. Mortensen

                Senior Vice President and Controller (Principal Accounting Officer)

                February 29, 2008

                /s/                  DOUGLAS C. EBY      
                Douglas C. Eby

                Director

                February 29, 2008

                /s/                  JAMES O. ELLIS, JR.      
                James O. Ellis, Jr.

                Director

                February 29, 2008

                /s/                  RICHARD R. JAROS      
                Richard R. Jaros

                Director

                February 29, 2008

                /s/                  ROBERT E. JULIAN      
                Robert E. Julian

                Director

                February 29, 2008

                /s/                  MICHAEL J. MAHONEY      
                Michael J. Mahoney

                Director

                February 29, 2008

                /s/                  ARUN NETRAVALI      
                Arun Netravali

                Director

                February 29, 2008

                /s/                  JOHN T. REED      
                John T. Reed

                Director

                February 29, 2008

                /s/                  MICHAEL B. YANNEY      
                Michael B. Yanney

                Director

                February 29, 2008

                /s/                  ALBERT C. YATES      
                Albert C. Yates

                Director

                February 29, 2008

                Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 
                		 Page

                Reports of Independent Registered Public Accounting Firm

                		F-2 F-2

                Financial Statements as of December 31, 20072009 and 20062008 and for each of the three years ended December 31, 2007:2009:

                		  
                 

                Consolidated Statements of Operations

                		 F-4
                 

                Consolidated Balance Sheets

                		 F-5
                 

                Consolidated Statements of Cash Flows

                		 F-6
                 

                Consolidated Statements of Changes in Stockholders' Equity (Deficit)

                		 F-8
                 

                Consolidated Statements of Comprehensive Loss

                		 F-9
                 

                Supplementary Stockholders' Equity (Deficit) Information

                		 F-9
                 

                Notes to Consolidated Financial Statements

                		F-10 F-10

                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.


                Table of Contents


                Report of Independent Registered Public Accounting Firm

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

                We have audited the accompanying consolidated balance sheets of Level 3 Communications, Inc. and subsidiaries as of December 31, 20072009 and 2006,2008, and the related consolidated statements of operations, cash flows, changes in stockholders' equity (deficit) and comprehensive loss for each of the years in the three-year period ended December 31, 2007.2009. These consolidated financial statements are the responsibility of the Company'sLevel 3 Communications, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

                We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Level 3 Communications, Inc. and subsidiaries as of December 31, 20072009 and 2006,2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007,2009, in conformity with U.S. generally accepted accounting principles.

                We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Level 3 Communications, Inc.'s internal control over financial reporting as of December 31, 2007,2009, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated February 29, 200826, 2010 expressed an unqualified opinion on the effectiveness of the Company'sLevel 3 Communications, Inc.'s internal control over financial reporting.

                /s/KPMG LLP

                Denver, Colorado
                February 29, 2008

                /s/ KPMG LLP

                Denver, Colorado
                February 26, 2010



                Table of Contents

                Report of Independent Registered Public Accounting Firm

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

                We have audited Level 3 Communications, Inc.'s internal control over financial reporting as of December 31, 2007,2009, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. Level 3 Communications, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control Over Financial Reporting".Reporting." Our responsibility is to express an opinion on the Company'sLevel 3 Communications Inc.'s internal control over financial reporting based on our audit.

                We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

                A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

                Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

                In our opinion, Level 3 Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2009, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

                We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Level 3 Communications, Inc. and subsidiaries as of December 31, 20072009 and 2006,2008, and the related consolidated statements of operations, cash flows, changes in stockholders' equity (deficit) and comprehensive loss for each of the years in the three-year period ended December 31, 2007,2009, and our report dated February 29, 200826, 2010 expressed an unqualified opinion on those consolidated financial statements.

                /s/KPMG LLP

                Denver, Colorado
                February 29, 2008

                /s/ KPMG LLP

                Denver, Colorado
                February 26, 2010



                Table of Contents



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF OPERATIONS

                For each of the three year periodyears ended December 31, 2007
                2009

                 
                		 2007
                		 2006
                		 2005
                		 
                 
                		 (dollars in millions, except per share data)

                		 
                Revenue:          
                 Communications $4,199 $3,311 $1,645 
                 Coal mining  70  67  74 
                  
                		 
                		 
                		 
                  Total revenue  4,269  3,378  1,719 
                Costs and Expenses (exclusive of depreciation and amortization shown separately below):          
                 Cost of revenue:          
                  Communications  1,769  1,460  463 
                  Coal mining  64  57  53 
                  
                		 
                		 
                		 
                   Total cost of revenue  1,833  1,517  516 
                 Depreciation and amortization  942  730  647 
                 Selling, general and administrative  1,723  1,258  769 
                 Restructuring and impairment charges  12  13  23 
                  
                		 
                		 
                		 
                   Total costs and expenses  4,510  3,518  1,955 
                  
                		 
                		 
                		 
                Operating Loss  (241) (140) (236)
                Other Income (Expense):          
                 Interest income  54  64  35 
                 Interest expense  (577) (648) (530)
                 Loss on early extinguishment of debt, net  (427) (83) — 
                 Other, net  55  19  29 
                  
                		 
                		 
                		 
                  Total other income (expense)  (895) (648) (466)
                  
                		 
                		 
                		 
                Loss from Continuing Operations Before Income Taxes  (1,136) (788) (702)
                Income Tax Benefit (Expense)  22  (2) (5)
                  
                		 
                		 
                		 
                Loss from Continuing Operations  (1,114) (790) (707)

                Discontinued Operations:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Income from discontinued operations  —  13  20 
                 Gain on sale of discontinued operations  —  33  49 
                  
                		 
                		 
                		 
                Income from Discontinued Operations  —  46  69 
                  
                		 
                		 
                		 
                Net Loss $(1,114)$(744)$(638)
                  
                		 
                		 
                		 
                Earnings (Loss) Per Share of Common Stock (Basic and Diluted):          
                 Loss from Continuing Operations $(0.73)$(0.79)$(1.01)
                 Income from Discontinued Operations  —  .05  0.10 
                  
                		 
                		 
                		 
                 Net Loss $(0.73)$(0.74)$(0.91)
                  
                		 
                		 
                		 

                 
                		 2009 2008 2007 
                 
                		 (dollars in millions, except per share data)
                		 

                Revenue:

                		          
                 

                Communications

                		 $3,695 $4,226 $4,199 
                 

                Coal Mining

                		  67  75  70 
                        
                  

                Total Revenue

                		  3,762  4,301  4,269 

                Costs and Expenses (exclusive of depreciation and amortization shown separately below):

                		          
                 

                Cost of Revenue:

                		          
                  

                Communications

                		  1,499  1,740  1,769 
                  

                Coal Mining

                		  66  69  64 
                        
                   

                Total Cost of Revenue

                		  1,565  1,809  1,833 
                 

                Depreciation and Amortization

                		  915  931  942 
                 

                Selling, General and Administrative

                		  1,338  1,505  1,723 
                 

                Restructuring and Impairment Charges

                		  9  25  12 
                        
                   

                Total Costs and Expenses

                		  3,827  4,270  4,510 
                        

                Operating Income (Loss)

                		  (65) 31  (241)

                Other Income (Expense):

                		          
                 

                Interest income

                		  2  15  54 
                 

                Interest expense

                		  (595) (570) (609)
                 

                Gain on sale of business groups, net

                		  —  99  — 
                 

                Gain (loss) on extinguishment of debt, net

                		  14  89  (427)
                 

                Other, net

                		  27  24  55 
                        
                  

                Total Other Income (Expense)

                		  (552) (343) (927)
                        

                Loss Before Income Taxes

                		  (617) (312) (1,168)

                Income Tax (Expense) Benefit

                		  (1) (6) 22 
                        

                Net Loss

                		 $(618)$(318)$(1,146)
                        

                Shares Used to Compute Basic and Diluted Loss Per Share (in thousands)

                		  
                1,633,049                		  
                1,564,996                		  
                1,517,616                		 

                Loss Per Share (Basic and Diluted)

                		 
                $
                (0.38
                )
                $
                (0.20
                )
                $
                (0.76
                )
                        

                See accompanying notes to consolidated financial statements.


                Table of Contents



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED BALANCE SHEETS
                December
                DECEMBER 31, 2007 and 2006
                2009 AND 2008

                 
                		 2007
                		 2006
                		 
                 
                		 (dollars in millions, except per share data)

                		 
                Assets       
                Current Assets:       
                 Cash and cash equivalents $714 $1,681 
                 Marketable securities  9  235 
                 Restricted cash and securities  23  46 
                 Receivables, less allowances for doubtful accounts of $20 and $17, respectively  395  326 
                 Other  88  101 
                  
                		 
                		 
                Total Current Assets  1,229  2,389 
                Property, Plant and Equipment, net  6,669  6,468 
                Restricted Cash and Securities  101  90 
                Goodwill  1,421  408 
                Other Intangibles, net  680  511 
                Other Assets, net  145  128 
                  
                		 
                		 
                Total Assets $10,245 $9,994 
                  
                		 
                		 

                Liabilities and Stockholders' Equity
                 
                 
                 
                 
                 
                 
                 
                Current Liabilities:       
                 Accounts payable $396 $391 
                 Current portion of long-term debt  32  5 
                 Accrued payroll and employee benefits  97  92 
                 Accrued interest  128  143 
                 Current portion of deferred revenue  166  128 
                 Other  139  156 
                  
                		 
                		 
                Total Current Liabilities  958  915 

                Long-Term Debt, less current portion
                 
                 
                6,832
                 
                 
                7,357
                 
                Deferred Revenue, less current portion  763  767 
                Other Liabilities  622  581 
                  
                		 
                		 
                Total Liabilities  9,175  9,620 
                  
                		 
                		 

                Commitments and Contingencies
                 
                 
                 
                 
                 
                 
                 

                Stockholders' Equity:
                 
                 
                 
                 
                 
                 
                 
                 Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares issued or outstanding  —  — 
                 Common stock, $.01 par value, authorized 2,250,000,000 shares: 1,537,862,685 issued and outstanding in 2007 and 1,178,423,105 issued and outstanding in 2006  15  12 
                 Additional paid-in capital  11,004  9,305 
                 Accumulated other comprehensive income (loss)  104  (4)
                 Accumulated deficit  (10,053) (8,939)
                  
                		 
                		 
                Total Stockholders' Equity  1,070  374 
                  
                		 
                		 
                  Total Liabilities and Stockholders' Equity $10,245 $9,994 
                  
                		 
                		 

                 
                		 2009 2008 
                 
                		 (dollars in millions,
                except per share data)
                		 

                Assets

                		       

                Current Assets:

                		       
                 

                Cash and cash equivalents

                		 $836 $768 
                 

                Restricted cash and securities

                		  3  3 
                 

                Receivables, less allowances for doubtful accounts of $18 and $16, respectively

                		  323  390 
                 

                Other

                		  97  81 
                      

                Total Current Assets

                		  1,259  1,242 

                Property, Plant and Equipment, net

                		  5,687  6,159 

                Restricted Cash and Securities

                		  122  127 

                Goodwill

                		  1,429  1,432 

                Other Intangibles, net

                		  467  559 

                Other Assets, net

                		  98  115 
                      

                Total Assets

                		 $9,062 $9,634 
                      

                Liabilities and Stockholders' Equity

                		       

                Current Liabilities:

                		       
                 

                Accounts payable

                		 $364 $365 
                 

                Current portion of long-term debt

                		  705  186 
                 

                Accrued payroll and employee benefits

                		  51  105 
                 

                Accrued interest

                		  140  117 
                 

                Current portion of deferred revenue

                		  162  168 
                 

                Other

                		  97  111 
                      

                Total Current Liabilities

                		  1,519  1,052 

                Long-Term Debt, less current portion

                		  5,755  6,245 

                Deferred Revenue, less current portion

                		  740  719 

                Other Liabilities

                		  557  597 
                      

                Total Liabilities

                		  8,571  8,613 

                Commitments and Contingencies

                		       

                Stockholders' Equity:

                		       
                 

                Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares outstanding

                		  —  — 
                 

                Common stock, $.01 par value, authorized 2,500,000,000 shares: 1,644,116,265 issued and outstanding in 2009 and 1,617,615,258 issued and outstanding in 2008

                		  16  16 
                 

                Additional paid-in capital

                		  11,537  11,495 
                 

                Accumulated other comprehensive loss

                		  (5) (51)
                 

                Accumulated deficit

                		  (11,057) (10,439)
                      

                Total Stockholders' Equity

                		  491  1,021 
                      

                Total Liabilities and Stockholders' Equity

                		 $9,062 $9,634 
                      

                See accompanying notes to consolidated financial statements.


                Table of Contents



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS

                For each of the three year periodyears ended December 31, 20072009

                 
                		 2007
                		 2006
                		 2005
                		 
                 
                		 (dollars in millions)

                		 
                Cash Flows from Operating Activities:          
                 Net Loss $(1,114)$(744)$(638)
                  Income from discontinued operations  —  (46) (69)
                  
                		 
                		 
                		 
                  Loss from continuing operations  (1,114) (790) (707)
                   Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities of continuing operations:          
                    Depreciation and amortization  942  730  647 
                    Loss on debt extinguishments, net  427  83  — 
                    Loss on impairments  1  8  9 
                    Gain on sale of property, plant and equipment and other assets  (40) (7) (9)
                    Non-cash compensation expense attributable to stock awards  122  84  51 
                    Amortization of debt issuance costs  15  19  16 
                    Deferred income taxes  (23) —  — 
                    Accreted interest on long-term debt discount  22  38  33 
                    Accrued interest on long-term debt  (5) 32  30 
                    Change in working capital items net of amounts acquired:          
                     Receivables  21  131  3 
                     Other current assets  18  8  (15)
                     Payables  (73) (23) (12)
                     Deferred revenue  17  (53) (121)
                     Other current liabilities  (105) (32) (26)
                    Other, net  6  (7) (17)
                  
                		 
                		 
                		 
                Net Cash Provided by (Used in) Operating Activities of Continuing Operations  231  221  (118)

                Cash Flows from Investing Activities:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Proceeds from sales and maturities of marketable securities  333  280  584 
                 Purchases of marketable securities  —  (98) (648)
                 Decrease (increase) in restricted cash and securities, net  12  (21) (4)
                 Capital expenditures  (633) (392) (300)
                 Advances from discontinued operations, net  —  18  13 
                 Acquisitions, net of cash acquired, and investments  (676) (749) (379)
                 Proceeds from sale of discontinued operations, net of cash sold  (2) 307  82 
                 Proceeds from sale of property, plant and equipment, and other investments  5  7  11 
                  
                		 
                		 
                		 
                Net Cash Used in Investing Activities $(961)$(648)$(641)

                (continued)

                 
                		 2009 2008 2007 
                 
                		 (dollars in millions)
                		 

                Cash Flows from Operating Activities:

                		          
                 

                Net Loss

                		 $(618)$(318)$(1,146)
                  

                Adjustments to reconcile net loss to net cash provided by operating activities:

                		          
                   

                Depreciation and amortization

                		  915  931  942 
                   

                (Gain) loss on debt extinguishments, net

                		  (14) (89) 427 
                   

                Accretion of debt discount and amortization of debt issuance costs

                		  56  52  69 
                   

                Change in fair value of embedded derivative

                		  (14) —  — 
                   

                Accrued interest on long-term debt

                		  22  (13) (5)
                   

                Asset retirement obligation adjustment

                		  —  (86) — 
                   

                Loss on impairments

                		  —  8  1 
                   

                Gain on sale of property, plant and equipment

                		  —  (3) (40)
                   

                Gain on sale of business groups, net

                		  —  (99) — 
                   

                Non-cash compensation expense attributable to stock awards

                		  59  78  122 
                   

                Deferred income taxes

                		  1  —  (23)
                   

                Other, net

                		  (17) (1) 6 
                   

                Change in working capital items net of amounts acquired:

                		          
                    

                Receivables

                		  70  5  21 
                    

                Other current assets

                		  (1) 2  18 
                    

                Payables

                		  (19) (26) (73)
                    

                Deferred revenue

                		  10  (34) 17 
                    

                Other current liabilities

                		  (93) 6  (105)
                        

                Net Cash Provided by Operating Activities

                		  357  413  231 

                Cash Flows from Investing Activities:

                		          
                 

                Capital expenditures

                		  (313) (449) (633)
                 

                (Increase) decrease in restricted cash and securities, net

                		  5  (5) 12 
                 

                Proceeds from sale of property, plant and equipment

                		  1  3  5 
                 

                Proceeds from sale of business groups, net

                		  —  124  — 
                 

                Proceeds from sales and maturities of marketable securities

                		  —  4  333 
                 

                Acquisitions, net of cash acquired and investments

                		  —  —  (676)
                 

                Other

                		  —  2  (2)
                        

                Net Cash Used in Investing Activities

                		 $(307)$(321)$(961)

                (Continued)

                		 

                See accompanying notes to consolidated financial statements.


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                (Continued)

                For each of the three year periodyears ended December 31, 2007 (Continued)2009

                 
                		 2007
                		 2006
                		 2005
                		 
                 
                		 (dollars in millions)

                		 
                Cash Flows from Financing Activities:          
                 Long-term debt borrowings, net of issuance costs $2,349 $2,256 $943 
                 Payments on and repurchases of long-term debt, including current portion and refinancing costs  (2,618) (1,110) (130)
                 Proceeds from warrants and stock-based equity plans  26  —  — 
                 Equity offering  —  543  — 
                  
                		 
                		 
                		 
                Net Cash (Used in) Provided by Financing Activities  (243) 1,689  813 

                Discontinued Operations:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Net cash used in discontinued operating activities  —  (20) (5)
                 Net cash used in investing activities  —  (23) (22)
                 Net cash used in financing activities  —  —  (1)
                 Effect of exchange rates on cash and cash equivalents  —  —  (4)
                  
                		 
                		 
                		 
                Net Cash Used in Discontinued Operations  —  (43) (32)

                Effect of Exchange Rates on Cash and Cash Equivalents
                 
                 
                6
                 
                 
                10
                 
                 
                (13
                )
                  
                		 
                		 
                		 
                Net Change in Cash and Cash Equivalents  (967) 1,229  9 

                Cash and Cash Equivalents at Beginning of Year:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Cash and cash equivalents of continuing operations  1,681  379  338 
                 Cash and cash equivalents of discontinued operations  —  73  105 
                  
                		 
                		 
                		 

                Cash and Cash Equivalents at End of Year:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Cash and cash equivalents of continuing operations $714 $1,681 $379 
                  
                		 
                		 
                		 
                 Cash and cash equivalents of discontinued operations $— $— $73 
                  
                		 
                		 
                		 

                Supplemental Disclosure of Cash Flow Information:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Cash interest paid $545 $559 $451 
                 Income taxes paid  1  —  — 

                Noncash Investing and Financing Activities:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Common stock issued for acquisitions $692 $904 $313 
                 Equity issued to retire debt  879  —  — 
                 Long-term debt retired by conversion to equity  702  —  — 
                 Amendment and restatement of $730 million credit agreement  —  730  — 
                 Long-term debt issued in exchange transaction  —  619  — 
                 Long-term debt retired in exchange transaction  —  692  — 
                 Settlement of debt obligation and current liabilities with restricted securities  —  —  13 
                 Decrease in deferred revenue related to acquisitions  —  10  2 

                 
                		 2009 2008 2007 
                 
                		 (dollars in millions)
                		 

                Cash Flows from Financing Activities:

                		          
                 

                Long-term debt borrowings, net of issuance costs

                		 $543 $400 $2,349 
                 

                Payments on and repurchases of long-term debt, including current portion and refinancing costs

                		  (527) (436) (2,618)
                 

                Proceeds from warrants and stock-based equity plans

                		  —  —  26 
                 

                Other

                		  —  2  — 
                        

                Net Cash Provided by (Used in) Financing Activities

                		  16  (34) (243)

                Effect of Exchange Rates on Cash and Cash Equivalents

                		  
                2                		  
                (4
                )                		 
                6                		 
                        

                Net Change in Cash and Cash Equivalents

                		  68  54  (967)

                Cash and Cash Equivalents at Beginning of Year

                		  
                768                		  
                714                		  
                1,681                		 
                        

                Cash and Cash Equivalents at End of Year

                		 
                $
                836                		 
                $
                768                		 
                $
                714                		 
                        

                Supplemental Disclosure of Cash Flow Information:

                		          
                 

                Cash interest paid

                		 $517 $531 $545 
                 

                Income taxes paid

                		  5  4  1 

                Noncash Investing and Financing Activities:

                		          
                 

                Common stock issued for acquisitions

                		 $— $— $692 
                 

                Long-term debt issued in exchange transaction

                		  196  —  — 
                 

                Long-term debt retired in exchange transaction

                		  204  —  — 
                 

                Long-term debt converted to equity

                		  —  128  879 

                See accompanying notes to consolidated financial statements.


                Table of Contents



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                For each of the three year periodyears ended December 31, 20072009

                 
                		 Common
                Stock
                		 Additional
                Paid-in
                Capital
                		 Accumulated
                Other
                Comprehensive
                Income (Loss)
                		 Accumulated
                Deficit
                		 Total
                		 
                 
                		 (dollars in millions)

                		 
                Balances at December 31, 2004 $7 $7,371 $19 $(7,554)$(157)
                Common Stock:                
                 WilTel acquisition  1  312  —  —  313 
                 Stock plan grants  —  37  —  —  37 
                 Shareworks plan  —  24  —  —  24 
                 401(k) plan  —  15  —  —  15 
                Net Loss  —  —  —  (638) (638)
                Other Comprehensive Loss  —  —  (70) —  (70)
                  
                		 
                		 
                		 
                		 
                		 
                Balances at December 31, 2005  8  7,759  (51) (8,192) (476)
                 Adjustment for EITF No. 04-6  —  —  —  (3) (3)
                  
                		 
                		 
                		 
                		 
                		 
                Adjusted balances at December 31, 2005  8  7,759  (51) (8,195) (479)
                Common Stock:                
                 Acquisitions  2  902  —  —  904 
                 Equity offering, net of offering costs  2  541  —  —  543 
                 Stock plan grants  —  60  —  —  60 
                 Shareworks plan  —  25  —  —  25 
                 401(k) plan  —  18  —  —  18 
                Net Loss  —  —  —  (744) (744)
                Other Comprehensive Income  —  —  47  —  47 
                  
                		 
                		 
                		 
                		 
                		 
                Balances at December 31, 2006  12  9,305  (4) (8,939) 374 
                Common Stock:                
                 Acquisitions  1  691  —  —  692 
                 Exercise of warrants and options and stock sales  —  26  —  —  26 
                 Stock plan grants  —  77  —  —  77 
                 401(k) plan  —  28  —  —  28 
                 Debt conversion to equity  2  877  —  —  879 
                Net Loss  —  —  —  (1,114) (1,114)
                Other Comprehensive Income  —  —  108  —  108 
                  
                		 
                		 
                		 
                		 
                		 
                Balances at December 31, 2007 $15 $11,004 $104 $(10,053)$1,070 
                  
                		 
                		 
                		 
                		 
                		 

                 
                		 Common Stock  
                		 Accumulated
                Other
                Comprehensive
                Income (Loss)                		  
                		  
                		 
                 
                		 Additional
                Paid-in
                Capital                		 Accumulated
                Deficit                		  
                		 
                 
                		 Shares $ Total 
                 
                		 (dollars in millions)
                		 

                Balances at January 1, 2007

                		  1,178,423,105 $12 $9,569 $(4)$(8,975)$602 

                Common Stock:

                		                   
                 

                Acquisitions

                		  122,942,018  1  691  —  —  692 
                 

                Common stock issued under employee stock and benefit plans and other

                		  22,558,511  —  8  —  —  8 
                 

                Debt conversion to equity

                		  213,939,051  2  877  —  —  879 

                Stock-based compensation expense

                		  —  —  123  —  —  123 

                Net Loss

                		  —  —  —  —  (1,146) (1,146)

                Other Comprehensive Income

                		  —  —  —  108  —  108 
                              

                Balances at December 31, 2007

                		  1,537,862,685  15  11,268  104  (10,121) 1,266 

                Common Stock:

                		                   
                 

                Common stock issued under employee stock and benefit plans and other

                		  32,131,248  —  21  —  —  21 
                 

                Debt conversion to equity

                		  47,621,325  1  127  —  —  128 

                Stock-based compensation expense

                		  —  —  79  —  —  79 

                Net Loss

                		  —  —  —  —  (318) (318)

                Other Comprehensive Loss

                		  —  —  —  (155) —  (155)
                              

                Balances at December 31, 2008

                		  1,617,615,258  16  11,495  (51) (10,439) 1,021 

                Common Stock:

                		                   
                 

                Common stock issued under employee stock and benefit plans and other

                		  27,108,607  —  15  —  —  15 

                Stock-based compensation expense

                		  —  —  30  —  —  30 

                Other

                		  (607,600) —  (3) —  —  (3)

                Net Loss

                		  —  —  —  —  (618) (618)

                Other Comprehensive Income

                		  —  —  —  46  —  46 
                              

                Balances at December 31, 2009

                		  1,644,116,265 $16 $11,537 $(5)$(11,057)$491 
                              

                See accompanying notes to consolidated financial statements.


                Table of Contents



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

                For each of the three year periodyears ended December 31, 20072009

                 
                		 2007
                		 2006
                		 2005
                		 
                 
                		 (dollars in millions)

                		 
                Net Loss $(1,114)$(744)$(638)
                Other Comprehensive Income (Loss) Before Income Taxes:          
                 Foreign currency translation  131  48  (69)
                 Unrealized appreciation (depreciation) of available-for-sale investment  7  1  (1)
                 Unrealized depreciation of interest rate swap  (37) —  — 
                 Other, net  7  (2) — 
                  
                		 
                		 
                		 
                Other Comprehensive Income (Loss), Before Income Taxes  108  47  (70)
                  
                		 
                		 
                		 
                Income Tax Benefit Related to Items of Other Comprehensive Income (Loss)  —  —  — 
                  
                		 
                		 
                		 
                Other Comprehensive Income (Loss), Net of Income Taxes  108  47  (70)
                  
                		 
                		 
                		 
                Comprehensive Loss $(1,006)$(697)$(708)
                  
                		 
                		 
                		 

                 
                		 2009 2008 2007 
                 
                		 (dollars in millions)
                		 

                Net Loss

                		 $(618)$(318)$(1,146)

                Other Comprehensive Income (Loss) Before Income Taxes:

                		          
                 

                Foreign currency translation

                		  36  (63) 131 
                 

                Unrealized holding gain (loss) on available-for-sale investment

                		  —  (7) 7 
                 

                Unrealized holding gain (loss) on interest rate swaps

                		  5  (60) (37)
                 

                Other, net

                		  5  (25) 7 
                        

                Other Comprehensive Income (Loss), Before Income Taxes

                		  46  (155) 108 

                Income Tax Related to Items of Other Comprehensive Income (Loss)

                		  —  —  — 
                        

                Other Comprehensive Income (Loss), Net of Income Taxes

                		  46  (155) 108 
                        

                Comprehensive Loss

                		 $(572)$(473)$(1,038)
                        


                SUPPLEMENTARY STOCKHOLDERS' EQUITY (DEFICIT) INFORMATION

                 
                		 Net Foreign
                Currency
                Translation
                Adjustment
                		 Unrealized
                Appreciation
                (Depreciation) of
                Investment and
                Interest Rate Swap
                		 Other
                		 Total
                		 
                 
                		 (dollars in millions)

                		 
                Accumulated Other Comprehensive Income (Loss):             
                Balance at December 31, 2004 $50 $— $(31)$19 
                 Change  (69) (1) —  (70)
                  
                		 
                		 
                		 
                		 
                Balance at December 31, 2005  (19) (1) (31) (51)
                 Change  48  1  (2) 47 
                  
                		 
                		 
                		 
                		 
                Balance at December 31, 2006  29  —  (33) (4)
                 Change  131  (30) 7  108 
                  
                		 
                		 
                		 
                		 
                Balance at December 31, 2007 $160 $(30)$(26)$104 
                  
                		 
                		 
                		 
                		 

                 
                		 Net
                Foreign
                Currency
                Translation
                Adjustment                		 Unrealized
                Holding
                Gain (Loss)
                on Investment
                and Interest
                Rate Swaps                		 Other Total 
                 
                		 (dollars in millions)
                		 

                Accumulated Other Comprehensive Income (Loss):

                		             

                Balance at January 1, 2007

                		 $29 $— $(33)$(4)
                 

                Change

                		  131  (30) 7  108 
                          

                Balance at December 31, 2007

                		  160  (30) (26) 104 
                 

                Change

                		  (63) (67) (25) (155)
                          

                Balance at December 31, 2008

                		  97  (97) (51) (51)
                 

                Change

                		  36  5  5  46 
                          

                Balance at December 31, 2009

                		 $133 $(92)$(46)$(5)
                          

                See accompanying notes to consolidated financial statements.


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                (1) Organization and Summary of Significant Accounting Policies

                Description of Business

                        The Company is 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 created its communications network generally by constructing its own assets, but also through a combination of purchasing and leasing other companies and facilities. The Company's network is an advanced, international, facilities based communications network. The Company designed its network to provide communications services, which employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

                        The Company is also engaged in coal mining through its two 50% owned joint-venture surface mines, one each in Montana and Wyoming.

                Principles of Consolidation and Basis of Presentation

                        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 enterprises engaged in the communications and coal mining businesses. Fifty-percent-owned mining joint ventures are consolidated on a pro rata basis. All significant intercompany accounts and transactions have been eliminated. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

                        Level 3 acquired WilTel Communications Group, LLC ("WilTel") on December 23, 2005; Progress Telecom, LLC ("Progress Telecom") on March 20, 2006; ICG Communications, Inc. ("ICG Communications") on May 31, 2006; TelCove, Inc. ("TelCove") on July 24, 2006; Looking Glass Networks Holding Co., Inc. ("Looking Glass") on August 2, 2006; Broadwing Corporation ("Broadwing") on January 3, 2007; the Content Delivery Network services business ("CDN Business") of SAVVIS, Inc. on January 23, 2007; and Servecast Limited ("Servecast") on July 11, 2007. As applicable, the Company also acquired these companies' operating subsidiaries. The results of operations, cash flows and financial position attributable to these acquisitions are included in the consolidated financial statements from the respective dates of their acquisition (See Note 2).acquisition.

                        On September 7, 2006,June 5, 2008, Level 3 sold Software Spectrum, Inc. ("Software Spectrum"),completed the Company's software reseller business, to Insight Enterprises, Inc. ("Insight Enterprises"). On November 30, 2005, Level 3 sold (i)Structure, LLC ("(i)Structure"), Level 3's wholly owned IT infrastructure management outsourcing subsidiary, to Infocrossing, Inc. ("Infocrossing"). The two businesses comprised Level 3's information services segment. The resultssale of operations, financial condition and cash flows for the Software Spectrum and (i)Structure businesses have been classified as discontinued operations in the consolidated financial statements and related notes for all periods presented in this report (See Note 3).

                        On December 19, 2007, Level 3 announced that it had reached a definitive agreement to sell theits Vyvx advertising distribution business of Vyvx, LLC ("Vyvx Ads") to DG FastChannel, Inc. for $129 million in cash.Level 3 has retained ownership of Vyvx's core broadcast business, including the Vyvx Services Broadcast Business' content distribution capabilities. The sale is expected to close in the second quarter of 2008 subject to regulatory approval. Thefinancial results of operations for the Vyvx Adsadvertising distribution business are included in continuingthe Company's consolidated results of operations from when it was acquired as partthrough the date of sale. See Note 2 for more details regarding the disposition of the WilTel transaction in December 2005.Vyvx advertising distribution business. The pending disposal of the Vyvx Adsadvertising distribution business doesdid not meet the criteria under SFAS No. 144qualify for presentation as discontinued operations since the business iswas not considered ana separately identifiable asset group as defined in Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").group.

                CommunicationsForeign Currency Translation

                        The Company's communications business providesGenerally, 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 broad rangecomponent of integrated communications services primarilyaccumulated other comprehensive income (loss) in stockholders' equity and in the United States and Europe as a facilities-based provider (that is, a provider that owns or leases a substantialstatements of comprehensive loss. A significant portion of the property, plant and equipment necessary to provide its services). The Company has created, through a combinationCompany's foreign subsidiaries have either the British Pound or the Euro as the functional currency, both of construction, purchase and leasing of facilities and other assets, an advanced international, end-to-end, facilities-based communications network. The Company has built, and continues to upgrade,which experienced significant fluctuations against the network based on optical and Internet Protocol technologies in order to leverage the efficiencies of these technologies to provide lower cost communications services.U.S. dollar


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                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)


                during 2009, 2008 and 2007. As a result, the Company has experienced significant foreign currency translation adjustments that are recognized as a component of accumulated other comprehensive income (loss) in stockholders' equity and in the statement of comprehensive loss in accordance with accounting guidance for foreign currency translation. The Company considers its investments in its foreign subsidiaries to be long-term in nature.

                Reclassifications

                        Certain immaterial reclassifications have been made to prior years to conform to the current period's presentation.

                Use of Estimates

                        The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 reported amounts of revenue and expenses during the reporting period. The accounting estimates that require management's most significant and subjective judgments include revenue recognition, revenue reserve, cost of revenue disputes for communications services, the determination of the useful lives of long-lived assets, the valuation and recognition of stock-based compensation expense, the valuation of long-lived assets, goodwill and acquired indefinite-lived intangible assets, derivative financial instruments and the valuation of asset retirement obligations. In addition, the Company has other accounting policies that involve estimates such as the allowance for doubtful accounts, the recognition of the fair value of assets acquired and liabilities assumed in business combinations, accruals for estimated tax and legal liabilities, and valuation allowance for deferred tax assets. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

                Communications

                        Revenue for communications services including private line, wavelengths, colocation, Internet access, managed modem, voice, video and dark fiber, is recognized on a monthly basis as thethese services are provided based on contractual amounts expected to be collected. Management establishes appropriate revenue reserves usingat the time services are rendered based on an analysis of historical credit activity to address, where significant, circumstances that at the time services are rendered,situations in which collection is not reasonably assured either due toas a result of credit risk, the potential for billing disputes or other reasons. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

                        Reciprocal compensation revenue is recognized when an interconnection agreement is in place with another carrier, or if an agreement has expired, when the parties have agreed to continue operating under the previous agreement until a new agreement is negotiated and executed; or at rates mandated by the FCC. Periodically, the Company will receive payment for reciprocal compensation services in excess of FCC rates and before an agreement is in place. These amounts are included in other current liabilities on the consolidated balance sheet until a final agreement has been reached and the necessary regulatory approvals have been received at which time the reciprocal compensation revenue is recognized. These amounts were insignificant to the Company in 2009, 2008 and 2007.

                        CertainFor certain sale and long-term indefeasible right of use, or IRU, agreements ofcontracts involving private line, wavelengths and dark fiber and capacity are requiredservices, the Company may receive up-front payments for services to be accounted


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)


                delivered for ina period of up to 20 years. In these situations, the same manner as sales of real estate with property improvements or integral equipment. This accounting treatment results inCompany defers the deferral of the cash that has been receivedrevenue and the recognition of revenue ratablyamortizes it on a straight-line basis to earnings over the term of the agreement (currently up to 20 years).contract.

                        Termination revenue is recognized when a customer discontinues service prior to the end of the contract period, for which Level 3 had previously received consideration and for which revenue recognition was deferred. Termination revenue is also recognized when customers are required to make termination penalty payments to Level 3 to settle contractually committed purchase amounts that the customer no longer expects to meet or when a customer and Level 3 renegotiate a contract under which Level 3 is no longer obligated to provide services for consideration previously received and for which revenue recognition has been deferred.

                        The Company is obligated under dark fiber IRUs and other capacity agreements 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.

                        Level 3's customer contracts require the Company to meet certain service level commitments. If Level 3 does not meet the required service levels, it may be obligated to provide credits, usually in the form of free service, for a short period of time. The original services that resulted in the credits are not included ina reduction to revenue and, to date, have not been material.

                        Cost of revenue for the communications business includes leased capacity, right-of-way costs, access charges, satellite transponder lease costs and other third party costs directly attributable to the network, but excludes depreciation and amortization and related impairment expenses. ThePrior to the sale of the Vyvx advertising distribution business, the Company also includesincluded in communications cost of revenue the satellite transponder lease costs, the package delivery costs and the blank tape media costs attributable to its video distributionassociated with this business.

                        The Company recognizes the cost of network services as they are incurred in accordance with contractual requirements. The Company disputes incorrect billings from its suppliers of network services. The most prevalent types of disputes include disputes for circuits that are not disconnected by itsthe supplier on a timely basis and usage bills with incorrect or inadequate information. Depending on the type and complexity of the issues involved, it may and often does take several quarters to resolve the disputes.

                        In determining the amount of the cost of network service expenses and related accrued liabilities to reflect in its financial statements, the Company considers the adequacy of documentation of


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Summary of Significant Accounting Policies (Continued)


                disconnect notices, compliance with prevailing contractual requirements for submitting these disconnect notices and disputes to the provider of the network services, and compliance with its interconnection agreements with these carriers. Significant judgmentJudgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could varybe material.

                Coal Mining

                        The Company sells coal primarily through long-term contracts with public utilities. The long-term contracts for the delivery of coal establish the price, volume, and quality requirements of the coal to be delivered. Revenue under these and other contracts is generally recognized when coal is shipped to the customer.


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)

                USF and Gross Receipts Taxes

                        The revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Company records Universal Service Fund ("USF") contributions where the Company is the primary obligor for the taxes assessed in each jurisdiction where it does business on a gross basis in its consolidated statements of operations, but records sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. Communications revenue and cost of revenue on the consolidated statements of operations includes USF contributions totaling $62 million, $65 million and $63 million for the years ended December 31, 2009, 2008 and 2007, respectively.

                Advertising Costs

                        The Company expenses the cost of advertising as incurred. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations. Advertising expense was $7 million, $8 million and $16 million for the years ended December 31, 2009, 2008 and 2007, respectively.

                Stock-Based Compensation

                        The Company recognizes the estimated fair value of stock based compensation costs, net of an estimated forfeiture rate, over the requisite service period of the award, which is generally the option vesting term. The Company estimates forfeiture rates based on its historical experience.

                Income Taxes

                        The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.

                Cash and Cash Equivalents

                        The Company classifies investments as cash equivalents if they are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of highly liquid investments in government and government agency securities and money market funds issued or managed by financial institutions in the United States and Europe and commercial paper depending on liquidity requirements. As of December 31, 2009 and 2008, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

                Derivative Financial Instruments

                        The Company uses derivative financial instruments, primarily interest rate swaps, to manage its exposure to fluctuations in interest rate movements. The Company's primary objective in managing


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)


                interest rate risk is to decrease the volatility of its earnings and cash flows affected by changes in the underlying rates. To achieve this objective, the Company enters into financial derivatives, primarily interest rate swap agreements, the values of which change in the opposite direction of the anticipated future cash flows. The Company has designated its interest rate swap agreements as cash flow hedges. Swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the lives of the agreements without exchange of the underlying notional amount. The change in the fair value of the interest rate swap agreements is reflected in other comprehensive income (loss) due to the fact that the interest rate swap agreements are designated as effective cash flow hedges. The Company evaluates the effectiveness of the hedges on a quarterly basis. The Company recognizes any ineffective portion of the hedges in the consolidated statements of operations. The Company does not use derivative financial instruments for speculative purposes.

                        The Company is exposed to credit related losses in the event of non-performance by counterparties. The counterparties to any of the financial derivatives the Company enters into are major institutions with investment grade credit ratings. The Company evaluates counterparty credit risk before entering into any hedge transaction, and continues to closely monitor the financial market and the risk that it's counterparties will default on their obligations. This credit risk is generally limited to the unrealized gains in such contracts, should any of these counterparties fail to perform as contracted.

                        The Company also has equity conversion rights associated with debt instruments, which are not designated as hedging instruments, and are considered derivative instruments as of December 31, 2009 and 2008. Certain of the derivative instruments had to be classified as a liability during 2009 and 2008 due to a potential requirement to settle the conversion rights in cash, and are carried at fair value. The Company's primary objective associated with including such conversion rights in certain of its debt instruments, is to reduce the contractual interest rate and related current cash borrowing costs of the debt instruments. The Company recognizes the gains or losses from changes in fair values of these derivative instruments in other income (expense) in the statements of operations. Gains from these derivative instruments were $14 million in 2009, zero in 2008 and zero in 2007.

                Allowance for Doubtful Accounts

                        Trade accounts receivable are recorded at the invoiced amount and can bear interest. The Company establishes an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. The Company determines the allowance for doubtful accounts based on the aging of its accounts receivable balances and an analysis of its historical experience of bad debt write-offs. The Company reviews its allowance for doubtful accounts quarterly. Past due balances over 60 days and over a specified amount are reviewed individually for collectability. Accounts receivable balances are written-off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. All of the Company's allowance for doubtful accounts relates to its communications business. The Company recognized bad debt expense, net of recoveries, of approximately $14 million in 2009, $9 million in 2008 and $11 million in 2007.


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)

                Property, Plant and Equipment

                        Property, plant and equipment are recorded at cost. Depreciation and amortization for the Company's property, plant and equipment are computed on straight-line or accelerated (for certain coal assets) methods based on the following useful lives:

                Facility and Leasehold Improvements

                		10 - 40 years

                Network Infrastructure (including fiber and conduit)

                		12 - 25 years

                Operating Equipment

                		4 - 7 years

                Furniture, Fixtures, Office Equipment and Other

                		2 - 7 years

                        The Company capitalizes costs directly associated with expansions and improvements of the Company's communications network, customer installations, including employee related costs, and generally capitalizes costs associated with network construction and provisioning of services. The Company amortizes such costs over an estimated useful life of three to seven years.

                        In addition, the Company continues to develop business support systems required for its business. The external direct costs of software, materials and services, and payroll and payroll related expenses for employees directly associated with business support systems projects are capitalized. Upon the completion of a project, the total cost of the business support system is amortized over an estimated useful life of three years.

                        Capitalized labor and related costs associated with employees and contract labor working on capital projects were approximately $57 million, $83 million and $102 million for the years ended December 31, 2009, 2008 and 2007, respectively.

                        Leasehold improvements are depreciated over the shorter of their estimated useful lives or lease terms that are reasonably assured.

                        The Company performs periodic internal reviews to determine depreciable lives of its property, plant and equipment based on input from global network services personnel, actual usage and the physical condition of the Company's property, plant and equipment.

                Asset Retirement Obligations

                        The Company recognizes a liability for the estimated fair value of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset in the period incurred. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated amounts accruedremaining useful life of the associated asset. Increases to the asset retirement obligation liability due to the passage of time are recognized as accretion expense and included within selling, general and administrative expenses for disputes.the Communications business and within cost of revenue for the Coal Mining business on the Company's consolidated statements of operations. Changes in the liability due to revisions to future cash flows are recognized by increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset. To the extent that the downward revisions exceed the carrying amount of the related long-lived asset initially recorded when the asset retirement obligation liability was established, the Company records the remaining adjustment as a reduction to depreciation expense, to the extent of historical depreciation of the related long-lived asset, and then to selling, general and administrative expense.


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                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (1) Organization and Summary of Significant Accounting Policies (Continued)

                  Business Combinations

                          All of the Company's business combinations in 2007 and prior years have been accounted for using the purchase method of accounting and, accordingly, are included in Level 3's results of operations as of the date of each acquisition. The Company allocated the purchase price of its acquisitions to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research & development ("IPR&D"), based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. The excess of those fair values over the purchase price was recorded as a reduction to long-lived assets.

                  Goodwill and Acquired Indefinite-Lived Intangible Assets

                          Accounting guidance prohibits the amortization of goodwill and purchased intangible assets with indefinite useful lives. The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually at the end of the fourth quarter and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. For goodwill, the Company performs a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company's reporting units are consistent with the reportable segments identified in Note 14. The Company considers the use of multiple valuation techniques in accordance with the Fair Value Measurements and Disclosures guidance to estimate the fair value of its reporting units and has consistently applied a market approach as part of its impairment assessment process. During 2008, the Company had also utilized the income approach (discounted cash flows) as a secondary measurement of fair value, as the Company believed the use of another valuation technique should be considered given the circumstances resulting from the difficult economic environment and extreme volatility in the financial markets during 2008, which resulted in a measurement that was equally representative of the fair value of the reporting units obtained using the primary value derived with the market approach. Under the market approach, the Company estimates the fair value using an in-exchange valuation premise based upon the market capitalization of Level 3 using quoted market prices, adds an estimated control premium, and then assigns that fair market value to the reporting units. Under the income approach, the Company calculated the fair value of a reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then a second step is performed and the implied fair value of the reporting unit's goodwill is determined and compared to the carrying value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded.

                          GAAP also requires that the fair value of acquired indefinite-lived intangible assets be estimated and compared to their carrying value each year. The Company estimates the fair value of these intangible assets primarily utilizing an income approach. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived acquired intangible assets is less than the carrying value.

                          The Company conducted its goodwill and acquired indefinite-lived intangible assets impairment analyses at the end of the fourth quarter of 2009, 2008 and 2007 and concluded that its goodwill and acquired indefinite-lived intangible assets were not impaired in any of those periods. As a result of the


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (1) Organization and Summary of Significant Accounting Policies (Continued)


                  sale of the Vyvx advertising distribution business in the second quarter of 2008, the Company also performed an interim impairment analysis of its indefinite-lived Vyvx trade name and concluded that there was no impairment as of June 30, 2008.

