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Upon$22 million for certain performance awards and $14 million related to retention bonuses, all of which were contingent on the completion of the merger, our assetsacquisition and liabilities will be revalued and recorded at fair value. The assignmenthad no benefit to CenturyLink after the acquisition.

        CenturyLink has cash management arrangements between certain of fair value will require a significant amount of judgment. The use of fair value measures will affect the comparability of our post-merger financial information and may make it more difficult to predict earnings in future periods. For example, we have certain deferred costs and deferred revenues on our balance sheet associated with installation activities and capacity leases whereby we incurred costs and received payments up front but are recognizing the related expenses and revenues over the estimated life of the customer or life of the contract. Based on the accounting guidance for business combinations, these existing deferred costs and deferred revenues are expected to be assigned little or no value in the purchase price allocation process and will thus be eliminated.

We could experience significant changes in our cost structure as the services provided to and purchased from our affiliates may change substantially in connection with QCII’s pending merger.

Our operations are included in the consolidated operations of our ultimate parent, QCII, and generally account forits subsidiaries, including us, under which the majority of QCII’s consolidated revenue. In additionour cash balance is transferred on a daily basis to our operations, QCII maintainsCenturyLink as a national

telecommunications network. Through its fiber-optic network, QCII provides some long-distance, data and Internet services that we do not provide. You can find additional information about these services that we do not provide in “Business” in Item        Since the April 1, 2011 closing of this report.

For certain products and services we provide, and for a varietyCenturyLink's indirect acquisition of internal communications functions, we use parts of QCII’s telecommunications network to transport voice and data traffic. Through its network, QCII also provides nationally and globally some data and Internet access services that are similar to services we provide withinus, our local service area. These services include private line, and our traditional wide area network, or WAN, services, which consist of asynchronous transfer mode, or ATM, and frame relay.

Our operations are integrated into and are reported as part of the segments of QCII and contribute to all three of QCII’s segments: business markets, mass markets and wholesale markets. We have the same Chief Operating Decision Maker, orCenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, as QCII. QCII’s CODMbut reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC.Securities and Exchange Commission ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis. Additional information on our contributions to QCII’s segments is provided in Note 15—Contribution to QCII Segments to our consolidated financial statements in Item 8 of this report.

During the firstsecond quarter of 2010, we changed the definitions we use2011, certain USF surcharges were reclassified from our legacy services to classify expenses as cost of sales, selling expenses or general, administrativeaffiliates and other operating expenses and, asservices revenues to better align with the classifications that our new ultimate parent, CenturyLink, uses. As a result, certain expenses in our consolidated statements of operations for the prior year have beenwe reclassified previously reported amounts to conform to the current yearperiod presentation. Our new definitionsFor the predecessor three months ended March 31, 2011, this reclassification resulted in a reduction of these expenses are as follows:

These definitions reflect changes primarilylegacy service revenues and an increase to reclassify expenses for: rent and utilities incurred by our network operations; fleet; network and supply chain management; and insurance and risk management from general, administrativeaffiliates and other operating expenses to costservices revenues of sales, where these expenses are more aligned with how we now manage our business. We believe these changes allow users of our financial statements to better understand our expense structure. These expense classifications may not be comparable to those of other companies. These changes had no impact on total operating expenses or net income for any period. These changes resulted in$34 million. For the reclassification of $199 million and $212 million from the general, administrative and other operating expenses and selling expenses categories to cost of sales for thepredecessor years ended December 31, 2010 and 2009, the reclassification resulted in a reduction of legacy service revenues and 2008,an increase of affiliates