                  Long-Lived Assets Including Finite-Lived Purchased Intangible Assets

                          The Company amortizes acquired intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from four to twelve years.

                          The Company evaluates long-lived assets, such as property, plant and equipment and acquired intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the assets plus net proceeds expected from disposition of the assets, if any, are less than the carrying value of the assets. If an asset is deemed to be impaired, the amount of the impairment loss is the excess of the asset's carrying value over its estimated fair value.

                          The Company conducted a long-lived asset impairment analysis in 2009, 2008 and 2007 and concluded that its long-lived assets, including finite-lived acquired intangible assets, were not impaired.

                  Concentration of Credit Risk

                        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable, restricted cash and securities and derivatives. The Company maintains its cash equivalents, restricted cash and securities and derivatives with various financial institutions. These financial institutions are primarily located in the United States and Europe and the Company's policy is to limit exposure with any one institution. As part of its cash and risk management processes, the Company performs periodic evaluations of the relative credit standing of the financial institutions. The Company also has established guidelines relative to financial instrument credit ratings, diversification and maturities that seek to maintain safety and liquidity. The Company's investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being used in the Company's business. The Company has not experienced any material losses on financial instruments held at financial institutions. The Company utilizes interest rate swap contracts to protect against the effects of interest rate fluctuations. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss.

                        The Company provides communications services to a wide range of wholesale and enterprise customers, ranging from well capitalized national carriers to smaller,small early stage companies.companies in the United States and Europe. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising Level 3's customer base and their dispersion across many different industries and geographical regions. The Company has in place policies and procedures to review theperforms ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers, although letters of potentialcredit and existing customers and concludes whether collectability of revenue and other out-of-pocket expenses is probable prior to the commencement of services. If the financial condition of an existing customer deteriorates to a point where payment for services isdeposits are required in doubt, the Company will not recognize revenue attributable to that customer until cash is received. As a result of the WilTel acquisition in 2005 and the Progress Telecom, ICG Communications, TelCove and Looking Glass acquisitions in 2006, the total number of customers increased to approximately 18,000 at December 31, 2006. As a result of the Broadwing, CDN Business and Servecast acquisitions in 2007, the total number of customers increased to approximately 34,000 at December 31, 2007. The policies and procedures for reviewing the financial condition of the additional customers related to the acquisitions remained consistent with those described above and as a result, the Company does not believe its overall credit risk has increased significantly.certain limited circumstances. The Company has from time to time entered into agreements with value-added resellers and other channel partners to reach consumer and enterprise markets for voice services. The Company has policies and procedures in place to evaluate the financial condition of these resellers prior to initiating service to the final customer. The Company maintains an allowance for doubtful accounts based upon the expected collectability of


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                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)


                accounts receivable. Due to the Company's credit evaluation and collection process, bad debt expenses have not been significant; however, the Company is not immune from the effects of downturnsable to predict changes in the communications industry; however, management believesfinancial stability of its customers. Any material change in the concentrationfinancial status of credit risk with respectany one or a particular group of customers may cause the Company to adjust its estimate of the recoverability of receivables is mitigatedand could have a material adverse effect on the Company's results of operations. Fair values of accounts receivable approximate cost due to the dispersionshort period of time to collection.

                        A relatively small number of customers account for a significant percentage of the Company's customer base among different industriesrevenue. The Company's top ten customers accounted for approximately 28%, 32% and geographic areas and remedies provided by the terms of contracts and statutes.

                        Approximately 34% of Level 3's communications revenue was concentrated among its top ten customers for the year ended December 31, 2007. Revenue attributable to AT&T, Inc. and subsidiaries, including SBC Communications, Bell South Communications and AT&T Mobility (formerly Cingular Wireless) amounted, on an aggregate basis, to approximately $624 million and $1.1 billion for the years ended December 31, 2007 and 2006, respectively. This represents approximately 15% and 32% of consolidated revenue for the years ended December 31, 2009, 2008 and 2007, respectively.

                Recently Issued Accounting Pronouncements

                        In December 2007, the FASB issued revised guidance on business combinations, which replaces the existing guidance on business combinations. The revised guidance retains the underlying concepts of the existing guidance in that an entity is required to recognize the assets acquired and 2006, respectively,liabilities assumed at their fair value on the acquisition date. The revised guidance changes the accounting treatment for certain specific acquisition related items to require: (1) expensing acquisition related costs as incurred; (2) expensing changes in deferred tax asset valuation allowances and is included withinincome tax uncertainties after the Communications segmentacquisition date; (3) valuing noncontrolling interests at fair value at the acquisition date; (4) generally expensing restructuring costs associated with an acquired business; (5) capitalizing in-process research and development assets acquired and (6) measuring acquirer shares issued in consideration for a business combination at fair value on the consolidated statements of operations. Prioracquisition date as opposed to the announcement date. The revised guidance also includes a substantial number of new disclosure requirements. The revised guidance is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The effect of WilTel in December 2005, AT&T, Inc. and subsidiaries was not a significant customer of the Company.

                Discontinued Information Services

                        On September 7, 2006, Level 3 sold Software Spectrum, Inc. ("Software Spectrum"),adopting this guidance on the Company's software reseller business, to Insight. On November 30, 2005, Level 3 sold (i)Structure, Level 3's wholly owned IT infrastructure management outsourcing subsidiary to Infocrossing. The two businesses comprised Level 3's information services segment. Theconsolidated results of operations and financial condition will be largely dependent on the size and cash flowsnature of any business combinations completed on or after January 1, 2009.

                        In April 2009, the FASB issued additional guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the Software Spectrumacquisition date is on or after January 1, 2009. The effect of adopting this guidance on the Company's consolidated results of operations and (i)Structure businesses have been classifiedfinancial condition will be largely dependent on the size and nature of any business combinations completed on or after January 1, 2009.

                        In October 2009, the FASB issued a new accounting standard that provides revenue recognition guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management's best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. This guidance is generally expected to result in revenue recognition for more delivered elements than under the current rules. Level 3 is required to adopt this guidance prospectively for new or materially modified agreements as of January 1, 2011. The Company is evaluating the effect of this


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Organization and Summary of Significant Accounting Policies (Continued)


                discontinuedguidance, but does not expect adoption to have a material effect on its consolidated results of operations inor financial condition.

                        In June 2009, the consolidated financial statementsFASB issued a new accounting standard that changes the consolidation rules as they relate to variable interest entities. The new standard makes significant changes to the model for determining who should consolidate a variable interest entity, and related footnotesalso addresses how often this assessment should be performed. The standard is effective for all periods presented in this report (See Note 3).

                Selling, General and Administrative Expenses

                        Selling, general and administrative expenses include salaries, wages and related benefits (including non-cash charges for stock based compensation), property taxes, travel, insurance, rent, contract maintenance, advertising and other administrative expenses. Selling, general and administrative expenses also include network related expenses such as network facility rent, utilities and maintenance costs.

                Advertising Costs

                Level 3 expenses the cost of advertising as incurred. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.

                        Advertising expense was $16 million, $8 million and $6 million for the years ended December 31, 2007, 2006 and 2005, respectively.

                Stock-Based Employee Compensation

                effective January 1, 2010. The Company has accounted for stock-based employee compensation using a fair value based method pursuantis currently evaluating the effect of this guidance, but would not expect it to SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") since 1998. For the year ended December 31, 2005, the Company recognized expense using the accelerated vesting methodology of FASB Interpretation No. 28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN 28") (See Note 16). Beginning January 1, 2006, Level 3 adopted the provisions of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"). Under SFAS No. 123R, the Company separates each award into vesting tranches and recognizes expense for each tranche over the vesting period in the same manner as under FIN 28. The adoption of SFAS No. 123R as of January 1, 2006 did not have a material effect on the Company's financial position orconsolidated results of operations.operations or financial condition.

                Depreciation and Amortization(2) Vyvx Advertising Distribution Business Disposition

                        Property, plantOn June 5, 2008, Level 3 completed the sale of its Vyvx advertising distribution business to DG FastChannel, Inc. and equipmentreceived gross proceeds at closing of approximately $129 million in cash. Net proceeds from the sale approximated $121 million after deducting transaction-related costs.

                        Operating results and cash flows from the Vyvx advertising distribution business are recorded at cost. Depreciation and amortizationpresented in continuing operations for all periods presented through the Company's property, plant and equipment are computed on straight-line and accelerated (for certain coal assets) methods baseddate of sale. The disposal of the Vyvx advertising distribution business did not meet the criteria for presentation as discontinued operations since the business was not considered a separately identifiable asset group.

                        Level 3 recognized a gain on the following useful lives:sale of the Vyvx advertising distribution business of $96 million in 2008. The gain is presented in the consolidated statements of operations as "Gain on Sale of Business Groups."

                        The carrying amounts of the major classes of assets and liabilities included in the sale of the Vyvx advertising distribution business were as follows (in millions):

                Facility and Leasehold Improvements10 - 40 years
                Network Infrastructure (including fiber and conduit)12 - 25 years
                Operating Equipment4 - 7 years
                Furniture, Fixtures, Office Equipment and Other2 - 7 years

                Other Current Assets

                		 $1 

                Property, Plant and Equipment, net

                		  3 

                Other Intangibles, net

                		  22 

                Accounts Payable

                		  (1)
                    

                		 $25 
                    

                        During 2006, Level 3 determined thatRevenue attributable to the period it expects to use its existing fiberVyvx advertising distribution business totaled $15 million in 2008 and certain equipment is longer than$36 million in 2007. The financial results, assets and liabilities of the remaining useful lives as originally estimated. As a result,Vyvx advertising distribution business are included in the Company extendedCommunications operating segment through the depreciable lifedate of its existing fiber from 7 years to 12 years, its existing transmission equipment from 5 years to 7 years and its existing IP equipment from 3 years to 4 years.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                sale.

                (1) Summary of Significant Accounting Policies (Continued)

                        Leasehold improvements are depreciated over the shorter of their estimated useful lives or lease terms that are reasonably assured.

                Earnings (Loss)(3) Loss Per Share

                        Basic earnings (loss)The Company computes basic net loss per share have been computed usingby dividing net loss for the period by the weighted average number of shares of common stock outstanding during eachthe period. Diluted earnings (loss)net loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding during the period and including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding convertible notes, stock options, stock based compensation awards and other dilutive securities. No such items were included in the computation of diluted loss per share in 2007, 20062009, 2008 or 20052007 because the Company incurred a loss from continuing operations in each of these periods and the effect of inclusion would have been anti-dilutive.


                Trade Accounts ReceivableTable of Contents

                        Trade accounts receivable are recorded at the invoiced amount and can bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on an analysis of its historical experience with bad debt writeoffs and aging of the accounts receivable balance. The Company reviews its allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

                Restricted Cash and Securities

                        The Company classifies any cash or investments that collateralize outstanding letters of credit, long-term debt, and certain operating or performance obligations of the Company as restricted cash. The Company also classifies cash and investments restricted to fund certain reclamation liabilities as restricted cash. The classification of restricted cash on the consolidated balance sheet as current or noncurrent is dependent on the duration of the restriction and the purpose for which the restriction exists.

                Long-Lived Assets

                        The Company segregates identifiable intangible assets acquired in an acquisition from goodwill. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill is no longer amortized, and is evaluated for impairment at least annually.

                        Other intangible assets primarily include customer contracts, customer relationships, patents and technology acquired in business combinations. The intangible assets with estimated useful lives are amortized on a straight-line basis over the expected period of benefit, which ranges from 2 to 12 years. Certain intangibles acquired in the WilTel and TelCove transactions have an indefinite life. In accordance with SFAS No. 142, the Company evaluates its indefinite lived intangible assets for impairment annually or as circumstances change that could affect the recoverability of the carrying amount of the assets.



                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Summary of Significant Accounting Policies(3) Loss Per Share (Continued)

                        The Company at least annually, or as events or circumstances change that could affect the recoverabilityeffect of the carrying value of its long-lived assets, conducts a comprehensive review of the carrying value of its assets to determine if the carrying amount of the assets are recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." This review requires the identification of the lowest level of identifiable cash flows for purposes of grouping assets subject to review. The estimate of undiscounted cash flows includes long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions. An impairment loss may exist when the estimated undiscounted cash flows attributable to the assets are less than their carrying amount. If an asset is deemed to be impaired, the amount of the impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair value, based on management's assumptions and projections.

                        Management's estimate of the future cash flows attributable to its long-lived assets and the fair value of its businesses involve significant uncertainty. Those estimates are based on management's assumptions of future results, growth trends and industry conditions. The impairment analysis of long-lived assets also requires management to make certain subjective assumptions and estimates regarding the expected future use of certain empty conduits included in the network asset group and the expected future use of certain empty conduit evaluated for impairment separately from the network asset group.

                Accounting for Asset Retirement Obligations

                        The Company follows the policy of providing an accrual for reclamation of mined properties in accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), based on the estimated total cost of restoration of such properties to meet compliance with laws governing surface mining. These estimated costs are calculated based on the expected future risk adjusted cash flows to remediate such properties discounted at a risk-free rate. The Company also provides an accrual for obligations related to certain colocation leases and right-of-way agreements in accordance with SFAS No. 143, based on the estimated total cost of restoration of such properties to their original condition. These estimated obligations are calculated based on the expected discounted future cash flows using the Company's estimated weighted average cost of capital at the time the obligation is incurred and applying a probability factor for conditional restoration obligations. Changes in expected future cash flows are discounted at interest rates that were in effect at the time of the original estimate for downward revisions to such cash flows, and at interest rates in effect at the time of the change for upward revisions in the expected future cash flows.

                Income Taxes

                        Deferred income taxes are provided for the temporary differences between the financial reporting 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. The U.S. net operating losses not utilized can be carried forward for 20 years to offset future taxable income. The majority of the foreign jurisdiction net operating losses not utilized can be carried forward indefinitely. A valuation allowance has been recorded against the majority of the Company's deferred tax assets, as the Company has concluded that under relevant accounting standards, it is more likely than not that deferred tax assets will be not be realizable. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Summary of Significant Accounting Policies (Continued)

                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 (deficit) and in the statements of comprehensive loss. A significant portion of the Company's foreign subsidiaries have either British Pound or the Euro as the functional currency, both of which experienced significant fluctuations against the U.S. dollar during 2007, 2006 and 2005. As a result, the Company has experienced significant foreign currency translation adjustments that are recognized as a component of accumulated other comprehensive income (loss) in stockholders' equity (deficit) and in the statement of comprehensive loss in accordance with SFAS No. 52 "Foreign Currency Translation". The Company considers its investments in its foreign subsidiaries to be long-term in nature.

                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 reported amounts of revenue and expenses during the reporting period. The most critical estimates and assumptions are made in determining the allowance for doubtful accounts, revenue reserves, recoverability of long-lived and indefinite-lived assets, useful lives of long-lived assets, accruals for estimated liabilities that are probable and estimatable, cost of revenue disputes for the communications business, unfavorable contract liabilities set up in purchase accounting, asset retirement obligations and the fair value of stock and option grants. Actual results could differ from those estimates and assumptions.

                Recently Issued Accounting Pronouncements

                        In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109" ("FIN No. 48"), which was effective for Level 3 starting January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN No. 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods and disclosure. The Company's policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations. The adoption of FIN No. 48 did not have an effect on the Company's consolidated results of operations or financial condition as of and for the year ended December 31, 2007.

                        In June 2006, the FASB ratified the consensus on EITF Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement" ("EITF No. 06-3"), which was effective for Level 3 starting January 1, 2007. The scope of


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Summary of Significant Accounting Policies (Continued)


                EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund ("USF") contributions and some excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies". If such taxes are significant and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company records USF contributions on a gross basis in its consolidated statements of operations, but records sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. Communications revenue on the consolidated statements of operations includes USF contributions totaling $45approximately 673 million, $19489 million and $7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The adoption of EITF No. 06-3 did not have a material effect on the Company's consolidated results of operations or financial condition for year ended December 31, 2007, as the policy followed was consistent before and after adoption.

                        In September 2006, the FASB issued Statements of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within that fiscal year. The adoption of SFAS No. 157 is not expected to have a material effect on the Company's consolidated results of operations or financial condition upon adoption on January 1, 2008.

                        In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces SFAS No. 141, "Business Combinations." SFAS No.141R retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) expensing changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date; (3) valuing noncontrolling interests at fair value at the acquisition date; and (4) expensing restructuring costs associated with an acquired business. SFAS No. 141R also includes a substantial number of new disclosure requirements. SFAS No. 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

                        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 requires noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity and applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date except that comparative period information must be restated to classify noncontrolling interests in


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (1) Summary of Significant Accounting Policies (Continued)


                equity, attributed net income and other comprehensive income to noncontrolling interests, and provide other disclosures required by SFAS No. 160. This statement is effective for the Company beginning January 1, 2009. The Company is currently assessing the potential effect that the adoption of SFAS No. 160 will have on its consolidated results of operations or financial condition.

                Reclassifications

                        Certain prior year amounts have been reclassified to conform to the December 31, 2007 presentation.

                (2) Acquisitions

                        In 2006, the Company embarked on a strategy to expand its presence in metropolitan markets and began offering services to enterprise customers through its Business Markets Group. This strategy allows the Company to terminate traffic over its owned facilities rather than paying third parties to terminate the traffic. The expansion into new metro markets also provides additional opportunities to sell services to bandwidth intensive businesses on the Company's national and international networks. In order to expedite the expansion of its metro business, Level 3 acquired Progress Telecom, ICG Communications, TelCove and Looking Glass in 2006 and Broadwing in the first quarter of 2007. Level 3 has also embarked on a strategy to expand its content delivery network services with the acquisitions of the CDN Business in the first quarter of 2007 and Servecast in the third quarter of 2007. The results of operations attributable to each acquisition are included in the consolidated financial statements from the date of acquisition. The value of Level 3 common stock issued in connection with the acquisitions was determined based on the average closing price for Level 3 common stock two days before and two days after the date the acquisition was announced multiplied by the number of shares issued.

                        Servecast Acquisition:    On July 11, 2007, Level 3 completed the acquisition of Servecast Limited, a Dublin, Ireland based provider of live and on-demand video management and streaming services for broadband and mobile platforms. Level 3 paid approximately €34 million, or $46 million, in cash, including $1 million of transaction costs, to complete the acquisition of Servecast.

                        CDN Business Acquisition:    On January 23, 2007, Level 3 completed the acquisition of the Content Delivery Network services business of SAVVIS, Inc. Level 3 paid $133 million in cash (including transaction costs) to acquire the assets of the CDN Business, including network elements, customer contracts and intellectual property used in the CDN Business. The purchase price was subsequently increased by less than $1 million for working capital and other contractual matters. The Company paid this adjustment in April 2007.

                        Broadwing Acquisition:    On January 3, 2007, Level 3 acquired Broadwing, a publicly held provider of optical network communications services. Under the terms of the merger agreement dated October 16, 2006, Level 3 paid $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing. In total, Level 3 paid approximately $753 million of cash, including $9 million of transaction costs, and issued approximately 123 million shares of the Company's common stock, valued at $688 million. As part of the Broadwing acquisition, approximately 3.8 million previously issued Broadwing warrants (valued at approximately $4 million) became exercisable for approximately 5.1 million shares of Level 3 common stock. In the second


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)


                quarter of 2007, the Company subsequently reduced the total consideration paid by $4 million for insurance proceeds received in June 2007 that related to the settlement of an insurance claim that occurred prior to the acquisition. In the fourth quarter of 2007, the Company incurred additional transaction costs of $2 million related to the transaction.

                        In connection with the acquisition of Broadwing, the Company guaranteed $180 million in aggregate principal amount of Broadwing Corporation's 3.125% Convertible Senior Debentures due 2026 (the "Broadwing Debentures") and the transaction included $24 million in capital lease obligations related primarily to a metro fiber IRU agreement. As of February 16, 2007, the holders of $179 million in aggregate principal amount of the Broadwing Debentures converted their Broadwing Debentures into a total of 17 million shares of Level 3 common stock and approximately $105 million in cash pursuant to the terms of the indenture governing the Broadwing Debentures and the agreement whereby Level 3 acquired Broadwing. The remaining $1 million in aggregate principal amount of the Broadwing Debentures was repurchased by Broadwing at 100% of par as required by the indenture governing the Broadwing Debentures.

                        Looking Glass Acquisition:    On August 2, 2006, Level 3 completed the acquisition of Looking Glass, a privately held Illinois-based telecommunications company. The consideration paid by Level 3 consisted of approximately $13 million in cash, including $4 million of transaction costs, and approximately 21 million shares of Level 3 common stock valued at $84 million. In addition, at the closing, Level 3 repaid approximately $67 million of Looking Glass liabilities. The transaction purchase price is not subject to any post-closing adjustments.

                        Level 3 entered into certain transactions with Looking Glass prior to the acquisition of Looking Glass by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue. As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the Looking Glass transaction by $2 million, the amount of the unamortized deferred revenue balance on August 2, 2006.

                        TelCove Acquisition:    On July 24, 2006, Level 3 completed the acquisition of TelCove, a privately held Pennsylvania-based telecommunications company. Under terms of the agreement, Level 3 paid $446 million in cash and issued approximately 150 million shares of Level 3 common stock, valued at $623 million. In addition, Level 3 repaid $132 million of TelCove debt and acquired $12 million in capital leases in the transaction. Also, the Company paid third party costs of approximately $15 million related to the transaction, which included certain costs incurred by TelCove.

                        Level 3 entered into certain transactions with TelCove prior to the acquisition of TelCove by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue. As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the TelCove transaction by $3 million, the amount of the unamortized deferred revenue balance on July 24, 2006.

                        ICG Communications:    On May 31, 2006, Level 3 acquired all of the stock of ICG Communications, a privately held Colorado-based telecommunications company, from MCCC ICG Holdings, LLC excluding certain assets and liabilities. Under the terms of the purchase agreement, Level 3 purchased ICG Communications for an aggregate consideration consisting of approximately


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)


                26 million shares of Level 3 common stock, valued at $131 million, and approximately $45 million in cash. The Company also incurred costs of less than $1 million related to the transaction. Post-closing adjustments, primarily working capital and other contractual matters resulted in additional consideration of approximately $3 million.

                        Level 3 entered into certain transactions with ICG Communications prior to the acquisition of ICG Communications by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue. As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the ICG Communications transaction by $1 million, the amount of the unamortized deferred revenue balance on May 31, 2006.

                        Progress Telecom:    On March 20, 2006, Level 3 completed its acquisition of all of the membership interests of Progress Telecom from PT Holding Company LLC ("PT Holding") excluding certain specified assets and liabilities of Progress Telecom. Progress Telecom was owned by PT Holding which is jointly owned by Progress Energy, Inc. and Odyssey Telecorp, Inc. Under the terms of the purchase agreement, Level 3 purchased Progress Telecom for an aggregate purchase price consisting of approximately $69 million in cash and approximately 20 million shares of Level 3 common stock, valued at $66 million. The purchase price was subsequently reduced by $2 million for working capital and other contractual matters. The Company received payment of the $2 million adjustment in July 2006.

                        Level 3 entered into certain transactions with Progress Telecom prior to the acquisition of Progress Telecom by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue. As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the Progress Telecom transaction by $4 million, the amount of the unamortized deferred revenue balance on March 20, 2006.

                        WilTel:    On December 23, 2005, the Company completed the acquisition of WilTel from Leucadia National Corporation and its subsidiaries (together "Leucadia"). The consideration paid consisted of approximately $390 million in cash (which included a $16 million adjustment for estimated excess working capital), plus $100 million in cash to reflect Leucadia's having complied with its obligation to leave that amount of cash in WilTel, and 115 million newly issued unregistered shares of Level 3 common stock, valued at $313 million.

                        The Company also incurred costs of approximately $7 million related to the transaction. The cash purchase price was subject to post-closing adjustments based on actual working capital and other contractual items as of the closing date. In March 2006, Leucadia and Level 3 agreed that the purchase price for WilTel should decrease by approximately $27 million as a result of working capital and other contractual post-closing adjustments. Level 3 received payment of the $27 million adjustment in April 2006.

                        The final valuation indicated that the fair value of the identifiable assets acquired exceeded the total of the purchase price paid and the liabilities assumed in the transaction. As a result, the excess value was applied against the fair value of the long-lived assets obtained in the transaction. The $27 million post-closing adjustment resulted in an additional decrease in long-lived assets in the first quarter of 2006.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)

                        Level 3 entered into certain transactions with WilTel prior to the acquisition of WilTel by Level 3, whereby it received cash for communications services to be provided in the future. As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and accordingly, reduced the purchase price applied to the net assets acquired in the WilTel transaction by $2 million, the amount of the unamortized deferred revenue balance on December 23, 2005.

                        The acquisition included all of WilTel's communications business and WilTel's Vyvx video transmission business. The acquisition also included a multi-year contract between SBC Service, Inc. and WilTel ("SBC Contract Services Agreement"). SBC Services, Inc. became a subsidiary of AT&T Inc. ("AT&T") (together "SBC") and announced its intention to migrate the services provided by WilTel to the merged SBC Services, Inc. and AT&T network. WilTel and SBC amended the SBC Contract Services Agreement to run through 2009. The agreement provides a gross margin purchase commitment of $335 million from December 2005 through the end of 2007, and $75 million from January 2008 through the end of 2009. As of December 31, 2007, SBC fully satisfied the $335 million of the December 2005 to the end of 2007 gross margin purchase commitment. SBC's purchases of services that exceed the original $335 million gross margin purchase commitment now count toward the $75 million gross margin purchase commitment for the period from January 2008 through the end of 2009. As of December 31, 2007, SBC had satisfied $39 million of the $75 million gross margin purchase commitment. Originating and terminating access charges paid to local phone companies are passed through to SBC in accordance with a formula that approximates cost. Additionally, the SBC Contract Services Agreement provides for the payment of $50 million from SBC if certain performance criteria are met by Level 3. The Company met the required performance criteria and recorded annual revenue of $25 million in both 2006 and 2007 under the agreement. Of the annual amounts, 50% was based on monthly performance criteria and the remaining 50% was based on performance criteria for the full year. The performance-based incentive provisions of the agreement ended on December 31, 2007. Level 3 will not earn performance-based incentives in 2008 under the SBC Contract Services Agreement.

                        As specified in the purchase agreement with Leucadia, WilTel transferred certain excluded assets to Leucadia and Leucadia assumed certain excluded liabilities. The excluded assets included all cash and cash equivalents in excess of $100 million at closing, all marketable securities, WilTel's headquarters building located in Tulsa, Oklahoma and certain other miscellaneous assets. In addition, WilTel assigned to Leucadia all of its right to receive cash payments from SBC totaling $236 million, pursuant to the Termination, Mutual Release and Settlement Agreement, dated June 15, 2005, among Leucadia, WilTel and SBC. The excluded liabilities include all of WilTel's long-term debt obligations, WilTel's obligations under its defined benefit pension plan, certain other employee related liabilities and other claims. The agreement required Leucadia to pay in full all of WilTel's obligations under its credit agreement and for Leucadia to release WilTel from any obligation under the outstanding mortgage note secured by its headquarters building. Level 3 entered into an agreement with Leucadia to lease a portion of the former WilTel headquarters building in Tulsa.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)

                Purchase Price Allocation

                        Under business combination accounting, the total final purchase price for each of the acquired companies was allocated to the net tangible and identifiable intangible assets based on their estimated fair values as of the acquisition dates. The allocation of the purchase price was based upon valuations performed for each acquired company. The valuations for the WilTel, Progress Telecom, ICG Communications, TelCove, Looking Glass, Broadwing and CDN Business acquisitions have been finalized. The valuation for the Servecast acquisition is in the process of being finalized.

                        The valuations for the WilTel, Looking Glass and CDN Business acquisitions indicated that the fair value of the assets acquired exceeded the total of the purchase price paid and the liabilities assumed in the transactions. As a result, the excess value was applied against the estimated fair value of the long-lived assets in each transaction. The valuations for the Progress Telecom, ICG Communications and TelCove acquisitions in 2006 and the valuations for the Broadwing and Servecast acquisitions in 2007 indicated that the fair value of the assets acquired was less than the total of the purchase price paid and the liabilities assumed in the transactions. As a result, the excess purchase price was assigned to goodwill for each acquisition.

                Tangible and Intangible Long-Lived Assets

                        In performing the purchase price allocation for each acquired company, the Company considered, among other factors, the intention for future use of acquired assets, analysis of historical financial performance and estimates of future performance of each acquired company's products. The fair value of assets was based, in part, on a valuation using either a cost, income, or in some cases, market valuation approach and estimates and assumptions provided by management. The tangible assets primarily include the real and personal property used to provide communications services, as well as video services in the case of the WilTel acquisition. In addition, tangible assets include the fair value of software purchased or developed by each company, if applicable. Intangible assets consist primarily of customer relationships, patents and developed technology and the Vyvx trademark. Management has established indefinite lives on the Vyvx trademark and certain other intangible assets, lives ranging from 6 to 12 years for the customer relationships and lives ranging from 10 to 12 years for patents and developed technology.

                Deferred Revenue

                        The fair value of deferred revenue included in the final purchase price allocation for each acquired company was determined based on monthly amounts billed in advance for which services would be provided to customers in the period immediately following acquisition. Level 3 did not record deferred revenue for long-term contracts in which the acquired company had already received consideration from the customer as Level 3 does not expect to incur any direct and incremental costs associated with these contracts.

                Current and Noncurrent Obligations

                        The fair value of each acquired company's current liabilities was determined based on the expected cash flows for the twelve months following the date of acquisition. Level 3 did not present value the cash flows as it does not expect the present values to be significantly different from the gross cash flows.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)

                        The noncurrent obligations assumed in each acquisition, if applicable, have been recorded at their present value using an appropriate interest rate. The Company has identified certain acquired facilities that it does not expect to utilize for the combined business. The Company has also revalued the asset retirement obligations of each acquired company using Level 3's weighted average cost of capital rather than the acquired company's weighted average cost of capital.

                  Pro Forma Financial Information

                        The unaudited financial information in the table below summarizes the combined results of operations of Level 3 and the acquired businesses, on a pro forma basis, as though the companies acquired in 2006 and 2007 had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of the periods presented. The pro forma financial information for all periods presented includes the business combination accounting effect on historical revenue of the acquired companies, adjustments to depreciation on acquired property, amortization charges from acquired intangible assets, restructuring costs and acquisition costs reflected in the historical statements of operations for periods prior to Level 3's acquisition.

                 
                		 Unaudited Pro Forma
                Years ended December 31,
                		 
                 
                		 2007
                		 2006
                		 
                 
                		 (dollars in millions, except per share data)

                		 
                Revenue $4,273 $4,595 
                  
                		 
                		 

                Loss from Continuing Operations
                 
                $
                (1,115
                )
                $
                (890
                )
                Income from Discontinued Operations  —  46 
                  
                		 
                		 
                Net Loss $(1,115)$(844)
                  
                		 
                		 
                Per common share:       
                 Loss from continuing operations $(0.73)$(0.69)
                 Income from discontinued operations  —  0.04 
                  
                		 
                		 
                 Net loss $(0.73)$(0.65)
                  
                		 
                		 

                Pro Forma Weighted Average Common Shares Outstanding (in thousands)
                 
                 
                1,518,906
                 
                 
                1,284,878
                 
                  
                		 
                		 

                        Included in the actual results and pro forma financial information for the year ended December 31, 2007 are certain amounts which affect the comparability of the results, including net losses of $427 million as a result of the early extinguishments of certain long-term debt, a gain of $37 million from the partial sale of the Company's investment in Infinera shares, a tax benefit of $23 million as a result of recognizing a deferred tax benefit for the reversal of a valuation allowance, a workforce reduction charge of $11 million and $10 million of termination revenue.

                        Included in the actual results and pro forma financial information for the year ended December 31, 2006 are certain amounts which affect the comparability of the results, including net


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)


                losses of $83 million as a result of the early extinguishments of certain long-term debt, $11 million of termination revenue, income from discontinued operations of $46 million, a workforce reduction charge of $5 million, and non-cash impairment charges of $8 million that primarily resulted from the decision to terminate certain information technology projects in the Communications business.

                        The fair value of the assets acquired and the liabilities assumed in the Servecast transaction is based upon a preliminary valuation as of the acquisition date after reflecting other contractual purchase price adjustments and is subject to change due to further analysis of the assets acquired and liabilities assumed as well as integration plans. The fair value of assets acquired and liabilities assumed in the WilTel, Progress Telecom, ICG Communications, TelCove, Looking Glass, CDN Business and Broadwing transactions are based upon final valuations after reflecting other contractual purchase price adjustments.

                        During the third quarter of 2007, the preliminary valuation for the Servecast acquisition was completed. As a result, the Company recorded intangible assets for customer relationships totaling $9 million and technology totaling $8 million. Based on the purchase price allocation, goodwill totaling $30 million was recorded for the Servecast transaction.

                        During the second and third quarters of 2007, the Company recorded purchase price allocation adjustments for the Broadwing acquisition that resulted in a net increase of $1 million to goodwill. The purchase price allocation adjustments included increases in goodwill of $4 million to record liabilities incurred by Broadwing prior to the acquisition and $1 million for additional transaction costs; and decreases to goodwill for the receipt after the acquisition of $4 million in insurance proceeds related to the settlement of an insurance claim that was made prior to the acquisition.

                        In addition, during the fourth quarter of 2007, the Company recorded purchase price allocation adjustments for the Broadwing acquisition that resulted in a net increase of $98 million to goodwill. The adjustments in the fourth quarter of 2007 included a decrease in the identifiable intangible assets for Broadwing from $254 million in the preliminary valuation to $154 million as a result of additional analysis of the estimated cash flows expected to be generated for the customers acquired in the Broadwing acquisition. The decrease in the value of the identifiable intangible assets for Broadwing increased the goodwill originally recorded on the transaction by $100 million. In addition, during the fourth quarter of 2007, there were miscellaneous adjustments to the assets and liabilities of Broadwing that resulted in a net decrease in goodwill of $2 million. These adjustments included additional transaction costs, adjustments to the original property, plant and equipment value and reductions to accrued severance and other liabilities. The changes resulted in total goodwill of $1.038 billion for the Broadwing acquisition as of December 31, 2007.

                        During the second quarter of 2007, the Company received a revised valuation for the CDN Business that indicated a significantly higher value for the identifiable intangible assets, primarily patents and customer-related intangible assets. The identifiable intangible assets for the CDN Business increased from $23 million in the preliminary valuation to $133 million in the revised valuation as a result of additional analysis of the estimated cash flows expected to be generated from the patents and customers acquired in the CDN Business acquisition. The increase in the value of the identifiable intangible assets for the CDN Business eliminated the $110 million of goodwill originally recorded on the transaction. During the third quarter of 2007, the Company received the final valuation report for the CDN Business acquisition. The final valuation report did not result in any changes to the valuation of the CDN Business.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (2) Acquisitions (Continued)

                        During the third quarter of 2007, the Company recorded net purchase price allocation adjustments for the Looking Glass acquisition totaling $2 million related to the impairment of unutilized leased facilities assumed in the acquisition. During the third quarter of 2007, the Company completed its analysis of facilities leases acquired in the Looking Glass acquisition and determined that certain facilities under lease have not been used by the Company since the date of acquisition and would not be used by the Company in the future, while also concluding a settlement agreement on one of the previously-impaired lease holdings. The net result of recording these lease impairment adjustments was to increase other non-current liabilities and certain long-lived assets acquired by $2 million since the fair value of the identifiable net assets acquired exceeds the consideration paid to the former owners in the Looking Glass acquisition.

                        During the second quarter of 2007, the Company received the final valuation for the ICG Communications acquisition that included revised valuations for both the identifiable tangible and intangible assets. The fixed assets acquired for ICG Communications increased from $10 million in the preliminary valuation to $93 million in the final valuation as a result of a detailed analysis to physically identify and estimate the fair value of the fixed assets acquired. As a result of the changes to the valuation of the fixed assets, the valuation of the identifiable intangible assets decreased from $49 million in the preliminary valuation to $18 million in the final valuation.

                        The adjusted fair values of the assets acquired and the liabilities assumed for the companies Level 3 acquired in 2006 and 2007 are as follows.

                 
                		 Servecast
                		 CDN
                Business
                		 Broadwing
                		 Looking
                Glass
                		 TelCove
                		 ICG
                Communications
                		 Progress
                Telecom
                		 WilTel
                		 
                 
                		 (dollars in millions)

                		 
                Assets:                         
                 Cash and cash equivalents $1 $— $257 $3 $3 $6 $— $128 
                 Marketable securities  —  —  46  —  —  —  —  — 
                 Accounts receivable  1  —  82  8  23  7  3  257 
                 Other current assets  —  —  19  2  5  2  2  22 
                 Property, plant and equipment, net  1  2  239  185  796  93  77  629 
                 Goodwill  30  —  1,038  —  179  73  30  — 
                 Identifiable intangible assets  17  133  154  9  273  18  36  152 
                 Other assets  —  —  31  1  —  5  —  26 
                  
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                Total Assets  50  135  1,866  208  1,279  204  148  1,214 
                  
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                		 

                Liabilities:
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Accounts payable  1  1  37  5  21  6  1  204 
                 Accrued payroll  —  1  14  1  6  2  1  29 
                 Other current liabilities  —  —  117  9  20  10  7  61 
                 Current portion of capital leases  3  —  2  —  3  —  1  — 
                 Long-term debt  —  —  203  —  —  —  —  — 
                 Capital leases  —  —  22  —  9  3  8  — 
                 Deferred revenue - Acquired Company  —  —  13  1  —  4  —  41 
                 Deferred revenue - Level 3  —  —  —  (2) (3) (1) (4) (2)
                 Other Liabilities  —  —  15  30  7  2  —  98 
                  
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                Total Liabilities  4  2  423  44  63  26  14  431 
                  
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                Purchase Price $46 $133 $1,443 $164 $1,216 $178 $134 $783 
                  
                		 
                		 
                		 
                		 
                		 
                		 
                		 
                		 

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (3) Discontinued Operations

                Disposal of Information Services Segment

                        The Company sold the two businesses, Software Spectrum and (i)Structure, that comprised Level 3's information services segment and has presented the results of operations for those businesses as discontinued operations for all periods presented.

                Software Spectrum

                        On September 7, 2006, Level 3 sold Software Spectrum to Insight, a leading provider of information technology products and services. In connection with the transaction, Level 3 received total proceeds of $353 million in cash, consisting of a base purchase price of $287 million and a working capital adjustment of approximately $66 million. The purchase price was subject to working capital and certain other post-closing adjustments. During the fourth quarter of 2006, the Company paid $2 million to Insight as the final working capital adjustment. Level 3 recognized a $33 million gain on the transaction in the third quarter of 2006 after transaction costs.

                        The following is the summarized results of operations of the Software Spectrum business for the period from January 1, 2006 through September 7, 2006 and for the year ended December 31, 2005:

                 
                		 January 1,
                Through
                September 7,
                2006
                		 Twelve Months
                Ended 2005
                		 
                 
                		 (dollars in millions)

                		 
                Revenue $1,400 $1,894 
                Costs and Expenses:       
                 Cost of revenue  1,269  1,717 
                 Depreciation and amortization  8  10 
                 Selling, general and administrative  111  143 
                 Restructuring and impairment charges  1  — 
                  
                		 
                		 
                  Total costs and expenses  1,389  1,870 
                  
                		 
                		 
                Income from Operations  11  24 

                Other Income (Expense)
                 
                 
                5
                 
                 
                (1
                )
                  
                		 
                		 
                Income Before Income Taxes  16  23 

                Income Tax Expense
                 
                 
                (3
                )
                 
                (3
                )
                  
                		 
                		 

                Income from Discontinued Operations
                 
                $
                13
                 
                $
                20
                 
                  
                		 
                		 

                (i)Structure

                        On November 30, 2005, Level 3 sold (i)Structure to Infocrossing for proceeds of $85 million which consisted of $82 million in cash and $3 million of Infocrossing common stock. Level 3 recognized a $49 million gain on the transaction in the fourth quarter of 2005. The cash purchase price was subject to a post-closing adjustment based on actual working capital as of the closing date that was settled in the fourth quarter of 2007 for approximately $2 million.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (3) Discontinued Operations (Continued)

                        The following is the summarized results of operations of the (i)Structure business for the eleven months ended November 30, 2005:

                 
                		 January 1,
                Through
                November 30,
                2005
                 
                		 (dollars in millions)
                Revenue $64
                Costs and Expenses:   
                 Cost of revenue  47
                 Depreciation and amortization  8
                 Selling, general and administrative  9
                  
                  Total costs and expenses  64
                  
                Income from Discontinued Operations $—
                  

                (4) Termination Revenue

                        The Company recognized termination revenue totaling $10 million, $11 million and $133 million in 2007, 2006 and 2005, respectively. Termination revenue is reported in the same manner as the original service provided.

                        On March 1, 2005, Level 3 entered into an agreement with 360networks in which both parties agreed to terminate a 20-year IRU agreement. Under the new agreement, 360networks returned the dark fiber originally provided by Level 3. Under the original IRU agreement, signed in 2000, the cash received by Level 3 was deferred and amortized to revenue over the 20-year term of the agreement. As a result of this transaction, Level 3 recognized the unamortized deferred revenue of approximately $86 million as non-cash termination revenue in the first quarter of 2005.

                        On February 22, 2005, France Telecom and Level 3 finalized an agreement to terminate a dark fiber agreement signed in 2000. Under the terms of the agreement, France Telecom returned the fiber to Level 3. Under the original IRU agreement, the cash received by Level 3 was deferred and amortized to revenue over the 20-year term of the agreement. As a result of this transaction, Level 3 recognized the unamortized deferred revenue of approximately $40 million as non-cash termination revenue in the first quarter of 2005.

                (5) Restructuring and Impairment Charges

                Restructuring Charges

                        During the period from December 23, 2005 through December 31, 2007, the Company initiated cumulative workforce reductions expected to affect approximately 2,200 employees in its North American communications business related to the integration of businesses acquired since December 2005. Of the 2,200 employees, approximately 23% were expected to be legacy Level 3 employees and approximately 77% were expected to be employees of acquired businesses.

                        In December 2005 and during 2006, the Company initiated cumulative workforce reductions expected to affect approximately 1,200 employees in its North American communications business


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (5) Restructuring and Impairment Charges (Continued)


                related to the integration of WilTel Communications Group, LLC ("WilTel"), Progress Telecom, ICG Communications, TelCove and Looking Glass into Level 3's operations. Of the 1,200 employees, approximately 22% were expected to be employees of legacy Level 3 and 78% were expected to be employees of the acquired companies. Separately, in January 2005, Level 3 initiated and completed workforce reductions affecting 472 employees in the legacy Level 3 business that were not related to integration of acquired businesses.

                        In the first quarter of 2007, Level 3 initiated additional workforce reductions expected to affect approximately 1,000 employees in its North American communications business related to the integration of Broadwing and the previous acquisitions. Of the 1,000 employees, approximately 25% were expected to be employees of legacy Level 3 and approximately 75% were expected to be employees of the acquired companies.

                        The accounting treatment for the severance costs associated with the workforce reductions is dependent on whether those individuals affected are former employees of the acquired companies or legacy Level 3 employees. For the period from January 1, 2006 through December 31, 2007, the Company had notified or terminated a total of 2,020 employees (729 employees of legacy Level 3 and 1,291 employees of acquired businesses) pursuant to integration activities.

                        The estimated severance costs earned by employees of the acquired companies as of the acquisition date are included as a liability in the balance sheet as of the acquisition date. The Company expects cumulative severance and related costs to total approximately $60 million for former WilTel, Progress Telecom, ICG Communications, TelCove, Looking Glass and Broadwing employees. During the year ended December 31, 2007, Level 3 paid $32 million of severance and related costs for these employees resulting in cumulative payments from January 1, 2006 to December 31, 2007 of $51 million for severance and related charges.

                        The workforce reduction attributable to the WilTel integration activity was substantially complete by the end of 2006. The workforce reductions attributable to the Progress Telecom, ICG Communications, TelCove and Looking Glass integration activities were substantially completed in the third quarter of 2007. The workforce reductions attributable to the Broadwing integration activities are expected to be substantially completed in 2008.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (5) Restructuring and Impairment Charges (Continued)

                        An analysis of the liability for the severance and related activity associated with the integration of the acquired companies follows:

                 
                		 Severance and Related
                Costs for Acquired Company Employees
                		 
                 
                		 Number of
                Employees
                		 Amount
                		 
                 
                		  
                		 (in millions)

                		 
                Balance December 31, 2004 — $— 
                 2005 Accruals 765  26 
                  
                		 
                		 
                Balance December 31, 2005 765  26 
                 2006 Accruals 445  12 
                 2006 Change in Estimate (277) (8)
                 2006 Payments (547) (19)
                  
                		 
                		 
                Balance December 31, 2006 386  11 
                 2007 Accruals 750  33 
                 2007 Change in Estimate (143) (3)
                 2007 Payments (744) (32)
                  
                		 
                		 
                Balance December 31, 2007 249 $9 
                  
                		 
                		 

                        Severance costs attributable to legacy Level 3 employees are recorded as a restructuring charge in the statement of operations once the employees are notified that their position will be eliminated and the severance arrangements are communicated to the employee. For the year ended December 31, 2007, the Company recorded approximately $11 million in restructuring charges for affected legacy Level 3 employees. As of December 31, 2007, the Company had remaining obligations of $4 million for those legacy Level 3 employees terminated or notified.

                        A summary of the restructuring charges and related activity for legacy Level 3 employees follows:

                 
                		 Severance and Related
                Costs for Legacy Level 3 Employees
                		  
                		 
                 
                		 Number of
                Employees
                		 Amount
                		 Facilities Related
                Amount
                		 
                 
                		  
                		 (in millions)

                		 (in millions)

                		 
                Balance December 31, 2004 — $— $16 
                 2005 Charges 472  15  (1)
                 2005 Payments (472) (15) (3)
                  
                		 
                		 
                		 
                Balance December 31, 2005 —  —  12 
                 2006 Charges 248  5  — 
                 2006 Payments (242) (5) (2)
                  
                		 
                		 
                		 
                Balance December 31, 2006 6  —  10 
                 2007 Charges 481  11  — 
                 2007 Payments (348) (7) (1)
                  
                		 
                		 
                		 
                Balance December 31, 2007 139 $4 $9 
                  
                		 
                		 
                		 

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (5) Restructuring and Impairment Charges (Continued)

                Impairments

                        The Company at least annually, or as events or circumstances change that could affect the recoverability of the carrying value of its communications assets, conducts a comprehensive review of the carrying value of its communications assets to determine if the carrying amount of the communications assets are recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). For purposes of this review, Level 3 has historically separately evaluated colocation facilities, certain additional conduits and its communications network (including network equipment, fiber, conduits and customer premise equipment) as these were the lowest levels with separately identifiable cash flows for grouping of assets. Beginning in 2006, the Company stopped evaluating colocation assets separately and began including them in the communications network asset group due to changes in the nature of the cash flows from the delivery of colocation services. The majority of the Company's colocation customers now purchase other services in conjunction with their colocation services thereby reducing the independence of colocation services cash flows from other services. In addition, the percentage of colocation space used to support the network asset has increased over time. The impairment analysis is based on a long-term cash flow forecast to assess the recovery of the communications assets over the estimated useful life of the primary asset. The Company concluded that the assets were not impaired as of December 31, 2007. Management's estimate of the future cash flows attributable to its long-lived assets and the fair value of its businesses involve significant assumptions. Those estimates are based on management's assumptions of future results, growth trends and industry conditions. The impairment analysis of long-lived assets also requires management to make certain subjective assumptions and estimates regarding the expected future use of certain additional conduits included in the network asset group and the expected future use of certain empty conduit evaluated for impairment separately from the network asset group. Management will continue to assess the Company's assets for impairment as events occur or as industry conditions warrant.

                        The Company recognized $8 million of non-cash impairment charges in 2006. Level 3 recognized $4 million of non-cash impairment charges as a result of the decision to terminate projects for certain voice services and certain information technology projects in the communications business which had been previously capitalized. These projects have identifiable costs which Level 3 can separately evaluate for impairment. The costs incurred for these projects, including capitalized labor, were impaired as the carrying value of these projects were no longer expected to provide future benefit to the Company. In addition, Level 3 recognized $4 million of non-cash impairment charges primarily related to excess land of the communications business held for sale in Germany. This charge resulted from the difference between the recorded carrying value and the estimated market value of the land. During the third quarter of 2007, the Company reclassified the excess land in Germany as property, plant and equipment due to the fact the land had not been sold and was no longer being actively marketed for sale.

                        The Company recognized $9 million of non-cash impairment charges in 2005 that primarily resulted from the decision to terminate projects for certain voice services and certain information technology projects in the communications business which had been previously capitalized. These projects have identifiable costs which Level 3 can separately evaluate for impairment. The costs incurred for these projects, including capitalized labor, were impaired as the carrying value of these projects were no longer expected to provide future benefit to the Company.


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (6) Loss Per Share

                        The Company had a loss from continuing operations for each the three years in the period ended December 31, 2007. Therefore, the effect of the approximately 315 million, 481 million and 418 million shares issuable pursuant to the various series of convertible notes outstanding at December 31, 2007, 20062009, 2008 and 2005,2007, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive to the computation. In addition, the effect of the approximately 5543 million, 5457 million and 5955 million stock options, outperform stock options, restricted stock units and warrants outstanding at December 31, 2007, 20062009, 2008 and 2005,2007, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive to the computation.

                        The following details the loss per share calculations for the Level 3 common stock (dollars in millions, except per share data):

                 
                		 Year Ended December 31,
                		 
                 
                		 2007
                		 2006
                		 2005
                		 
                Loss from Continuing Operations $(1,114)$(790)$(707)
                Income from Discontinued Operations (2006 and 2005 include gain on sale)  —  46  69 
                  
                		 
                		 
                		 
                Net Loss $(1,114)$(744)$(638)
                  
                		 
                		 
                		 
                Total Number of Weighted Average Common Shares Outstanding used to Compute Basic and Diluted Earnings Per Share (in thousands)  1,517,616  1,003,255  699,589 

                Earnings (Loss) Per Share of Level 3 Common Stock (Basic and Diluted):
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 Loss from Continuing Operations $(0.73)$(0.79)$(1.01)
                 Income from Discontinued Operations  —  0.05  0.10 
                  
                		 
                		 
                		 
                 Net Loss $(0.73)$(0.74)$(0.91)
                  
                		 
                		 
                		 

                (7) Disclosures about Fair Value of Financial Instruments(4) Property, Plant and Equipment

                        The following methodscomponents of the Company's property, plant and assumptions were used to determine classification and fair valuesequipment as of financial instruments:

                Cash and Cash Equivalents

                        Cash equivalents generally consist of funds invested in highly liquid instruments with a maturity of three months or less from the purchase dates. The securities are stated at cost, which approximates fair value.

                Marketable and Restricted Securities

                        At December 31, 2007, marketable securities totaling $9 million consist of an investment in the common stock of Infinera Corporation ("Infinera"). In 2005, the Company invested $10 million in Infinera2009 and accounted for this investment using the cost method and included the investment in2008 are as follows (in millions):

                 
                		 Cost Accumulated
                Depreciation                		 Net 

                December 31, 2009

                		          

                Land

                		 $162 $— $162 

                Land Improvements

                		  80  (44) 36 

                Facility and Leasehold Improvements:

                		          
                 

                Communications

                		  1,906  (802) 1,104 
                 

                Coal Mining

                		  159  (156) 3 

                Network Infrastructure

                		  5,632  (2,269) 3,363 

                Operating Equipment:

                		          
                 

                Communications

                		  4,009  (3,041) 968 
                 

                Coal Mining

                		  74  (66) 8 

                Furniture, Fixtures and Office Equipment

                		  146  (129) 17 

                Other

                		  23  (22) 1 

                Construction-in-Progress

                		  25  —  25 
                        

                		 $12,216 $(6,529)$5,687 
                        

                December 31, 2008

                		          

                Land

                		 $169 $— $169 

                Land Improvements

                		  68  (35) 33 

                Facility and Leasehold Improvements:

                		          
                 

                Communications

                		  1,856  (682) 1,174 
                 

                Coal Mining

                		  151  (150) 1 

                Network Infrastructure

                		  5,568  (1,967) 3,601 

                Operating Equipment:

                		          
                 

                Communications

                		  3,738  (2,615) 1,123 
                 

                Coal Mining

                		  72  (65) 7 

                Furniture, Fixtures and Office Equipment

                		  139  (121) 18 

                Other

                		  24  (22) 2 

                Construction-in-Progress

                		  31  —  31 
                        

                		 $11,816 $(5,657)$6,159 
                        

                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (7) Disclosures about Fair Value of Financial Instruments (Continued)


                long-term other assets. On June 7, 2007, Infinera completed its initial public offering ("IPO") and its common stock began trading publicly on the NASDAQ Global Market. As a result of the Infinera IPO, the Company began classifying the Infinera investment on its balance sheet as a current marketable security that is available for sale, subject to compliance with applicable U.S. federal securities laws.

                        The fair value of the Infinera investment as of December 31, 2007 is approximately $9 million. For the year ended December 31, 2007, an unrealized gain of $7 million was recorded on the investment in Infinera and is included in Other Comprehensive Income (Loss).

                        On November 5, 2007 the Company sold approximately 80% of its original Infinera investment as part of a secondary equity offering completed by Infinera. The Company received proceeds of approximately $45 million and recognized a gain on the sale of $37 million. The realized gain of $37 million was previously included as an unrealized gain in Other Comprehensive Income (Loss) at September 30, 2007.

                        At December 31, 2006, marketable securities consist of U.S. Treasury securities that were characterized as held to maturity. These securities total $235 million and are reflected as current assets on the consolidated balance sheet at December 31, 2006.

                        Restricted securities consist primarily of cash investments that serve to collateralize outstanding letters of credit and certain performance and operating obligations of the Company.

                        The 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.

                        The net unrealized holding gains and losses for marketable securities classified as available for sale were included in accumulated other comprehensive income (loss) within stockholders' equity (deficit). Securities characterized as held to maturity are stated at cost. The unrealized holding gains and losses for securities characterized as held to maturity are not reflected in the consolidated financial statements.

                        At December 31, 2007 and 2006 the unrealized holding gains and losses on the marketable securities were as follows:

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

                2007            
                Marketable Securities:            
                 Equity Securities—Current $2 $7 $— $9
                  
                		 
                		 
                		 
                  $2 $7 $— $9
                  
                		 
                		 
                		 

                2006
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                Marketable Securities:            
                 U.S. Treasury Securities—Current $235 $— $(1)$234
                  
                		 
                		 
                		 
                  $235 $— $(1)$234
                  
                		 
                		 
                		 

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (7) Disclosures about Fair Value of Financial Instruments (Continued)

                        The Company recognized $37 million of realized gains from the sale of marketable equity securities in 2007, $2 million of realized gains from the sale of marketable equity securities in 2006 and $2 million of realized losses from the sale of marketable debt securities in 2005. These realized gains and losses are reflected in Other, net on the consolidated statement of operations for all periods presented.

                        Maturities for the restricted securities have not been presented, as the types of securities are either cash or money market mutual funds that do not have a single maturity date.

                Long-Term Debt

                        The fair value of long-term debt was estimated using the December 31, 2007 and 2006 average of the bid and ask price for the publicly traded debt instruments. The CBRE Commercial Mortgage was not traded in an organized public manner. The fair value of this instrument is assumed to approximate the carrying value at December 31, 2007 as it was secured by underlying assets. The 9% Convertible Senior Discount Notes due 2013 included within Long-Term Debt are not traded in an organized public manner. The fair value of these notes was calculated using a convertible model, which uses the Black-Scholes valuation model to value the equity portion of the security and bond math to value the debt portion of the security (using market yields on other Level 3 traded debt). The 10% Convertible Senior Notes due 2011 included within Long-Term Debt are not traded in an organized public manner. Level 3 has obtained a market value from a third party broker for the 10% Convertible Senior Notes due 2011. The 11.5% Senior Notes due 2010, Floating Rate Notes due 2011 and the 10.75% Senior Notes due 2011 are not actively traded debt instruments. Level 3 has calculated the estimated fair value of these debt instruments using bond math and market yields on other Level 3 traded debt.

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

                 
                		 December 31, 2007
                		 December 31, 2006
                 
                		 Carrying Amount
                		 Fair Value
                		 Carrying Amount
                		 Fair Value
                 
                		 (dollars in millions)

                Cash and Cash Equivalents $714 $714 $1,681 $1,681
                Marketable Securities—Current  9  9  235  234
                Restricted Cash and Securities—Current  23  23  46  46
                Restricted Cash and Securities—Noncurrent  101  101  90  90
                Receivables less allowance for doubtful accounts (Note 8)  395  395  326  326
                Investments (Note 13)  10  10  14  14
                Accounts Payable  396  396  391  391
                Long-term Debt, including current portion (Note 14)  6,864  6,345  7,362  8,578
                Interest Rate Swap Liability (Note 14)  37  37  —  —

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (8) Receivables

                        Receivables at December 31, 2007 and 2006 were as follows:

                 
                		 Communications
                		 Coal
                		 Total
                		 
                 
                		 (dollars in millions)

                		 
                2007          
                Accounts Receivable—Trade $409 $6 $415 
                Allowance for Doubtful Accounts  (20) —  (20)
                  
                		 
                		 
                		 
                Total $389 $6 $395 
                  
                		 
                		 
                		 

                2006
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                Accounts Receivable—Trade $337 $6 $343 
                Allowance for Doubtful Accounts  (17) —  (17)
                  
                		 
                		 
                		 
                Total $320 $6 $326 
                  
                		 
                		 
                		 

                        The Company recognized bad debt expense in selling, general and administrative expenses of $11 million, $1 million, and less than $1 million in 2007, 2006 and 2005, respectively. Level 3 received $2 million, $1 million and $2 million of proceeds for amounts previously deemed uncollectible in 2007, 2006 and 2005, respectively. The Company reduced accounts receivable and the allowance for doubtful accounts by $8 million in 2007 and less than $1 million in both 2006 and 2005, for the write off of previously reserved amounts the Company deemed as uncollectible.

                (9) Other Current Assets

                        At December 31, 2007 and 2006 other current assets consisted of the following:

                 
                		 2007
                		 2006
                 
                		 (dollars in millions)

                Prepaid Assets $46 $53
                Debt Issuance Costs, net  16  18
                Other  26  30
                  
                		 
                  $88 $101
                  
                		 

                        Prepaid assets include insurance, software maintenance, rent and right of way costs.

                (10)(4) Property, Plant and Equipment net

                        Costs associated directly with expansions and improvements to the communications network and customer installations, including employee related costs, have been capitalized. The Company generally capitalizes costs associated with network construction, provisioning of services and software development. Capitalized labor and related costs associated with employees and contract labor working on capital projects were approximately $102 million, $72 million and $51 million for the years ended December 31, 2007, 2006 and 2005, respectively.

                        The Company continues to develop business support systems required for its business. The external direct costs of software, materials and services, and payroll and payroll related expenses for employees directly associated with the project incurred when developing the business support systems are


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (10) Property, Plant and Equipment, net (Continued)


                capitalized and included in the capitalized costs above. Upon completion of a project, the total cost of the business support system is amortized over an estimated useful life of three years.

                        Land primarily represents owned assets of the communications business, including land improvements.

                Capitalized business support systems and network construction costs that have not been placed in service have been classified as construction-in-progress withinconstruction-in-progress.

                        Depreciation expense was $823 million in 2009, $832 million in 2008 and $838 million in 2007.

                (5) Asset Retirement Obligations

                        The Company's asset retirement obligations consist of legal requirements to remove certain of its network infrastructure at the expiration of the underlying right-of-way ("ROW") term, restoration requirements for leased facilities and reclamation requirements in the coal mining business to remediate previously mined properties. The Company recognizes its estimate of the fair value of its asset retirement obligations in the period incurred in other long-term liabilities. The fair value of the asset retirement obligation is also capitalized as property, plant and equipment below.and then amortized over the estimated remaining useful life of the associated asset.

                        As a result of indicators suggesting that the estimated cash flows underlying the Company's ROW asset retirement obligations were too high, the Company revised its assessment on December 31, 2008. Network infrastructure relocations indicated that the Company is not being required to physically remove its underground network infrastructure at rates consistent with the Company's previous estimates. Other internal and external information corroborated these lower rates. As a result, on December 31, 2008, the Company revised its probability assessment related to its requirement to physically remove its underground network infrastructure at the end of the underlying ROW terms, which caused a significant reduction to the related cash flows that the Company believes will be required to settle its ROW asset retirement obligations. The Company reduced its asset retirement obligation liability accordingly as of December 31, 2008.

                        As part of the ROW asset retirement obligation change in estimate, the Company determined that certain of its asset retirement obligations for acquired entities should have been higher at the acquisition date. As a result, the Company increased goodwill by approximately $15 million as of December 31, 2008.

                        The Company also determined that its estimates of restoration costs for its leased facility asset retirement obligations were too high based on current costs to restore. As a result, on December 31, 2008, the Company reduced its estimates of the cash flows that it believes will be required to settle its leased facility asset retirement obligations at the end of the respective lease terms, which resulted in a reduction to the Company's asset retirement obligation liability.

                        In the fourth quarter of 2008, the Company was awarded a long-term coal contract, which will extend the life of one of the Company's coal mining operations. As a result of the increase in the estimated life of one of the Company's coal mining operations, the Company revised the timing of its cash flows to remediate the mining site causing a reduction in its asset retirement obligation liability in the fourth quarter of 2008. In 2009, the Company increased its asset retirement obligation by $6 million to reflect a change in the estimation of the cost to remediate.

                        As a result of the aforementioned revisions in the estimated amount and accumulated depreciationtiming of cash flows for asset retirement obligations, the Company reduced its asset retirement obligation liability by $103 million with an offsetting reduction to property, plant and equipment has been reduced for impairments taken in currentof $21 million, selling, general and prior years.

                        At December 31, 2007administrative expenses of $86 million, depreciation and 2006, property, plantamortization of $11 million and equipment were as follows:

                 
                		 Cost
                		 Accumulated
                Depreciation
                		 Book
                Value
                 
                		 (dollars in millions)

                December 31, 2007         
                Land $234 $(32)$202
                Facility and Leasehold Improvements:         
                 Communications  1,856  (589) 1,267
                 Coal Mining  153  (151) 2
                Network Infrastructure  5,591  (1,705) 3,886
                Operating Equipment:         
                 Communications  3,455  (2,267) 1,188
                 Coal Mining  72  (64) 8
                Furniture, Fixtures and Office Equipment  141  (117) 24
                Other  27  (24) 3
                Construction-in-Progress  89  —  89
                  
                		 
                		 
                  $11,618 $(4,949)$6,669
                  
                		 
                		 

                December 31, 2006
                 
                 
                 
                 
                 
                 
                 
                 
                 
                Land $214 $(28)$186
                Facility and Leasehold Improvements:         
                 Communications  1,692  (482) 1,210
                 Coal Mining  151  (148) 3
                Network Infrastructure  5,430  (1,409) 4,021
                Operating Equipment:         
                 Communications  2,706  (1,799) 907
                 Coal Mining  71  (64) 7
                Furniture, Fixtures and Office Equipment  132  (106) 26
                Other  28  (24) 4
                Construction-in-Progress  104  —  104
                  
                		 
                		 
                  $10,528 $(4,060)$6,468
                  
                		 
                		 

                        The value of property, plant and equipment related to the Servecast acquisition is based on a preliminary valuation. The value of property, plant and equipment related to the Progress Telecom,an


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (10) Property, Plant and Equipment, net(5) Asset Retirement Obligations (Continued)


                ICG Communications, TelCove, Looking Glass,increase to goodwill of $15 million in 2008. The Company reduced property, plant and equipment to the CDN Businessextent of the carrying amount of the related long-lived asset initially recorded when the asset retirement obligation liability was established. The remaining amount of the reduction to the asset retirement obligation was recorded as a reduction to depreciation expense, to the extent of historical depreciation of the related long-lived asset, and Broadwing acquisitions is basedthen to selling, general and administrative expense.

                        Approximately $71 million of restricted cash and securities were contractually restricted to settle the Company's coal mining reclamation liabilities at December 31, 2009 and 2008, and are recorded in non-current, restricted cash and securities on final valuations.the consolidated balance sheets.

                        During 2006, Level 3The following table provides asset retirement obligation activity for the years ended December 31, 2009 and 2008 (in millions):

                 
                		 December 31, 
                 
                		 2009 2008 

                Asset retirement obligation at January 1

                		 $151 $231 

                Liabilities incurred

                		  6  2 

                Accretion expense

                		  16  25 

                Liabilities settled

                		  (6) (4)

                Revision in estimated cash flows

                		  —  (103)
                      

                Asset retirement obligation at December 31

                		 $167 $151 
                      

                (6) Goodwill

                        The changes in the carrying amount of goodwill during the year ended December 31, 2009 are as follows (in millions):

                 
                		 Communications
                Segment                		 Coal
                Mining
                Segment                		 Total 

                Balance as of January 1, 2008

                		 $1,421 $— $1,421 

                Goodwill adjustments

                		  12  —  12 

                Effect of foreign currency rate change

                		  (1) —  (1)
                        

                Balance as of December 31, 2008

                		 $1,432 $— $1,432 

                Goodwill adjustments

                		  (3) —  (3)
                        

                Balance as of December 31, 2009

                		 $1,429 $— $1,429 
                        

                        The goodwill adjustments primarily relate to asset retirement obligation revisions. The Company revised the amount of its original estimate of undiscounted cash flows related to certain ROW asset retirement obligations at December 31, 2008. As part of the ROW asset retirement obligation change in estimate, the Company determined that certain of its asset retirement obligations for acquired entities should have been higher at the period the Company expects to use its existing fiber is longer than the remaining useful life as originally estimated.acquisition date. As a result, the Company extended the depreciable life of its existing fiber from 7 years to 12 years. This change in estimate, effective as of April 1, 2006, was accounted for prospectively, in accordance with SFAS No. 154 and reduced depreciation expenseincreased goodwill by $54 million in 2006. This change in estimate reduced loss from continuing operations and net loss by $54 million, or approximately $0.05 per share for the year ended December 31, 2006.

                        In addition, during 2006, Level 3 determined that the period the Company expects to use its existing electronic equipment is longer than the remaining useful lives as originally estimated. As a result, the Company extended the depreciable life of its existing transmission equipment from 5 years to 7 years and existing IP equipment from 3 years to 4 years. This change in estimate, effective as of July 1, 2006, was accounted for prospectively, in accordance with SFAS No. 154, and reduced depreciation expense by $26 million in 2006. In addition, this change in estimate reduced loss from continuing operations and net loss by $26 million, or approximately $0.03 per share for the year ended December 31, 2006.

                        Depreciation expense was $838 million in 2007, $652 million in 2006 and $584 million in 2005.

                (11) Goodwill

                        Goodwill attributable to each of the Company's acquisitions at December 31, 2007 and 2006 was as follows (dollars in millions):

                 
                		 December 31, 2007
                		 December 31, 2006
                Servecast $31 $—
                Broadwing  1,038  —
                TelCove  179  179
                ICG Communications  73  127
                Progress Telecom  30  32
                McLeod  40  40
                XCOM  30  30
                  
                		 
                  $1,421 $408
                  
                		 

                        The Company segregates identifiable intangible assets acquired in a business combination from goodwill. Goodwill is not amortized and the carrying amount of the goodwill must be evaluated at least annually for impairment using a fair value based test. An assessment of the carrying value of goodwill attributable to the communications business was performed as of December 31, 2007 and indicated that goodwill was not impaired.

                        The preliminary valuation for the Servecast acquisition indicated that the purchase price exceeded the fair value of the identifiable assets acquired and liabilities assumed and resulted in goodwill of $31$15 million as of December 31, 2007.2008.

                        The Company conducted its annual goodwill impairment analysis at December 31, 2009. The Company has consistently applied a market approach to determine the fair value of its reporting units


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (11)(6) Goodwill (Continued)


                        As described in Note 2,at December 31, 2009 and 2008. During 2008, the Company receivedhad also utilized the income approach (discounted cash flows) as a revisedsecondary measurement of fair value, as the Company believed the use of another valuation report fortechnique should be considered given the CDN Businesscircumstances resulting from the difficult economic environment and extreme volatility in the second quarter of 2007 that resulted in increased valuations for patents and customer-related intangible assets and resulted in the eliminationfinancial markets during 2008. The results of the $110 million of goodwill preliminarily recorded for the CDN Business acquisition in the first quarter of 2007. During the third quarter of 2007, the Company received the final valuation report for the CDN Business acquisition. The final valuation report did not result in any additional changes to the valuation of the CDN Business.

                        The preliminary valuation for the Broadwing acquisition indicated that the purchase price exceeded the fair value of the identifiable assets acquired and liabilities assumed and resulted in goodwill of $939 million. As described in Note 2, the Company received a final valuation for Broadwing that resulted in a reduced valuation for customer-related intangible assets and an increase to goodwill totaling $100 million in the fourth quarter of 2007. In addition, the Company made other purchase price allocation adjustments for the Broadwing acquisition during 2007 that resulted in a net decrease of $1 million to the goodwill recorded for Broadwing.

                        The final valuation of the assets acquired and liabilities assumed in the Looking Glass transactionCompany's valuations indicated that the fair value of the identifiable netCommunications business significantly exceeded its carrying value and as a result, Level 3 concluded that its goodwill is not impaired at December 31, 2009 and 2008.

                (7) Acquired Intangible Assets

                        Identifiable acquisition-related intangible assets as of December 31, 2009 and December 31, 2008 were as follows (in millions):

                 
                		 Gross
                Carrying
                Amount                		 Accumulated
                Amortization                		 Net 

                December 31, 2009

                		          

                Finite-Lived Intangible Assets:

                		          
                 

                Customer Contracts and Relationships

                		 $743 $(407)$336 
                 

                Patents and Developed Technology

                		  141  (62) 79 
                        

                		  884  (469) 415 

                Indefinite-Lived Intangible Assets:

                		          
                 

                Vyvx Trade Name

                		  32  —  32 
                 

                Wireless Licenses

                		  20  —  20 
                        

                		 $936 $(469)$467 
                        

                December 31, 2008

                		          

                Finite-Lived Intangible Assets:

                		          
                 

                Customer Contracts and Relationships

                		 $743 $(325)$418 
                 

                Patents and Developed Technology

                		  141  (52) 89 
                        

                		  884  (377) 507 

                Indefinite-Lived Intangible Assets:

                		          
                 

                Vyvx Trade Name

                		  32  —  32 
                 

                Wireless Licenses

                		  20  —  20 
                        

                		 $936 $(377)$559 
                        

                        Acquired finite-lived intangible asset amortization expense was $92 million in 2009, $99 million in 2008 and $104 million in 2007.

                        The weighted average remaining useful lives of the Company's acquired exceededfinite-lived intangible assets was 4.2 years for customer contracts and relationships and 7.2 years for patents and developed technology.


                Table of Contents


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (7) Acquired Intangible Assets (Continued)

                        As of December 31, 2009, estimated amortization expense for the consideration paidCompany's finite-lived acquisition-related intangible assets over the next five years and thereafter is as follows (in millions):

                2010

                		 $92 

                2011

                		  91 

                2012

                		  70 

                2013

                		  51 

                2014

                		  40 

                Thereafter

                		  71 
                    

                		 $415 
                    

                (8) Restructuring and Impairment Charges

                        Changing economic and business conditions as well as organizational structure optimization efforts have caused the Company to initiate various workforce reductions resulting in involuntary employee terminations. The Company has also initiated multiple workforce reductions resulting from the integration of acquired companies. Restructuring charges totaled $9 million in 2009, $25 million in 2008 and $11 million in 2007.

                        During 2009, the Company initiated a workforce reduction of approximately 260 employees, or 5% of the Company's total employee base. As a result of the 2009 workforce reduction, the Company incurred a restructuring charge of $9 million, all of which related to the former ownerscommunications business. The workforce reductions related to multiple levels within the organization and across multiple locations within North America. The terms of the workforce reduction, including the involuntary termination benefits to be received by $22 million, which reduced the fair value of long-lived assets acquired in the transaction on a pro-rata basis. During the third quarter of 2007,affected employees, were communicated by the Company recorded net purchase price allocation adjustmentsin 2009. The Company paid approximately $21 million of involuntary termination benefits for the Looking Glass acquisition totaling $2affected employees in 2009, of which $9 million related to unutilized leased facilities assumed in the acquisition.Company's 2009 restructuring activities and $12 million related to prior restructuring activities. The facilities underlying these leasesCompany does not have not been used byany remaining liabilities related to restructuring activities completed prior to 2009.

                        During the fourth quarter of 2008, the Company sinceinitiated a workforce reduction of approximately 400 employees, or 7% of the dateCompany's total employee base, and incurred a restructuring charge of acquisition$12 million, all of which related to the communications business. The workforce reductions relate to multiple levels within the organization and are not plannedacross multiple locations within North America. The terms of the workforce reduction, including the involuntary termination benefits to be usedreceived by affected employees, were communicated by the Company in the future.fourth quarter of 2008. The $2 million adjustment to the purchase price of Looking Glass was recorded as an increaseCompany concluded this workforce reduction in the valuefirst quarter of 2009. As of December 31, 2008, none of the long-lived assets.$12 million of involuntary termination benefits were paid. The benefits were recorded in accrued payroll and employee benefits on the consolidated balance sheets.

                        The final valuationsCompany also has accrued contract termination costs of $42 million and $49 million as of December 31, 2009 and December 31, 2008, respectively, for the Progress Telecom, ICG Communications and TelCove acquisitions indicatedfacility lease costs, primarily in North America, that the purchase price exceeded the fair value of the identifiable assets acquiredCompany continues to incur without economic benefit. Accrued contract termination costs are recorded in other liabilities (current and liabilities assumed and resulted in goodwill of $30 million, $73 million and $179 million, respectively. The final valuation for ICG Communications was receivednon-current) in the second quarterconsolidated balance sheets. The Company expects to pay the majority of 2007. As a resultthese costs through 2018. The Company incurred charges of approximately $1 million in 2009 and $11 million in 2008 as the revisions to the fixed asset and customer-related intangible asset valuations described in Note 2, the goodwill recorded in connection with the ICG Communications acquisition was reduced from $127 million based on the preliminary valuation to $73 million based on the final valuation.Company ceased using additional


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                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (11) Goodwill(8) Restructuring and Impairment Charges (Continued)


                facilities and as a result of revisions to the estimated cash flows for certain facility subleases. The Company did not incur any such charges in 2007. The Company records charges for contract termination costs within selling, general and administrative expenses in the consolidated statements of operations.

                (12) Other Intangibles, net(9) Fair Value

                        Other Intangibles, net attributableGAAP defines fair value as the price that would be received from selling an asset or paid to eachtransfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

                Fair Value Hierarchy

                        GAAP establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. GAAP establishes three levels of inputs that may be used to measure fair value:

                        Level 1—Quoted prices in active markets for identical assets or liabilities.

                        Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the Company's acquisitions at December 31, 2007 and 2006 were as follows (dollars in millions):assets or liabilities.

                 
                		 Initial
                Fair Value
                		 Accumulated
                Amortization
                		 Book
                Value
                December 31, 2007         
                Customer Contracts and Relationships:         
                 Servecast $9 $— $9
                 CDN Business  31  (5) 26
                 Broadwing  154  (14) 140
                 Looking Glass  9  (2) 7
                 TelCove  253  (41) 212
                 ICG Communications  18  (5) 13
                 Progress Telecom  36  (8) 28
                 WilTel  120  (33) 87
                 360networks  4  (2) 2
                 Sprint  31  (31) —
                 Genuity  107  (107) —
                Trademarks:         
                 WilTel  32  —  32
                Patents and Developed Technology:         
                 Servecast  8  —  8
                 CDN Business  102  (10) 92
                 Telverse  31  (27) 4
                Other  20  —  20
                  
                		 
                		 
                  $965 $(285)$680
                  
                		 
                		 

                        Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.


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                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (12) Other Intangibles, net(9) Fair Value (Continued)

                        The table below presents the fair values for certain of Level 3's liabilities measured on a recurring basis as well as the input levels used to determine these fair values as of December 31, 2009 and December 31, 2008 (in millions):

                 
                		 Initial
                Fair
                Value
                		 Accumulated
                Amortization
                		 Book
                Value
                December 31, 2006         
                Customer Contracts and Relationships:         
                 Looking Glass $9 $(1)$8
                 TelCove  253  (9) 244
                 ICG Communications  49  (2) 47
                 Progress Telecom  36  (3) 33
                 WilTel  120  (17) 103
                 360networks  4  (1) 3
                 Sprint  31  (26) 5
                 Genuity  107  (101) 6
                Trademarks:         
                 WilTel  32  —  32
                Technology:         
                 Telverse  31  (21) 10
                Other  20  —  20
                  
                		 
                		 
                  $692 $(181)$511
                  
                		 
                		 

                 
                		  
                		  
                		 Fair Value Measurement Using 
                 
                		 Total
                Carrying Value
                in Consolidated
                Balance Sheet                		 Quoted Prices
                in Active
                Markets for
                Identical Assets
                (Level 1)                		 Significant
                Other
                Observable
                Inputs
                (Level 2)                		 Significant
                Unobservable
                Inputs
                (Level 3)                		 
                December 31,
                		 2009 2008 2009 2008 2009 2008 2009 2008 
                 
                		 (dollars in millions)
                		 

                Liabilities Recorded at Fair Value in the Financial Statements:

                		                         

                Interest Rate Swap Liabilities (included in other non-current liabilities)

                		 $92 $97 $— $— $92 $97 $— $— 

                Embedded Derivatives in Convertible Debt (included in other non-current liabilities)

                		 $20 $13 $— $— $20 $13 $— $— 
                                  

                Total Liabilities Recorded at Fair Value in the Financial Statements

                		 $112 $110 $— $— $112 $110 $— $— 
                                  

                Liabilities not Recorded at Fair Value in the Financial Statements:

                		                         

                Long-term Debt, including the current portion

                		 $6,460 $6,431 $4,996 $3,218 $1,342 $747 $— $— 
                                  

                        The Company segregates identifiable intangible assets acquiredinterest rate swaps are measured in a business combination from goodwill. Identifiable intangible assets are generally amortized (unlessaccordance with the useful life is determined to be indefinite)Fair Value Measurements and Disclosures guidance using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, forward rates, and the carrying amountspecific swap rate stated in each of the identifiable intangible assets must be evaluatedswap agreements. The embedded derivative contracts are priced using inputs that are observable in the market, such as the Company's stock price, risk-free interest rate and other contractual terms of certain of the Company's convertible debt.

                (10) Financial Instruments

                        The Company's financial instruments consist of cash and cash equivalents, restricted cash and securities, accounts receivable, accounts payable, interest rate swaps, embedded derivative contracts and long-term debt including the current portion. The carrying values of cash and cash equivalents, restricted cash and securities, accounts receivable and accounts payable approximated their fair values at least annually for impairment using aDecember 31, 2009 and December 31, 2008. The interest rate swaps and embedded derivative contracts are recorded in the consolidated balance sheets at fair value based test. An assessment of thevalue. The carrying value of identifiable intangible assets attributable to the communications businessCompany's long-term debt, including the current portion, reflects the original amounts borrowed net of unamortized discounts, premiums and debt discounts and was performed in the fourth quarter$6.5 billion as of 2007December 31, 2009 and indicated that the assets were not impaired.

                        On July 11, 2007, Level 3 completed the acquisition$6.4 billion as of Servecast. In the third quarter of 2007, the preliminary valuation of the assets acquired in the Servecast transaction indicated a value of $9 million for customer relationships and $8 million for technology with lives of 11 and 12 years, respectively.

                        On January 23, 2007, Level 3 completed the acquisition of the CDN Business. In the first quarter of 2007, the preliminary valuation of the assets acquired in the CDN Business transaction indicated a value of $23 million for patents and customer-related intangible assets. As described in Note 2, during the second quarter of 2007 the Company received a revised valuation for the CDN Business that indicated a significant increase in theDecember 31, 2008. The estimated fair value of the identifiable intangible assets, primarily patentsCompany's long-term debt approximated $6.3 billion at December 31, 2009 and customer-related intangible assets.$4.0 billion at December 31, 2008. The identifiable intangible assets for the CDN Business increased from $23 million in the preliminary valuation to $133 million in the revised valuation as a result of additional analysis of the estimated cash flows expected to be generated from the patents and customers acquired in the CDN Business acquisition. The increase in the value allocated to the identifiable intangible assets for the CDN Business eliminated the $110 million of goodwill recorded on the transaction in the first quarter of 2007. The estimated useful lives for the patent and customer-related intangible assets range from four to ten years. The final valuation report did not result in any additional changes to the valuation of the CDN Business.

                        On January 3, 2007, Level 3 completed the acquisition of Broadwing. A preliminary valuation of the assets acquired in the Broadwing transaction indicated a value of $254 million for wholesale andfair values


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                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (12) Other Intangibles, net(10) Financial Instruments (Continued)


                enterprise customer-related intangible assets. Level 3 had initially assigned anof the Company's actively traded long-term debt were estimated useful life of ten yearsusing the December 31, 2009 and 2008 mid price trading quotes as provided by large financial institutions that trade in the Company's securities. The pricing quotes provided by these market participants incorporate spreads to the customer-related intangible assets. During June 2007,Treasury curve, security coupon, convertible optionality, borrower entity, corporate and security ratings, maturity date and liquidity, among other security characteristics and relative value at both the Company completed a reviewborrower entity level and across other securities of the estimated useful lives of the customer-related intangible assets for the Broadwing acquisition that resulted in a reduction of the estimated useful lives from ten years to a range of six to eight years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively and increased amortization expense by approximately $4 million for the nine months ended September 30, 2007. Subsequent to September 30, 2007, and as described in Note 2, the Company received a revised valuation for Broadwing that indicated a significant decrease in thesimilar characteristics. The fair value of the identifiable customer-related intangible assets.Commercial Mortgage is not readily determinable. The identifiable intangible assets for Broadwing decreased from $254 million infair value is estimated by management by discounting the preliminary valuation to $154 million in the revised valuation as a resultexpected cash outflows using quoted prices and implicit market yields of additional analysissimilar maturity and security profile. The fair value of the estimated cash flows expected to be generated from the customers acquired in the Broadwing acquisition. The decrease in customer-related intangibles of $100Commercial Mortgage was approximately $75 million resulted in a corresponding increase in the goodwill recorded on the Broadwing transaction. As a result of the revised valuation of the customer-related intangible assets in the fourth quarter of 2007, the Company also reviewed the estimated useful lives of the customer-related intangible assets for the Broadwing acquisition again. The fourth quarter 2007 review of the useful lives of the Broadwing customer-related intangible assets resulted in increasing the useful lives from a range of six to eight years to a range of nine to twelve years. The increase in the useful lives from the analysis completed in the second quarter of 2007and $62 million at December 31, 2009 and 2008, respectively, as compared to the analysis completed in the fourth quartercarrying amounts of 2007 was due to the underlying changes in the timing of estimated cash flows expected to be generated from the customers acquired in the Broadwing acquisition. Due to the fact that the valuation of the Broadwing customer-related intangible assets changed significantly in the revised valuation report, the Company recorded, in the fourth quarter, a cumulative catch up adjustment to recognize the amount of amortization expense that would have been recognized for the full year based on the revised valuation. This resulted in a net decrease in amortization expense of $9 million in the fourth quarter of 2007.

                        On August 2, 2006, Level 3 completed the acquisition of Looking Glass. The final valuation of the assets acquired in the Looking Glass transaction as of the acquisition date indicated wholesale customer-related intangible assets of approximately $9 million with an estimated useful life of eight years. During June 2007, the Company completed a review of the estimated useful life of the customer-related intangible assets for the Looking Glass acquisition that resulted in a reduction of the estimated useful life from eight years to six years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively, in accordance with SFAS No. 154, and increased amortization expense by approximately $1 million for year ended December 31, 2007. In addition, this change in estimate increased loss from continuing operations and net loss by $1 million, or less than $0.01 per share, for the year ended December 31, 2007.

                        On July 24, 2006, Level 3 completed the acquisition of TelCove. The final valuation of the assets acquired in the TelCove transaction as of the acquisition date indicated wholesale and enterprise customer-related intangible assets of approximately $253 million, with lives ranging from nine to thirteen years and other intangible assets of approximately $20 million with an indefinite life. During June 2007, the Company completed a review of the estimated useful lives of the customer-related intangible assets for the TelCove acquisition that resulted in a reduction of the estimated useful lives from a range of nine to thirteen years to a range of six to eight years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively, in accordance with SFAS No. 154, and increased amortization expense by approximately $9 million for the year ended December 31, 2007. In addition,


                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (12) Other Intangibles, net (Continued)


                this change in estimate increased loss from continuing operations and net loss by $9 million, or approximately $0.01 per share, for the year ended December 31, 2007.

                        On May 31, 2006, Level 3 completed the acquisition of ICG Communications. A preliminary valuation of the assets acquired in the ICG Communications transaction indicated a value of $49 million for wholesale customer-related intangible assets with an estimated useful life of 15 years. As described in Note 2, during the second quarter of 2007 the Company received the final valuation for both the identifiable tangible and intangible assets acquired in the ICG Communications acquisition that included revised valuations for those assets. As a result of the changes to the valuation of the fixed assets, the valuation of the identifiable intangible assets decreased from $49 million in the preliminary valuation to $18 million in the final valuation. During June 2007, the Company completed a review of the estimated useful life of the customer-related intangible assets for the ICG Communications acquisition that resulted in a reduction in the estimated useful life from fifteen years to six years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively and decreased amortization expense by less than $1 million for the year ended December 31, 2007 after taking into consideration the reduced valuation of the ICG Communications customer-related intangible assets.

                        On March 20, 2006, Level 3 completed the acquisition of Progress Telecom. A final valuation of the assets acquired in the Progress Telecom acquisition resulted in a value of $36 million for customer-related intangible assets with an estimated useful life of eight years.

                        On December 23, 2005, Level 3 completed the acquisition of WilTel. A final valuation of the assets acquired indicated a value of $152 million for identifiable intangible assets. The intangible assets primarily include customer relationships and the Vyvx trademark. The final valuation placed an indefinite life on the Vyvx trademark and lives ranging from 6 to 11 years for the customer relationships.

                        Intangible asset amortization expense was $104 million, $78$68 million and $63$69 million, forrespectively. The 9% Convertible Senior Discount Notes due 2013, the years ended December 31, 2007, 2006 and 2005, respectively.

                        The amortization expense related to intangible assets currently recorded on the Company's books for each of the five succeeding years is estimated to be the following for the years ended December 31: 2008—$100 million; 2009—$95 million; 2010—$95 million; 2011—$94 million, 2012—$72 million and thereafter—$172 million.

                (13) Other Assets, net

                        At December 31, 2007 and 2006 other assets consisted of the following:

                 
                		 2007
                		 2006
                 
                		 (dollars in millions)

                Debt Issuance Costs, net $78 $75
                Deferred Tax Asset  23  —
                Investments  10  14
                Deposits  12  17
                Other  22  22
                  
                		 
                  $145 $128
                  
                		 

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (13) Other Assets, net (Continued)

                        The Company had investments totaling $10 million and $14 million for the years ended December 31, 2007 and 2006, respectively. These investments are accounted for using the cost method.

                        See Note 14 below for a discussion of debt issuance costs included in other assets, net above.

                (14) Long-Term Debt

                        At December 31, 2007 and 2006, long-term debt was as follows:

                (dollars in millions)
                		 2007
                		 2006
                		 
                 
                		 (dollars in millions)

                		 
                Senior Secured Term Loan due 2014 (7.493%) $1,400 $— 
                Senior Secured Term Loan due 2011  —  730 
                Senior Notes due 2008 (11.0%)  20  78 
                Senior Euro Notes due 2008 (10.75%)  5  65 
                Senior Discount Notes due 2010  —  488 
                Senior Euro Notes due 2010  —  137 
                Senior Notes due 2010  —  96 
                Senior Notes due 2010 (11.5%)  13  692 
                 Fair value adjustment on Senior Notes due 2010  (1) (60)
                Senior Notes due 2011 (10.75%)  3  3 
                Floating Rate Senior Notes due 2011 (11.884%)  6  150 
                 Issue discount on Senior Notes due 2011  —  (4)
                Senior Notes due 2013 (12.25%)  550  550 
                 Issue discount on Senior Notes due 2013  (2) (2)
                Senior Notes due 2014 (9.25%)  1,250  1,250 
                 Issue premium on Senior Notes due 2014  10  11 
                Floating Rate Senior Notes due 2015 (9.15%)  300  — 
                Senior Notes due 2017 (8.75%)  700  — 
                Convertible Senior Notes due 2010 (2.875%)  374  374 
                Convertible Senior Notes due 2011 (5.25%)  345  345 
                Convertible Senior Notes due 2011 (10.0%)  275  880 
                Convertible Senior Notes due 2012 (3.5%)  335  335 
                Convertible Senior Discount Notes due 2013 (9.0%)  295  275 
                Convertible Subordinated Notes due 2009 (6.0%)  362  362 
                Convertible Subordinated Notes due 2010 (6.0%)  514  514 
                Commercial Mortgage due 2015 (6.86%)  69  70 
                Capital leases  41  23 
                  
                		 
                		 
                   6,864  7,362 
                 Less current portion  (32) (5)
                  
                		 
                		 
                  $6,832 $7,357 
                  
                		 
                		 

                LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                (14) Long-Term Debt (Continued)

                Debt Exchanges, Conversions, Redemptions and Repurchases

                  2007 Debt for Equity Exchanges

                        In January 2007, in two separate transactions, Level 3 completed the exchange of $605 million in aggregate principal amount of its 10%7% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3's common stock. The shares of2013, the Company's common stock are exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. The Company recognized a $177 million loss on extinguishment of debt for the exchanges. Included in the loss was approximately $1 million of unamortized debt issuance costs.

                  2007 Redemptions and Repurchases

                        In March 2007, the Company redeemed using cash the entire $722 million of outstanding principal amount of the following debt issuances and recognized a loss on extinguishment of debt totaling $54 million on the redemption transactions.

                  •
                  Redeemed $488 million of outstanding 12.875%7% Convertible Senior Notes due 2010 at a price equal to 102.146% of2015, Series B, and the principal amount and recognized a $12 million loss on extinguishment of debt consisting of a $10 million cash loss and $2 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million.

                  •
                  Redeemed $96 million of outstanding 11.25% Senior Notes due 2010 at a price equal to 101.875% of the principal amount and recognized a $3 million loss on extinguishment of debt consisting of a $2 million cash loss and $1 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million.

                  •
                  Redeemed $138 million (€104 million) of outstanding 11.25% Senior Euro Notes due 2010 at a price equal to €101.875 per €1,000 of principal amount and recognized a $39 million loss on extinguishment of debt consisting of a $38 million cash loss and $1 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million (less than €1 million).

                        In March 2007, the respective issuers repurchased using cash, through tender offers, $941 million of the outstanding principal amounts of the following debt issuances and recognized a loss on extinguishment of debt totaling $186 million on the repurchase transactions.

                  •
                  Repurchased $144 million of its outstanding Floating Rate Senior Notes due 2011 at a price equal to $1,080 per $1,000 principal amount of the notes, which included $1,050 as the tender offer consideration and $30 as a consent payment, and recognized an $18 million loss on extinguishment of debt consisting of a $12 million cash loss and $6 million in unamortized debt issuance costs and unamortized discount. Accrued interest paid at the time of repurchase totaled $8 million.

                  •
                  Repurchased $59 million of its outstanding 11% Senior Notes due 2008 at a price equal to $1,054.28 per $1,000 principal amount of the notes, which included $1,024.28 as the tender offer consideration and $30 as a consent payment, and recognized a $3 million loss on extinguishment of debt consisting of a $3 million cash loss and less than $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $3 million.

                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    •
                    Repurchased $677 million of its outstanding 11.5% Senior Notes due 2010 at a price equal to $1,115.26 per $1,000 principal amount of the notes, which included $1,085.26 as the tender offer consideration and $30 as a consent payment, and recognized a $141 million loss on extinguishment of debt consisting of a $78 million cash loss and $63 million in unamortized debt issuance costs and unamortized discount. Accrued interest paid at the time of repurchase totaled $3 million.

                    •
                    Repurchased $61 million (€46 million) of its outstanding 10.75% Senior Euro Notes due 2008 at a price equal to €1,061.45 per €1,000 of principal amount of the notes, which included €1,031.45 as the tender offer consideration and €30 as a consent payment, and recognized a $24 million loss on extinguishment of debt consisting of a $24 million cash loss and less than $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $3 million (€2 million).

                          In connection with the tender offers completed in the first quarter of 2007, Level 3 and Level 3 Financing, Inc. ("Level 3 Financing"), a wholly owned subsidiary of the Company, obtained consents to certain proposed amendments to the respective indentures governing the notes that are subject to the tender offer transactions described above to eliminate substantially all of the covenants, amend certain repurchase rights, certain discharge rights and certain events of default and related provisions contained in those indentures.

                          On February 23, 2007, Level 3 Financing completed a consent solicitation with respect to certain amendments to the indenture governing Level 3 Financing's outstanding 12.25%15% Convertible Senior Notes due 2013 are not traded in an active market. The fair value of these notes was estimated using a Black-Scholes valuation model that allowedincludes risk-free, stock price, strike price, volatility and maturity inputs for the incurrence of debt based upon a multiple ofoption component and for the bond component, the value determined by discounting cash flow available for fixed charges on a "pro forma" basis giving effect to any acquisition, merger or consolidation completed prior to February 1, 2007. Additional debt as permitted under the amended indenture was incurred in March 2007. In connectionflows associated with the consent solicitation,note's interest payments using estimated market yields. The bond value is driven by the Company paid consent fees totaling approximately $2 million which were capitalized as additional debt issuance costsdifference between estimated market yields and will be amortizedthe securities coupon over the remaining life of the related debt issuances using the effective interest method.

                    2007 Conversion of Broadwing Corporation 3.125% Convertible Senior Debentures due 2026

                          On February 17, 2007, Level 3's wholly-owned subsidiary, Broadwing, completed the repurchase of $1 million aggregate principal amount of Broadwing's outstanding 3.125% Convertible Senior Debentures due 2026 (the "Debentures"). The indenture governing the Debentures required Broadwing to make the offer to repurchase the Debentures as a result of the Company's acquisition of Broadwing on January 3, 2007.

                          As a result of the acquisition, each $1,000 principal amount of the Debentures was convertible at the option of the holder into $492.77 in cash and 80.789 shares of Level 3 common stock, representing a conversion price equal to the consideration payable to Broadwing stockholders in the acquisition of (i) $8.18 in cash per share of Broadwing, multiplied by 60.241, and (ii) 1.3411 shares of Level 3 common stock, multiplied by 60.241. Additionally, as a result of the acquisition, a make-whole premium was payable on Debentures converted prior to February 17, 2007, consisting of (i) 14.969 additional shares of Level 3 common stock and (ii) an additional $91.31 in cash per $1,000 principal amount of Debentures.

                          Holders owning $179 million aggregate principal amount of the Debentures converted those Debentures into a total of approximately 17 million shares of Level 3 common stock and also received


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  approximately $105 million in cash. As a result of these conversions and the repurchase discussed above, as of February 17, 2007, the Debentures are no longer outstanding. There was no gain or loss recognized due to the fact that, under purchase accounting, the liability for the notes was valued at the total cost to retire the obligation.

                    2006 Debt Exchange

                          On January 13, 2006, the Company completed private exchange offers to exchange a portion of its outstanding 9.125% Senior Notes due 2008, 11% Senior Notes due 2008 and 10.5% Senior Discount Notes due 2008 (together the "2008 Notes") that were held by eligible holders in a private placement for cash and new 11.5% Senior Notes due 2010. The Company issued $692 million aggregate principal amount of 11.5% Senior Notes due 2010 as well as paid $46 million of cash consideration in exchange for the 2008 Notes tendered in the transactions. The Company also paid approximately $13 million in cash for total accrued interest to the closing date on the 2008 Notes that were accepted for exchange.

                          Pursuant to the guidance in EITF No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments" ("EITF No. 96-19"), the Company accounted for the exchange of the 9.125% Senior Notes due 2008 and the 11% Senior Notes due 2008 as an extinguishment of debt and recognized a gain of approximately $27 million in Other Income in the first quarter of 2006. The gain was determined using the fair value of the new 11.5% Senior Notes due 2010 at the time of issuance. The fair value of the 11.5% Senior Notes due 2010 was approximately $73 million less than the face amount of the debt. The accretion of the $73 million discount will be reflected as interest expense in future periods using the effective interest method.security. The 11.5% Senior Notes due 2010 were recorded at theirare not actively traded debt instruments. The estimated fair value of these debt instrument was derived using market yields on the transaction dateother Level 3 traded debt of similar characteristics and will accrete to their face value at maturity. Premiums paid to holders of the 9.125% Senior Notes due 2008 and the 11% Senior Notes due 2010 of $41 million reduced the gain on extinguishment of debt.

                          In accordance with EITF No. 96-19, the exchange of the 10.5% Senior Discount Notes due 2008 was accounted for as a modification of the existing debt. The premiums paid to the holders of the 10.5% Senior Discount Notes due 2008 of $5 million were added to the existing debt issuance costs and will be amortized over the term of the 11.5% Senior Notes due 2010.

                          The Company incurred approximately $5 million of third party costs associated with the exchange transaction. The costs were allocated to each tranche of debt based on the amount tendered for exchange. The $4 million of fees allocated to the 9.125% Senior Notes due 2008 and the 11% Senior Notes due 2008 were capitalized and will be amortized to interest expense over the term of the respective notes. The $1 million of costs allocated to the 10.5% Senior Discount Notes due 2008 were expensed in the first quarter of 2006.

                          The principal amount of 2008 Notes tendered is set forth in the table below (dollars in millions).

                  2008 Notes Exchanged
                  		 Aggregate
                  Principal Amount
                  Outstanding
                  Before
                  Exchange Offers
                  		 Aggregate
                  Principal Amount
                  Tendered
                  		 Aggregate
                  Principal Amount
                  of Old Notes that
                  Remained
                  Outstanding
                  		 Total Cash
                  Premium
                  Payment
                  9.125% Senior Notes due 2008 $954 $556 $398 $36
                  11% Senior Notes due 2008  132  54  78  5
                  10.5% Senior Discount Notes due 2008  144  82  62  5

                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                  discounted cash flows.

                  (14) Long-Term Debt (Continued)Restricted Cash and Securities

                          The exchange offers were made onlyRestricted cash and securities consists primarily of cash and investments that serve to qualified institutional buyerscollateralize outstanding letters of credit, long-term debt and institutional accredited investors inside the United Statescertain performance and to certain non-U.S. investors.

                          The 11.5% Senior Notes are senior unsecuredoperating obligations of the Company, ranking equal in right of payment with the old notes not tendered in the exchange offers as well as all other senior unsecured obligationscash and investments restricted to fund certain reclamation liabilities of the Company. The 11.5% Senior Notes due 2010 mature on March 1, 2010,Restricted cash and bear interest at a rate per annum equal to 11.5%. Interestsecurities are recorded in other assets (current or non-current) in the consolidated balance sheets depending on the notes is payable on March 1 and September 1 of each year, beginning on September 1, 2006. The Company may redeem some or allduration of the 11.5% Senior Notes due 2010 at any time on or after March 1, 2009, at 100% of their principal amount plus accrued interest. As described above, on March 15, 2007,restriction and the Company repurchased $677 million of its outstanding 11.5% Senior Notes due 2010.purpose for which the restriction exists.

                          The Company's exchange offer registration statement for these notes was declared effective by the Securitiescost and Exchange Commission on August 8, 2006fair value of restricted cash and the exchange offer relating to these notes was subsequently completed.securities totaled $125 million at December 31, 2009 and $130 million at December 31, 2008.

                    2006 Debt Tenders and RedemptionsCash Flow Hedges

                          On July 13, 2006, Level 3 redeemed all of its outstanding 9.125% Senior Notes due 2008 and 10.5% Senior Discount Notes due 2008 remaining after the debt exchange completed on January 13, 2006, described above. Aggregate principal, call premium and accrued interest totaled $470 million.

                          The 9.125% Senior Notes due 2008 were redeemed at a redemption price equal to 100% of the principal amount of those notes plus accrued and unpaid interest. The aggregate principal amount of 9.125% Senior Notes due 2008 that were redeemed was $398 million. The 10.5% Senior Discount Notes due 2008 were redeemed at a redemption price equal to 101.75% of the principal amount at maturity of those notes plus accrued and unpaid interest. The aggregate principal amount at maturity of 10.5% Senior Discount Notes due 2008 that were redeemed was $62 million.

                          On December 27, 2006, Level 3 Financing purchased for cash $497 million in total principal amount of its 10.75% Senior Notes due 2011, representing approximately 99.3% of the aggregate principal amount outstanding of all 10.75% Senior Notes Due 2011. Holders of the 10.75% Senior Notes due 2011 validly tendered and accepted for purchase by Level 3 Financing received $1,092.21 per $1,000 principal amount of the these notes, which included $1,062.21 as the purchase price and $30.00 as a consent payment. Level 3 Financing paid in cash approximately $528 million to purchase the 10.75% Senior Notes due 2011 as well as a $15 million consent payment and $11 million for total accrued interest to the closing date of the tender offer. The Company recorded a $54 million net loss on the early extinguishment of the debt, including unamortized debt issuance costs of $8 million.

                  Debt Issuances and Refinancings

                    2007 Senior Note Issuance

                          On February 14, 2007, Level 3 Financing issued $700 million of its 8.75% Senior Notes due 2017 and $300 million of its Floating Rate Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt and to fund the cost of construction, installation, acquisition, lease, development and improvement of other assets to be used in Level 3's communications business. See a detailed description of the notes below.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    2007 Senior Secured Credit Agreement Refinancing

                          In March 2007, Level 3 Financing refinanced its senior secured credit agreement and received net proceeds of $1.382 billion. The proceeds from this transaction were used to repay the existing $730 million Senior Secured Term Loan due 2011 and other debt. The effect of this transaction was to increase the amount of senior secured debt from $730 million to $1.4 billion, reduce the interest rate on that debt from the London Interbank Offering Rate ("LIBOR") plus 3.00% to LIBOR plus 2.25% and extend the final maturity from 2011 to 2014. The Company recognized a $10 million loss on this transaction related to unamortized debt issuance costs. See a detailed description of the Senior Secured Term Loan due 2014 below.

                    2007 Interest Rate Swaps

                          Level 3 has floating rate long-term debt.debt (see Note 11). These obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. On March 13, 2007, Level 3 Financing Inc., the Company's wholly owned subsidiary, entered into two interest rate swap agreements to hedge the interest payments on $1 billion notional amount of floating rate debt. The two interest rate swap agreements are with different counterparties and are for $500 million each. The transactions were effective beginning April 13, 2007 and mature on January 13, 2014. Under the terms of the interest rate swap transactions, Level 3the Company receives interest payments based on rolling three month LIBOR terms and pays interest at the fixed rate of 4.93% under one arrangement and 4.92% under the other. Level 3The Company has designated the interest rate swap agreements as a cash flow hedgehedges on the interest payments for $1 billion of floating rate debt. Level 3The Company evaluates the effectiveness of the hedgehedges on a quarterly basis. The Company measures


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                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (10) Financial Instruments (Continued)


                  effectiveness by offsetting the change in the variable portion of the interest rate swaps with the changes in interest expense paid due to fluctuations in the LIBOR-based interest rate. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Loss and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During 2009, these derivatives were used to hedge the variable cash flows associated with existing obligations. The ineffective portion of the change in fair value of derivatives is recognized directly in the consolidated statements of operations. All components of the interest rate swaps were included in the assessment of hedge effectiveness. Hedge ineffectiveness for the Company's cash flow hedges was not material in any period presented.

                          Amounts reported in Accumulated Other Comprehensive Loss ("Accumulated OCI") related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. As of December 31, 2009, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

                  Interest Rate Derivative
                  		 Number of
                  Instruments                  		 Notional
                  (in Millions)                  		 

                  Interest rate swaps

                  		 Two $1,000 

                          The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as follows (in millions):

                   
                  		 Liability Derivatives 
                   
                  		 December 31, 2009 December 31, 2008 
                  Derivatives designated as
                  hedging instruments
                  		 Balance Sheet
                  Location                  		 Fair
                  Value                  		 Balance Sheet
                  Location                  		 Fair
                  Value                  		 

                  Cash flow hedging contracts

                  		 Other noncurrent liabilities $92 Other noncurrent liabilities $97 


                   
                  		 Liability Derivatives 
                   
                  		 December 31, 2009 December 31, 2008 
                  Derivatives not designated as
                  hedging instruments
                  		 Balance Sheet
                  Location                  		 Fair
                  Value                  		 Balance Sheet
                  Location                  		 Fair
                  Value                  		 

                  Embedded equity conversion rights

                  		 Other noncurrent liabilities $20 Other noncurrent liabilities $13 

                          The table below presents the effect of the Company's derivative instruments on the Company's consolidated balance sheets and statements of operations for the years ended December 31, 2009 and 2008:

                   
                  		 Amount of Gain
                  (Loss) Recognized
                  in OCI on
                  Derivative
                  (Effective Portion)
                  December 31,                  		  
                  		 Amount of Loss
                  Reclassified from
                  Accumulated OCI into
                  Earnings
                  (Effective Portion)
                  December 31,
                   
                  		 Location of
                  Gain(Loss)
                  Reclassified from
                  Accumulated
                  OCI into Income
                  (Effective Portion)
                  Derivatives in Cash Flow
                  Hedging Relationships
                  		 2009 2008 2009 2008

                  Interest rate swaps

                  		 $5 $(60)Interest expense Not applicable

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                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (10) Financial Instruments (Continued)

                          The Company has not recognized any gain or loss in income for hedge ineffectiveness related to its interest rate swaps for the three years ended December 31, 2009. The Company does not enterexpect to reclassify any gains or losses into earnings within the next twelve months.

                          The effect of the Company's derivative instruments on net (loss) and income is as follows (in millions):

                   
                  		  
                  		 December 31, 
                   
                  		 Location of Gain Recognized in
                  Income on Derivative                  		 
                  Derivatives not designated as
                  hedging instruments
                  		 2009 2008 2007 

                  Embedded equity conversion rights(1)

                  		 Other Income (Expense)—Other, net $14 $— $— 
                  (1)
                  See Note 1 for anyadditional information on the Company's purpose other than cash flow hedging.

                  for entering into derivatives not designated as hedging instruments.

                          The fair value of the interest rate swap agreements was a liability of $37$92 million as of December 31, 2007. For the year ended2009 and $97 million as of December 31, 2007, unrealized2008. Unrealized gains of $5 million in 2009 and losses of $37$60 million in 2008 were recorded on the interest rate swap agreements and are included in Other Comprehensive Income (Loss)other comprehensive income (loss). The change in the fair value of the interest rate swap agreements is reflected in Other Comprehensive Income (Loss)other comprehensive income (loss) due to the fact that the interest rate swap agreements are designated as an effective cash flow hedgehedges of $1 billion notional amount of the Company's floating rate debt.


                    2006 AmendmentTable of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (11) Long-Term Debt

                            As of December 31, 2009 and Restatement2008, long-term debt was as follows:

                    (dollars in millions)
                    		 2009 2008 

                    Senior Secured Term Loan due 2014

                    		 $1,680 $1,400 

                    Senior Notes due 2010 (11.5%)

                    		  —  13 

                    Senior Notes due 2011 (10.75%)

                    		  3  3 

                    Floating Rate Senior Notes due 2011

                    		  —  6 

                    Senior Notes due 2013 (12.25%)

                    		  550  550 

                    Senior Notes due 2014 (9.25%)

                    		  1,250  1,250 

                    Floating Rate Senior Notes due 2015 (4.601% as of December 31, 2009)

                    		  300  300 

                    Senior Notes due 2017 (8.75%)

                    		  700  700 

                    Convertible Senior Notes due 2010 (2.875%)

                    		  40  192 

                    Convertible Senior Notes due 2011 (5.25%)

                    		  199  330 

                    Convertible Senior Notes due 2011 (10.0%)

                    		  172  228 

                    Convertible Senior Notes due 2012 (3.5%)

                    		  294  326 

                    Convertible Senior Notes due 2013 (15.0%)

                    		  400  400 

                    Convertible Senior Discount Notes due 2013 (9.0%)

                    		  295  295 

                    Convertible Senior Notes due 2015 (7.0%)

                    		  200  — 

                    Convertible Senior Notes due 2015 Series B (7.0%)

                    		  275  — 

                    Convertible Subordinated Notes due 2009 (6.0%)

                    		  —  181 

                    Convertible Subordinated Notes due 2010 (6.0%)

                    		  111  308 

                    Commercial Mortgage due 2015 (6.86%)

                    		  68  69 

                    Capital Leases

                    		  32  35 
                          
                     

                    Total Debt Obligations

                    		  6,569  6,586 

                    Unamortized (Discount) Premium:

                    		       

                    Discount on Senior Secured Term Loan due 2014

                    		  (2) — 

                    Discount on Senior Notes due 2013 (12.25%)

                    		  (2) (2)

                    Premium on Senior Notes due 2014 (9.25%)

                    		  8  9 

                    Discount on Convertible Senior Notes due 2011 (5.25%)

                    		  (38) (89)

                    Discount on Convertible Senior Notes due 2014 (3.5%)

                    		  (46) (69)

                    Discount on Convertible Senior Notes due 2015 (7.0%)

                    		  (4) — 

                    Discount due to embedded derivative contracts

                    		  (25) (4)
                          
                     

                    Total Unamortized (Discount) Premium

                    		  (109) (155)
                          

                    Carrying Value of Debt

                    		  6,460  6,431 
                     

                    Less current portion

                    		  (705) (186)
                          

                    Long-term Debt, less current portion

                    		 $5,755 $6,245 
                          

                    Convertible Debt That May be Settled in Cash Upon Conversion

                            During 2008, the FASB issued accounting guidance that requires issuers of Credit Facilityconvertible debt that may be settled in cash upon conversion to separately account for the debt and equity components of the convertible debt in a way that reflects the issuer's borrowing rate at the date of issuance for similar debt instruments without the conversion feature. This guidance applies to certain of the Company's


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                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  convertible debt that may be settled in cash upon conversion and was effective for the Company beginning on January 1, 2009 and has been applied retrospectively to all periods presented in the Company's consolidated financial statements. Although the adoption of this accounting guidance does not affect the Company's actual past or future cash flows, the Company incurred additional non-cash interest expense as a result of its adoption of this accounting guidance of approximately $39 million for the year ended December 31, 2009. The Company expects to incur additional non-cash interest expense of $35 million for the year ended December 31, 2010, $39 million for the year ended December 31, 2011 and $10 million for the year ended December 31, 2012, notwithstanding any further debt repurchases, modifications, extinguishments or conversion of its convertible debt subject to accounting under this guidance prior to maturity.

                          On June 27, 2006,This new guidance is only applicable to the Company's 5.25% Convertible Senior Notes due 2011 and 3.5% Convertible Senior Notes due 2012, as the Company has the right to deliver cash in lieu of shares of its common stock, or a combination of cash and shares of common stock, upon conversion for each of these issuances. The 5.25% Convertible Senior Notes are convertible, at the option of the holders, into approximately 50 million shares of the Company's common stock as of December 31, 2009, at a conversion rate of $3.98 per share, subject to certain adjustments. The 3.5% Convertible Senior Notes are convertible, at the option of the holders, into approximately 54 million shares of the Company's common stock as of December 31, 2009, at a conversion price of $5.46 per share, subject to certain adjustments.

                          The Company recognized total interest expense of approximately $64 million, $66 million and $63 million during the years ended December 31, 2009, 2008 and 2007, respectively, related to both the contractual interest coupon and amortization of the discount for the liability component of the Company's 5.25% Convertible Senior Notes and 3.5% Convertible Senior Notes. The effective interest rate on the liability component of the Company's 5.25% Convertible Senior Notes is approximately 17%. The effective interest rate on the liability component of the Company's 3.5% Convertible Senior Notes is approximately 11%. The Company is amortizing the discount on the liability component of its 5.25% Convertible Senior Notes and 3.5% Convertible Senior Notes over the remaining term of each issuance.

                          The carrying amount of the equity component, principal amount of the liability component, unamortized debt discount related to the liability component and net carrying amount of the liability component of the Company's convertible debt that may be settled in cash upon conversion as of December 31, 2009 and December 31, 2008 were as follows (in millions):

                   
                  		 December 31,
                  2009                  		 December 31,
                  2008                  		 

                  Carrying amount of equity component

                  		 $243 $241 

                  Principal amount of liability component

                  		 
                  $
                  493                  		 
                  $
                  656                  		 

                  Unamortized discount related to liability component

                  		  (84) (158)
                        

                  Net carrying amount of liability component

                  		 $409 $498 
                        

                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  2009 Debt Issuances

                          During the second quarter of 2009, Level 3 Financing amended and restated its existing $730 million senior secured credit facility (seeto increase the borrowings through the creation of a $280 million Tranche B Term Loan that matures on March 13, 2014 with a current interest rate of LIBOR plus 8.50% per annum, with LIBOR set at a minimum of 3.00%. The net proceeds of the Tranche B Term Loan were approximately $274 million after deducting a $2 million original issue discount and $4 million of debt issuance costs.

                          Level 3 Financing's obligations under the Tranche B Term Loan are, subject to certain exceptions, secured by certain of the assets of (i) the Company and (ii) certain of the Company's material domestic subsidiaries which are engaged in the communications business. The Company and certain of its subsidiaries have also guaranteed the obligations of Level 3 Financing under the Tranche B Term Loan.

                          No changes were made to any of the restrictive covenants or events of default contained in the existing senior secured credit facility.

                          During the fourth quarter of 2009, Level 3 Communications, Inc. issued (at par) $275 million aggregate principal of 7% Convertible Senior Notes due 2015, Series B, (the "7% Convertible Senior Notes, Series B"). The net proceeds approximated $274 million after deducting debt issuance costs of approximately $1 million. These new notes are substantially similar in all respects to the $200 million of 7% Convertible Notes due 2015 issued on June 26, 2009, except that these notes will be a separate series (Series B). The 7% Convertible Senior Notes due 2015, Series B, will mature on March 15, 2015 and have an interest rate of 7% per annum with interest payable semi-annually on March 15 and September 15, beginning on March 15, 2010. Interest on these notes will accrue from October 15, 2009.

                  2009 Debt Exchange

                          During the second quarter of 2009, the Company exchanged approximately $142 million aggregate principal amount of the Company's 6% Convertible Subordinated Notes due 2010 and approximately $140 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010 for $200 million aggregate principal amount of the Company's 7% Convertible Senior Notes due 2015 ("7% Convertible Notes due 2015") and $78 million in cash, plus accrued and unpaid interest.

                          The Company recognized a net gain on the exchange transaction, after deducting $1 million in unamortized debt issuance costs, of approximately $7 million. The gain was recorded in "Gain on extinguishment of debt, net" in the consolidated statements of operations.

                          The Company paid approximately $3 million of debt issuance costs in the third quarter related to this transaction.

                  2009 Debt Repurchases and Maturities

                          In the first quarter of 2009, the Company repurchased $5 million aggregate principal amount of its 6% Convertible Senior Notes due 2009 and $1 million aggregate principal amount of its 11.5% Senior Notes due 2010 at discounts to the principal amounts and recognized a net gain on extinguishment of less than $1 million.

                          In the second quarter of 2009, the Company repurchased approximately $301 million aggregate principal amount of various issues of its convertible debt at discounts to the principal amount and


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                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  recognized a net gain on extinguishment of debt of approximately $7 million. The gain consisted of a $33 million cash gain, which was partially offset by $20 million of unamortized debt discount, $1 million in unamortized debt issuance costs and a $5 million increase to equity for the component of the convertible debt subject to new guidance for convertible debt that may be settled in cash upon conversion. The gain was recorded in "Gain on extinguishment of debt, net" in the consolidated statements of operations.

                          The second quarter 2009 debt repurchases consisted of $121 million in 2009 maturities, $50 million in 2010 maturities, $106 million in 2011 maturities and $24 million in 2012 maturities. The second quarter 2009 debt repurchases consisted of the following:

                    •
                    $121 million aggregate principal amount of 6% Convertible Subordinated Notes due 2009;

                    •
                    $47 million aggregate principal amount of 6% Convertible Subordinated Notes due 2010;

                    •
                    $3 million aggregate principal amount of 2.875% Convertible Senior Notes due 2010;

                    •
                    $75 million aggregate principal amount of 5.25% Convertible Senior Notes due 2011;

                    •
                    $31 million aggregate principal amount of 10% Convertible Senior Notes due 2011; and

                    •
                    $24 million aggregate principal amount of 3.5% Convertible Senior Notes due 2012.

                          In the third quarter of 2009, $55 million of outstanding aggregate principal of the Company's 6% Convertible Subordinated Notes due 2009 matured. In addition, during the third quarter of 2009, the Company repurchased approximately $39 million aggregate principal amount of various issues of its convertible and floating rate debt at discounts to the principal amount and recognized a net gain on extinguishment of debt of approximately $2 million. The third quarter 2009 debt repurchases consisted of $11 million in 2010 maturities and $28 million in 2011 maturities. The third quarter 2009 debt repurchases consisted of the following:

                    •
                    $25 million aggregate principal amount of 10% Convertible Senior Notes due 2011

                    •
                    $8 million aggregate principal amount of 6% Convertible Subordinated Notes due 2010;

                    •
                    $3 million aggregate principal amount of 2.875% Convertible Senior Notes due 2010; and

                    •
                    $3 million aggregate principal amount of Floating Rate Notes due 2011.

                          During the fourth quarter of 2009, the Company repurchased approximately $73 million aggregate principal amount of various issues of its convertible and floating rate debt at discounts to the principal amount and recognized a net loss on extinguishment of debt of approximately $2 million. The loss consisted of $11 million of unamortized debt discount and unamortized debt issuance costs partially offset by a cash gain of $6 million and a $3 million decrease to equity for the component of the convertible debt subject to the new guidelines. The fourth quarter 2009 debt repurchases consisted of the following:

                    •
                    $56 million aggregate principal amount of 5.25% Convertible Senior Notes due 2011

                    •
                    $7 million aggregate principal amount of 3.5% Convertible Senior Notes due 2012;

                    •
                    $7 million aggregate principal amount of 2.875% Convertible Senior Notes due 2010; and

                    •
                    $3 million aggregate principal amount of Floating Rate Notes due 2011.

                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  2009 Debt Redemption

                          The Company redeemed the remaining $13 million aggregate principal amount of its 11.5% Senior Notes due 2010 at 100% of the outstanding principal amount in the second quarter of 2009.

                  2008 Debt Issuances

                          In December 2008, the Company issued $400 million aggregate principal amount of its 15% Convertible Senior Notes due 2013 and received gross proceeds of $400 million. The proceeds from this issuance were primarily used to repurchase, through tender offers, a portion of the Company's 6% Convertible Subordinated Notes due 2009, 6% Convertible Subordinated Notes due 2010 and 2.875% Convertible Senior Notes due 2010. See a detailed description of the notes below.

                  2008 Debt Repurchases

                          In September 2008, in various transactions, the Company repurchased $39 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2009 at discounts to the principal amount and recognized a net gain on extinguishment of debt of $1 million. Unamortized debt issuance costs totaled less than $1 million and accrued interest paid at the time of repurchase totaled less than $1 million.

                          In September 2008, the Company repurchased $32 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2010 at a discount to the principal amount and recognized a net gain on extinguishment of debt of $2 million. Unamortized debt issuance costs totaled less than $1 million and accrued interest paid at the time of repurchase totaled $1 million.

                          In December 2008, in connection with the issuance of the 15% Convertible Senior Notes due 2013, the Company repurchased using $336 million in cash, through tender offers $460 million aggregate principal amount of various issues of its convertible debt securities at discounts to par and recognized a gain on the extinguishment of debt of approximately $122 million. The gain consisted of a $124 million cash gain, which was partially offset by $2 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $7 million.

                          The December 2008 debt repurchases consisted of the following:

                    •
                    $163 million of 2.875% Convertible Senior Notes due 2010;

                    •
                    $173 million of 6% Convertible Subordinated Notes due 2010; and

                    •
                    $124 million of 6% Convertible Subordinated Notes due 2009.

                  2008 Debt for Equity Exchanges

                          On multiple dates in October 2008, the Company entered into exchange agreements with holders of various issues of its convertible debt and issued approximately 48 million shares of Level 3 common stock in exchange for approximately $108 million aggregate principal amount of its convertible debt securities. The shares of the Company's common stock are exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. These transactions were considered to be induced conversions and as a result, the Company recorded a non-cash loss in the fourth quarter of 2008 on the exchange of the $108 million aggregate principal amount of convertible debt securities of


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  approximately $36 million, consisting of $35 million of debt conversion expense and $1 million of previously capitalized debt issuance costs and expenses. The loss was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          The fourth quarter 2008 exchange transactions consisted of the following:

                    •
                    $18 million of 6% Convertible Subordinated Notes due 2009;

                    •
                    $47 million of 10% Convertible Senior Notes due 2011;

                    •
                    $19 million of 2.875% Convertible Senior Notes due 2010;

                    •
                    $15 million of 5.25% Convertible Senior Notes due 2011; and

                    •
                    $9 million of 3.5% Convertible Senior Notes due 2012.

                  2008 Debt Repayments

                          During March 2008, Level 3 Communications, Inc. repaid the remaining $20 million of outstanding 11% Senior Notes due 2008 and $6 million (€4 million) of outstanding 10.75% Senior Euro Notes due 2008.

                  Senior Secured Term Loan due 2014

                          On March 13, 2007, Level 3 Communications, Inc., as guarantor, Level 3 Financing, as borrower, Merrill Lynch Capital Corporation, as administrative agent and collateral agent, and certain other agents and certain lenders entered into a Credit Agreement, pursuant to which the lenders extended a $1.4 billion senior secured term loan to Level 3 Financing. The $1.4 billion senior secured term loan has an interest rate of LIBOR plus an applicable margin of 2.25% per annum. In addition, during the second quarter of 2009, Level 3 Financing amended and restated its existing senior secured Credit Agreement to increase the borrowings through the creation of a $280 million Tranche B Term Loan with a current interest rate of LIBOR plus 8.50% per annum, with LIBOR set at a minimum of 3.00%. The entire $1.68 billion senior secured term loan ("Senior Secured Term Loan due 2014") matures on March 13, 2014.

                          The borrower has the option of electing one, two, three or six month LIBOR at the end of each interest period and may elect different options with respect to different portions of the Senior Secured Term Loan due 2014. Interest is payable in cash at the end of each LIBOR period elected in arrears, beginning July 13, 2007, provided that in the case of a six month interest period, interim interest payments are required at the end of the first three months. The interest rate on $1.0 billion of the Senior Secured Term Loan due 2014 resets quarterly and was 2.53% as of December 31, 2009 and 7.0% as of December 31, 2008. The interest rate on $400 million resets quarterly and was 2.53% as of December 31, 2009 and $7.0% as of December 31, 2008. The interest rate on the remaining $280 million of the Senior Secured Term Loan due 2014 issued in the second quarter of 2009 currently resets semiannually and was 11.5% as of December 31, 2009.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                          Level 3 Financing's obligations under this term loan are, subject to certain exceptions, secured by certain assets of the Company and certain of the Company's material domestic subsidiaries that are engaged in the telecommunications business.

                          The Senior Secured Term Loan due 2014 includes certain negative covenants which restrict the ability of the Company, Level 3 Financing and any restricted subsidiary to engage in certain activities. The Senior Secured Term Loan due 2014 also contains certain events of default. It does not require the Company or Level 3 Financing to maintain specific financial ratios or other financial metrics.

                          Level 3 used a portion of the original net proceeds after transaction costs to repay Level 3 Financing's $730 million Senior Secured Term Loan due 2011 below) to reduce the interest rate payable under thethat certain credit agreement by 400 basis points, modify the pre-payment provisions and make other specified changes.

                          The amendmentdated June 27, 2006. In addition, Level 3 used a portion of the credit facility was treated as an extinguishmentnet proceeds to fund the purchase of thecertain of its existing debt instrument due to the significant change in lenders of the debt in accordance with EITF No. 96-19. The fair value of the amended and restated credit facility approximated the carrying value of the original credit facility as the interest rate of the amended and restated credit facility approximated current market rates. As part of the transaction, Level 3 Financing paid a prepayment premium of approximately $42 million to existing debt holders. The prepayment premium along with the unamortized deferred debtsecurities.

                          Debt issuance costs of $13$22 million from the original offering, were recognized as a loss on the extinguishment of debt in the second quarter of 2006. The Company also incurred


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  $11 million of third party costs to complete this transaction. These costs were reflected as deferred debt issuance costscapitalized and will beare being amortized to interest expense over the term of the Senior Secured Term Loan due 2014 using the effective interest method. As a result of amortization, the capitalized debt issuance costs have been reduced to $16 million at December 31, 2009.

                  10.75% Senior Notes due 2011

                          In October 2003, Level 3 Financing received $486 million of net proceeds from a private placement offering of $500 million aggregate principal amount of its 10.75% Senior Notes due 2011 ("10.75% Senior Notes"). The Notes were subsequently registered through a public exchange offer. As of December 31, 2009, a total of $497 million aggregate principal amount of the 10.75% Senior Notes had been redeemed. Interest on the notes accrues at 10.75% per year and is payable in arrears on April 15 and October 15 each year in cash. These notes are guaranteed by Level 3 Communications, LLC and Level 3 Communications, Inc. (See Note 16).

                          On December 8, 2009, Level 3 Financing notified holders of the outstanding 10.75% Senior Notes that it was redeeming the notes, at a price of 100% of the principal amount plus accrued and unpaid interest, effective January 7, 2010. The Company has included the $3 million of outstanding 10.75% Senior Notes within current portion of long term debt on the December 31, 2009 consolidated balance sheet.

                          The 10.75% Senior Notes were senior, unsecured obligations of Level 3 Financing, rankingpari passu with all existing and future senior unsecured indebtedness of Level 3 Financing.

                          Debt issuance costs of $14 million were originally capitalized and were amortized to interest expense through the redemption date. As a result of amortization and repurchases, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2009.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  12.25% Senior Notes due 2013

                          On March 14, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, as borrower, entered into an indenture with the Bank of New York, as trustee, and issued $250 million aggregate principal amount of 12.25% senior notes due 2013 ("12.25% Senior Notes due 2013") in a private offering. The Notes were subsequently registered in a public offering.

                          On April 6, 2006, the Company issued $300 million aggregate principal amount of 12.25% Senior Notes due 2013 in a private offering. The Notes were subsequently registered through a public exchange offer. These notes, together with the $250 million aggregate principal amount of 12.25% Senior Notes due 2013 issued on March 14, 2006, are treated under the same indenture as a single series of notes. The Company received net proceeds of $538 million associated with the 12.25% Senior Notes due 2013.

                          The 12.25% Senior Notes due 2013 are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. These notes are guaranteed by Level 3 Communications, Inc. and Level 3 Communications, LLC (See Note 16). Interest on the notes accrues at 12.25% per year and is payable on March 15 and September 15 of each year, beginning on September 15, 2006. The $250 million of 12.25% Senior Notes due 2013 issued on March 14, 2006 were priced at 96.618% of par. The $300 million of 12.25% Senior Notes due 2013 issued on April 6, 2006 were priced at 102% of par. The resulting net discount for the two issuances of approximately $2 million is reflected as a reduction in long-term debt and is being amortized as interest expense over the remaining term of the 12.25% Senior Notes due 2013 using the effective interest method.

                          The 12.25% Senior Notes due 2013 are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after March 15, 2010 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning March 15, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2010

                  		  106.125%

                  2011

                  		  103.063%

                  2012

                  		  100.000%

                          The 12.25% Senior Notes due 2013 contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $11 million were capitalized and are being amortized over the term of the 12.25% Senior Notes due 2013. As described above,a result of amortization, the capitalized debt issuance costs have been reduced to $8 million at December 31, 2009.

                          See Note 17—Subsequent Events regarding additional information regarding the repurchase of the 12.25% Senior Notes due 2013 in Marchthe first quarter of 2010. As such these notes have been classified as current portion of long-term debt on the consolidated balance sheet.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  9.25% Senior Notes Due 2014

                          On October 30, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, Inc. as borrower, received $588 million of net proceeds after transaction costs, from a private offering of $600 million aggregate principal amount of its 9.25% Senior Notes due 2014 ("9.25% Senior Notes Due 2014"). On December 13, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, Inc. as borrower, received $661 million of net proceeds after transaction costs and accrued interest, for a second offering of $650 million aggregate principal amount of 9.25% Senior Notes due 2014. These notes together with the $600 million aggregate principal amount of 9.25% Senior Notes due 2014 issued on October 30, 2006 were issued under the same indenture and will be treated as a single series of notes. The Company received total net proceeds of $1.239 billion (excluding prepaid interest). The Notes were subsequently registered through a public exchange offer.

                          The 9.25% Senior Notes due 2014 are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. These notes are guaranteed by Level 3 Communications, Inc. (see Note 16). The notes will mature on November 1, 2014. Interest on the 9.25% Senior Notes Due 2014 accrues at 9.25% interest per year and is payable semi-annually in cash on May 1 and November 1 beginning May 1, 2007. The $600 million of 9.25% Senior Notes due 2014 issued on October 30, 2006 were priced at par. The $650 million of 9.25% Senior Notes due 2014 issued on December 13, 2006 were priced at 101.75% of par plus accrued interest from October 30, 2006, representing an effective yield of 8.86% to the purchasers of these senior notes. The resulting premium of the two issuances of approximately $11 million is reflected as an increase to long-term debt and is being amortized as a reduction to interest expense over the remaining term of the 9.25% Senior Notes due 2014 using the effective interest method. As of December 31, 2009, the premium remaining was approximately $8 million.

                          The 9.25% Senior Notes Due 2014 are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after November 1, 2010 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning November 1, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2010

                  		  104.625%

                  2011

                  		  102.313%

                  2012

                  		  100.000%

                          The 9.25% Senior Notes due 2014 contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $23 million were capitalized and are being amortized over the term of the 9.25% Senior Notes due 2014. As a result of amortization, the capitalized debt issuance costs have been reduced to $16 million at December 31, 2009.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  Floating Rate Senior Notes Due 2015 and 8.75% Senior Notes Due 2017

                          On February 14, 2007, Level 3 Financing received $982 million of net proceeds after transaction costs, from a private offering of $700 million aggregate principal amount of its 8.75% Senior Notes due 2017 (the "8.75% Senior Notes") and $300 million aggregate principal amount of its Floating Rate Senior Notes due 2015 (the "2015 Floating Rate Senior Notes"). The Notes were subsequently registered through a public exchange offer. The 8.75% Senior Notes and the 2015 Floating Rate Senior Notes are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. Level 3 Communications, Inc. and Level 3 Communications, LLC have guaranteed the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes (See Note 16). Interest on the 8.75% Senior Notes accrues at 8.75% interest per year and is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 8.75% Senior Notes will be due on February 15, 2017. Interest on the 2015 Floating Rate Senior Notes accrues at LIBOR plus 3.75% per annum, reset semi-annually. The interest rate was 4.60% at December 31, 2009. Interest on the 2015 Floating Rate Senior notes is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 2015 Floating Rate Senior Notes will be due on February 15, 2015.

                          At any time prior to February 15, 2012, Level 3 Financing may redeem all or a part of the 8.75% Senior Notes upon not less than 30 nor more than 60 days' prior notice, at a redemption price equal to 100% of the principal amount of the 8.75% Senior Notes so redeemed plus the 8.75% Applicable Premium as of, and accrued and unpaid interest thereon (if any) to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

                          With respect to the 8.75% Senor Notes, "8.75% Applicable Premium" means on any redemption date, the greater of (1) 1.0% of the principal amount of such 8.75% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) 104.375% of the principal amount of such 8.75% Senior Notes plus (ii) all required interest payments due on such 8.75% Senior Notes through February 15, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 8.75% Senior Notes) as of such redemption date plus 50 basis points, over (b) the principal amount of such 8.75% Senior Notes.

                      ��   The 8.75% Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2012 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2012

                  		  104.375%

                  2013

                  		  102.917%

                  2014

                  		  101.458%

                  2015

                  		  100.000%

                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                          The Floating Rate Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2010 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2010

                  		  101.0%

                  2011

                  		  100.0%

                          The 8.75% Senior Notes and the 2015 Floating Rate Senior Notes contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $16 million were capitalized and are being amortized over the term of the 8.75% Senior Notes due 2017. As a result of amortization, the capitalized debt issuance costs have been reduced to approximately $13 million at December 31, 2009.

                          Debt issuance costs of approximately $6 million were capitalized and are being amortized over the term of the Floating Rate Senior Notes due 2015. As a result of amortization, the capitalized debt issuance costs have been reduced to approximately $4 million at December 31, 2009.

                  2.875% Convertible Senior Notes due 2010

                          In July 2003, Level 3 Communications, Inc. completed the offering of $374 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010 ("2.875% Convertible Senior Notes") in an underwritten public offering pursuant to the Company's shelf registration statement. Interest on the notes accrues at 2.875% per year and is payable semi-annually in arrears in cash on January 15 and July 15, beginning January 15, 2004. The 2.875% Convertible Senior Notes are senior, unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured debt. The 2.875% Convertible Senior Notes contain limited covenants, which restrict additional liens on assets of the Company.

                          In October 2008, the Company refinancedcompleted the exchange of $19 million in aggregate principal amount of its senior secured credit agreement2.875% Convertible Senior Notes for a total of 7 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to these exchanges were exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. These transactions were considered to be induced conversions and repaidas a result, the $730Company recorded a non-cash loss in the fourth quarter of 2008 on the exchange of the 2.875% Convertible Senior Notes of $8 million, consisting of approximately $8 million of debt conversion expense and less than $1 million of previously capitalized debt issuance costs. The loss was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          In December 2008, the Company repurchased using $101 million in cash, through tender offers, $163 million aggregate principal amount of its 2.875% Convertible Senior Secured Term Loan due 2011.Notes at a price equal to $620 per $1,000 principal amount of the notes and recognized a gain on the extinguishment of debt of approximately $61 million. The gain consisted of a $62 million cash gain, which was partially offset by


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $2 million. The gain was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          During the second quarter of 2009, the Company repurchased approximately $140 million aggregate principal amount of its 2.875% Convertible Senior Notes as part of the 7% Convertible Senior Notes due 2015 transaction and an additional $3 million in other transactions.

                          In the third and fourth quarters of 2009, the Company repurchased $10 million aggregate principal amount of 2.875% Convertible Senior Notes due 2010.

                          The remaining 2.875% Convertible Senior Notes are convertible into shares of the Company's common stock at a conversion rate of $7.18 per share, subject to certain adjustments. At any time and from time to time, the Company, at its option, may redeem for cash all or a portion of the notes. The Company may exercise this option only if the current market price for Level 3's common stock for at least 20 trading days within any 30 consecutive trading day period exceeds 150% of the conversion price on or after July 15, 2009. The Company would also be obligated to pay the holders of the redeemed notes a cash amount equal to the present value of all remaining scheduled interest payments.

                          Debt issuance costs of $13 million were originally capitalized and are being amortized to interest expense over the term of the 2.875% Convertible Senior Notes. As a result of amortization, exchanges and repurchases the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2009.

                  5.25% Convertible Senior Notes due 2011

                          On December 2, 2004, Level 3 Communications, Inc. completed the offering of $345 million aggregate principal amount of its 5.25% Convertible Senior Notes due 2011 ("5.25% Convertible Senior Notes") in a private offering. Interest on the notes accrues at 5.25% per year and is payable semi-annually in arrears in cash on June 15 and December 15, beginning June 15, 2005. The 5.25% Convertible Senior Notes are senior, unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured debt of Level 3 Communications, Inc. The 5.25% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          In October 2008, the Company completed the exchange of $15 million in aggregate principal amount of its 5.25% Convertible Senior Notes for a total of 5 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to this exchange were exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. This transaction was considered to be an induced conversion and as a result, the Company recorded a non-cash loss in the fourth quarter of 2008 on the exchange of the 5.25% Convertible Senior Notes of $3 million, consisting of approximately $3 million of debt conversion expense and less than $1 million of previously capitalized debt issuance costs. The loss was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          During 2009, the Company repurchased approximately $131 million aggregate principal amount of its 5.25% Convertible Senior Notes at discounts to the principal amount and recognized a net loss on extinguishment of debt of approximately $3 million.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                          The remaining 5.25% Convertible Senior Notes are convertible, at the option of the holders, into shares of the Company's common stock at a conversion rate of $3.98 per share, subject to certain adjustments. Upon conversion, the Company will have the right to deliver cash in lieu of shares of its common stock, or a combination of cash and shares of common stock. In addition, holders of the 5.25% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount plus accrued interest and a make whole premium. As of December 31, 2008, the make whole premium privileges on the 5.25% Convertible Senior Notes had lapsed.

                          On or after December 15, 2009, Level 3, at its option, may redeem for cash all or a portion of the notes. The 5.25% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than 60 nor less than 30 days' notice, on or after December 15, 2009, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning December 15, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2009

                  		  101.500%

                  2010 and thereafter

                  		  100.750%

                          Debt issuance costs of $11 million were originally capitalized and are being amortized to interest expense over the term of the 5.25% Convertible Senior Notes. As a result of amortization, repurchases and exchanges, the remaining unamortized debt issuance costs were $1 million at December 31, 2009.

                  10% Convertible Senior Notes due 2011

                          In April 2005, Level 3 Communications, Inc. received $877 million of net proceeds, after giving effect to offering expenses, from an offering of $880 million aggregate principal amount of its 10% Convertible Senior Notes due 2011 ("10% Convertible Senior Notes") to institutional investors. Interest on the notes accrues at 10% per year and will be payable semi-annually on May 1 and November 1 beginning on November 1, 2005. The 10% Convertible Senior Notes are unsecured unsubordinated obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future unsecured unsubordinated debt of Level 3 Communications, Inc. The 10% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          In January 2007, in two separate transactions, Level 3 completed the exchange of $605 million in aggregate principal amount of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to these announced exchanges are exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. The Company recognized a $177 million loss on extinguishment of debt for the exchanges. Included in the loss was approximately $1 million of unamortized debt issuance costs.

                          In October 2008, the Company completed the exchange of $47 million in aggregate principal amount of its 10% Convertible Senior Notes for a total of 22 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to this exchange was exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. This transaction was considered to be an induced conversion and as a result, the Company recorded a non-cash loss in


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  the fourth quarter of 2008 on the exchange of the 10% Convertible Senior Notes of $15 million, consisting of approximately $15 million of debt conversion expense and less than $1 million of previously capitalized debt issuance costs. The loss was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          In 2009, in various transactions, the Company repurchased $56 million aggregate principal amount of the 10% Convertible Senior Notes and recognized a net gain on extinguishment of debt of approximately $3 million.

                          The remaining 10% Convertible Senior Notes are convertible by holders at any time and from time to time into shares of Level 3 common stock at a conversion price of $3.60 per share (subject to adjustment in certain events). This is equivalent to a conversion rate of approximately 277.77 shares per $1,000 principal amount of notes. In addition, holders of the 10% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount of the notes plus accrued interest and a make whole premium. As of December 31, 2009, the make-whole premium provisions on the 10% Convertible Senior Notes had lapsed.

                          On or after May 1, 2009, Level 3, at its option, may redeem for cash all or a portion of the notes. The 10% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than sixty nor less than thirty days' notice, on or after May 1, 2009, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning May 1, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2009

                  		  103.330%

                  2010 and thereafter

                  		  101.670%

                          Debt issuance costs of $3 million were originally capitalized and are being amortized to interest expense over the term of the 10% Convertible Senior Notes. As a result of amortization and exchanges, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2009.

                  3.5% Convertible Senior Notes due 2012

                          On June 13, 2006 Level 3 Communications, Inc. received $326 million of net proceeds, after giving effect to offering expenses, from a public offering of $335 million aggregate principal amount of its 3.5% Convertible Senior Notes due 2012 ("3.5% Convertible Senior Notes"). The 3.5% Convertible Senior Notes were priced at 100% of the principal amount. The notes are senior unsecured obligations of the Company, ranking equal in right of payment with all the Company's existing and future unsubordinated indebtedness. The 3.5% Convertible Senior Notes will mature on June 15, 2012. Interest on the notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2006. The 3.5% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          In October 2008, the Company completed the exchange of $9 million in aggregate principal amount of its 3.5% Convertible Senior Notes for a total of 3 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to this exchange was exempt from


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. This transaction was considered to be an induced conversion and as a result, the Company recorded a non-cash loss in the fourth quarter of 2008 on the exchange of the 3.5% Convertible Senior Notes of $2 million, consisting of approximately $2 million of debt conversion expense and less than $1 million of previously capitalized debt issuance costs. The loss was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          During 2009, in various transactions, the Company repurchased approximately $31 million aggregate principal amount of its 3.5% Convertible Senior Notes at discounts to the principal amount and recognized a net gain on extinguishment of debt of approximately $3 million.

                          The remaining 3.5% Convertible Senior Notes will be convertible by holders at any time before the close of business on June 15, 2012 into shares of Level 3's common stock at a conversion price of $5.46 per share (subject to adjustment in certain events). This is equivalent to a conversion rate of approximately 183.1502 shares of common stock per $1,000 principal amount of these notes. Upon conversion, the Company will have the right to deliver cash in lieu of shares of its common stock, or a combination of cash and shares of common stock. In addition, holders of the 3.5% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount of the notes plus accrued interest. In addition, if a holder elects to convert its notes in connection with certain changes in control, Level 3 could be required to pay a make whole premium by increasing the number of shares deliverable upon conversion of the notes.

                          The 3.5% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than 60 nor less than 30 days' notice, on or after June 15, 2010, plus accrued and unpaid interest thereon (if any) to the redemption date, if redeemed during the twelve months beginning June 15, of the years indicated below:

                  Year
                  		 Redemption
                  Price                  		 

                  2010

                  		  101.17%

                  2011

                  		  100.58%

                          Debt issuance costs of $9 million were originally capitalized and are being amortized to interest expense over the term of the 3.5% Convertible Senior Notes. As a result of amortization and the exchange, the capitalized debt issuance costs have been reduced to approximately $3 million at December 31, 2009.

                  15% Convertible Senior Notes Due 2013

                          On December 24, 2008 the Company received gross proceeds of $373.8 million and on December 31, 2008 the Company received gross proceeds of $26.2 million from the issuance of its $400 million 15% Convertible Senior Notes due 2013 ("15% Convertible Senior Notes"). The proceeds from this issuance were primarily used to repurchase, through tender offers, a portion of the Company's 6% Convertible Subordinated Notes due 2009, 6% Convertible Subordinated Notes due 2010 and 2.875% Convertible Senior Notes due 2010. The 15% Convertible Senior Notes were priced at 100% of the principal amount. The 15% Convertible Senior Notes are unsecured and unsubordinated obligations and will rank equally with all the Company's existing and future unsecured


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)


                  and unsubordinated indebtedness. The 15% Convertible Senior Notes will mature on January 15, 2013. Interest on the notes will accrue from the date of original issuance at a rate of 15% per year and will be payable on January 15 and July 15 of each year, beginning on January 15, 2009. The 15% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          The 15% Convertible Senior Notes are convertible by holders into shares of the Company's common stock at an initial conversion price of $1.80 per share (which is equivalent to a conversion rate of 555.5556 shares of common stock per $1,000 principal amount of the 15% Convertible Senior Notes), subject to adjustment upon certain events, at any time before the close of business on January 15, 2013. If at any time following the date of original issuance of the 15% Convertible Senior Notes and prior to the close of business on January 15, 2013 the closing per share sale price of the Company's common stock exceeds 222.2% of the conversion price then in effect for at least 20 trading days within any 30 consecutive trading day period, the 15% Convertible Senior Notes will automatically convert into shares of Level 3 common stock, plus accrued and unpaid interest (if any) to, but excluding the automatic conversion date, which date will be designated by the Company following such automatic conversion event.

                          Holders of the 15% Convertible Senior Notes may require the Company to repurchase all or any part of their notes upon the occurrence of a designated event at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the repurchase date, if any.

                          In addition, if a holder elects to convert its 15% Convertible Senior Notes in connection with certain changes in control, the Company could be required to pay a make-whole premium by increasing the number of shares deliverable upon conversion of such notes. Any make whole premium will have the effect of increasing the number of shares due to holders of the 15% Convertible Senior Notes upon conversion.

                          Debt issuance costs of $3 million were originally capitalized and are being amortized to interest expense over the term of the 15% Convertible Senior Notes. The unamortized debt issuance costs were approximately $3 million at December 31, 2009.

                  9% Convertible Senior Discount Notes due 2013

                          In October 2003, Level 3 Communications, Inc. issued $295 million aggregate principal amount at maturity of 9% Convertible Senior Discount Notes due 2013. Interest on the 9% Convertible Senior Discount Notes accretes at a rate of 9% per annum, compounded semiannually, to an aggregate principal amount of $295 million by October 15, 2007. Cash interest did not accrue on the 9% Convertible Senior Discount Notes prior to October 15, 2007. Commencing October 15, 2007, interest on the 9% Convertible Senior Discount Notes accrues at the rate of 9% per annum and is payable in cash semiannually in arrears.

                          The 9% Convertible Senior Discount Notes are convertible into shares of the Company's common stock at a conversion rate of $9.99 per share, subject to certain adjustments. On or after October 15, 2008, the Company, at its option, may redeem for cash all or a portion of the notes. The Company may exercise this option only if the current market price for at least 20 trading days within any 30 consecutive trading day period exceeds 140% of the conversion price. If the initial holders sell greater than 33.33% of the notes, this amount decreases to 130% and 120% effective October 15, 2009 and 2010, respectively. The Company is also obligated to pay the holders of the redeemed notes a cash amount equal to the present value of all remaining scheduled interest payments.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                          The 9% Convertible Senior Discount Notes are subject to conversion into common stock at the option of the holder, in whole or in part, at any time or from time to time at a conversion rate of 100.09 shares per $1,000 of face value of the debt plus accrued and unpaid interest thereon to the conversion date.

                          These notes are senior unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured indebtedness of Level 3 Communications, Inc.

                  7% Convertible Senior Notes due 2015

                          On June 26, 2009, Level 3 Communications, Inc. issued $200 million aggregate principal amount of 7% Convertible Notes due 2015 under an indenture between Level 3 and The Bank of New York, as trustee. The 7% Convertible Notes due 2015 were issued in conjunction with the exchange of approximately $142 million aggregate principal amount of the Company's 6% Convertible Subordinated Notes due 2010 and approximately $140 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010. As part of this exchange, Level 3 also paid $78 million in cash, including accrued and unpaid interest for the notes exchanged.

                          On October 15, 2009, Level 3 issued $275 million aggregate principal amount of 7% Convertible Senior due 2015, Series B under a second supplemental indenture between Level 3 and The Bank of New York, as trustee. The 7% Convertible Senior Notes due 2015, Series B are substantially similar in all respects to the 7% Convertible Senior Notes due 2015. The 7% Convertible Senior Notes due 2015, together with the 7% Convertible Senior Notes due 2015, Series B are referred to as the "7% Convertible Senior Notes due 2015".

                          The 7% Convertible Senior Notes due 2015 mature on March 15, 2015 and bear interest at a rate of 7% per annum, payable semiannually in arrears on March 15 and September 15. Interest payments commence for the 7% Convertible Senior Notes due 2015, Series A on September 15, 2009 and on March 15, 2010 for the 7% Convertible Senior Notes due 2015, Series B. The 7% Convertible Senior Notes due 2015 rank equally in right of payment with all other existing and future senior unsecured indebtedness of Level 3 Communications, Inc.

                          The 7% Convertible Senior Notes due 2015 are convertible into shares of Level 3 common stock, at the option of the holder, at any time prior to maturity, unless previously repurchased or redeemed, or unless Level 3 has caused the conversion rights to expire. The 7% Convertible Senior Notes due 2015 may be converted at the initial rate of 555.5556 shares of common stock per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. This is equivalent to a conversion price of approximately $1.80 per share.

                          Upon the occurrence of a designated event (a change of control or a termination of trading), holders of the 7% Convertible Senior Notes due 2015 will have the right, subject to certain exceptions and conditions, to require Level 3 to repurchase all or any part of the 7% Convertible Senior Notes due 2015 at a repurchase price equal to 100% of the principal amount plus accrued and unpaid interest thereon (if any) to, but excluding, the designated event purchase date. In addition, if an event treated as a change in control of Level 3 occurs, Level 3 will be obligated, subject to certain conditions, to offer to purchase all of the outstanding 7% Convertible Senior Notes due 2015 at a purchase price of 100% of the principal amount, plus a "make whole" premium, by increasing the conversion rate applicable to such 7% Convertible Senior Notes due 2015.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                          Debt issuance costs of $4 million were originally capitalized and are being amortized to interest over the term of the 7% Convertible Senior Notes due 2015 using the effective interest method. The unamortized debt issuance costs were approximately $4 million at December 31, 2009.

                  6% Convertible Subordinated Notes due 2010

                          In February 2000, Level 3 Communications, Inc. 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.

                          In September 2008, the Company repurchased $32 million aggregate principal amount of Subordinated Notes 2010 at a discount to the principal amount and recognized a net gain on extinguishment of debt of $2 million. Unamortized debt issuance costs totaled less than $1 million and accrued interest paid at the time of repurchase totaled $1 million.

                          In December 2008, in connection with the issuance of the $400 million of 15% Convertible Senior Notes due 2013, the Company repurchased using $121 million in cash, through tender offers, $173 million aggregate principal amount of Subordinated Notes 2010 at a price equal to $700 per $1,000 principal amount of the notes and recognized a gain on the extinguishment of debt of approximately $51 million. The gain consisted of a $52 million cash gain, which was partially offset by $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $3 million. The gain was recorded in gain (loss) on extinguishment of debt in the consolidated statements of operations.

                          During the second quarter of 2009, the Company repurchased approximately $142 million aggregate principal amount of the Company's 6% Convertible Subordinated Notes due 2010 as part of the issuance of the 7% Convertible Senior Notes due 2015 ("Convertible 7% Notes") and recognized a loss on the extinguishment of debt of less than $1 million.

                          In the third quarter of 2009, in various transactions, the Company repurchased $8 million aggregate principal amount of 6% Convertible Subordinated Notes due 2010 and recognized a net gain on the extinguishment of debt of less than $1 million.

                          The remaining Subordinated Notes 2010 may be converted into shares of common stock of Level 3 Communications, Inc. at any time prior to the close of business on the business day immediately preceding maturity, unless previously redeemed, repurchased or Level 3 Communications, Inc. 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.

                          Debt issuance costs of $27 million were originally capitalized and are being amortized to interest expense over the term of the Subordinated Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2009.


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (11) Long-Term Debt (Continued)

                  Commercial Mortgage

                          In the third quarter of 2005, the HQ Realty, Inc., a wholly owned subsidiary of the Company, completed a refinancing of the mortgage on the Company's corporate headquarters. On September 27, 2005, HQ Realty, Inc. entered into a $70 million loan at an initial fixed rate of 6.86% through October 1, 2010, the initial repayment date as defined in the loan agreement ("Commercial Mortgage"). The term of the Commercial Mortgage will automatically extended to a final maturity date of October 1, 2015 at the election of HQ Realty, Inc. if the Commercial Mortgage is not paid in full in 2010. The Company expects to extend the term of the Commercial Mortgage to the final maturity date and therefore it is recorded in long-term debt on the consolidated balance sheet. After October 1, 2010 through maturity in 2015, the interest rate will adjust to the greater of 9.86% or the five year U.S. Treasury rate plus 300 basis points. HQ Realty, Inc. received $66 million of net proceeds after transaction costs and has deposited $7 million into restricted cash accounts as of December 31, 2009, for future facility improvements and property taxes. HQ Realty, Inc. was required to make interest only payments in the first year and began making monthly principal payments in the second year based on a 30-year amortization schedule.

                          Debt issuance costs of $1 million were capitalized and are being amortized as interest expense over the term of the Commercial Mortgage. As a result of amortization, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2009.

                          The assets of HQ 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 and its subsidiaries other than HQ Realty, Inc. are not available to satisfy the obligations of HQ Realty, Inc.

                  Capital Leases

                          As partThe Company leases certain dark fiber facilities and metro fiber under noncancelable IRU agreements that are accounted for as capital leases. All of the Broadwing transaction completed on January 3, 2007,these capital leases were assumed by the Company now includes inthrough its financial statements certain capital lease obligations of Broadwing totaling $24 million, related primarily to a metro fiber IRU agreement. Theprevious acquisitions. Interest rates on capital leases mature at various dates through 2022.approximate 8% on average as of December 31, 2009. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense.

                  Debt InstrumentsCovenant Compliance

                          At December 31, 2007, Level 32009 and 2008, the Company was in compliance with the covenants on all outstanding debt issuances.

                    Senior Secured Term Loan due 2014

                          On March 13, 2007, Level 3, as guarantor, Level 3 Financing, as borrower, Merrill Lynch Capital Corporation, as administrative agent and collateral agent, and certain other agents and certain lenders entered into a Credit Agreement, pursuant to which the lenders extended a $1.4 billion senior secured term loan ("Senior Secured Term Loan due 2014") to Level 3 Financing. The term loan matures on March 13, 2014 and has an interest rate of LIBOR plus an applicable margin of 2.25% per annum. The borrower has the option of electing one, two, three or six month LIBOR at the end of each interest rate period.

                          Interest on the Senior Secured Term Loan due 2014 accrues at the elected LIBOR rate plus 2.25% per annum and is payable in cash at the end of each LIBOR period elected in arrears, beginning July 13, 2007, provided that in the case of a six month interest period, interim interest payments are required at the end of the first three months. The interest rate was 7.493% at December 31, 2007. See discussion of the interest rate swap agreements earlier in this footnote.

                          Level 3 Financing's obligations under this term loan are, subject to certain exceptions, secured by certain assets of the Company and certain of the Company's material domestic subsidiaries that are engaged in the telecommunications business. The Company and these subsidiaries have also guaranteed the obligations of Level 3 Financing under the Senior Secured Term Loan due 2014. During the second quarter of 2007, Level 3 Communications, LLC and its material domestic subsidiaries obtained all material governmental authorizations and consents required in order for them to pledge certain of their assets and guarantee the Senior Secured Term Loan due 2014. The guarantee was entered into by Level 3 Communications, LLC and its material domestic subsidiaries on June 28, 2007.

                          The Senior Secured Term Loan due 2014 includes certain negative covenants which restrict the ability of the Company, Level 3 Financing and any restricted subsidiary to engage in certain activities. The Senior Secured Term Loan due 2014 also contains certain events of default. It does not require the Company or Level 3 Financing to maintain specific financial ratios or other financial metrics.

                          Level 3 used a portion of the original net proceeds after transaction costs to repay Level 3 Financing's $730 million Senior Secured Term Loan due 2011 under that certain credit agreement


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14)(11) Long-Term Debt (Continued)


                  dated June 27, 2006. In addition, Level 3 used a portion of the net proceeds to fund the purchase of certain of its existing debt securities.

                  Long-Term Debt issuance costs of $18 million were capitalized and are being amortized to interest expense over the term of the Senior Secured Term Loan due 2014 using the effective interest method.

                    11% Senior Notes due 2008

                          In February 2000, Level 3 Communications, Inc. 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"). As of December 31, 2007 a total of $780 million aggregate principal amount of the 11% Senior Notes had been repurchased. 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 Level 3 Communications, Inc., rankingpari passuMaturities: with all existing and future senior debt. The 11% Senior Notes cannot be prepaid by Level 3 Communications, Inc., and mature on March 15, 2008.

                          In March 2007, the Company repurchased $59 millionAggregate future contractual maturities of its outstanding 11% Senior Notes due 2008 at a price equal to $1,054.28 per $1,000 principal amount of the notes, which included $1,024.28 as the tender offer consideration and $30 as a consent payment, and recognized a $3 million loss on extinguishment of debt consisting of a $3 million cash loss and less than $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $3 million.

                          Debt issuance costs of $21 million were originally capitalized and are being amortized to interest expense over the term of the 11% Senior Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                    10.75% Senior Euro Notes due 2008

                          In February 2000, Level 3 Communications, Inc. received €488 million ($478 million when issued) of net proceeds, after debt issuance costs, from an offering of €500 million aggregate principal amount 10.75% Senior Euro Notes due 2008 ("10.75% Senior Euro Notes").

                          In March 2007, the Company repurchased $61 million (€46 million) of its outstanding 10.75% Senior Euro Notes due 2008 at a price equal to €1,061.45 per €1,000 of principal amount of the notes, which included €1,031.45 as the tender offer consideration and €30 as a consent payment, and recognized a $24 million loss on extinguishment of debt consisting of a $24 million cash loss and less than $1 million in unamortized debt issuance costs. Accrued interest paid at the time of repurchase totaled $3 million (€2 million).

                          As of December 31, 2007, a total of €496 million aggregate principal amount of the 10.75% Senior Euro Notes had been repurchased. 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 Level 3 Communications, Inc. prior to their maturity on March 15, 2008. Debt issuance costs of €12 million were originally capitalized and are being amortized over the term of the 10.75% Senior Euro Notes. As a result of amortization and debt repurchases, the net capitalized debt issuance costs have been reduced to less than €1 million at December 31, 2007


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                          The 10.75% Senior Euro Notes are senior, unsecured obligations of the Company, ranking pari passu with all existing and future senior debt.

                    12.875% Senior Discount Notes due 2010

                          In February 2000, Level 3 Communications, Inc. 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. As of December 31, 2006, a total of $187 million aggregate principal amount at maturity of the 12.875% Senior Discount Notes had been repurchased.

                          In March 2007, the Company redeemed the remaining $488 million of outstanding 12.875% Senior Notes due 2010 at a price equal to 102.146% of the principal amount and recognized a $12 million loss on extinguishment of debt consisting of a $10 million cash loss and $2 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million.

                          Debt issuance costs of $9 million were originally capitalized and were being amortized to interest expense over the term of the 12.875% Senior Discount Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to zero at December 31, 2007.

                    11.25% Senior Euro Notes due 2010

                          In February 2000, Level 3 Communications, Inc. received €293 million ($285 million when issued) of net proceeds, after debt issuance costs, from an offering of €300 million aggregate principal amount 11.25% Senior Euro Notes due 2010 ("11.25% Senior Euro Notes").

                          In March 2007, the Company redeemed the remaining $138 million (€104 million) of outstanding 11.25% Senior Euro Notes due 2010 at a price equal to €101.875 per €1,000 of principal amount and recognized a $39 million loss on extinguishment of debt consisting of a $38 million cash loss and $1 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million (less than €1 million).

                          Debt issuance costs of €7 million were originally capitalized and were being amortized over the term of the 11.25% Senior Euro Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to zero at December 31, 2007.

                    11.25% Senior Notes due 2010

                          In February 2000, Level 3 Communications, Inc. 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"). As of December 31, 2006, a total of $154 million aggregate principal amount of the 11.25% Senior Notes had been repurchased.

                          In March 2007, the Company redeemed the remaining $96 million of outstanding 11.25% Senior Notes due 2010 at a price equal to 101.875% of the principal amount and recognized a $3 million loss on extinguishment of debt consisting of a $2 million cash loss and $1 million in unamortized debt issuance costs. Accrued interest paid at the time of redemption totaled less than $1 million.

                          Debt issuance costs of $7 million were originally capitalized and were being amortized to interest expense over the term of the 11.25% Senior Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to zero at December 31, 2007.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    11.5% Senior Notes Due 2010

                          In January 2006, Level 3 Communications, Inc. issued $692 million aggregate principal amount of its 11.5% Senior Notes due 2010 in connection with the private exchange offers for a portion of its outstanding 9.125% Senior Notes due 2008, 11% Senior Notes due 2008 and 10.5% Senior Discount Notes due 2008 as described above for the 2006 Debt Exchange. The fair value of the 11.5% Senior Notes due 2010 was approximately $73 million less than the face amount of the debt. The accretion of the $73 million discount will be reflected as interest expense in future periods using the effective interest method. The 11.5% Senior Notes due 2010 were recorded at their fair value on the transaction date and will accrete to their face value at maturity.

                          The 11.5% Senior Notes are senior unsecured obligations of the Company, ranking equal in right of payment with the old notes not tendered in the exchange offers as well as all other senior unsecured obligations of the Company. The 11.5% Senior Notes due 2010 mature on March 1, 2010, and bear interest at a rate per annum equal to 11.5%. Interest on the notes is payable on March 1 and September 1 of each year, beginning on September 1, 2006. The Company may redeem some or all of the 11.5% Senior Notes due 2010 at any time on or after March 1, 2009, at 100% of their principal amount plus accrued interest.

                          In March 2007, the Company repurchased $677 million of its outstanding 11.5% Senior Notes due 2010 at a price equal to $1,115.26 per $1,000 principal amount of the notes, which included $1,085.26 as the tender offer consideration and $30 as a consent payment, and recognized a $141 million loss on extinguishment of debt consisting of a $78 million cash loss and $63 million in unamortized debt issuance costs and unamortized discount. Accrued interest paid at the time of repurchase totaled $3 million. As of December 31, 2007, a total of $13 million aggregate principal amount remains outstanding.

                          Debt issuance costs of $11 million were originally capitalized and were being amortized to interest expense over the term of the 11.5% Senior Notes due 2010. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                    10.75% Senior Notes due 2011

                          In October 2003, Level 3 Financing received $486 million of net proceeds from a private placement offering of $500 million aggregate principal amount of its 10.75% Senior Notes due 2011 ("10.75% Senior Notes"). As of December 31, 2006, a total of $497 million aggregate principal amount of the 10.75% Senior Notes had been redeemed. Interest on the notes accrues at 10.75% per year and is payable in arrears on April 15 and October 15 each year in cash. These notes are guaranteed by Level 3 Communications, LLC and Level 3 Communications, Inc. (See Note 21).


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                          The 10.75% Senior Notes are subject to redemption at the option of Level 3 Financing, in whole or in part, at any time or from time to time on or after October 15, 2007, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning October 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2007 105.375%
                  2008 102.688%
                  2009 and thereafter 100.000%

                          In connection with the tender offer and related consent solicitation on December 27, 2006, Level 3 Financing entered into a Supplemental Indenture, which modified the original indenture dated as of October 1, 2003 ("10.75% Note Indenture"), among Level 3, as Guarantor, Level 3 Financing, as issuer, and The Bank of New York, as Trustee, relating to the 10.75% Notes. Pursuant to the Supplemental Indenture, the 10.75% Note Indenture was amended to eliminate substantially all of the covenants, certain repurchase rights and certain events of default and related provisions contained in the 10.75% Note Indenture.

                          The 10.75% Senior Notes are senior, unsecured obligations of Level 3 Financing, rankingpari passu with all existing and future senior unsecured indebtedness of Level 3 Financing.

                          Debt issuance costs of $14 million were originally capitalized and are being amortized to interest expense over the term of the 10.75% Senior Notes. As a result of amortization and the repurchase transaction, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                    Floating Rate Senior Notes due 2011

                          On March 14, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, as borrower, entered into an indenture with the Bank of New York, as trustee, and issued $150 million aggregate principal amount of floating rate senior notes due 2011 ("Floating Rate Senior Notes due 2011") in a private offering. After transaction costs, the Company received net proceeds associated with this offering of $142 million.

                          In March 2007, the Company repurchased $144 million of its outstanding Floating Rate Senior Notes due 2011 at a price equal to $1,080 per $1,000 principal amount of the notes, which included $1,050 as the tender offer consideration and $30 as a consent payment, and recognized an $18 million loss on extinguishment of debt consisting of a $12 million cash loss and $6 million in unamortized debt issuance costs and unamortized discount. Accrued interest paid at the time of repurchase totaled $8 million.

                          As of December 31, 2007, a total of $6 million aggregate principal amount remains outstanding. The Floating Rate Senior Notes due 2011 rank equal in right of payment with all other senior unsecured obligations of Level 3 Financing and have an initial interest rate equal to the six month London Interbank Offered Rate ("LIBOR"), plus 6.375%, which will be reset semi-annually. Interest on the notes is payable on March 15 and September 15 of each year, beginning on September 15, 2006. The interest rate was 11.88% at December 31, 2007. The Floating Rate Senior Notes due 2011 were priced at 96.782% of par and will mature on March 15, 2011. The discount, after the debt repurchase is


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  less than $1 million and is reflected as a reduction in long-term debt and is being amortized as interest expense over the term of the Floating Rate Senior Notes due 2011 using the effective interest method. These notes are guaranteed by Level 3 Communications, Inc.capital leases (excluding issue discounts, premiums and Level 3 Communications, LLC (See Note 21).

                          The Floating Rate Senior Notes due 2011 are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after March 15, 2008 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning March 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2008 102.0%
                  2009 101.0%
                  2010 100.0%

                          Debt issuance costs of $3 million were capitalized and are being amortized over the term of the Floating Rate Senior Notes due 2011 using the effective interest method. As a result of amortization and the debt repurchase, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                    12.25% Senior Notes due 2013

                          On March 14, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, as borrower, entered into an indenture with the Bank of New York, as trustee, and issued $250 million aggregate principal amount of 12.25% senior notes due 2013 ("12.25% Senior Notes due 2013") in a private offering.

                          On April 6, 2006, the Company issued $300 million aggregate principal amount of 12.25% Senior Notes due 2013 in a private offering. These notes together with the $250 million aggregate principal amount of 12.25% Senior Notes due 2013 issued on March 14, 2006 are treated under the same indenture as a single series of notes. The Company received net proceeds of $538 million associated with the 12.25% Senior Notes due 2013.

                          The 12.25% Senior Notes due 2013 are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. These notes are guaranteed by Level 3 Communications, Inc. and Level 3 Communications, LLC (See Note 21). The notes will mature on March 15, 2013. Interest on the notes accrues at 12.25% per year and is payable on March 15 and September 15 of each year, beginning on September 15, 2006. The $250 million of 12.25% Senior Notes due 2013 issued on March 14, 2006 were priced at 96.618% of par. The $300 million of 12.25% Senior Notes due 2013 issued on April 6, 2006 were priced at 102% of par. The resulting net discount for the two issuances of approximately $2 million is reflected as a reduction in long-term debt and is being amortized as interest expense over the remaining term of the 12.25% Senior Notes due 2013 using the effective interest method.

                          The 12.25% Senior Notes due 2013 are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after March 15, 2010 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  interest thereon to the redemption date, if redeemed during the twelve months beginning March 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2010 106.125%
                  2011 103.063%
                  2012 100.000%

                          The 12.25% Senior Notes due 2013 contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $11 million were capitalized and are being amortized over the term of the 12.25% Senior Notes due 2013. As a result of amortization, the capitalized debt issuance costs have been reduced to $10 million at December 31, 2007.

                    9.25% Senior Notes Due 2014

                          On October 30, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, Inc. as borrower, received $588 million of net proceeds after transaction costs, from a private offering of $600 million aggregate principal amount of its 9.25% Senior Notes due 2014 ("9.25% Senior Notes Due 2014"). On December 13, 2006, Level 3 Communications, Inc., as guarantor and Level 3 Financing, Inc. as borrower, received $661 million of net proceeds after transaction costs and accrued interest, for a second offering of $650 million aggregate principal amount of 9.25% Senior Notes due 2014. These notes together with the $600 million aggregate principal amount of 9.25% Senior Notes due 2014 issued on October 30, 2006 were issued under the same indenture and will be treated as a single series of notes. The Company received total net proceeds of $1.239 billion (excluding prepaid interest).

                          The 9.25% Senior Notes due 2014 are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. These notes are guaranteed by Level 3 Communications, Inc. (See Note 21). The notes will mature on November 1, 2014. Interest on the 9.25% Senior Notes Due 2014 accrues at 9.25% interest per year and is payable semi-annually in cash on May 1 and November 1 beginning May 1, 2007. The $600 million of 9.25% Senior Notes due 2014 issued on October 30, 2006 were priced at par. The $650 million of 9.25% Senior Notes due 2014 issued on December 13, 2006 were priced at 101.75% of par plus accrued interest from October 30, 2006, representing an effective yield of 8.86% to the purchasers of these senior notes. The resulting premium of the two issuances of approximately $11 million is reflected as an increase to long-term debt and is being amortized as a reduction to interest expense over the remaining term of the 9.25% Senior Notes due 2014 using the effective interest method. As of December 31, 2007, the premium remaining was approximately $10 million.

                          A portion of the proceeds were used to redeem $497 million of the Company's 10.75% Senior Notes Due 2008 on December 27, 2006.

                          The 9.25% Senior Notes Due 2014 are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after November 1, 2010 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  interest thereon to the redemption date, if redeemed during the twelve months beginning November 1, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2010 104.625%
                  2011 102.313%
                  2012 100.000%

                          At any time or from time to time on or prior to November 1, 2009, Level 3 Financing may redeem up to 35% of the original aggregate principal amount of the 9.25% Senior Notes Due 2014 at a redemption price equal to 109.25% of the principal amount of those notes so redeemed, plus accrued and unpaid interest thereon (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), with the net cash proceeds contributed to the capital of Level 3 Financing of one or more private placements to persons other than affiliates of Level 3 or underwritten public offerings of common stock of Level 3 resulting, in each case, in gross proceeds of at least $100 million in the aggregate; provided, however, that at least 65% of the original aggregate principal amount of the 9.25% Senior Notes Due 2014 would remain outstanding immediately after giving effect to such redemption. Any such redemption shall be made within 90 days of such private placement or public offering upon not less than 30 nor more than 60 days' prior notice.

                          The 9.25% Senior Notes due 2014 contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $23 million were capitalized and are being amortized over the term of the 9.25% senior Notes Due 2014. As a result of amortization, the capitalized debt issuance costs have been reduced to $21 million at December 31, 2007.

                    Floating Rate Senior Notes Due 2015 and 8.75% Senior Notes Due 2017

                          On February 14, 2007, Level 3 Financing received $982 million of net proceeds after transaction costs, from a private offering of $700 million aggregate principal amount of its 8.75% Senior Notes due 2017 (the "8.75% Senior Notes") and $300 million aggregate principal amount of its Floating Rate Senior Notes due 2015 (the "2015 Floating Rate Senior Notes"). The 8.75% Senior Notes and the 2015 Floating Rate Senior Notes are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. Level 3 Communications, Inc. and Level 3 Communications, LLC have guaranteed the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes. Interest on the 8.75% Senior Notes accrues at 8.75% interest per year and is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 8.75% Senior Notes will be due on February 15, 2017. Interest on the 2015 Floating Rate Senior Notes accrues at LIBOR plus 3.75% per annum, reset semi-annually. The interest rate was 9.15% at December 31, 2007. Interest on the 2015 Floating Rate Senior notes is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 2015 Floating Rate Senior Notes will be due on February 15, 2015.

                          At any time prior to February 15, 2012, Level 3 Financing may redeem all or a part of the 8.75% Senior Notes upon not less than 30 nor more than 60 days' prior notice, at a redemption price equal to 100% of the principal amount of the 8.75% Senior Notes so redeemed plus the 8.75% Applicable


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  Premium as of, and accrued and unpaid interest thereon (if any) to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

                          With respect to the 8.75% Senor Notes, "8.75% Applicable Premium" means on any redemption date, the greater of (1) 1.0% of the principal amount of such 8.75% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) 104.375% of the principal amount of such 8.75% Senior Notes plus (ii) all required interest payments due on such 8.75% Senior Notes through February 15, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 8.75% Senior Notes) as of such redemption date plus 50 basis points, over (b) the principal amount of such 8.75% Senior Notes.

                          The 8.75% Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2012 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2012 104.375%
                  2013 102.917%
                  2014 101.458%
                  2015 100.000%

                          At any time or from time to time on or prior to February 15, 2010, Level 3 Financing may redeem up to 35% of the original aggregate principal amount of the 8.75% Senior Notes at a redemption price equal to 108.75% of the principal amount of the 8.75% Senior Notes so redeemed, plus accrued and unpaid interest thereon (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), with the net cash proceeds contributed to the capital of Level 3 Financing of one or more private placements to persons other than affiliates of Level 3 or underwritten public offerings of common stock of Level 3 resulting, in each case, in gross proceeds of at least $100 million in the aggregate; provided, however, that at least 65% of the original aggregate principal amount of the 8.75% Senior Notes would remain outstanding immediately after giving effect to such redemption. Any such redemption shall be made within 90 days of such private placement or public offering upon not less than 30 nor more than 60 days' prior notice.

                          At any time prior to February 15, 2009, Level 3 Financing may redeem all or a part of the Floating Rate Senior Notes, upon not less than 30 nor more than 60 days' prior notice, at a redemption price equal to 100% of the principal amount of the Floating Rate Senior Notes so redeemed plus the Applicable Premium as of, and accrued and unpaid interest thereon (if any) to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

                          With respect to the Floating Rate Senior Notes, "Applicable Premium" means, on any redemption date, the greater of (1) 1.0% of the principal amount of such Floating Rate Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of 102% of


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  the principal amount of such Floating Rate Senior Notes, plus (ii) all required interest payments due on such Floating Rate Senior Notes through February 15, 2009 (excluding accrued but unpaid interest to the redemption date), such interest payments to be determined in accordance with the indenture governing the Floating Rate Senior Notes assuming that LIBOR in effect on the date of the applicable redemption notice would be the applicable LIBOR in effect through February 15, 2009, computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the Floating Rate Senior Notes) as of such redemption date plus 50 basis points, over (b) the principal amount of such Floating Rate Senior Notes.

                          The Floating Rate Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2009 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2009 102.0%
                  2010 101.0%
                  2011 100.0%

                          At any time or from time to time on or prior to February 15, 2009, Level 3 Financing may redeem up to 35% of the original aggregate principal amount of the Floating Rate Senior Notes at a redemption price equal to 100.0% of the principal amount of the Floating Rate Senior Notes so redeemed, plus a premium equal to the interest rate on the Floating Rate Senior Notes applicable on the date that notice of the redemption is given, plus accrued and unpaid interest thereon (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), with the net cash proceeds contributed to the capital of Level 3 Financing of one or more private placements to persons other than affiliates of Level 3 or underwritten public offerings of common stock of Level 3 resulting, in each case, in gross proceeds of at least $100 million in the aggregate; provided, however, that at least 65% of the original aggregate principal amount of the Floating Rate Senior Notes would remain outstanding immediately after giving effect to such redemption. Any such redemption shall be made within 90 days of such private placement or public offering upon not less than 30 nor more than 60 days' prior notice.

                          The 8.75% Senior Notes and the 2015 Floating Rate Senior Notes contain certain covenants, which among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates.

                          Debt issuance costs of approximately $16 million were capitalized and are being amortized over the term of the 8.75% Senior Notes due 2017. As a result of amortization, the capitalized debt issuance costs have been reduced to approximately $15 million at December 31, 2007.

                          Debt issuance costs of approximately $6 million were capitalized and are being amortized over the term of the Floating Rate Senior Notes due 2015. As a result of amortization, the capitalized debt issuance costs have been reduced to approximately $5 million at December 31, 2007.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    2.875% Convertible Senior Notes due 2010

                          In July 2003, Level 3 Communications, Inc. completed the offering of $374 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010 ("2.875% Convertible Senior Notes") in an underwritten public offering pursuant to the Company's shelf registration statement. Interest on the notes accrues at 2.875% per year and is payable semi-annually in arrears in cash on January 15 and July 15, beginning January 15, 2004. The 2.875% Convertible Senior Notes are senior, unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured debt. The 2.875% Convertible Senior Notes contain limited covenants, which restrict additional liens on assets of the Company.

                          The 2.875% Convertible Senior Notes are convertible into shares of the Company's common stock at a conversion rate of $7.18 per share, subject to certain adjustments. On or after July 15, 2007, Level 3, at its option, may redeem for cash all or a portion of the notes. Level 3 may exercise this option only if the current market price for the Level 3 common stock for at least 20 trading days within any 30 consecutive trading day period exceeds prices ranging from 170% of the conversion price on July 15, 2007 decreasing to 150% of the conversion price on or after July 15, 2009. Level 3 would also be obligated to pay the holders of the redeemed notes a cash amount equal to the present value of all remaining scheduled interest payments.

                          Debt issuance costs of $13 million were originally capitalized and are being amortized to interest expense over the term of the 2.875% Convertible Senior Notes. As a result of amortization, the capitalized debt issuance costs have been reduced to $4 million at December 31, 2007.

                    5.25% Convertible Senior Notes due 2011

                          On December 2, 2004, Level 3 Communications, Inc. completed the offering of $345 million aggregate principal amount of its 5.25% Convertible Senior Notes due 2011 ("5.25% Convertible Senior Notes") in a private offering. Interest on the notes accrues at 5.25% per year and is payable semi-annually in arrears in cash on June 15 and December 15, beginning June 15, 2005. The 5.25% Convertible Senior Notes are senior, unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured debt of Level 3 Communications, Inc. The 5.25% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          The 5.25% Convertible Senior Notes are convertible, at the option of the holders, into shares of the Company's common stock at a conversion rate of $3.98 per share, subject to certain adjustments. Upon conversion, the Company will have the right to deliver cash in lieu of shares of its common stock, or a combination of cash and shares of common stock. In addition, holders of the 5.25% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount plus accrued interest and a make whole premium.

                          On or after December 15, 2008, Level 3, at its option, may redeem for cash all or a portion of the notes. The 5.25% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than 60 nor less than 30 days' notice,


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  on or after December 15, 2008, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning December 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2008 102.250%
                  2009 101.500%
                  2010 and thereafter 100.750%

                          In connection with the issuance of the notes, Level 3 used approximately $62 million of the net proceeds of the offering to enter into convertible note hedge and warrant transactions with respect to the Company's common stock to reduce the potential dilution from conversion of the notes. Level 3 used the remainder of the net proceeds from this offering to fund repurchases of its existing debt securities due in 2008.

                          Under the terms of the convertible note hedge arrangement (the "Convertible Note Hedge") with Merrill Lynch International ("Merrill"), Level 3 paid $125 million for a forward purchase option contract under which it is entitled to purchase from Merrill a fixed number of shares of Level 3 common stock (at a current price per share of $3.98). In the event of the conversion of the notes, this forward purchase option contract allows the Company to purchase, at a fixed price equal to the implicit conversion price of shares issued under the convertible notes, a number of shares equal to the shares that Level 3 issues to a note holder upon conversion. Settlement terms of this forward purchase option allow the Company to elect cash or share settlement based on the settlement option it chooses in settling the conversion feature of the notes. The Company accounted for the Convertible Note Hedge pursuant to the guidance in EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF No. 00-19"). Accordingly, the $125 million purchase price of the forward stock purchase option contract was recorded as a reduction to consolidated stockholders' equity.

                          Level 3 also sold to Merrill a warrant (the "Warrant") to purchase shares of Level 3 common stock. The Warrant is currently exercisable for 86,596,380 shares of Level 3 common stock at a current exercise price of $6.00 per share. Level 3 received $63 million cash from Merrill in return for the sale of this forward share purchase option contract. Merrill cannot exercise the Warrant unless and until a conversion event occurs. Level 3 has the option of settling the Warrant in cash or shares of Level 3 common stock. The Company accounted for the sale of the Warrant as the sale of a permanent equity instrument pursuant to the guidance in EITF No. 00-19. Accordingly, the $63 million sales price of the forward stock purchase option contract was recorded as an increase to consolidated stockholders' equity.

                          The Convertible Note Hedge and the Warrant economically allow Level 3 to acquire sufficient shares of common stock from Merrill to meet its obligation to deliver common stock upon conversion by the holder, unless the common stock price exceeds $6.00. When the fair value of the Level 3 common stock exceeds such price, the contracts have an offsetting economic impact and, accordingly, will no longer be effectiveadjustments) were as a hedge of the dilutive impact of possible conversion.

                          Debt issuance costs of $11 million were originally capitalized and are being amortized to interest expense over the term of the 5.25% Convertible Senior Notes. As a result of amortization, debt issuance costs were $6 million at December 31, 2007.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    10% Convertible Senior Notes due 2011

                          In April 2005, Level 3 Communications, Inc. received $877 million of net proceeds, after giving effect to offering expenses, from an offering of $880 million aggregate principal amount of its 10% Convertible Senior Notes due 2011 ("10% Convertible Senior Notes") to institutional investors. Interest on the notes accrues at 10% per year and will be payable semi-annually on May 1 and November 1 beginning on November 1, 2005. The 10% Convertible Senior Notes are unsecured unsubordinated obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future unsecured unsubordinated debt of Level 3 Communications, Inc. The 10% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          In January 2007, in two separate transactions, Level 3 completed the exchange of $605 million in aggregate principal amount of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3's common stock. The shares of the Company's common stock issued pursuant to these announced exchanges are exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. The Company recognized a $177 million loss on extinguishment of debt for the exchanges. Included in the loss was approximately $1 million of unamortized debt issuance costs.

                          The remaining 10% Convertible Senior Notes will be convertible by holders at any time after January 1, 2007 (or sooner if certain corporate events occur) into shares of Level 3 common stock at a conversion price of $3.60 per share (subject to adjustment in certain events). This is equivalent to a conversion rate of approximately 277.77 shares per $1,000 principal amount of notes. In addition, holders of the 10% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount of the notes plus accrued interest and a make whole premium.

                          On or after May 1, 2009, Level 3, at its option, may redeem for cash all or a portion of the notes. The 10% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than sixty nor less than thirty days' notice, on or after May 1, 2009, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning May 1, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2009 103.330%
                  2010 and thereafter 101.670%

                          Debt issuance costs of $3 million were originally capitalized and are being amortized to interest expense over the term of the 10% Convertible Senior Notes. As a result of amortization and the debt repurchase, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                    3.5% Convertible Senior Notes due 2012

                          On June 13, 2006 Level 3 Communications, Inc. received $326 million of net proceeds, after giving effect to offering expenses, from a public offering of $335 million aggregate principal amount of its 3.5% Convertible Senior Notes due 2012 ("3.5% Convertible Senior Notes"). The 3.5% Convertible Senior Notes were priced at 100% of the principal amount. The notes are senior unsecured obligations


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                  of the Company, ranking equal in right of payment with all the Company's existing and future unsubordinated indebtedness. The 3.5% Convertible Senior Notes will mature on June 15, 2012. Interest on the notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2006. The 3.5% Convertible Senior Notes contain limited covenants which restrict additional liens on assets of the Company.

                          At any time before the close of business on June 15, 2012, the 3.5% Convertible Senior Notes are convertible by holders into shares of Level 3's common stock at a conversion price of $5.46 per share (subject to adjustment in certain events). This is equivalent to a conversion rate of approximately 183.1502 shares of common stock per $1,000 principal amount of these notes. Upon conversion, the Company will have the right to deliver cash in lieu of shares of its common stock, or a combination of cash and shares of common stock. In addition, holders of the 3.5% Convertible Senior Notes will have the right to require the Company to repurchase the notes upon the occurrence of a change in control, as defined, at a price of 100% of the principal amount of the notes plus accrued interest. In addition, if a holder elects to convert its notes in connection with certain changes in control, Level 3 could be required to pay a make whole premium by increasing the number of shares deliverable upon conversion of the notes.

                          The 3.5% Convertible Senior Notes are subject to redemption at the option of Level 3, in whole or in part, at any time or from time to time, on not more than 60 nor less than 30 days' notice, on or after June 15, 2010, plus accrued and unpaid interest thereon (if any) to the redemption date, if redeemed during the twelve months beginning June 15, of the years indicated below:

                  Year
                  		 Redemption Price
                  		 
                  2010 101.17%
                  2011 100.58%

                          Level 3 used a portion of the net proceeds from this offering and its common stock offering completed in the second quarter of 2006 to redeem certain debt securities maturing in 2008. The remaining proceeds were used for acquisitions and for general corporate purposes, including working capital and capital expenditures.

                          Debt issuance costs of $9 million were originally capitalized and are being amortized to interest expense over the term of the 3.5% Convertible Senior Notes. As a result of amortization, the capitalized debt issuance costs have been reduced to approximately $7 million at December 31, 2007.

                    9% Convertible Senior Discount Notes due 2013

                          In October 2003, Level 3 completed the exchange of approximately $352 million (book value) of debt and accrued interest outstanding, as of October 24, 2003, for approximately 20 million shares of Level 3 common stock and $208 million (book value) of a new issue of 9% Convertible Senior Discount Notes due 2013.

                          Level 3 Communications, Inc. issued $295 million aggregate principal amount at maturity of 9% Convertible Senior Discount Notes due 2013. Interest on the 9% Convertible Senior Discount Notes accretes at a rate of 9% per annum, compounded semiannually, to an aggregate principal amount of $295 million by October 15, 2007. Cash interest did not accrue on the 9% Convertible Senior Discount Notes prior to October 15, 2007. Commencing October 15, 2007, interest on the 9% Convertible Senior


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)


                  Discount Notes accrues at the rate of 9% per annum and is payable in cash semiannually in arrears. Accreted interest expense of $20 million for the year ended December 31, 2007 on the 9% Convertible Senior Discount Notes due 2013 was added to long-term debt.

                          The 9% Convertible Senior Discount Notes are convertible into shares of the Company's common stock at a conversion rate of $9.99 per share, subject to certain adjustments. The total number of shares issuable upon conversion is approximately 30 million shares. On or after October 15, 2008, Level 3, at its option, may redeem for cash all or a portion of the notes. Level 3 may exercise this option only if the current market price for at least 20 trading days within any 30 consecutive trading day period exceeds 140% of the conversion price on October 15, 2008. This amount will be decreased to 130% and 120% on October 15, 2008 and 2010, respectively, if the initial holders sell greater than 33.33% of the notes. Level 3 is also obligated to pay the holders of the redeemed notes a cash amount equal to the present value of all remaining scheduled interest payments.

                          The 9% Convertible Senior Discount Notes will be subject to conversion into common stock at the option of the holder, in whole or in part, at any time or from time to time after October 15, 2007 at a conversion rate of 100.09 shares per $1,000 of face value of the debt plus accrued and unpaid interest thereon to the conversion date.

                          These notes are senior unsecured obligations of Level 3 Communications, Inc., rankingpari passu with all existing and future senior unsecured indebtedness of Level 3 Communications, Inc.

                    6% Convertible Subordinated Notes due 2009

                          In September 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 2009"). The Subordinated Notes 2009 are unsecured and subordinated to all existing and future senior indebtedness of the Company. Interest on the Subordinated 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 Subordinated 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 previously redeemed, repurchased or 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. As of December 31, 2007, less than $1 million of debt had been converted into shares of common stock. As of December 31, 2007, a total of $461 million aggregate principal amount of the Subordinated Notes 2009 had been repurchased or exchanged for common stock.

                          Debt issuance costs of $25 million were originally capitalized and are being amortized to interest expense over the term of the Subordinated Notes 2009. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to $2 million at December 31, 2007.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (14) Long-Term Debt (Continued)

                    6% Convertible Subordinated Notes due 2010

                          In February 2000, Level 3 Communications, Inc. 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 Level 3 Communications, Inc. at any time prior to the close of business on the business day immediately preceding maturity, unless previously redeemed, repurchased or Level 3 Communications, Inc. 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.

                          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. As of December 31, 2007, no debt had been converted into shares of common stock. As of December 31, 2007, a total of $350 million aggregate principal amount of the Subordinated Notes 2010 had been repurchased.

                          Debt issuance costs of $27 million were originally capitalized and are being amortized to interest expense over the term of the Subordinated Notes. As a result of amortization and debt repurchases, the capitalized debt issuance costs have been reduced to $4 million at December 31, 2007.

                    Commercial Mortgage

                          In the third quarter of 2005, the Company completed a refinancing of the mortgage on its corporate headquarters. On September 27, 2005, HQ Realty, Inc. entered into a $70 million loan at an initial fixed rate of 6.86% through 2010, the anticipated repayment date as defined in the loan agreement ("CBRE Commercial Mortgage"). After 2010 through maturity in 2015, the interest rate will adjust to the greater of 9.86% or the five year U.S. Treasury rate plus 300 basis points. HQ Realty, Inc. received $66 million of net proceeds after transaction costs and has deposited $6 million into restricted cash accountsfollows as of December 31, 20072009 (in millions):

                  2010

                  		 $154 

                  2011

                  		  377 

                  2012

                  		  298 

                  2013

                  		  1,248 

                  2014

                  		  2,934 

                  Thereafter

                  		  1,558 
                      

                  		 $6,569 
                      

                          See Note 17—Subsequent Events for future facility improvements and property taxes. HQ Realty, Inc. was requiredinformation regarding our financing activities subsequent to make interest only payments in the first year and began making monthly principal payments in the second year based on a 30-year amortization schedule.

                          Debt issuance costs of $1 million were capitalized and are being amortized as interest expense over the term of the CBRE Commercial Mortgage. As a result of amortization, the capitalized debt issuance costs have been reduced to less than $1 million at December 31, 2007.

                          The assets of HQ 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 and its subsidiaries other than HQ Realty, Inc. are not available to satisfy the obligations of HQ Realty, Inc.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                  2009.

                  (14) Long-Term Debt (Continued)

                    Capital Leases

                          As part of the Progress Telecom transaction completed on March 20, 2006, the Company assumed certain capital lease obligations of Progress Telecom for IRU dark fiber facilities of $9 million. The capital leases mature at various dates through 2021. As of December 31, 2007 the capital lease obligation is approximately $8 million.

                          As part of the ICG Communications transaction on May 31, 2006, the Company assumed certain capital lease obligations of ICG Communications for IRU dark fiber facilities of $3 million. The capital leases mature at various dates through 2018. As of December 31, 2007 the capital lease obligation is approximately $3 million.

                          As part of the TelCove transaction completed on July 24, 2006, the Company assumed certain capital lease obligations of TelCove primarily for IRU dark fiber facilities of $13 million. The capital leases mature at various dates through December 2030. As of December 31, 2007 the capital lease obligation is approximately $7 million.

                          As part of the Broadwing transaction completed on January 3, 2007, the Company assumed certain capital lease obligations of Broadwing totaling $24 million, related primarily to a metro fiber IRU agreement. The capital leases mature at various dates through 2022. As of December 31, 2007 the capital lease obligations is approximately $22 million.

                  Future Debt Maturities:

                          The Company's contractual obligations as of December 31, 2007 related to debt, including capital leases and excluding issue discounts and fair value adjustments, will require estimated cash payments during each of the five succeeding years as follows: 2008—$32 million; 2009—$366 million; 2010—$971 million, 2011—$631 million, 2012—$337 million and $4,520 million thereafter.

                  (15) Asset Retirement Obligations

                          Asset retirement obligation accretion expense of $28 million, $24 million and $13 million was recorded during the years ended December 31, 2007, 2006 and 2005, respectively; resulting in total asset retirement obligations, including reclamation costs for the coal business, of $231 million and $202 million at December 31, 2007 and 2006, respectively. Total asset retirement obligation as of December 31, 2007 includes $62 million related to WilTel, ICG Communications, Looking Glass and Broadwing. The total asset retirement obligation as of December 31, 2006 included $46 million of asset retirement obligation related to WilTel, ICG Communications and Looking Glass.

                          Expense of $25 million related to the communications business was recorded in selling, general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2007. In addition, expense of $4 million related to the Company's coal mining business was recorded in cost of revenue on the consolidated statement of operations for the year ended December 31, 2007. This was partially offset by less than $1 million of gains recognized on settlement of obligations attributable to the use of internal resources rather than third parties to perform reclamation work. In addition, the coal mining business incurred $4 million of additional reclamation liabilities as a result of expanded mining activities and incurred $3 million of costs for work performed to remediate previously mined properties.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (15) Asset Retirement Obligations (Continued)

                          Expense of $21 million related to the communications business was recorded in selling, general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2006. In addition, expense of $3 million related to the Company's coal mining business was recorded in cost of revenue on the consolidated statement of operations for the year ended December 31, 2006. This was partially offset by less than $1 million of gains recognized on settlement of obligations attributable to the use of internal resources rather than third parties to perform reclamation work. In addition, the coal mining business incurred $2 million of additional reclamation liabilities as a result of expanded mining activities and incurred $3 million of costs for work performed to remediate previously mined properties.

                          Also in 2006, Level 3 recorded a reduction in depreciation expense totaling approximately $5 million as a result of a change in the estimated future asset retirement obligation costs associated with its 50% interest in the Decker coal mine. In accordance with SFAS No. 143, Level 3 recorded the full effect of the change in estimate in the fourth quarter of 2006.

                          Expense of $10 million related to the communications business was recorded in selling, general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2005. In addition, expense of $3 million related to the Company's coal mining business was recorded in cost of revenue on the consolidated statement of operations for the year ended December 31, 2005. In addition, the coal mining business incurred $3 million of additional reclamation liabilities as a result of expanded mining activities and incurred $2 million of costs for work performed to remediate previously mined properties.

                          The Company had noncurrent restricted cash of approximately $61 million and $59 million set aside to fund the reclamation liabilities at December 31, 2007 and 2006, respectively.

                  (16)(12) Employee Benefit Plans

                          The Company adopted the recognition provisions of SFAS No. 123records non-cash compensation expense for its outperform stock appreciation rights that it refers to as outperform stock options ("OSO"), restricted stock units and shares, 401(k) matching contributions, discretionary 401(k) contributions paid in 1998. Under SFAS No. 123, the fair value of an option orshares and other stock-based compensation. Total non-cash compensation (as computedexpense related to these equity awards was $59 million in accordance with accepted option valuation models) on the date of grant was amortized over the vesting periods2009, $78 million in 2008 and $122 million in 2007.

                          The following table summarizes non-cash compensation expense and capitalized non-cash compensation for each of the option or stock grant.

                          Although the recognition of the value of the instruments results in compensation expense in an entity's financial statements, the expense differs from other compensation expense in that these charges may not be settled in cash, but rather, are generally settled through issuance of common stock.

                          Beginning January 1, 2006, the Company adopted SFAS No. 123R. SFAS No. 123R requires that estimated forfeitures be factored in the amount of expense recognized for awards that are not fully vested. The Company has historically recorded the effect of forfeitures of equity awards as they occur. The effect of applying the change from the original provisions of SFAS No. 123 on the Company's results of operations, basic and diluted earnings per share and cash flows for the yearthree years ended December 31, 2006 was not material.2009 (in millions):

                   
                  		 2009 2008 2007 

                  OSO

                  		 $7 $13 $35 

                  Restricted Stock Units and Shares

                  		  23  36  42 

                  401(k) Match Expense

                  		  16  30  30 

                  401(k) Discretionary Grant Plan

                  		  —  —  16 

                  Restricted Stock Unit Bonus Grant

                  		  14  —  — 
                          

                  		  60  79  123 

                  Capitalized Noncash Compensation

                  		  (1) (1) (1)
                          

                  		 $59 $78 $122 
                          

                          OSOs and restricted stock units and shares are granted under the Company's 1995 Stock Plan, as amended, which term extends through September 25, 2010. The adoption of SFAS No. 123 resulted in material non-cash charges to operations since its adoption in 1998, and the adoption of SFAS No. 123R on January 1, 2006 continues to result in material non-cash charges to operations in the future. The amount of the non-cash charges will be dependent upon a number of factors, including the number of grants, the fair value of each grant estimated at the time of its award and the number of grants that ultimately vest.


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (16) Employee Benefit Plans (Continued)

                          The Company recognized in loss from continuing operations a total of $122 million, $84 million and $51 million of non-cash compensation in 2007, 2006 and 2005, respectively. Included in discontinued operations is non-cash compensation expense of zero, $2 million and $6 million in 2007, 2006 and 2005, respectively.

                          The CompanyCompany's 1995 Stock Plan, as amended, provides anfor accelerated vesting of stock awards upon retirement if an employee meets certain age and years of service requirements and certain other requirements. Under SFAS No. 123R,the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired. The Company recognized $11 million of non-cash compensation expense in 2007 for employees that met the age and


                  Table of Contents


                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (12) Employee Benefit Plans (Continued)


                  years of service requirements for accelerated vesting at retirement.

                          During the second quarterretirement of 2006, the October 2005 and January 2006 grants of Outperform Stock Option ("OSO") units were revalued using May 15, 2006 as the grant date, in accordance with SFAS No. 123R, and resulted in an additional $6$5 million in non-cash compensation expense. As stated2009, $7 million in the Company's proxy materials for its 2006 Annual Meeting of Stockholders, over the course of the years since April 1, 1998, the compensation committee of the Company's Board of Directors had administered the 1995 Stock Plan under the belief that the action of the Company's Board of Directors to amend2008 and restate the plan effective April 1, 1998 had the effect of extending the original term of the Plan to April 1, 2008. After a further review of the terms of the plan, however, the compensation committee determined that an ambiguity could have existed that may have resulted$11 million in an interpretation that the expiration date of the plan was September 25, 2005. To remove any ambiguity, the Board of Directors sought the approval of the Company's stockholders to amend the plan to extend the term of the plan by five years to September 25, 2010. This approval was obtained at the 2006 Annual Meeting of Stockholders held on May 15, 2006.

                          The following table summarizes non-cash compensation expense and capitalized non-cash compensation for each of the three years ended years ended December 31, 2007.

                   
                  		 2007
                  		 2006
                  		 2005
                  		 
                   
                  		 (dollars in millions)

                  		 
                  OSO $35 $38 $18 
                  Restricted Stock  42  20  19 
                  Shareworks Match Plan  —  —  (2)
                  401(k) Match Expense  30  18  15 
                  401(k) Discretionary Grant Plan  16  12  9 
                    
                  		 
                  		 
                  		 
                     123  88  59 
                  Capitalized Noncash Compensation  (1) (2) (2)
                    
                  		 
                  		 
                  		 
                     122  86  57 
                  Discontinued Operations  —  (2) (6)
                    
                  		 
                  		 
                  		 
                    $122 $84 $51 
                    
                  		 
                  		 
                  		 

                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (16) Employee Benefit Plans (Continued)

                    Outperform Stock Options

                          In April 1998, the Company adopted an outperform stock option ("OSO")The Company's 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 directly aligns 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 Company's common stock price outperforms the S&P 500® Index during the life of the grant. 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 500® Index for grants awarded before September 30, 2005), the value received for awards under the OSO plan is based on a formula involving a multiplier related to the level by which the Company's common stock outperforms the S&P 500500® Index. To the extent that Level 3's common stock outperforms the S&P 500500® Index, the value of OSO units to a holder may exceed the value of nonqualified stock options.

                          The initial strike price, as determined on the day prior to the OSO grant date, is adjusted over time (the "Adjusted Strike Price"), until the exercise date. The adjustment is an amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the date of exercise. The value of the OSO increases for increasing levels of outperformance. OSO units outstanding at December 31, 2006 have a multiplier range from zero to four depending upon the performance of Level 3 common stock relative to the S&P 500® Index as shown in the following table.

                  If Level 3 Stock Outperforms the
                  S&P 500® Index by:
                  		 Then the Pre-multiplier Gain Is
                  Multiplied by
                  a Success Multiplier of:
                  0% or Less 0.00
                  More than 0% but Less than 11% Outperformance percentage multiplied by4/11
                  11% or More 4.00

                          The Pre-multiplier gain is the Level 3 common stock price minus the Adjusted Strike Price on the date of exercise.

                          Upon exercise of an OSO, the Company shall deliver or pay to the grantee the difference between the Fair Market Value of a share of Level 3 common stock as of the day prior to the exercise date, less the Adjusted Strike Price (the "Exercise Consideration"). The Exercise Consideration may be paid in cash, Level 3 common stock or any combination of cash or Level 3 common stock at the Company's discretion. The number of shares of Level 3 common stock to be delivered by the Company to the grantee is determined by dividing the Exercise Consideration to be paid in Level 3 common stock by the Fair Market Value of a share of Level 3 common stock as of the date prior to the exercise date. Fair Market Value is defined in the OSO agreement, but is currently the closing price per share of Level 3 common stock on the NASDAQ exchange. Exercise of the OSO units does not require any cash outlay by the employee.

                          In August 2002, the Company modified thePrior to March 31, 2007, OSO program as follows:

                    •
                    OSO targets are communicated in terms of number of OSO units rather than a theoretical dollar value.

                  LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                  (16) Employee Benefit Plans (Continued)

                      •
                      The success multiplier was reduced from eight to four.

                      •
                      Awards vestawards vested over 2 years and havehad a 4-year life. Fifty percent of the award vestsawards vested at the end of the first year after grant, with the remaining 50% vestingvested over the second year (12.5% per quarter).

                            The vesting terms described above apply to outstanding OSO awards issued prior to March 31, 2007. As described below, the Company subsequently modified the OSO program effective as of April 1, 2007.

                            As part of a comprehensive review of its long-term compensation program completed in the second quarter of 2005, the Company temporarily suspended awards of OSO units in April 2005. During the second quarter of 2005, the Company granted participants in the plan restricted stock units, discussed below. Beginning in the third quarter 2005, the Company issued both restricted stock units and OSO units as part of its long-term compensation program. In the third quarter of 2005, the Company made a grant for 2005 of restricted stock units that vest ratably over four years.

                    As part of a comprehensive review of its long-term compensation program completed in the first quarter of 2007, beginning with awards made on or after April 1, 2007,


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (12) Employee Benefit Plans (Continued)


                    OSO units are now awarded monthly to employees in mid-management level and higher positions, have a three year life, will vest 100% and fully settle on the third anniversary of the date of the award and will fully settle on that date. OSO units awarded beginning April 1, 2007 are valued as of the first day of each month. Recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007, thus the expected life of all such OSO units is three years.

                            As a result of the long-term compensation review that was being completed, OSO units were not awarded to participants during the first quarter of 2007. During the period from April 1, 2007 to December 31, 2007, the Company awarded 4.8 million OSO units to participants.

                            As of December 31, 2007, the Company had not reflected $292009, there was $11 million of unamortized compensation expense in its financial statements for previouslyrelated to granted OSO units. The weighted average period over which this cost will be recognized is 2.351.75 years.

                            The fair value of the OSO units granted is calculated by applying a modified Black-Scholes model with the assumptions identified below. The Company utilized a modified Black-Scholes model due to the additional variables required to calculate the impacteffect of the success multiplier of the OSO program. Beginning January 1, 2006, as a result of the adoption of SFAS No. 123R, the Company also considers the estimated forfeiture rate to measure the value of outperform stock options granted to employees. The Company believes that given the relative short life of the options and the other variables used in


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (16) Employee Benefit Plans (Continued)


                    the model, the modified Black-Scholes model provides a reasonable estimate of the fair value of the OSO units at the time of grant.

                     
                    		 Year Ended December 31,
                    		 
                     
                    		 2007
                    		 2006
                    		 2005
                    		 
                    S&P 500 Expected Dividend Yield Rate 1.78%1.78%1.99%
                    Expected Life 3 years 3.4 years 2 years 
                    S&P 500 Expected Volatility Rate 12%12%13%
                    Level 3 Common Stock Expected Volatility Rate 55%55%55%
                    Expected S&P 500 Correlation Factor .28 .28 .30 
                    Calculated Theoretical Value 146%153%116%
                    Estimated Forfeiture Rate 11.88%10.19%— 

                     
                    		 Year Ended December 31, 
                     
                    		 2009 2008 2007 

                    S&P 500 Expected Dividend Yield Rate

                    		  3.00% 2.00% 1.78%

                    Expected Life

                    		  3 years  3 years  3 years 

                    S&P 500 Expected Volatility Rate

                    		  26% 13% 12%

                    Level 3 Common Stock Expected Volatility Rate

                    		  45% 56% 55%

                    Expected S&P 500 Correlation Factor

                    		  .46  .32  .28 

                    Calculated Theoretical Value

                    		  119% 147% 146%

                    Estimated Forfeiture Rate

                    		  20% 12% 12%

                            The fair value of each OSO grant equals the calculated theoretical value multiplied by the Level 3 common stock price on the grant date.

                            The expected life data was stratified based on levels of responsibility within the Company. The theoretical value used in 2006 was determined using the weighted average exercise behavior for these groups of employees.        As described above, recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007, thus the expected life of all such OSO units is three years. Upon adoptionThe Company estimates the stock price volatility using a combination of SFAS No. 123R,historical and implied volatility as Level 3 believes it is consistent with the approach most marketplace participants would consider using all available information to estimate expected volatility. The Company has determined that expected volatility is more reflective of market conditions and provides a more accurate indication of volatility than using solely historical volatility. In reaching this conclusion, the Company updatedhas considered many factors including the extent to which its calculationfuture expectations of volatility over the Expected Life. Volatility assumptions were derived usingrespective term is likely to differ from historical data as well as current market data.measures, the absence of actively traded options and the Company's ability to review volatility of its publicly traded convertible debt with similar terms and prices to the securities the Company is valuing.

                            The fair value under SFAS No. 123 and SFAS No. 123R for the approximately 5 million, 8 million and 6 million OSO units awarded to participants during the years ended December 31, 2007, 20062009, 2008 and 2005, respectively,2007 was approximately $32$8 million, $50$18 million and $18$32 million, respectively.


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (16)(12) Employee Benefit Plans (Continued)

                            Transactions involving OSO units awarded are summarized in the table below. The Option Price Per Unit identified in the table below represents the initial strike price, as determined on the day prior to the OSO grant date for those grants.

                     
                    		 Units
                    		 Initial Strike Price
                    Per Unit
                    		 Weighted
                    Average
                    Initial
                    Strike Price
                    		 Aggregate
                    Intrinsic
                    Value
                    		 Weighted
                    Average
                    Remaining
                    Contractual
                    Term
                     
                    		  
                    		  
                    		  
                    		 (in millions)

                    		  
                    Balance December 31, 2004 21,361,522 $2.45 - $25.31 $6.61 $5.3 1.59 years
                     Options granted 5,859,066   2.03 -     3.39  2.61     
                     Options cancelled (1,048,494)  2.03 -   25.31  3.00     
                     Options expired (11,841,490)  2.59 -   25.31  8.91     
                     Options exercised (84,628)  2.45 -     3.02  2.86     
                      
                    		 
                    		        
                    Balance December 31, 2005 14,245,976   2.03 -     6.66  3.34 $9.3 2.34 years
                     Options granted 8,092,915   2.87 -     5.39  4.49     
                     Options cancelled (1,101,849)  2.03 -     6.66  3.71     
                     Options expired (3,010,367)  2.03 -     6.66  3.62     
                     Options exercised (2,941,180)  2.03 -     4.44  2.97     
                      
                    		 
                    		        
                    Balance December 31, 2006 15,285,495   2.03 -     6.66  3.93 $82.7 2.54 years
                     Options granted 4,818,069   3.03 -     6.10  5.25     
                     Options cancelled (631,603)  2.03 -     6.66  5.08     
                     Options expired (1,767,687)  2.03 -     6.66  5.37     
                     Options exercised (1,999,717)  2.03 -     5.39  2.87     
                      
                    		 
                    		        
                    Balance December 31, 2007 15,704,557 $2.03 - $  6.10 $4.27 $2.4 2.04 years
                      
                    		 
                    		        

                    Options exercisable ("vested"):
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     December 31, 2005 8,453,296 $2.59 - $  6.66 $3.88     
                     December 31, 2006 7,903,200 $2.03 - $  6.66  3.48     
                     December 31, 2007 9,821,827 $2.03 - $  5.70 $3.72 $2.4 1.75 years
                     
                    		 OSO units Outstanding
                    at December 31, 2007
                    		 OSO units Exercisable
                    at December 31, 2007
                    Range of Exercise Prices
                    		 Number
                    Outstanding
                    		 Weighted
                    Average
                    Remaining Life
                    (years)
                    		 Weighed
                    Average Initial
                    Strike Price
                    		 Number
                    Exercisable
                    		 Weighted
                    Average
                    Initial Strike Price
                    $2.03 - $3.03 4,410,872 1.74 $2.52 4,011,439 $2.47
                    $3.36 - $4.65 4,241,373 1.82  3.97 3,025,197  3.89
                    $5.18 - $6.10 7,052,312 2.37  5.54 2,785,191  5.31
                      
                    		      
                    		   
                      15,704,557 2.04 $4.27 9,821,827 $3.72
                      
                    		      
                    		   

                     
                    		 Units Initial
                    Strike Price
                    Per Unit                    		 Weighted
                    Average
                    Initial
                    Strike Price                    		 Aggregate
                    Intrinsic
                    Value                    		 Weighted
                    Average
                    Remaining
                    Contractual
                    Term
                     
                    		  
                    		  
                    		  
                    		 (in millions)
                    		  

                    Balance January 1, 2007

                    		  15,285,495 $2.03 - $6.66 $3.93 $82.7 2.54 years
                     

                    Options granted

                    		  4,818,069  3.03 - 6.10  5.25     
                     

                    Options forfeited

                    		  (631,603) 2.03 - 6.66  5.08     
                     

                    Options expired

                    		  (1,767,687) 2.03 - 6.66  5.37     
                     

                    Options exercised

                    		  (1,999,717) 2.03 - 5.39  2.87     
                                 

                    Balance December 31, 2007

                    		  15,704,557 $2.03 - $6.10  4.27 $2.4 2.04 years
                     

                    Options granted

                    		  4,592,809  0.94 - 3.44  2.70     
                     

                    Options forfeited

                    		  (1,552,070) 1.05 - 6.10  4.65     
                     

                    Options expired

                    		  (2,228,545) 2.03 - 6.10  3.97     
                     

                    Options exercised

                    		  (709,483) 2.03 - 3.39  2.42     
                                 

                    Balance December 31, 2008

                    		  15,807,268 $0.94 - $6.10  3.90  — 1.56 years
                     

                    Options granted

                    		  7,167,525  .70 - 1.51  1.15     
                     

                    Options forfeited

                    		  (2,320,959) .70 - 6.10  3.25     
                     

                    Options expired

                    		  (4,804,432) 2.03 - 5.39  3.23     
                     

                    Options exercised

                    		  —  0.00 - 0.00  —     
                                 

                    Balance December 31, 2009

                    		  15,849,402 $.70 - $6.10 $2.95 $5.2 1.55 years
                                 

                    Options exercisable ("vested"):

                    		              
                     

                    December 31, 2007

                    		  9,821,827 $2.03 - $5.70 $3.72     
                     

                    December 31, 2008

                    		  7,962,066 $2.03 - $5.39 $3.95     
                     

                    December 31, 2009

                    		  3,298,799 $4.44 - $5.39 $5.01 $— .50 years


                     
                    		 OSO units Outstanding
                    at December 31, 2009                    		 OSO units Exercisable
                    at December 31, 2009                    		 
                    Range of Exercise Prices
                    		 Number
                    Outstanding                    		 Weighted
                    Average
                    Remaining
                    Life (years)                    		 Weighted
                    Average
                    Initial
                    Strike Price                    		 Number
                    Exercisable                    		 Weighted
                    Average
                    Initial
                    Strike Price                    		 

                    $.70 - $1.05

                    		  2,132,653  2.08 $.90  0 $0 

                    $1.07 - $1.51

                    		  5,147,972  2.63 $1.24  0 $0 

                    $2.03 - $3.04

                    		  1,741,434  1.28 $2.72  0 $0 

                    $3.36 - $4.65

                    		  2,567,434  .94 $3.96  1,083,231 $4.44 

                    $5.18 - $6.10

                    		  4,259,909  .45 $5.53  2,215,568 $5.29 
                                   

                    		  15,849,402        3,298,799    
                                   

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (12) Employee Benefit Plans (Continued)

                            In the table above, the weighted average initial strike price represents the values used to calculate the theoretical value of OSO units on the grant date and the intrinsic value represents the value of OSO units that have outperformed the S&P 500® Index as of December 31, 2007.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (16) Employee Benefit Plans (Continued)2009.

                            The total realized value of OSO units exercised was zero, $2 million and $19 million for the years ended December 31, 2009, 2008 and 2007, 2006 and 2005 was $19 million, $20 million and $6 million, respectively. For the years ended December 31, 2007, 2006 and 2005, respectively, theThe Company issued 3.2 million, 3.8 millionapproximately zero, 466,000 and 2.73.2 million shares of Level 3 common stock upon the exercise of OSO units.units for the years ended December 31, 2009, 2008 and 2007, respectively. The number of shares of Level 3 stock issued upon exercise of an OSO unit varies based upon the relative performance of Level 3's stock price and the S&P 500® Index between the initial grant date and exercise date of the OSO unit.

                            AtAs of December 31, 2007,2009, based on the Level 3 common stock price and post-multiplier values, the Company was not obligated to issue 0.8 millionany shares for those vested and exercisable OSOs for whichOSO units as the percentage increase in the Level 3Company's common stock price exceeded the percentage increase indid not outperform the S&P 500® Index.

                      Restricted Stock and Units

                            Employees continue to receive restricted stock units under the revised compensation program. In 2007, 2006 and 2005, approximately 12.0 million, 5.9 million and 24.6 million restricted stock shares or restricted stock units, respectively, were awarded to certain employees and non-employee members of the Board of Directors. The restrictedRestricted stock units and shares wereare granted to the recipients at no cost. Restrictions on transfer lapse over one to four year periods. The fair value of restricted stock units and shares awarded totaled $16 million, $43 million and $68 million, for the years ended December 31, 2009, 2008 and 2007, 2006 and 2005 totaled $68 million, $27 million and $50 million andrespectively. The fair value of these awards was calculated using the value of the Level 3 common stock on the grant date and isare being amortized over the restriction lapse periods ofin which the awards.restrictions lapse. As of December 31, 2007, the total2009, unamortized compensation cost related to nonvested restricted stock orand restricted stock units not yet recognized was $50$17 million and the weighted average period over which this cost will be recognized is 2.972.45 years.

                            The changes in restricted stock and restricted stock units are shown in the following table:

                     
                    		 Number
                    		 Weighted Average
                    Grant Date Fair Value
                    Nonvested at December 31, 2004 980,157 $4.05
                     Stock and units granted 24,627,233  2.03
                     Lapse of restrictions (719,716) 3.80
                     Stock and units forfeited (1,510,831) 2.12
                      
                    		   
                    Nonvested at December 31, 2005 23,376,843  2.06
                     Stock and units granted 5,874,765  4.65
                     Lapse of restrictions (7,225,744) 2.13
                     Stock and units forfeited (2,575,137) 2.45
                      
                    		   
                    Nonvested at December 31, 2006 19,450,727  2.76
                     Stock and units granted 11,992,520  5.67
                     Lapse of restrictions (6,997,946) 2.71
                     Stock and units forfeited (2,173,989) 4.20
                      
                    		   
                    Nonvested at December 31, 2007 22,271,312 $4.20
                      
                    		 

                     
                    		 Number Weighted Average
                    Grant Date
                    Fair Value                    		 

                    Nonvested at January 1, 2007

                    		  19,450,727 $2.76 
                     

                    Stock and units granted

                    		  11,992,520  5.67 
                     

                    Lapse of restrictions

                    		  (6,997,946) 2.71 
                     

                    Stock and units forfeited

                    		  (2,173,989) 4.20 
                           

                    Nonvested at December 31, 2007

                    		  22,271,312  4.20 
                     

                    Stock and units granted

                    		  17,627,904  2.43 
                     

                    Lapse of restrictions

                    		  (9,701,473) 3.57 
                     

                    Stock and units forfeited

                    		  (4,063,944) 4.08 
                           

                    Nonvested at December 31, 2008

                    		  26,133,799  3.26 
                     

                    Stock and units granted

                    		  13,618,696  1.15 
                     

                    Lapse of restrictions

                    		  (11,854,329) 3.11 
                     

                    Stock and units forfeited

                    		  (3,969,484) 2.74 
                           

                    Nonvested at December 31, 2009

                    		  23,928,682 $2.22 
                          

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (12) Employee Benefit Plans (Continued)

                            The total fair value of restricted stock and restricted stock units at the date thewhose restrictions lapsed forin the years ended December 31, 2009, 2008 and 2007 2006was $37 million, $35 million and 2005 was $19 million, $15 million and $2 million, respectively.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                    Warrants

                    (16) Employee Benefit Plans (Continued)

                      Non-qualified Stock Options and Warrants

                            The Company has not granted non-qualified stock options ("NQSOs") since 2000.        As of December 31, 2007,2009, there were approximately 4 million warrants outstanding ranging in exercise price from $4.00 to $29.00, all NQSOs previously grantedof which were fully vested and thefor which compensation expense had been fully recognized in the consolidated statements of operations. At December 31, 2007, there were approximately 1.1 million NQSOs outstanding with exercise prices ranging from $1.76 to $8.00. The weighted average exercise price of the NQSOs outstandingthese warrants was $6.86 at December 31, 2007.

                            Transactions involving NQSOs are summarized$5.11 as follows:

                     
                    		 Units
                    		 Exercise Price
                    Per Unit
                    		 Weighted
                    Average
                    Exercise Price
                    		 Aggregate
                    Intrinsic Value
                     
                    		  
                    		  
                    		  
                    		 (in millions)

                    Balance December 31, 2004 8,559,864 $0.12 - $21.69 $5.85 Less than $1.0
                     Options granted — —  —  
                     Options cancelled (606,150)  5.43 -     8.00  6.00  
                     Options exercised (61,168)  0.12 -     0.12  0.12  
                     Options expired (1,746,500)  4.04 -   21.69  6.36  
                      
                    		       
                    Balance December 31, 2005 6,146,046   1.76 -     8.00  5.75 Less than $1.0
                     Options granted — —  —  
                     Options cancelled (553,248)  1.76 -     8.00  6.29  
                     Options exercised (689,250)  4.95 -     5.43  4.97  
                     Options expired — —  —  
                      
                    		       
                    Balance December 31, 2006 4,903,548   1.76 -     8.00  5.79 $1.0
                     Options granted — —  —  
                     Options cancelled (229,775)  5.43 -     8.00  6.11  
                     Options exercised (1,485,000)  5.43 -     5.43  5.43  
                     Options expired (2,046,825)  5.43 -     6.20  5.43  
                      
                    		       
                    Balance December 31, 2007 1,141,948 $1.76 - $  8.00 $6.86 Less than $1.0
                      
                    		       

                    Options exercisable:
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     December 31, 2005 6,146,046 $1.76 - $  8.00 $5.75  
                     December 31, 2006 4,903,548   1.76 -     8.00  5.79  
                     December 31, 2007 1,141,948 $1.76 - $  8.00 $6.86  
                    Range of Exercise Prices
                    		 Number
                    Outstanding
                    as of
                    December 31, 2007
                    		 Options Outstanding
                    and Exercisable
                    Weighted Average
                    Remaining
                    Life (years)
                    		 Weighted
                    Average
                    Exercise Price
                    $1.76 - $1.76 2,348 0.28 $1.76
                    $6.20 - $8.00 1,139,600 0.06  6.87
                      
                    		     
                      1,141,948 0.06 $6.86
                      
                    		     

                            At December 31, 2007, there were approximately 15.5 million warrants outstanding ranging in exercise price from $4.00 to $29.00. As of December 31, 2007, all of the warrants previously granted


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (16) Employee Benefit Plans (Continued)


                    were fully vested and the compensation expense had been fully recognized in the consolidated statements of operations. Of these warrants, all were exercisable at December 31, 2007, with a weighted average exercise price of $7.64 per warrant.2009.

                            In connection with the acquisition of Broadwing, approximately 4 million previously issued Broadwing warrants were converted into warrants to purchase approximately 5 million shares of Level 3 common stock at a weighted average exercise price of $5.76 per share of Level 3 common stock. During the first quarter ofIn 2007, approximately 3 million of the Broadwing warrants were exercised to purchase approximately 4 million shares of Level 3 common stock and resulted in proceeds to the Company totaling approximately $23 million. As of December 31, 2007, approximately 700,000 Broadwing warrants remain outstanding and are convertible into approximately 1 million shares of Level 3 common stock at a weighted average exercise price of $5.38 per share.

                      401(k) Plan

                            The Company and its subsidiaries offer their 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 ("401(k) Plan"). Each employee is eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $15,500$16,500 in 2007. The2009. Effective March 6, 2009, the Company matches to 100% of employee contributions up to 3% of eligible earnings or applicable regulatory limits. Prior to March 6, 2009, the Company matched 100% of employee contributions up to 7% of eligible earnings or applicable regulatory limits.

                            The Company's matching contributions are made with Level 3 common stock based on the closing stock price on each pay date. The Company's matching contributions are made through units in the Level 3 Stock Fund, which represent shares of Level 3 common stock. The Level 3 Stock Fund is the mechanism that is used for Level 3 to make employer matching and other contributions to employees through the Level 3 401(k) plan. Employees are not able to purchase units in the Level 3 Stock Fund. Employees are able to diversify the Company's matching contribution as soon as it is made, even if they are not fully vested. The Company's matching contributions will vest ratably over the first three years of service or over such shorter period until the employee has completed three years of service at such time the employee is then 100% vested in all Company matching contributions, including future contributions. The Company made 401(k) Plan matching contributions of $15 million, $30 million $18 million and $14$30 million for the yearyears ended December 31, 2007, 20062009, 2008 and 2005,2007, respectively. The Company's matching contributions wereare recorded as non-cash compensation and included in selling, general and administrative expenses.

                            The Company made a discretionary contribution to the 401(k) plan in Level 3 common stock for the yearsyear ended December 31, 2007 2006 and 2005 equal to three percent of eligible employees' earnings each year. The 2007 deposit is expected to be made into the employees'401(k) accounts during the first quarter of 2008. The 2006 and 2005 deposits werewas made into the employees' 401(k) accounts during the first quarter of the subsequent year. Level 3 recorded an expense of $16 million $11 million and $8 millionin 2007 for the discretionary contribution in 2007, 2006 and 2005, respectively.

                            The WilTel Communications employees began contributing to the Level 3 plan on June 17, 2006. On July 3, 2006, the WilTel Communications plan assets were merged into the Level 3 plan. Prior to June 17, 2006, employees of WilTel Communications that participated in the WilTel 401(k) Plan received an employer matching cash contribution of 100% of employee contributions up to 6% of eligible earnings or regulatory limits. The Company made matching cash contributions of $3 million for the period from January 1 through June 16, 2006.contribution.


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (16)(12) Employee Benefit Plans (Continued)

                            The Progress Telecom employees began contributingCompany did not make a discretionary contribution to the Level 3401(k) plan on March 20, 2006. The Progress Telecom plan assets were merged into the Level 3 plan on August 7, 2006.

                            The ICG Communications employees began contributing to the Level 3 plan on July 1, 2006. There were no matching cash contributions for ICG Communications for the period Mayyear ended December 31, 2006,2009 or 2008.

                    Restricted Stock Unit Bonus Grant

                            For 2009, the dateCompany will pay a portion of acquisition, through July 1, 2006. The ICG Communications plan assets were merged intoits discretionary bonus in the Level 3 plan on September 1, 2006.

                            The TelCove and Looking Glass employees began contributing to the Level 3 plan on August 4, 2006 and September 9, 2006, respectively. The matching cash contributions made to the TelCove and Looking Glass plans for the period from the respective acquisition dates to the dates employees began contributing to the Level 3 plan was less than $1form of restricted stock units. Restricted stock units of approximately 10 million each for TelCove and Looking Glass. The Looking Glass plan assets were merged into the Level 3 plan on November 1, 2006. The Company merged the TelCove plan assets into the Level 3 plan on January 2, 2007.

                            The Broadwing employees began contributing to the Level 3 plan on March 1, 2007. There were no matching cash contributions for Broadwing for the period January 3, 2007, the date of acquisition, through March 1, 2007. The Broadwing plan assets were merged into the Level 3 plan on March 1, 2007.

                            The CDN Business employees began contributing to the Level 3 plan on January 23, 2007, the date of acquisition. The CDN Business did not have a separate 401(k) plan and as a result no assetsshares, or $14 million, will be merged intoawarded in the Level 3 plan.first quarter of 2010 and will vest promptly upon award.

                    (17)(13) Income Taxes

                            An analysis of the income tax benefit (provision) attributable to loss from continuing operations before income taxes for each of the years in the three year period ended December 31, 20072009 follows:

                     
                    		 2007
                    		 2006
                    		 2005
                    		 
                     
                    		 (dollars in millions)

                    		 
                    Current:          
                     United States federal $— $— $(4)
                     State  (3) —  — 
                     Foreign  2  (2) (1)
                      
                    		 
                    		 
                    		 
                       (1) (2) (5)
                    Deferred, net of changes in valuation allowances:          
                     United States federal  —  —  — 
                     State  23  —  — 
                     Foreign  —  —  — 
                      
                    		 
                    		 
                    		 
                    Income tax benefit (provision) $22 $(2)$(5)
                      
                    		 
                    		 
                    		 


                     
                    		 2009 2008 2007 
                     
                    		 (dollars in millions)
                    		 

                    Current:

                    		          
                     

                    United States federal

                    		 $— $1 $— 
                     

                    State

                    		  —  (7) (3)
                     

                    Foreign

                    		  —  —  2 
                            

                    		  —  (6) (1)

                    Deferred, net of changes in valuation allowances:

                    		          
                     

                    United States federal

                    		  —  —  — 
                     

                    State

                    		  (1) —  23 
                     

                    Foreign

                    		  —  —  — 
                            

                    Income tax benefit (provision)

                    		 $(1)$(6)$22 
                            

                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (17) Income Taxes (Continued)

                            The United States and foreign components of income (loss)loss from continuing operations before income taxes follows:

                     
                    		 2007
                    		 2006
                    		 2005
                    		 
                     
                    		 (dollars in millions)

                    		 
                    United States $(1,016)$(710)$(717)
                    Foreign  (120) (78) 15 
                      
                    		 
                    		 
                    		 
                      $(1,136)$(788)$(702)
                      
                    		 
                    		 
                    		 

                     
                    		 2009 2008 2007 
                     
                    		 (dollars in millions)
                    		 

                    United States

                    		 $(513)$(216)$(1,048)

                    Foreign

                    		  (104) (96) (120)
                            

                    		 $(617)$(312)$(1,168)
                            

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (13) Income Taxes (Continued)

                            A reconciliation of the actual income tax benefit (provision) and the tax computed by applying the U.S. federal rate (35%) to the loss from continuing operations before income taxes for each of the three years in the three-year period ended December 31, 20072009 follows:

                     
                    		 2007
                    		 2006
                    		 2005
                    		 
                     
                    		 (dollars in millions)

                    		 
                    Computed tax benefit at statutory rate $397 $276 $246 
                    State income tax benefit  39  26  23 
                    Stock option plan exercises  8  3  (3)
                    Disallowance of losses on extinguishments of debt  (62) (3) — 
                    Other  (9) —  (11)
                    Change in valuation allowance  (351) (304) (260)
                      
                    		 
                    		 
                    		 
                    Income tax benefit (provision) $22 $(2)$(5)
                      
                    		 
                    		 
                    		 


                     
                    		 2009 2008 2007 
                     
                    		 (dollars in millions)
                    		 

                    Computed tax benefit at statutory rate

                    		 $216 $109 $409 

                    State income tax benefit

                    		  20  9  39 

                    Disallowance of losses on extinguishments of debt

                    		  —  (15) (62)

                    Other, net

                    		  16  (7) (1)

                    Change in valuation allowance

                    		  (253) (102) (363)
                            

                    Income tax benefit (provision)

                    		 $(1)$(6)$22 
                            

                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (17) Income Taxes (Continued)

                            The components of the net deferred tax assets (liabilities) as of December 31, 20072009 and 20062008 were as follows:

                     
                    		 2007
                    		 2006
                    		 
                     
                    		 (dollars in millions)

                    		 
                    Deferred Tax Assets:       
                     Fixed assets and intangible assets $59 $66 
                     Accrued payroll and related benefits  41  26 
                     State tax credit carry forwards  23  — 
                     Investment in securities  25  25 
                     Investment in joint ventures  94  88 
                     Unutilized tax net operating loss carry forwards  3,690  2,880 
                     Accrued liabilities and deferred revenue  11  5 
                     Other assets or liabilities  6  190 
                      
                    		 
                    		 
                    Total Deferred Tax Assets  3,949  3,280 
                    Deferred Tax Liabilities:       
                     Fixed assets and intangible assets  —  — 
                     Accrued liabilities and deferred revenue  —  — 
                      
                    		 
                    		 
                    Total Deferred Tax Liabilities  —  — 
                      
                    		 
                    		 
                    Net Deferred Tax Assets before valuation allowance  3,949  3,280 
                    Valuation Allowance  (3,926) (3,280)
                      
                    		 
                    		 
                    Net Non-Current Deferred Tax Asset after Valuation Allowance $23 $— 
                      
                    		 
                    		 

                            The change in the net non-current deferred tax asset after valuation allowance of $23 million in 2007 was primarily the result of reversing $23 million of the valuation allowance against the Company's deferred tax asset for certain state tax loss carry forwards. These state tax loss carry forwards were converted to a state tax credit carry forward associated with a change in the state's tax law that replaced the tax on net income with a tax on gross margin. The change in this state's tax law primarily occurred in the second quarter of 2007. The Company now expects it will be able to use this state tax credit carry forward against current and future state taxable gross margin.

                            As a result of the acquisition of Broadwing on January 3, 2007, the Company recognized an increase in deferred tax assets related to unutilized tax net operating loss carry forwards totaling $266 million.

                     
                    		 2009 2008 
                     
                    		 (dollars in millions)
                    		 

                    Deferred Tax Assets:

                    		       
                     

                    Accrued payroll and related benefits

                    		 $64 $80 
                     

                    State tax credit carry forwards

                    		  22  23 
                     

                    Deferred revenue

                    		  268  254 
                     

                    Investment in Coal and other businesses

                    		  8  7 
                     

                    Unutilized tax net operating loss carry forwards

                    		  2,017  1,790 
                     

                    Accrued liabilities

                    		  61  43 
                          

                    Total Deferred Tax Assets

                    		  2,440  2,197 

                    Deferred Tax Liabilities:

                    		       
                     

                    Fixed assets and intangible assets

                    		  (27) (10)
                     

                    Convertible debt

                    		  (32) (60)
                          

                    Total Deferred Tax Liabilities

                    		  (59) (70)
                          

                    Net Deferred Tax Assets before valuation allowance

                    		  2,381  2,127 

                    Valuation Allowance

                    		  (2,359) (2,104)
                          

                    Net Non-Current Deferred Tax Asset after Valuation Allowance

                    		 $22 $23 
                          

                            The Company has recastchanged its presentation of certain of the deferred tax assets and liabilities presented in the table above as of December 31, 20062008, to be comparable with the presentation as of December 31, 2007.2009. These changes are primarily reclassifications and true ups of the 2006 income tax provision2008 amounts to conform with the current year presentation, but also include certain immaterial corrections to components of prior years'year's income tax provisions. These changes to the Company's net deferred tax assets as of December 31, 20062008, had no impacteffect on the Company's results of operations or financial condition since a full valuation allowance was recognized for the total netagainst all deferred tax asset balance asitems affected by these changes.

                    As of December 31, 2006. The following is a


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (17) Income Taxes (Continued)


                    summary of2009, the more significant changes to the presentation of deferred tax assets and liabilities as of December 31, 2006:

                      •
                      Deferred tax assets and liabilities related to fixed assets and intangible assets were decreased to correct basis differences related to foreign currency exchange rates, to reclassify basis differences thatCompany had been presented in the deferred taxes for accrued liabilities and deferred revenue and other assets or liabilities, and to correct prior period tax depreciation.

                      •
                      Deferred tax assets related to accrued payroll and related benefits were decreased to correct the deferred tax asset related to outstanding stock based compensation awards.

                      •
                      Deferred tax assets related to unutilized tax net operating loss carry forwards were increased to reflect adjustments to the unutilized tax net operating loss carry forwards of TelCove, ICG Communications and Looking Glass based on analysesapproximately $5.2 billion for federal income tax purposes. Under the rules prescribed by U.S. Internal Revenue Code


                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (13) Income Taxes (Continued)


                      ("IRC") Section 382 and applicable regulations, if certain transactions occur with respect to an entity's capital stock that result in a cumulative ownership shift of more than 50 percentage points by 5-percent stockholders over a testing period, annual limitations are imposed with respect to true up state taxthe entity's ability to utilize its net operating loss carry forwards and certain current deductions against any taxable income the entity achieves in future periods. The Company had entered into transactions over the testing period resulting in significant cumulative shifts in the ownership of its capital stock which alone would not have resulted in an ownership change under IRC Section 382. However, when the Company's actions are coupled with the trading activity in the Company's common stock throughout 2008 by third-party market participants, the Company believes that in 2008 the Company experienced a cumulative ownership change of more than 50 percentage points by 5-percent stockholders during the applicable testing period. Prior to correctthe ownership change in 2008, the Company had net operating loss carry forwards primarily relatedof $9.7 billion. The Company believes that the limitation of its net operating loss carry forwards will not have a near term effect on its consolidated results of operations and financial position. Additional transactions could cause the Company to depreciation.

                      •
                      Deferred tax liabilities related to accrued liabilitiesincur a subsequent 50 percentage point ownership change by 5-percent stockholders and, deferred revenue decreased primarily due toif the reclassifications described above and a correction of tax basis deferred revenue.

                      •
                      Deferred tax assets related to other assets or liabilities increased primarily due toCompany triggers the reclassifications described aboveabove-noted IRC imposed limitations, could further limit it from fully utilizing the remaining net operating loss carry forwards and certain other immaterial adjustments.
                    current deductions to reduce income taxes.

                            The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance has been recorded against deferred tax assets, as the Company has concluded that under relevant accounting standards it is not more likely than not that the deferred tax assets are not realizable.

                            For U.S. federal incomeThe valuation allowance for deferred tax reporting purposes, the Company hasassets was approximately $9.5$2.4 billion as of tax loss carry forwards at December 31, 2007,2009 and approximately $2.1 billion as of December 31, 2008. The net of previous carry backs, available to offset future U.S. federal taxable income. Net operating losses not utilized can be carried forwardchange in the valuation allowance for 20 years for U.S. federal income tax purposes to offset future taxable income.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (17) Income Taxes (Continued)the year ended December 31, 2009 was approximately $255 million.

                            The U.S. federal tax loss carry forwards expire through 20272029 and are subject to examination by the tax authorities until three years after the carry forwards are utilized. The U.S. federal tax loss carry forwards expire as follows (dollars in millions):

                    Expiring December 31
                    		 Amount
                    2018 $3
                    2019  —
                    2020  656
                    2021  969
                    2022  1,570
                    2023  1,399
                    2024  1,239
                    2025  1,124
                    2026  1,093
                    2027  1,477
                      
                      $9,530
                      

                    Expiring December 31
                    		 Amount 

                    2024

                    		 $532 

                    2025

                    		  1,186 

                    2026

                    		  1,029 

                    2027

                    		  1,501 

                    2028

                    		  356 

                    2029

                    		  591 
                        

                    		 $5,195 
                        

                            In addition, theThe Company has approximately $98$90 million of tax loss carry forwards for controlled foreign corporations at December 31, 2007,2009, the majority of which have no expiration period.

                            The Internal Revenue Code contains provisions which may limit the net operating loss carry forwards available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interests. If certain transactions occur with respect to Level 3's capital stock that result in a cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a three-year period as determined under rules prescribed by the U.S. Internal Revenue Code and applicable regulations, annual limitations would be imposed with respect to our ability to utilize our net operating loss carry forwards and certain current deductions against any taxable income it achieves in future periods.

                            Provisions of the Internal Revenue Code also allow In addition, the Company to utilize a limited amounthas approximately $4.7 billion of thegross state tax loss carry forwards that were generated by Broadwing, Looking Glass, TelCove, and ICG Communications prior to the Company's acquisitionwith various expiration periods through 2029.


                    Table of these companies. Accordingly, the Company has increased its tax loss carry forwards to include these tax losses. As a result, the Company's tax loss carry forwards increased by $953 million, which includes $694 million related to the acquisition of Broadwing in 2007.Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (13) Income Taxes (Continued)

                            The majority of the Company's foreign assets and operations are owned by entities that have elected to be treated for U.S. tax purposes as unincorporated branches of a U.S. holding company and, as a result, the taxable income or loss and other tax attributes of such entities are included in the Company's U.S. federal consolidated income tax return. However, the Company has some foreign subsidiaries that have not so elected and therefore are treated for U.S. tax purposes as controlled foreign corporations. With respect to such controlled foreign corporations, as of December 31, 2007,2009, the Company has no plans to repatriate undistributed earnings of such controlled foreign corporations as any earnings are deemed necessary to fund ongoing European operations and planned expansion. Undistributed earnings of such controlled foreign corporations that are permanently invested and for which no deferred taxes have been provided are immaterial as of December 31, 20072009 and 2006.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                    2008.

                    (17) Income Taxes (Continued)

                            The Company adopted the provisions of FIN No. 48 on January 1, 2007. The adoption of FIN No. 48 did not affect the Company's liability for uncertain tax positions.        The Company's liability for uncertain tax positions totaled $18$16 million at December 31, 20072009 and January 1, 2007. During 2007, the Company increased the liability for uncertain tax positions by $3$16 million for possible indemnification of certain tax liabilities related to a business disposed of prior to 2007, increased the liability for uncertain tax positions by $3 million to reflect liabilities for uncertain tax positions related to acquired companies and decreased the liability for uncertain tax positions by $6 million for the recognition of tax positions related to matters favorably settled during 2007. All of theseat December 31, 2008. These amounts also include the related accrued interest and penalties associated with the uncertain tax positions if applicable. The Company does not expect the liability for uncertain tax positions will change significantly during the twelve months ended December 31, 2008;2010; however, actual changes in the liability for uncertain tax positions could be different than currently expected. A rollforward of the liability for uncertain tax positions follows:

                    (dollars in millions)
                    		 Amount
                    		 
                    Balance as of January 1, 2007 $18 
                     Gross increases—tax positions prior to 2007  3 
                     Gross increases—during 2007  3 
                     Gross decreases—tax positions prior to 2007  (6)
                    Balance as of December 31, 2007 $18 

                    (dollars in millions)
                    		 Amount 

                    Balance as of January 1, 2007

                    		 $18 
                     

                    Gross increases—tax positions prior to 2007

                    		  3 
                     

                    Gross increases—during 2007

                    		  3 
                     

                    Gross decreases—tax positions prior to 2007

                    		  (6)
                        

                    Balance as of December 31, 2007

                    		  18 
                     

                    Gross increases—tax positions prior to 2008

                    		  3 
                     

                    Gross increases—during 2008

                    		  1 
                     

                    Gross decreases—tax positions prior to 2008

                    		  (6)
                        

                    Balance as of December 31, 2008

                    		  16 
                     

                    Gross increases—tax positions prior to 2009

                    		  2 
                     

                    Gross decreases—settlements with taxing authorities

                    		  (2)
                        

                    Balance as of December 31, 2009

                    		 $16 
                        

                            The Company, or at least one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999.2003. The Internal Revenue Service commencedand state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available. During the third quarter of 2008, the Company and the Internal Revenue Service settled an income tax audit for years 1999 through 2001 in addition to 1996 interest issues resulting in a refund of $1 million to the Company. In addition, the Internal Revenue Service completed an examination of certain adjustments to the Company's U.S. income tax returns for 2002 resulting from final resolution of the 1999 through 2001.2001 audit. The auditCompany is currently under audit by the taxing authority in the appeals process and a resolution is expected to be reached in 2008. The Company does not expect that any settlement or payment that may result from the audit will have a material effect on the Company's resultsGermany for tax years 2003 through 2007.


                    Table of operations or cash flows.Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (13) Income Taxes (Continued)

                            The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense in its consolidated statements of operations.operations of approximately $1 million, $2 million and $1 million for the years ended December 31, 2009, 2008 and 2007, respectively. The Company's liability for uncertain tax positions includes approximately $9$11 million and $10 million of accrued interest and penalties at December 31, 2007.

                            Included in the liability for uncertain tax positions at December 31, 2007 are $3 million of uncertain tax positions related to acquired companies, the disallowance of which would affect the valuation of the assets2009 and or liabilities acquired and therefore would not affect the annual effective income tax rate.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                    2008, respectively.

                    (18) Stockholders' Equity(14) Segment Information

                            During 2006, Level 3 completed the sale of 125 million shares of its common stock, par value $0.01 per share, at $4.55 per share in an underwritten public offering. Level 3 received proceeds of $543 million net of $26 million in transaction costs.

                            The Level 3 1995 Stock Plan permits option holders to tender shares to the Company to cover income taxes due on option exercises.

                            Issuances of common stock, for option exercises, equity offerings and acquisitionsAccounting guidance for the three year period ended December 31, 2007 are shown below.


                    		Outstanding
                    Common Shares
                    December 31, 2004686,496,721
                    Option, Restricted Stock, Shareworks and 401(k) activity (Note 16)16,271,097
                    WilTel Communications Group, LLC Acquisition (Note 2)115,000,000
                    December 31, 2005817,767,818
                    Option, Restricted Stock and 401(k) activity (Note 16)18,737,450
                    Equity offering125,000,000
                    2006 Acquisitions (Note 2)216,917,837
                    December 31, 20061,178,423,105
                    Option, Restricted Stock and 401(k) activity (Note 16)22,558,511
                    Debt conversion to equity (Note 14)213,939,051
                    2007 Acquisitions (Note 2)122,942,018
                    December 31, 20071,537,862,685

                    (19) Industry and Geographic Data

                            SFAS No. 131 "Disclosuresdisclosures about Segmentssegments of an Enterprise and Related Information"enterprise defines operating segments as 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. OperatingThe Company's operating segments are managed separately and represent separate strategic business units that offer different products or services and serve different markets. The Company's current reportable segments include: communications and coal mining (See(see Note 1). Other primarily includesbusiness interests, which are not reportable segments, include corporate assets and overhead costs that are not attributable to a specific segment. In the third quarter of 2006, the

                            The Company exited the information services business as a result of the sale of Software Spectrum. Segment information has been revised due to reclassification of the information services businesses as discontinued operations in the consolidated financial statements (See Note 3).

                            Effective January 1, 2007, the Company has reflected cash, cash equivalents and marketable securities in the respective segments which hold the related cash, cash equivalents and marketable securities. Prior year balances have been reclassified to conform to the current period presentation.

                    evaluates performance based upon Adjusted EBITDA, as defined by the Company, isas net income (loss) from the consolidated statements of operations before (1) gain (loss) from discontinued operations, (2) income taxes, (3)(2) total other income (expense), (4)(3) non-cash impairment charges included within restructuring and impairment


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data (Continued)


                    charges, as reported in the consolidated statements of operations, (5)(4) depreciation and amortization and (6)(5) non-cash stock compensation expense included within selling, general and administrative expenses on the consolidated statements of operations.

                            Adjusted EBITDA is not a measurement under accounting principles generally accepted in the United States and may not be used by other companies. Management believes that Adjusted EBITDA is an important part of the Company's internal reporting and is a key measure used by Management to evaluate profitability and operating performance of the Company and to make resource allocation decisions. Management believes such measures are especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA to compare the Company's performance to that of its competitors. Management uses Adjusted EBITDA to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses.

                            Adjusted EBITDA excludes non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense, income taxes and gain (loss) on extinguishment of debt because these items are associated with the Company's capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of capital investments which management believes should be evaluated through cash flow measures. Adjusted EBITDA excludes total other income (expense) because these items are not related to the primary operations of the Company.

                            There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from the Company's calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income taxes, depreciation and amortization, non-cash impairment charges, non-cash stock compensation expense, gain (loss) on early extinguishment of debt and net other income (expense). Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

                    The data presented in the following tables includes information for the twelve monthsyears ended December 31, 2007, 20062009, 2008 and 20052007 for all statement of operations and cash flow information presented, and as of December 31, 20072009 and 20062008 for all balance sheet information presented. Information related to the acquired businesses is included from their respective acquisition dates. Revenue and the related expenses are attributed to countries based on where services are provided.


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data(14) Segment Information (Continued)

                            IndustrySegment information for the Company's Communications and geographic segment financial information follows. Certain prior year information has been reclassified to conform to the 2007 presentation.Coal Mining businesses is summarized as follows (in millions):

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Total
                     
                    		 (dollars in millions)

                    2007            
                    Revenue:            
                     North America $3,941 $70 $— $4,011
                     Europe  258  —  —  258
                      
                    		 
                    		 
                    		 
                      $4,199 $70 $— $4,269
                      
                    		 
                    		 
                    		 
                    Adjusted EBITDA:            
                     North America $758 $5 $(4)  
                     Europe  65  —  —   
                      
                    		 
                    		 
                    		   
                      $823 $5 $(4)  
                      
                    		 
                    		 
                    		   
                    Capital Expenditures:            
                     North America $578 $2 $— $580
                     Europe  53  —  —  53
                      
                    		 
                    		 
                    		 
                      $631 $2 $— $633
                      
                    		 
                    		 
                    		 
                    Depreciation and Amortization:            
                     North America $861 $7 $— $868
                     Europe  74  —  —  74
                      
                    		 
                    		 
                    		 
                      $935 $7 $— $942
                      
                    		 
                    		 
                    		 
                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Total
                     
                    		 (dollars in millions)

                    2006            
                    Revenue:            
                     North America $3,121 $67 $— $3,188
                     Europe  190  —  —  190
                      
                    		 
                    		 
                    		 
                      $3,311 $67 $— $3,378
                      
                    		 
                    		 
                    		 
                    Adjusted EBITDA:            
                     North America $636 $8 $(3)  
                     Europe  41  —  —   
                      
                    		 
                    		 
                    		   
                      $677 $8 $(3)  
                      
                    		 
                    		 
                    		   
                    Capital Expenditures:            
                     North America $346 $1 $— $347
                     Europe  45  —  —  45
                      
                    		 
                    		 
                    		 
                      $391 $1 $— $392
                      
                    		 
                    		 
                    		 
                    Depreciation and Amortization:            
                     North America $661 $1 $— $662
                     Europe  68  —  —  68
                      
                    		 
                    		 
                    		 
                      $729 $1 $— $730
                      
                    		 
                    		 
                    		 

                     
                    		 Year Ended
                    December 31,                    		 
                     
                    		 2009 2008 2007 

                    Revenue from external customers:

                    		          

                    Communications

                    		 $3,695 $4,226 $4,199 

                    Coal Mining

                    		  67  75  70 
                            

                    		 $3,762 $4,301 $4,269 
                            

                    Adjusted EBITDA:

                    		          

                    Communications

                    		 $910 $1,039 $823 

                    Coal Mining

                    		 $— $5 $5 

                    Capital expenditures:

                    		          

                    Communications

                    		 $308 $446 $631 

                    Coal Mining

                    		  5  3  2 
                            

                    		 $313 $449 $633 
                            

                    Depreciation and amortization:

                    		          

                    Communications

                    		 $906 $929 $935 

                    Coal Mining

                    		  9  2  7 
                            

                    		 $915 $931 $942 
                            

                    Total assets:

                    		          

                    Communications

                    		 $8,932 $9,505    

                    Coal Mining

                    		  120  121    

                    Other

                    		  10  8    
                             

                    		 $9,062 $9,634    
                             

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data(14) Segment Information (Continued)

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Total
                     
                    		 (dollars in millions)

                    2005            
                    Revenue:            
                     North America $1,496 $74 $— $1,570
                     Europe  149  —  —  149
                      
                    		 
                    		 
                    		 
                      $1,645 $74 $— $1,719
                      
                    		 
                    		 
                    		 
                    Adjusted EBITDA:            
                     North America $437 $16 $(3)  
                     Europe  21  —  —   
                      
                    		 
                    		 
                    		   
                      $458 $16 $(3)  
                      
                    		 
                    		 
                    		   
                    Capital Expenditures:            
                     North America $271 $2 $— $273
                     Europe  27  —  —  27
                      
                    		 
                    		 
                    		 
                      $298 $2 $— $300
                      
                    		 
                    		 
                    		 
                    Depreciation and Amortization:            
                     North America $560 $5 $— $565
                     Europe  82  —  —  82
                      
                    		 
                    		 
                    		 
                      $642 $5 $— $647
                      
                    		 
                    		 
                    		 
                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Total
                     
                    		 (dollars in millions)

                    Identifiable Assets            
                    December 31, 2007            
                     North America $9,189 $115 $11 $9,315
                     Europe  930  —  —  930
                      
                    		 
                    		 
                    		 
                      $10,119 $115 $11 $10,245
                      
                    		 
                    		 
                    		 

                    December 31, 2006
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     North America $9,043 $127 $18 $9,188
                     Europe  806  —  —  806
                      
                    		 
                    		 
                    		 
                      $9,849 $127 $18 $9,994
                      
                    		 
                    		 
                    		 

                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data (Continued)

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Total
                     
                    		 (dollars in millions)

                    Long-Lived Assets (excluding Goodwill)            
                    December 31, 2007            
                     North America $6,702 $75 $— $6,777
                     Europe  818  —  —  818
                      
                    		 
                    		 
                    		 
                      $7,520 $75 $— $7,595
                      
                    		 
                    		 
                    		 

                    December 31, 2006
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     North America $6,362 $88 $— $6,450
                     Europe  747  —  —  747
                      
                    		 
                    		 
                    		 
                      $7,109 $88 $— $7,197
                      
                    		 
                    		 
                    		 

                    Goodwill
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                    December 31, 2007            
                     North America $1,390 $— $— $1,390
                     Europe  31  —  —  31
                      
                    		 
                    		 
                    		 
                      $1,421 $— $— $1,421
                      
                    		 
                    		 
                    		 

                    December 31, 2006
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     North America $408 $— $— $408
                     Europe  —  —  —  —
                      
                    		 
                    		 
                    		 
                      $408 $— $— $408
                      
                    		 
                    		 
                    		 

                            Communications revenue is grouped into three categories: 1) Core Communications Services (including transport and infrastructure services, IP and data services, voice services and Level 3 Vyvx services) 2) Other Communications Services (including managed modem and its related reciprocal compensation, DSL aggregation, and legacy managed IP services), and 3) SBC Contract Services. This revenue reporting structure reflects how the Company's management invests in the communications


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data (Continued)


                    business. Management invests in supporting the growth of Core Communications Services revenue and optimizing the cash flows from the Company's declining Other and SBC Contract Services Revenue.

                     
                    		 Communications Services
                    		  
                     
                    		 Core
                    		 Other
                    		 SBC
                    Contract
                    Services
                    		 Total
                     
                    		 (dollars in millions)

                    Communications Revenue            
                    2007            
                     North America $3,366 $272 $303 $3,941
                     Europe  256  2  —  258
                      
                    		 
                    		 
                    		 
                      $3,622 $274 $303 $4,199
                      
                    		 
                    		 
                    		 

                    2006
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     North America $1,787 $441 $893 $3,121
                     Europe  186  4  —  190
                      
                    		 
                    		 
                    		 
                      $1,973 $445 $893 $3,311
                      
                    		 
                    		 
                    		 

                    2005
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     North America $818 $653 $25 $1,496
                     Europe  144  5  —  149
                      
                    		 
                    		 
                    		 
                      $962 $658 $25 $1,645
                      
                    		 
                    		 
                    		 

                            Transport and Infrastructure includes $7 million, $2 million and $130 million of termination revenue for the years ended December 31, 2007, 2006 and 2005, respectively. IP and data includes less than $1 million, $7 million and $1 million of termination revenue for the years ended December 31, 2007, 2006 and 2005, respectively. SBC Contract Services includes $2 million of termination revenue for the years ended December 31, 2007 and 2006. No termination revenue was recorded for SBC in 2005.

                            In the third quarter of 2006, Level 3 announced the formation of four customer-facing groups to better serve the changing needs of customers in growing markets and drive growth across the organization:

                      •
                      The Wholesale Markets Group services the communications needs of large national and global service providers, including carriers, cable companies, wireless companies, and voice service providers. These customers typically integrate Level 3 services into their own products and services to offer to their end user customers. Revenue from the Wholesale Markets Group represented 56% of Core Communications revenue for the year ended December 31, 2007.

                      •
                      The Business Markets Group targets enterprise customers and regional carriers who value a local, professional sales force. Specific customer markets include small, medium, and large businesses, local and regional carriers, state and local government entities, and higher education institutions. Revenue from the Business Markets Group represented 26% of Core Communications revenue for the year ended December 31, 2007.

                      •
                      The Content Markets Group focuses on serving media and content companies with large and growing bandwidth needs. Customers in this market include video distribution companies,

                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (19) Industry and Geographic Data (Continued)

                        providers of gaming, mega-portals, software service providers, social networking providers, as well as more traditional media distribution companies such as broadcasters, television networks and sports leagues. Revenue from the Content Markets Group represented 11% of Core Communications revenue in the year ended December 31, 2007.

                      •
                      The European Markets Group serves large European consumers of bandwidth, including the largest European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors. Revenue from the European Markets Group represented 7% of Core Communications revenue in the year ended December 31, 2007.

                            The Company believes that the alignment around customer markets should allow it to drive growth while enabling it to better focus on the needsfollowing is a summary of the customers.geographical information (in millions):

                     
                    		 Year Ended
                    December 31,                    		 
                     
                    		 2009 2008 2007 

                    Revenue from external customers:

                    		          

                    North America

                    		 $3,436 $3,975 $4,011 

                    Europe:

                    		          
                     

                    United Kingdom

                    		  134  143  123 
                     

                    Germany

                    		  73  67  48 
                     

                    Other European Countries

                    		  119  116  87 
                            
                      

                    Total Europe

                    		  326  326  258 
                            

                    		 $3,762 $4,301 $4,269 
                            

                    Long-lived assets:

                    		          

                    North America

                    		 $5,648 $6,242    

                    Europe:

                    		          
                     

                    United Kingdom

                    		  121  106    
                     

                    Germany

                    		  369  378    
                     

                    Other European Countries

                    		  236  234    
                             
                      

                    Total Europe

                    		  726  718    
                             

                    		 $6,374 $6,960    
                             

                            The majority of North American revenue consists of services delivered within the United States. The majority of European revenue consists of services delivered within the United Kingdom France and Germany. Revenue from transoceanic services is allocated to Europe.

                            The Company includes all non-current assets, except for goodwill, in its long-lived assets.

                            Communications revenue consists of:

                      1)
                      Core Communications Services, which includes Core Network Services and Wholesale Voice Services;

                      •
                      Core Network Services includes revenue from transport, infrastructure, data and local and enterprise voice communication services.

                      •
                      Wholesale Voice Services includes revenue from long distance voice services, including domestic voice termination, international voice termination and toll free services.

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (14) Segment Information (Continued)

                      2)
                      Other Communications Services includes revenue from managed modem and its related reciprocal compensation services and SBC Contract Services, which includes revenue from the SBC Master Services Agreement, which was obtained in the acquisition of WilTel.

                     
                    		 Core
                    Communications
                    Services                    		 Other
                    Communications
                    Services                    		 Total 
                     
                    		 (in millions)
                    		 

                    Communications Revenue

                    		          

                    2009

                    		          
                     

                    North America

                    		 $3,177  192 $3,369 
                     

                    Europe

                    		  326  —  326 
                            

                    		 $3,503 $192 $3,695 
                            

                    2008

                    		          
                     

                    North America

                    		 $3,534 $366 $3,900 
                     

                    Europe

                    		  326  —  326 
                            

                    		 $3,860 $366 $4,226 
                            

                    2007

                    		          
                     

                    North America

                    		 $3,366 $575 $3,941 
                     

                    Europe

                    		  256  2  258 
                            

                    		 $3,622 $577 $4,199 
                            

                            The following information provides a reconciliation of Net Income (Loss) to Adjusted EBITDA by reportable segment, as defined by the Company, for the years ended December 31, 2009, 2008 and 2007 2006 and 2005:(in millions):

                    20072009

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Discontinued
                    Information
                    Services
                     
                    		 (dollars in millions)

                    Net Income (Loss) $(1,113)$(3)$2 $—
                    Income from Discontinued Operations  —  —  —  —
                    Income Tax Provision (Benefit)  (17) 1  (6) —
                    Total Other (Income) Expense  895  —  —  —
                    Non-Cash Impairment Charge  1  —  —  —
                    Depreciation and Amortization Expense  935  7  —  —
                    Non-Cash Compensation Expense  122  —  —  —
                      
                    		 
                    		 
                    		 
                    Adjusted EBITDA $823 $5 $(4)$—
                      
                    		 
                    		 
                    		 

                     
                    		 Communications Coal
                    Mining                    		 

                    Net Income (Loss)

                    		 $(605)$6 

                    Income Tax Provision (Benefit)

                    		  —  — 

                    Total Other (Income) Expense

                    		  550  (15)

                    Depreciation and Amortization Expense

                    		  906  9 

                    Non-Cash Compensation Expense

                    		  59  — 
                          

                    Adjusted EBITDA

                    		 $910 $— 
                          

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (14) Segment Information (Continued)

                    2008

                     
                    		 Communications Coal
                    Mining                    		 

                    Net Income (Loss)

                    		 $(322)$3 

                    Income Tax Provision (Benefit)

                    		  4  — 

                    Total Other (Income) Expense

                    		  350  — 

                    Depreciation and Amortization Expense

                    		  929  2 

                    Non-Cash Compensation Expense

                    		  78  — 
                          

                    Adjusted EBITDA

                    		 $1,039 $5 
                          

                    2007

                     
                    		 Communications Coal
                    Mining                    		 

                    Net Income (Loss)

                    		 $(1,145)$(3)

                    Income Tax Provision (Benefit)

                    		  (17) 1 

                    Total Other (Income) Expense

                    		  927  — 

                    Non-Cash Impairment Charge

                    		  1  — 

                    Depreciation and Amortization Expense

                    		  935  7 

                    Non-Cash Compensation Expense

                    		  122  — 
                          

                    Adjusted EBITDA

                    		 $823 $5 
                          

                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    (19) Industry and Geographic DataNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    2006

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Discontinued
                    Information
                    Services
                    		 
                     
                    		 (dollars in millions)

                    		 
                    Net Income (Loss) $(800)$7 $3 $46 
                    Income from Discontinued Operations  —  —  —  (46)
                    Income Tax Provision (Benefit)  4  —  (2) — 
                    Total Other (Income) Expense  652  —  (4) — 
                    Non-Cash Impairment Charge  8  —  —  — 
                    Depreciation and Amortization Expense  729  1  —  — 
                    Non-Cash Compensation Expense  84  —  —  — 
                      
                    		 
                    		 
                    		 
                    		 
                    Adjusted EBITDA $677 $8 $(3)$— 
                      
                    		 
                    		 
                    		 
                    		 

                    2005

                     
                    		 Communications
                    		 Coal
                    Mining
                    		 Other
                    		 Discontinued
                    Information
                    Services
                    		 
                     
                    		 (dollars in millions)

                    		 
                    Net Income (Loss) $(720)$16 $(3)$69 
                    Income from Discontinued Operations  —  —  —  (69)
                    Income Tax Provision (Benefit)  2  2  1  — 
                    Total Other (Income) Expense  474  (7) (1) — 
                    Non-Cash Impairment Charge  9  —  —  — 
                    Depreciation and Amortization Expense  642  5  —  — 
                    Non-Cash Compensation Expense  51  —  —  — 
                      
                    		 
                    		 
                    		 
                    		 
                    Adjusted EBITDA $458 $16 $(3)$— 
                      
                    		 
                    		 
                    		 
                    		 

                    (20)(15) Commitments, Contingencies and Other Items

                    Right of Way Litigation

                            In April 2002, Level 3 Communications, Inc.,        The Company and twocertain of its subsidiaries were named as defendants inBauer, et. al. v. Level 3 Communications, LLC, et al.,(the "companies") are parties to a number of purported class action covering 22 states, filedlawsuits involving the companies' right to install fiber optic cable network in state courtrailroad right-of-ways adjacent to plaintiffs' land. The only lawsuit in Madison County, Illinois. In July 2001, Level 3 was named aswhich a defendantclass has been certified against the companies occurred inKoyle, et. al. v. Level 3 Communications, Inc., et. alal.,., a purported two state class action filed in the U.S. District Court for the District of Idaho. In November of 2005, the court granted class certification only for the state of Idaho. In September 2002, Level 3 Communications, LLC and Williams Communications, LLC were named as defendantsThe companies have defeated motions for class certification inSmith et. al. v. Sprint Communications Company, L.P., et al., a purported nationwide class action filednumber of these actions but expect that plaintiffs in the United States District Court for the Northern Districtpending lawsuits will continue to seek certification of Illinois. In April 2005, the Smith plaintiffs filed a Fourth Amended Complaint which did not include Level 3statewide or Williams Communications, Inc. as a party, thus ending both companies' involvement in the Smith case. On February 17, 2005, Level 3 Communications, LLC and Williams Communications, LLC were named as defendants inMcDaniel, et. al., v. Qwest Communications Corporation, et al., a purported class action covering 10 states filed in the United States District Court for the Northern District of Illinois. These


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (20) Commitments, Contingencies and Other Items (Continued)


                    actions involve the companies' right to install its fiber optic cable network in easements and right-of-ways crossing the plaintiffs' land.multi-state classes. In general, the companies obtained the rights to construct their networks from railroads, utilities, and others, and have installed their networks along the rights-of-way so granted. Plaintiffs in the purported class actions assert that they are the owners of lands over which the companies' fiber optic cable networks pass, and that the railroads, utilities, and others who granted the companies the right to construct and maintain their networks did not have the legal authority to do so. The complaints seek damages on theories of trespass, unjust enrichment and slander of title and property, as well as punitive damages. The companies have also received, and may in the future receive, claims and demands related to rights-of-way issues similar to the issues in these cases that may be based on similar or different legal theories. To date, other than as noted above,

                            The companies negotiated a series of class settlements affecting all adjudicated attemptspersons who own or owned land next to have class action status granted on complaints filed againstor near railroad rights of way in which the companies or anyhave their fiber optic cable network. The United States District Court for the District of their subsidiaries involving claimsMassachusetts inKingsborough v. Sprint Communications Co. L.P. granted preliminary approval of the proposed settlement; however, on September 10, 2009, the court denied a motion for final approval of the settlement on the basis that the court lacked subject matter jurisdiction and demands related to rights-of-way issues have been denied.dismissed the case.

                            It is still too early for the Company to reach a conclusion as to the ultimate outcome of these actions. However, management believes that the Company and its subsidiariescompanies have substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future), and intends to defend them vigorously if a satisfactory form of settlement is not ultimately negotiated and approved. Additionally, management believes that any resulting liabilities for these actions, beyond amounts reserved, will not materially affect the Company's financial condition or future results of operations, but could affect future cash flows.

                            In February 2009, Level 3 Communications, Inc., certain of its current officers and a former officer were named as defendants in purported class action lawsuits filed in the United States District Court for the District of Colorado, which have been consolidated as In reLevel 3 Communications, Inc. Securities Litigation (Civil Case No. 09-cv-00200-PAB-CBS). The Plaintiffs in each complaint allege, in general, that throughout the purported class period specified in the complaint that the defendants failed to disclose material adverse facts about the Company's integration activities, business and operations. The complaints seek damages based on purported violations of Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934. On May 4, 2009, the Court appointed a lead plaintiff in the case, and on June 29, 2009, the lead plaintiff filed a Consolidated Class Action Complaint (the "Complaint"). On July 29, 2009, the Company and the other defendants named in the Complaint filed a motion to dismiss the Complaint with prejudice which is pending before the court.


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (15) Commitments, Contingencies and Other Items (Continued)

                            It remains too early for the Company to reach a conclusion as to the ultimate outcome of these actions. However, management believes that the Company has substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future) and intends to defend these actions vigorously.

                            During March 2009, Level 3 Communications, Inc., as a nominal defendant, certain of its directors and its current officers, and a former officer, were named as defendants in purported stockholder derivative actions in the District Court, Broomfield County, Colorado, which have been consolidated as In reLevel 3 Communications, Inc. Derivative Litigation (Lead Case No. 2009CV59). On December 11, 2009, Level 3 Communications, Inc., as a nominal defendant, certain of its directors and current officers, and a former officer, were named as defendants in purported stockholder derivative action in the United States District Court for the District of Colorado in Iron Workers District Council Of Tennessee Valley & Vicinity Pension Plan v. Level 3 Communications, Inc., et. al. The Plaintiffs allege that during the period specified in the complaints the named defendants failed to disclose material adverse facts about the Company's integration activities, business and operations. The complaints seek damages on behalf of the Company based on purported breaches of fiduciary duties for disseminating false and misleading statements and failing to maintain internal controls; unjust enrichment; abuse of control; gross mismanagement; waste of corporate assets; and, with respect to certain defendants, breach of fiduciary duties in connection with the resignation of Kevin O'Hara. The parties have agreed to a temporary stay of all activities in these actions pending the outcome of the motion to dismiss or other relevant time periods in the securities litigation described above.

                            It remains too early for the Company to reach a conclusion as to the ultimate outcome of these derivative actions. However, management believes that the complaints have numerous deficiencies including that each plaintiff failed to make a demand on the Company's Board of Directors before filing the suit.

                            In March 2009, late April 2009 and early May 2009, Level 3 Communications, Inc., the Level 3 Communications, Inc. 401(k) Plan Committee and certain current and former officers and directors of Level 3 Communications, Inc. were named as defendants in purported class action lawsuits filed in the U.S. District Court for the District of Colorado inWalter v. Level 3 Communications, Inc., et. al., Dagres v. Level 3 Communications, Inc., et. al. andFragale v. Level 3 Communications,  Inc., et. al. The complaints allege breaches of fiduciary and other duties under the Employee Retirement Income Security Act ("ERISA") with respect to investments in the Company's common stock held in individual participant accounts in the Level 3 Communications, Inc. 401(k) Plan. The complaints claim that those investments were imprudent for reasons that are similar to those alleged in the securities and derivative actions described above. A motion to consolidate the three actions and specify lead counsel is pending before the court.

                            It remains too early for the Company to reach a conclusion as to the ultimate outcome of these ERISA actions. However, management believes that the Company has substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future) and intends to defend these actions vigorously.

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


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (15) Commitments, Contingencies and Other Items (Continued)

                    Letters of Credit

                            It is customary in Level 3's industry to use various financial instruments in the normal course of business. These instruments include 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, 2009 and 2008, Level 3 had outstanding letters of credit of approximately $25 million and $30 million, respectively, which are collateralized by cash, which is reflected on the consolidated balance sheet as restricted cash. 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 nor material.

                    Operating Leases

                            The Company is leasing rights-of-way, facilities and other assets under various operating leases which, in addition to rental payments, may 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 consumervarious price indexindexes and increases in the landlord's management costs.

                            The right-of-way agreements have various expiration dates through 2060. Payments under these right-of-way agreements were $90$118 million in 2007, $622009, $112 million in 20062008 and $30$106 million in 2005.2007.

                            The Company has obligations under non-cancelable operating leases for certain colocation and office facilities, including lease obligations for which facility related restructuring charges have been recorded. The lease agreements have various expiration dates through 2099. Rent expense, including common area maintenance, under non-cancelable lease agreements was $198 million in 2009, $193 million in 2008 and $190 million in 2007, $132 million in 2006 and $76 million in 2005.2007.

                            For those leases involving communications colocation and right-of-way agreements, the Company anticipates that it will renew these leases under option provisions contained in the lease agreements given the significant cost to relocate the Company's network and other facilities.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (20) Commitments, Contingencies and Other Items (Continued)

                            Future minimum payments for the next five years under network and related right-of-way agreements and non-cancelable operating leases for facilities (including common area maintenance) consist of the following atas of December 31, 2007 (dollars in2009 (in millions):

                     
                    		 Right-of-Way
                    Agreements
                    		 Facilities
                    		 Total
                    2008 $101 $126 $227
                    2009  91  105  196
                    2010  85  88  173
                    2011  80  77  157
                    2012  77  70  147
                    Thereafter  918  261  1,179
                      
                    		 
                    		 
                     Total $1,352 $727 $2,079
                      
                    		 
                    		 

                     
                    		 Right-of-Way
                    Agreements                    		 Facilities Total 

                    2010

                    		 $121 $160 $281 

                    2011

                    		  96  147  243 

                    2012

                    		  93  138  231 

                    2013

                    		  90  117  207 

                    2014

                    		  83  102  185 

                    Thereafter

                    		  767  340  1,107 
                            
                     

                    Total

                    		 $1,250 $1,004 $2,254 
                            

                            Certain right of way agreements include provisions for increases in payments in future periods based on the rate of inflation as measured by the consumervarious price index.indexes. The Company has not included estimates for these increases in future periods in the amounts included above.


                    Table of Contents


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (15) Commitments, Contingencies and Other Items (Continued)

                            Certain non-cancelable right of way agreements provide for automatic renewal on a periodic basis. Payments due under these agreements with automatic renewal options have been included in the table above for a period of 16 years from January 1, 2010, which approximates the economic remaining useful life of the Company's conduit. In addition, certain other right of way agreements are cancellable or can be terminated under certain conditions. However,conditions by the Company. The Company includes the payments under such cancelable right of way agreements in most cases cancellation or terminationthe table above for a period of 1 year from January 1, 2010, if the Company does not consider it likely that it will cancel the right of way agreement requires removal ofwithin the Company's network. Because the Company considers it unlikely that it would cancel or terminate its right of way agreements and remove its network, the payments due under these agreements have been included in the table above. Certain of these right of way agreements provide for automatic renewal on a periodic basis. For purposes of presenting future payment commitments under these agreements, the Company has included 18 years of future payments from January 1, 2008 in the table above.next year.

                    Other

                            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, 2007 and 2006, Level 3 had outstanding letters of credit of approximately $36 million and $45 million, respectively, which are collateralized by cash which is reflected on the consolidated balance sheet as restricted cash and securities. 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 nor material.

                    (21)(16) Condensed Consolidating Financial Information

                            As discussed in Note 14,11, Level 3 Financing has issued senior notes as described below:

                      •
                      In October 2003, Level 3 Financing issued $500 million of 10.75% Senior Notes due 2011. The 10.75% Senior Notes were registered with the Securities and Exchange Commission in 2005. The Company repurchased $497 million of the 10.75% notes in 2006.


                    LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    (21) Condensed Consolidating Financial Information (Continued)

                        •
                        In March 2006, Level 3 Financing issued $150 million of Floating Rate Senior Notes due 2011 and $250 million of 12.25% Senior Notes due 2013. The Company repurchased $144 million of the Floating Rate Senior Notes due 2011 in 2007.2007 and the remaining $6 million of the Floating Rate Senior Notes due 2011 in 2009.

                        •
                        In April 2006, Level 3 Financing issued an additional $300 million of 12.25% Senior Notes due 2013. See Note 17—Subsequent Events for addition information on the 12.25% Senior Notes due 2013.

                        •
                        In October 2006, Level 3 Financing issued $600 million of 9.25% Senior Notes due 2014 and in December 2006 issued an additional $650 million of 9.25% Senior Notes due 2014.

                        •
                        In February 2007, Level 3 Financing issued $700 million of 8.75% Senior Notes due 2017 and $300 million of Floating Rate Senior Notes due 2015.

                              The notes discussed above are unsecured obligations of Level 3 Financing; however, they are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by Level 3 Communications, Inc. and Level 3 Communications, LLC.

                              In addition, Level 3 Financing's 12.25% Senior Notes due 2013, Floating Rate Senior Notes due 2011 and 9.25% Senior Notes due 2014 are jointly and severally and fully and unconditionally guaranteed by Broadwing Financial Services, Inc., a wholly owned subsidiary of Level 3 Communications, Inc. Broadwing Financial Services, Inc. was acquired in the acquisition of Broadwing on January 3, 2007. As a result of this guarantee, the Company has included Broadwing Financial Services, Inc. in the condensed consolidating financial information below for the periods subsequent to the acquisition of Broadwing onfrom January 3, 2007.2007 through December 31, 2009 when the Company merged Broadwing Financial Services, Inc. with and into Level 3 Communications LLC. In the Condensed Consolidating Balance Sheets for the year ended December 31, 2009, Broadwing Financial Services, Inc. is included in Level 3 Communications, LLC.


                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (16) Condensed Consolidating Financial Information (Continued)

                              In conjunction with the registration of the 10.75% Senior Notes, Floating Rate Senior Notes due 2011, 12.25% Senior Notes due 2013, 9.25% Senior Notes due 2014, 8.75% Senior Notes due 2017 and Floating Rate Senior Notes due 2015 the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."

                              Condensed Consolidating Statements of Operations for the three years ended December 31, 2007, 2006 and 2005 follow. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Communications, Inc. These transactions are eliminated in the consolidated results of the Company. The operating activities of the separate legal entities included in the Company's consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities, and are not intended to present the operating results of those legal entities on a stand-alone basis.

                              Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Communications, Inc. These transactions are eliminated in the consolidated results of the Company.

                              The Condensed Consolidating Balance Sheet as of December 31, 2008 has been adjusted to reflect the reclassification of noncurrent deferred tax liabilities from Level 3 Communications, LLC. to Other Non-Guarantor Subsidiaries. The effect of this change was an increase in the Other Liabilities for the Other Non-Guarantor Subsidiaries and a reduction in the Other Liabilities for Level 3 Communications, LLC., with corresponding changes to Due from (to) affiliates. This change did not have any effect on the Level 3 Consolidated Balance Sheet as of December 31, 2008 or the financial results for the year ended December 31, 2008.


                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21)(16) Condensed Consolidating Financial Information (Continued)


                      Condensed Consolidating Statements of Operations
                      For the year ended December 31, 2009

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Revenue

                      		 $— $— $1,642 $— $2,350 $(230)$3,762 

                      Costs and Expenses:

                      		                      
                       

                      Cost of Revenue

                      		  —  —  737  —  1,047  (219) 1,565 
                       

                      Depreciation and Amortization

                      		  —  —  412  —  503  —  915 
                       

                      Selling, General and Administrative

                      		  2  —  1,108     239  (11) 1,338 
                       

                      Restructuring and Impairment Charges

                      		  —  —  9  —  —  —  9 
                                      
                        

                      Total Costs and Expenses

                      		  2  —  2,266  —  1,789  (230) 3,827 
                                      

                      Operating Income (Loss)

                      		  (2) —  (624) —  561  —  (65)

                      Other Income (Expense):

                      		                      
                       

                      Interest income

                      		  —  —  1  —  1  —  2 
                       

                      Interest expense

                      		  (211) (374) (2) (1) (7) —  (595)
                       

                      Interest income (expense) affiliates, net

                      		  795  1,180  (2,057) —  82  —  — 
                       

                      Equity in net earnings (losses) of subsidiaries

                      		  (1,242) (2,048) 387  —  —  2,903  — 
                       

                      Other income (expense), net

                      		  42  —  4  —  (5) —  41 
                                      
                        

                      Other Income (Expense)

                      		  (616) (1,242) (1,667) (1) 71  2,903  (552)
                                      

                      Income (Loss) Before Income Taxes

                      		  (618) (1,242) (2,291) (1) 632  2,903  (617)

                      Income Tax Benefit (Expense)

                      		  —  —  2  —  (3) —  (1)
                                      

                      Net Income (Loss)

                      		 $(618)$(1,242)$(2,289)$(1)$629 $2,903 $(618)
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (16) Condensed Consolidating Financial Information (Continued)


                      Condensed Consolidating Statements of Operations
                      For the year ended December 31, 2008

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Revenue

                      		 $— $— $1,720 $— $2,795 $(214)$4,301 

                      Costs and Expenses:

                      		                      
                       

                      Cost of Revenue

                      		  —  —  684  —  1,328  (203) 1,809 
                       

                      Depreciation and Amortization

                      		  —  —  362  —  569  —  931 
                       

                      Selling, General and Administrative

                      		  1  —  1,243     272  (11) 1,505 
                       

                      Restructuring and Impairment Charges

                      		  —  —  25  —  —  —  25 
                                      
                        

                      Total Costs and Expenses

                      		  1  —  2,314  —  2,169  (214) 4,270 
                                      

                      Operating Income (Loss)

                      		  (1) —  (594) —  626  —  31 

                      Other Income (Expense):

                      		                      
                       

                      Interest income

                      		  —  1  10  —  4  —  15 
                       

                      Interest expense

                      		  (191) (369) —  (2) (8) —  (570)
                       

                      Interest income (expense) affiliates, net

                      		  787  1,103  (1,951) —  61  —  — 
                       

                      Equity in net earnings (losses) of subsidiaries

                      		  (998) (1,733) 527  —  —  2,204  — 
                       

                      Other income (expense), net

                      		  85  —  7  —  120  —  212 
                                      
                        

                      Total Other Income (Expense)

                      		  (317) (998) (1,407) (2) 177  2,204  (343)
                                      

                      Income (Loss) Before Income Taxes

                      		  (318) (998) (2,001) (2) 803  2,204  (312)

                      Income Tax Benefit (Expense)

                      		  —  —  (5) —  (1) —  (6)
                                      

                      Net Income (Loss)

                      		 $(318)$(998)$(2,006)$(2)$802 $2,204 $(318)
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (16) Condensed Consolidating Financial Information (Continued)


                      Condensed Consolidating Statements of Operations
                      For the year ended December 31, 2007

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Broadwing
                      Financial
                      Services, Inc.
                      		 Othe
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Revenue $— $— $1,439 $27 $2,994 $(191)$4,269 

                      Costs and Expenses:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Cost of Revenue  —  —  553  —  1,434  (154) 1,833 
                       Depreciation and Amortization  —  —  345  —  597  —  942 
                       Selling, General and Administrative  3  —  1,251  27  479  (37) 1,723 
                       Restructuring and Impairment Charges  —  —  12  —  —  —  12 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Total Costs and Expenses  3  —  2,161  27  2,510  (191) 4,510 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      Operating Income (Loss)
                       
                       
                      (3
                      )
                       
                      —
                       
                       
                      (722
                      )
                       
                      —
                       
                       
                      484
                       
                       
                      —
                       
                       
                      (241
                      )

                      Other Income (Loss), net:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Interest Income  2  1  43  —  8  —  54 
                       Interest Expense  (202) (365) (1) (1) (8) —  (577)
                       Interest Income (Expense) Affiliates, net  781  976  (1,818) —  61  —  — 
                       Equity in Net Earnings (Losses) of Subsidiaries  (1,329) (1,934) 444  —  —  2,819  — 
                       Other Income (Expense)  (363) (29) 7  —  13  —  (372)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Other Income (Loss)  (1,111) (1,351) (1,325) (1) 74  2,819  (895)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      Income (Loss) from Continuing Operations Before Income Taxes
                       
                       
                      (1,114
                      )
                       
                      (1,351
                      )
                       
                      (2,047
                      )
                       
                      (1
                      )
                       
                      558
                       
                       
                      2,819
                       
                       
                      (1,136
                      )

                      Income Tax Benefit
                       
                       
                      —
                       
                       
                      22
                       
                       
                      —
                       
                       
                      —
                       
                       
                      —
                       
                       
                      —
                       
                       
                      22
                       
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      Income (Loss) from Continuing Operations
                       
                       
                      (1,114
                      )
                       
                      (1,329
                      )
                       
                      (2,047
                      )
                       
                      (1
                      )
                       
                      558
                       
                       
                      2,819
                       
                       
                      (1,114
                      )
                      Income (Loss) from Discontinued Operations  —  —  —  —  —  —  — 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Income (Loss) $(1,114)$(1,329)$(2,047)$(1)$558 $2,819 $(1,114)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Revenue

                      		 $— $— $1,439 $27 $2,994 $(191)$4,269 

                      Costs and Expenses:

                      		                      
                       

                      Cost of Revenue

                      		  —  —  553  —  1,434  (154) 1,833 
                       

                      Depreciation and Amortization

                      		  —  —  345  —  597  —  942 
                       

                      Selling, General and Administrative

                      		  3  —  1,251  27  479  (37) 1,723 
                       

                      Restructuring and Impairment Charges

                      		  —  —  12  —  —  —  12 
                                      
                        

                      Total Costs and Expenses

                      		  3  —  2,161  27  2,510  (191) 4,510 
                                      

                      Operating Income (Loss)

                      		  (3) —  (722) —  484  —  (241)

                      Other Income (Expense):

                      		                      
                       

                      Interest income

                      		  2  1  43  —  8  —  54 
                       

                      Interest expense

                      		  (234) (365) (1) (1) (8) —  (609)
                       

                      Interest income (expense) affiliates, net

                      		  781  976  (1,818) —  61  —  — 
                       

                      Equity in net earnings (losses) of subsidiaries

                      		  (1,329) (1,934) 444  —  —  2,819  — 
                       

                      Other Income (Expense)

                      		  (363) (29) 7  —  13  —  (372)
                                      
                        

                      Total Other Income (Expense)

                      		  (1,143) (1,351) (1,325) (1) 74  2,819  (927)
                                      

                      Income (Loss) Before Income Taxes

                      		  (1,146) (1,351) (2,047) (1) 558  2,819  (1,168)

                      Income Tax Benefit

                      		  —  22  —  —  —  —  22 
                                      

                      Net Income (Loss)

                      		 $(1,146)$(1,329)$(2,047)$(1)$558 $2,819 $(1,146)
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21)(16) Condensed Consolidating Financial Information (Continued)

                      Condensed Consolidating Statements of OperationsBalance Sheets
                      For the year ended December 31, 20062009

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Revenue $— $— $1,304 $2,270 $(196)$3,378 
                      Costs and Expenses:                   
                       Cost of Revenue  —  —  525  1,179  (187) 1,517 
                       Depreciation and Amortization  —  —  358  372  —  730 
                       Selling, General and Administrative  6  —  816  445  (9) 1,258 
                       Restructuring and Impairment Charges  —  —  9  4  —  13 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Total Costs and Expenses  6  —  1,708  2,000  (196) 3,518 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Operating Income (Loss)  (6) —  (404) 270  —  (140)
                      Other Income (Loss), net:                   
                       Interest Income  16  1  40  7  —  64 
                       Interest Expense  (432) (207) —  (9) —  (648)
                       Interest Income (Expense) Affiliates, net  860  666  (1,572) 46  —  — 
                       Equity in Net Earnings (Losses) of Subsidiaries  (1,209) (1,561) 141  —  2,629  — 
                       Other Income (Expense)  27  (108) 7  10  —  (64)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Other Income (Loss)  (738) (1,209) (1,384) 54  2,629  (648)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Income (Loss) from Continuing Operations Before Income Taxes  (744) (1,209) (1,788) 324  2,629  (788)
                      Income Tax (Expense) Benefit  —  —  —  (2) —  (2)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Income (Loss) from Continuing Operations  (744) (1,209) (1,788) 322  2,629  (790)
                      Income from Discontinued Operations  —  —  —  46  —  46 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Income (Loss) $(744)$(1,209)$(1,788)$368 $2,629 $(744)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Assets

                      		                   

                      Current Assets:

                      		                   
                       

                      Cash and cash equivalents

                      		 $236 $8 $431 $161 $— $836 
                       

                      Restricted cash and securities

                      		  —  —  1  2  —  3 
                       

                      Receivable, net

                      		  —  —  77  246  —  323 
                       

                      Due from (to) affiliates

                      		  11,404  10,397  (24,068) 2,267  —  — 
                       

                      Other

                      		  3  16  43  35  —  97 
                                    

                      Total Current Assets

                      		  11,643  10,421  (23,516) 2,711  —  1,259 

                      Property, Plant and Equipment, net

                      		  —  —  3,119  2,568  —  5,687 

                      Restricted Cash and Securities

                      		  18  —  23  81  —  122 

                      Goodwill and Other Intangibles, net

                      		  —  —  566  1,330  —  1,896 

                      Investment in Subsidiaries

                      		  (9,222) (15,037) 3,288  —  20,971  — 

                      Other Assets, net

                      		  7  63  15  13  —  98 
                                    

                      Total Assets

                      		 $2,446 $(4,553)$(16,505)$6,703 $20,971 $9,062 
                                    

                      Liabilities and Stockholders' Equity (Deficit)

                      		                   

                      Current Liabilities:

                      		                   
                       

                      Accounts payable

                      		 $1 $— $136 $227 $— $364 
                       

                      Current portion of long-term debt

                      		  151  551  2  1  —  705 
                       

                      Accrued payroll and employee benefits

                      		  —  —  46  5  —  51 
                       

                      Accrued interest

                      		  47  92  —  1  —  140 
                       

                      Current portion of deferred revenue

                      		  —  —  116  46  —  162 
                       

                      Other

                      		  —  1  61  35  —  97 
                                    

                      Total Current Liabilities

                      		  199  644  361  315  —  1,519 

                      Long-Term Debt, less current portion

                      		  1,722  3,936  26  71  —  5,755 

                      Deferred Revenue, less current portion

                      		  —  —  662  78  —  740 

                      Other Liabilities

                      		  34  93  156  274  —  557 

                      Stockholders' Equity (Deficit)

                      		  491  (9,226) (17,710) 5,965  20,971  491 
                                    

                      Total Liabilities and Stockholders' Equity (Deficit)

                      		 $2,446 $(4,553)$(16,505)$6,703 $20,971 $9,062 
                                    

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21)(16) Condensed Consolidating Financial Information (Continued)

                      Condensed Consolidating Statements of Operations
                      For the year ended December 31, 2005

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Revenue $— $— $1,457 $440 $(178)$1,719 
                      Costs and Expenses:                   
                       Cost of Revenue  —  —  575  104  (163) 516 
                       Depreciation and Amortization  —  —  444  203  —  647 
                       Selling, General and Administrative  4  —  640  140  (15) 769 
                       Restructuring and Impairment Charges  —  —  21  2  —  23 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Total Costs and Expenses  4  —  1,680  449  (178) 1,955 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Operating Income (Loss)  (4) —  (223) (9) —  (236)
                      Other Income (Loss), net:                   
                       Interest Income  19  1  11  4  —  35 
                       Interest Expense  (390) (133) —  (7) —  (530)
                       Interest Income (Expense) Affiliates, net  784  527  (1,336) 25  —  — 
                       Equity in Net Earnings (Losses) of Subsidiaries  (1,048) (1,492) (1) —  2,541  — 
                       Other Income (Expense)  1  —  12  16  —  29 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                        Other Income (Loss)  (634) (1,097) (1,314) 38  2,541  (466)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Income (Loss) from Continuing Operations Before Income Taxes  (638) (1,097) (1,537) 29  2,541  (702)
                      Income Tax Expense  —  —  —  (5) —  (5)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Income (Loss) from Continuing Operations  (638) (1,097) (1,537) 24  2,541  (707)
                      Income from Discontinued Operations  —  49  —  20  —  69 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Income (Loss) $(638)$(1,048)$(1,537)$44 $2,541 $(638)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21) Condensed Consolidating Financial Information (Continued)

                              Condensed Consolidating Balance Sheets as of December 31, 2007 and 2006 follow:

                      Condensed Consolidating Balance Sheets
                      December 31, 20072008

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Broadwing
                      Financial
                      Services, Inc.
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                       
                      		 (dollars in millions)

                      Assets                     
                      Current Assets:                     
                       Cash and cash equivalents $— $27 $588 $— $99 $— $714
                       Marketable securities  8  —  —  —  1  —  9
                       Restricted cash and securities  —  —  14  —  9  —  23
                       Accounts receivable, net  —  —  80  —  315  —  395
                       Due from (to) affiliates  10,575  8,549  (20,897) 20  1,753  —  —
                       Other  7  8  32  —  41  —  88
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Current Assets  10,590  8,584  (20,183) 20  2,218  —  1,229
                      Property, Plant and Equipment, net  —  —  3,256  —  3,413  —  6,669
                      Restricted Cash and Securities  18  —  17  —  66  —  101
                      Goodwill and Other Intangibles, net  —  —  151  —  1,950  —  2,101
                      Investment in Subsidiaries  (6,951) (11,270) 4,481  —  —  13,740  —
                      Other Assets, net  16  47  17  —  65  —  145
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Assets $3,673 $(2,639)$(12,261)$20 $7,712 $13,740 $10,245
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      Liabilities and Stockholders' Equity (Deficit)
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                      Current Liabilities:                     
                       Accounts payable $— $— $170 $— $226 $— $396
                       Current portion of long-term debt  25  —  —  1  6  —  32
                       Accrued payroll and employee benefits  —  —  88  —  9  —  97
                       Accrued interest  33  95  —     —  —  128
                       Deferred revenue  —  —  91     75  —  166
                       Other  —  —  42  —  97  —  139
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Current Liabilities  58  95  391  1  413  —  958

                      Long-Term Debt, less current portion
                       
                       
                      2,511
                       
                       
                      4,217
                       
                       
                      —
                       
                       
                      20
                       
                       
                      84
                       
                       
                      —
                       
                       
                      6,832
                      Deferred Revenue  —  —  644  —  119  —  763
                      Other Liabilities  34  —  213  —  375  —  622
                      Stockholders' Equity (Deficit)  1,070  (6,951) (13,509) (1) 6,721  13,740  1,070
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Liabilities and Stockholders' Equity (Deficit) $3,673 $(2,639)$(12,261)$20 $7,712 $13,740 $10,245
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Assets

                      		                      

                      Current Assets:

                      		                      
                       

                      Cash and cash equivalents

                      		 $67 $10 $555 $— $136 $— $768 
                       

                      Restricted cash and securities

                      		  —  —  1  —  2  —  3 
                       

                      Receivable, net

                      		  —  —  73  —  317  —  390 
                       

                      Due from (to) affiliates

                      		  11,148  9,306  (22,305) 17  1,834  —  — 
                       

                      Other

                      		  4  9  36  —  32  —  81 
                                      

                      Total Current Assets

                      		  11,219  9,325  (21,640) 17  2,321  —  1,242 

                      Property, Plant and Equipment, net

                      		  —  —  3,150  —  3,009  —  6,159 

                      Restricted Cash and Securities

                      		  18  —  25  —  84  —  127 

                      Goodwill and Other Intangibles, net

                      		  —  —  540  —  1,451  —  1,991 

                      Investment in Subsidiaries

                      		  (8,043) (13,041) 3,484  —  —  17,600  — 

                      Other Assets, net

                      		  9  76  15  —  15  —  115 
                                      

                      Total Assets

                      		 $3,203 $(3,640)$(14,426)$17 $6,880 $17,600 $9,634 
                                      

                      Liabilities and Stockholders' Equity (Deficit)

                      		                      

                      Current Liabilities:

                      		                      
                       

                      Accounts payable

                      		 $3 $— $147 $— $215 $— $365 
                       

                      Current portion of long-term debt

                      		  181  —  1  1  3  —  186 
                       

                      Accrued payroll and employee benefits

                      		  —  —  97  —  8  —  105 
                       

                      Accrued interest

                      		  24  93  —  —  —  —  117 
                       

                      Current portion of deferred revenue

                      		  —  —  96  —  72  —  168 
                       

                      Other

                      		  —  1  59  —  51  —  111 
                                      

                      Total Current Liabilities

                      		  208  94  400  1  349  —  1,052 

                      Long-Term Debt, less current portion

                      		  1,930  4,216  7  19  73  —  6,245 

                      Deferred Revenue, less current portion

                      		  —  —  630  —  89  —  719 

                      Other Liabilities

                      		  44  97  101  —  355  —  597 

                      Stockholders' Equity (Deficit)

                      		  1,021  (8,047) (15,564) (3) 6,014  17,600  1,021 
                                      

                      Total Liabilities and Stockholders' Equity (Deficit)

                      		 $3,203 $(3,640)$(14,426)$17 $6,880 $17,600 $9,634 
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21)(16) Condensed Consolidating Financial Information (Continued)

                      Condensed Consolidating Balance SheetsStatements of Cash Flows
                      For the year ended December 31, 20062009

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                       
                      		 (dollars in millions)

                      Assets                  
                      Current Assets:                  
                       Cash and cash equivalents $15 $12 $1,592 $62 $— $1,681
                       Marketable securities  235  —  —  —  —  235
                       Restricted cash and securities  —  —  31  15  —  46
                       Accounts receivable, net  —  —  97  229  —  326
                       Due from (to) affiliates  11,183  6,432  (18,631) 1,016  —  —
                       Other  17  6  41  37  —  101
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Current Assets  11,450  6,450  (16,870) 1,359  —  2,389
                      Property, Plant and Equipment, net  —  —  3,268  3,200  —  6,468
                      Marketable Securities  —  —  —  —  —  —
                      Restricted Cash and Securities  17  —  —  73  —  90
                      Goodwill and Other Intangibles, net  —  —  44  875  —  919
                      Investment in Subsidiaries  (6,419) (10,170) 2,639  —  13,950  —
                      Other Assets, net  43  41  12  32  —  128
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Assets $5,091 $(3,679)$(10,907)$5,539 $13,950 $9,994
                        
                      		 
                      		 
                      		 
                      		 
                      		 

                      Liabilities and Stockholders' Equity (Deficit)
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                      Current Liabilities:                  
                       Accounts payable $— $1 $160 $230 $— $391
                       Current portion of long-term debt  —  —  —  5  —  5
                       Accrued payroll and employee benefits  —  —  59  33  —  92
                       Accrued interest  93  49  —  1  —  143
                       Deferred revenue  —  —  84  44  —  128
                       Other  1  2  56  97  —  156
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Current Liabilities  94  52  359  410  —  915
                      Long-Term Debt, less current portion  4,581  2,688  —  88  —  7,357
                      Deferred Revenue  —  —  642  125  —  767
                      Other Liabilities  42  —  199  340  —  581
                      Stockholders' Equity (Deficit)  374  (6,419) (12,107) 4,576  13,950  374
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      Total Liabilities and Stockholders' Equity (Deficit) $5,091 $(3,679)$(10,907)$5,539 $13,950 $9,994
                        
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Net Cash Provided by (Used in) Operating Activities

                      		 $(142)$(369)$(154)$— $1,022 $— $357 

                      Cash Flows from Investing Activities:

                      		                      
                       

                      Capital expenditures

                      		  —  —  (121) —  (192) —  (313)
                       

                      Proceeds from sale of business groups, net

                      		  —  —  —  —  —  —  — 
                       

                      (Increase) decrease in restricted cash and securities, net

                      		  —  —  2  —  3  —  5 
                       

                      Proceeds from sale of property, plant and equipment

                      		  —  —  —  —  1  —  1 
                                      

                      Net Cash Used in Investing Activities

                      		  —  —  (119) —  (188) —  (307)

                      Cash Flows from Financing Activities:

                      		                      
                       

                      Long-term debt borrowings, net of issuance costs

                      		  269  274  —  —  —  —  543 
                       

                      Payments on and repurchases of long-term debt, including current portion and refinancing costs

                      		  (518) (6) (1) —  (2) —  (527)
                       

                      Increase (decrease) due from affiliates, net

                      		  560  99  142  —  (801) —  — 
                       

                      Other

                      		  —  —  —  —  —  —  — 
                                      

                      Net Cash Provided by (Used in) Financing Activities

                      		  311  367  141  —  (803) —  16 

                      Effect of Exchange Rates on Cash and Cash Equivalents

                      		  —  —  8  —  (6) —  2 
                                      

                      Net Change in Cash and Cash Equivalents

                      		  169  (2) (124) —  25  —  68 

                      Cash and Cash Equivalents at Beginning of Year

                      		  67  10  555  —  136  —  768 
                                      

                      Cash and Cash Equivalents at End of Year

                      		 $236 $8 $431 $— $161 $— $836 
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21)(16) Condensed Consolidating Financial Information (Continued)


                      Condensed Consolidating Statements of Cash Flows for
                      For the yearsyear ended December 31, 2007, 2006 and 2005 follow:2008

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Net Cash Provided by (Used in) Operating Activities

                      		 $(149)$(377)$(159)$(1)$1,099 $— $413 

                      Cash Flows from Investing Activities:

                      		                      
                       

                      Capital expenditures

                      		  —  —  (160) —  (289) —  (449)
                       

                      Proceeds from sale of business groups, net

                      		  —  —  —  —  124  —  124 
                       

                      (Increase) decrease in restricted cash and securities, net

                      		  —  —  3  —  (8) —  (5)
                       

                      Proceeds from sale of property, plant and equipment

                      		  —  —  1  —  2  —  3 
                       

                      Other

                      		  —  —  2  —  4  —  6 
                                      

                      Net Cash Used in Investing Activities

                      		  —  —  (154) —  (167) —  (321)

                      Cash Flows from Financing Activities:

                      		                      
                       

                      Long-term debt borrowings, net of issuance costs

                      		  400  —  —  —  —  —  400 
                       

                      Payments on and repurchases of long-term debt, including current portion and refinancing costs

                      		  (431) —  —  (1) (4) —  (436)
                       

                      Increase (decrease) due from affiliates, net

                      		  245  360  282  2  (889) —  — 
                       

                      Other

                      		  2  —  —  —  —  —  2 
                                      

                      Net Cash Provided by (Used in) Financing Activities

                      		  216  360  282  1  (893) —  (34)

                      Effect of Exchange Rates on Cash and Cash Equivalents

                      		  —  —  (2) —  (2) —  (4)
                                      

                      Net Change in Cash and Cash Equivalents

                      		  67  (17) (33) —  37  —  54 

                      Cash and Cash Equivalents at Beginning of Year

                      		  —  27  588  —  99  —  714 
                                      

                      Cash and Cash Equivalents at End of Year

                      		 $67 $10 $555 $— $136 $— $768 
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (16) Condensed Consolidating Financial Information (Continued)


                      Condensed Consolidating Statements of Cash Flows
                      For the year ended December 31, 2007

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Broadwing
                      Financial
                      Services, Inc.
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Net Cash Provided by (Used in) Operating Activities $(229)$(306)$(146)$(15)$927 $— $231 

                      Cash Flows from Investing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Proceeds from sale and maturity of marketable securities  280  —  —  —  53  —  333 
                       Decrease in restricted cash and securities, net  —  —  1  —  11  —  12 
                       Capital expenditures  —  —  (271) —  (362) —  (633)
                       Acquisitions, net of cash acquired and investments  —  —  (893) —  217  —  (676)
                       Proceeds from sale of discontinued operations  —  (2) —  —  —  —  (2)
                       Proceeds from sale of property, plant and equipment and other assets  —  —  2  —  3  —  5 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Investing Activities  280  (2) (1,161) —  (78) —  (961)

                      Cash Flows from Financing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Long-term debt borrowings, net of issuance costs  —  2,349  —     —  —  2,349 
                       Payments on and repurchases of long-term debt, including current portion and refinancing costs  (1,619) (887) —  (1) (111) —  (2,618)
                       Proceeds from warrants and stock-based equity plans  26  —  —     —  —  26 
                       Increase (decrease) due from affiliates, net  1,527  (1,139) 300  16  (704) —  — 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Financing Activities  (66) 323  300  15  (815) —  (243)

                      Effect of Exchange Rates on Cash and Cash Equivalents
                       
                       
                      —
                       
                       
                      —
                       
                       
                      3
                       
                       
                      —
                       
                       
                      3
                       
                       
                      —
                       
                       
                      6
                       
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      Net Change in Cash and Cash Equivalents
                       
                       
                      (15
                      )
                       
                      15
                       
                       
                      (1,004
                      )
                       
                      —
                       
                       
                      37
                       
                       
                      —
                       
                       
                      (967
                      )

                      Cash and Cash Equivalents at Beginning of the Year
                       
                       
                      15
                       
                       
                      12
                       
                       
                      1,592
                       
                       
                      —
                       
                       
                      62
                       
                       
                      —
                       
                       
                      1,681
                       
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Cash and Cash Equivalents at End of the Year $— $27 $588 $— $99 $— $714 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Level 3
                      Communications,
                      Inc.                      		 Level 3
                      Financing,
                      Inc.                      		 Level 3
                      Communications,
                      LLC                      		 Broadwing
                      Financial
                      Services,
                      Inc.                      		 Other
                      Non-Guarantor
                      Subsidiaries                      		 Eliminations Total 
                       
                      		 (dollars in millions)
                      		 

                      Net Cash Provided by (Used in) Operating Activities

                      		 $(229)$(306)$(146)$(15)$927 $— $231 

                      Cash Flows from Investing Activities:

                      		                      
                       

                      Capital expenditures

                      		  —  —  (271) —  (362) —  (633)
                       

                      Proceeds from sale and maturity of marketable securities

                      		  280  —  —  —  53  —  333 
                       

                      Decrease in restricted cash and securities, net

                      		  —  —  1  —  11  —  12 
                       

                      Acquisitions, net of cash acquired and investments

                      		  —  —  (893) —  217  —  (676)
                       

                      Proceeds from sale of property, plant and equipment

                      		  —  —  2  —  3  —  5 
                       

                      Other

                      		  —  (2) —  —  —  —  (2)
                                      

                      Net Cash Provided by (Used in) Investing Activities

                      		  280  (2) (1,161) —  (78) —  (961)

                      Cash Flows from Financing Activities:

                      		                      
                       

                      Long-term debt borrowings, net of issuance costs

                      		  —  2,349  —  —  —  —  2,349 
                       

                      Payments on and repurchases of long-term debt, including current portion and refinancing costs

                      		  (1,619) (887) —  (1) (111) —  (2,618)
                       

                      Proceeds from warrants and stock-based equity plans

                      		  26  —  —  —  —  —  26 
                       

                      Increase (decrease) due from affiliates, net

                      		  1,527  (1,139) 300  16  (704) —  — 
                                      

                      Net Cash Provided by (Used in) Financing Activities

                      		  (66) 323  300  15  (815) —  (243)

                      Effect of Exchange Rates on Cash and Cash Equivalents

                      		  —  —  3  —  3  —  6 
                                      

                      Net Change in Cash and Cash Equivalents

                      		  (15) 15  (1,004) —  37  —  (967)

                      Cash and Cash Equivalents at Beginning of the Year

                      		  15  12  1,592  —  62  —  1,681 
                                      

                      Cash and Cash Equivalents at End of the Year

                      		 $— $27 $588 $— $99 $— $714 
                                      

                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21) Condensed Consolidating Financial Information (Continued)(17) Subsequent Events

                      Condensed Consolidating StatementsIssuance of Cash Flows
                      For10% Senior Notes Due 2018

                              On January 20, 2010, Level 3 Financing, Inc., in a private offering, issued $640 million in aggregate principal amount of its 10% Senior Notes due 2018 (the "10% Senior Notes"). The net proceeds from the issuance of the 10% Senior Notes were $613 million after deducting discount and debt issuance costs and were used to fund Level 3 Financing, Inc.'s purchase of its 12.25% Senior Notes due 2013 (the "12.25% Senior Notes") in a concurrent tender offer and consent solicitation. The 10% Senior Notes will mature on February 1, 2018 and are guaranteed by Level 3 Communications, Inc. Interest on the notes accrues at 10% per year ended December 31, 2006and is payable on February 1 and August 1 of each year, beginning August 1, 2010.

                              The offering of the 10% Senior Notes was not registered under the Securities Act of 1933, as amended, and the 10% Senior Notes may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 10% Senior Notes were sold to "qualified institutional buyers" as defined in Rule 144A under the Securities Act of 1933, as amended, and non-U.S. persons outside the United States under Regulation S under the Securities Act of 1933, as amended.

                              On January 20, 2010, Level 3, Level 3 Financing, Inc. and the initial purchasers of the 10% Senior Notes entered into a registration rights agreement regarding the 10% Senior Notes pursuant to which Level 3 and Level 3 Financing, Inc. agreed, among other things, to file an exchange offer registration statement with the Securities and Exchange Commission.

                              In addition, each of Level 3 Communications, Inc. and Level 3 Financing has agreed to endeavor in good faith using commercially reasonable efforts to cause Level 3 Communications, LLC to obtain all material governmental authorizations and consents required in order for it to guarantee the 10% Senior Notes at the earliest practicable date and to enter into a guarantee of the 10% Senior Notes promptly thereafter.

                      Tender Offer

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Net Cash Provided by (Used in) Operating Activities of Continuing Operations $(380)$(183)$62 $722 $— $221 

                      Cash Flows from Investing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Proceeds from sale and maturity of marketable securities  175  5  100  —  —  280 
                       Purchases of marketable securities  —  —  (98) —  —  (98)
                       Decrease (increase) in restricted cash and securities  1  2  (10) (14) —  (21)
                       Capital expenditures  —  —  (166) (226) —  (392)
                       Investments and acquisitions  —  —  (761) 12  —  (749)
                       Proceeds from sale of discontinued operations, net of cash sold  —  —  —  307  —  307 
                       Advances from discontinued operations, net  —  —  —  18  —  18 
                       Proceeds from sale of property, plant and equipment and other assets  —  —  6  1  —  7 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Investing Activities  176  7  (929) 98  —  (648)

                      Cash Flows from Financing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Long-term debt borrowings, net of issuance costs  326  1,930  —  —  —  2,256 
                       Payments on long-term debt, including current portion (net of restricted cash)  (513) (596) —  (1) —  (1,110)
                       Equity offering  543        —     543 
                       Increase (decrease) due from affiliates, net  (174) (1,154) 2,170  (842) —  — 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Financing Activities  182  180  2,170  (843) —  1,689 
                      Net Cash Used in Discontinued Operations  —  —  —  (43) —  (43)

                      Effect of Exchange Rates on Cash and Cash Equivalents
                       
                       
                      —
                       
                       
                      —
                       
                       
                      14
                       
                       
                      (4
                      )
                       
                      —
                       
                       
                      10
                       
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Change in Cash and Cash Equivalents  (22) 4  1,317  (70) —  1,229 
                      Cash and Cash Equivalents at Beginning of Year (includes cash of discontinued operations)  37  8  275  132  —  452 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Cash and Cash Equivalents at End of Year $15 $12 $1,592 $62 $— $1,681 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                              On January 5, 2010, Level 3 Financing, Inc. commenced a tender offer to purchase for cash any and all of the outstanding $550 million aggregate principal amount of its 12.25% Senior Notes for a price equal to $1,080.00 per $1,000 principal amount of the notes, which included $1,050.00 as the tender offer consideration and $30.00 as a consent payment (the "12.25% Tender Offer"). In connection with the 12.25% Tender Offer, Level 3 and Level 3 Financing, Inc. solicited consents to certain proposed amendments to the indenture governing the 12.25% Senior Notes to eliminate substantially all of the covenants, certain repurchase rights and certain events of default and related provisions contained in the indenture.

                              In January 2010, holders of the 12.25% Senior Notes representing approximately 99.4% of the aggregate principal amount of the outstanding 12.25% Senior Notes (or $546,882,000 aggregate principal amount) tendered notes in the tender offer. The 12.25% Senior Notes tendered in the tender offer were accepted and paid for by Level 3 Financing, Inc. on January 20, 2010. At the expiration of the tender offer on February 2, 2010, an additional $30 thousand in notes were tendered for an aggregate principal amount of tendered notes of $546,912,000.

                              In connection with the 12.25% Tender Offer and consent solicitation, on January 20, 2010, Level 3 Financing, Inc. entered into a supplemental indenture, among Level 3, Level 3 Financing, Inc., Level 3


                      Table of Contents


                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      (21) Condensed Consolidating Financial Information(17) Subsequent Events (Continued)


                      Condensed Consolidating StatementsCommunications, LLC and The Bank of Cash Flows
                      ForNew York Mellon, as Trustee (the "Supplemental Indenture") to effect the year ended December 31, 2005                      amendments to the indenture relating to the 12.25% Senior Notes. On February 12, 2010, the Company also provided notice to the remaining holders of the 12.25% Senior Notes, that they would be redeemed in full on March 15, 2010, at a redemption price equal to 106.125% of the principal amount thereof, plus accrued and unpaid interest.

                       
                      		 Level 3
                      Communications,
                      Inc.
                      		 Level 3
                      Financing,
                      Inc.
                      		 Level 3
                      Communications,
                      LLC
                      		 Other
                      Subsidiaries
                      		 Eliminations
                      		 Total
                      		 
                       
                      		 (dollars in millions)

                      		 
                      Net Cash Provided by (Used in) Operating Activities of Continuing Operations $(306)$(128)$226 $90 $— $(118)

                      Cash Flows from Investing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Proceeds from sale and maturity of marketable securities  243  —  340  1  —  584 
                       Purchases of marketable securities  (648) —  —  —  —  (648)
                       Decrease (increase) in restricted cash and securities  —  3  (6) (1) —  (4)
                       Capital expenditures  —  —  (167) (133) —  (300)
                       Investments and acquisitions  (10) —  (497) 128  —  (379)
                       Proceeds from sale of discontinued operations  —  82  —  —  —  82 
                       Advances from discontinued operations, net  —  —  —  13  —  13 
                       Proceeds from sale of property, plant and equipment and other assets  —  —  3  8  —  11 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Investing Activities  (415) 85  (327) 16  —  (641)

                      Cash Flows from Financing Activities:
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       Long-term debt borrowings, net of issuance costs  877  —  —  66  —  943 
                       Payments on long-term debt, including current portion (net of restricted cash)  —  —  (26) (104) —  (130)
                       Increase (decrease) due from affiliates, net  (121) 34  170  (83) —  — 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Cash Provided by (Used in) Financing Activities  756  34  144  (121) —  813 

                      Net Cash Used in Discontinued Operations
                       
                       
                      —
                       
                       
                      —
                       
                       
                      —
                       
                       
                      (32
                      )
                       
                      —
                       
                       
                      (32
                      )

                      Effect of Exchange Rates on Cash and Cash Equivalents
                       
                       
                      (1
                      )
                       
                      —
                       
                       
                      (13
                      )
                       
                      1
                       
                       
                      —
                       
                       
                      (13
                      )
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Net Change in Cash and Cash Equivalents  34  (9) 30  (46) —  9 
                      Cash and Cash Equivalents at Beginning of Year (includes cash of discontinued operations)  3  17  245  178  —  443 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      Cash and Cash Equivalents at End of Year (includes cash of discontinued operations) $37 $8 $275 $132 $— $452 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                      LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)                              The Company expects to recognize a loss associated with the 12.25% tender offer in the first quarter of 2010, of approximately $55 million.

                      (22)(18) Unaudited Quarterly Financial Data

                       
                      		 Three Months Ended
                      		 
                       
                      		 March 31,
                      		 June 30,
                      		 September 30,
                      		 December 31,
                      		 
                       
                      		 2007
                      		 2006
                      		 2007
                      		 2006
                      		 2007
                      		 2006
                      		 2007
                      		 2006
                      		 
                       
                      		 (dollars in millions except per share data)

                      		 
                      Revenue $1,056 $822 $1,052 $835 $1,061 $875 $1,100 $846 
                      Operating Loss  (75) (57) (79) (18) (58) (25) (29) (40)
                      Loss from Continuing Operations  (647) (166) (202) (224) (174) (163) (91) (237)
                      Income (loss) from Discontinued Operations  —  (2) —  23  —  25  —  — 
                      Net Loss  (647) (168) (202) (201) (174) (138) (91) (237)
                      Income (Loss) per Share (Basic and Diluted):                         
                       Loss from Continuing Operations $(0.44)$(0.20)$(0.13)$(0.25)$(0.11)$(0.14)$(0.06)$(0.20)
                       Income from Discontinued Operations  —  —  —  0.02  —  0.02  —  — 
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                       Net Loss $(0.44)$(0.20)$(0.13)$(0.23)$(0.11)$(0.12)$(0.06)$(0.20)
                        
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 
                      		 

                       
                      		 Three Months Ended 
                       
                      		 March 31, June 30, September 30, December 31, 
                       
                      		 2009 2008 2009 2008 2009 2008 2009 2008 
                       
                      		 (dollars in millions except per share data)
                      		 

                      Revenue

                      		 $980 $1,092 $942 $1,090 $916 $1,070 $924 $1,049 

                      Gross Margin

                      		  573  617  547  630  529  626  548  619 

                      Operating Income (Loss)

                      		  12  (52) (8) (3) (26) 4  (43) 82 

                      Net Income (Loss)

                      		  (132) (190) (134) (42) (170) (129) (182) 43 

                      Earnings (Loss) per Share:

                      		                         
                       

                      Basic

                      		 $(0.08)$(0.12)$(0.08)$(0.03)$(0.10)$(0.08)$(0.11)$0.03 
                       

                      Diluted

                      		 $(0.08)$(0.12)$(0.08)$(0.03)$(0.10)$(0.08)$(0.11)$(0.04)

                              LossThe 2008 financial information has been adjusted for the retrospective application of Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has been codified into the guidance relating to Debt with Conversion and Other Options.

                              Earnings (loss) per share was calculated for each three-month period on a stand-alone basis. As a resultquarter is computed using the weighted-average number of stock transactionsshares outstanding during that quarter, while earnings (loss) per share for the year is computed using the weighted-average number of shares outstanding during the periods,year. Thus, the sum of the lossearnings (loss) per share for each of the four quarters may not equal the earnings (loss) per share for the four quartersyear.

                              In the second quarter of each year may not equal2008, the loss per share for the twelve month periods. As a result ofCompany completed the sale of Software Spectrum in 2006, certain amounts previously included in the 2006 quarterly reports on Forms 10-Q have been reclassified from continuing operationsits Vyvx advertising distribution business to discontinued operations.

                              In the first quarter of 2007, the Company purchased BroadwingDG FastChannel, Inc. and the CDN Business. The Company alsoa recognized a $427 million net loss on the extinguishmentgain of various debt instruments in several transactions.

                              In the third quarter of 2007, the Company purchased Servecast Limited.$96 million.

                              In the fourth quarter of 2007,2008, the Company recognized a $37$12 million gain relatedrestructuring charge, $44 million of induced debt conversion expenses attributable to the partial saleexchange of certain of the Company's convertible debt securities, and a gain on the early extinguishment of debt of $125 million as a result of certain debt repurchases. The Company also revised its estimates of the amounts and timing of its investment in Infinera stock and recognized a tax benefitoriginal estimate of $23 millionundiscounted cash flows related to certain changes in state income tax law that primarily occurredfuture asset retirement obligations and reduced selling, general and administrative expenses by $86 million and depreciation and amortization by $11 million.


                      Table of Contents


                      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 26th day of February, 2010.




                      LEVEL 3 COMMUNICATIONS, INC.



                      By:

                      /s/ JAMES Q. CROWE
                      Name: James Q. Crowe
                      Title:                      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 second quarter of 2007.

                              In the first quarter of 2006, the Company purchased Progress Telecom. The Company also recognized a $27 million gain related to a debt exchange.

                              In the second quarter of 2006, the Company purchased ICG Communications. The Company also recognized a $55 million losscapacities and on the amendment and restatementdates indicated.









                      /s/ WALTER SCOTT, JR.
                      Walter Scott, Jr.                      		Chairman of the BoardFebruary 26, 2010

                      /s/ JAMES Q. CROWE
                      James Q. Crowe

                      Chief Executive Officer and Director

                      February 26, 2010

                      /s/ SUNIT S. PATEL
                      Sunit S. Patel

                      Executive Vice President and
                      Chief Financial Officer
                      (Principal Financial Officer)

                      February 26, 2010

                      /s/ ERIC J. MORTENSEN
                      Eric J. Mortensen

                      Senior Vice President and Controller
                      (Principal Accounting Officer)

                      February 26, 2010

                      /s/ R. DOUGLAS BRADBURY
                      R. Douglas Bradbury

                      Director

                      February 26, 2010

                      /s/ DOUGLAS C. EBY
                      Douglas C. Eby

                      Director

                      February 26, 2010

                      /s/ JAMES O. ELLIS, JR
                      James O. Ellis, Jr.

                      Director

                      February 26, 2010

                      /s/ RICHARD R. JAROS
                      Richard R. Jaros

                      Director

                      February 26, 2010

                      Table of the Company's Senior Secured term Loan due 2011.

                              In the third quarter of 2006, the Company purchased TelCove and Looking Glass. The Company also recognized a $33 million gain from the sale of Software Spectrum.

                              In the fourth quarter of 2006, the Company recognized a $54 million loss on the extinguishment of debt.Contents









                      /s/ ROBERT E. JULIAN
                      Robert E. Julian                      		DirectorFebruary 26, 2010

                      /s/ CHARLES C. MILLER, III
                      Charles C. Miller, III

                      Executive Vice President,
                      Vice Chairman and Director

                      February 26, 2010

                      /s/ MICHAEL J. MAHONEY
                      Michael J. Mahoney

                      Director

                      February 26, 2010

                      /s/ RAHUL N. MERCHANT
                      Rahul N. Merchant

                      Director

                      February 26, 2010

                      /s/ ARUN NETRAVALI
                      Arun Netravali

                      Director

                      February 26, 2010

                      /s/ JOHN T. REED
                      John T. Reed

                      Director

                      February 26, 2010

                      /s/ MICHAEL B. YANNEY
                      Michael B. Yanney

                      Director

                      February 26, 2010

                      /s/ ALBERT C. YATES
                      Albert C. Yates

                      Director

                      February 26, 2010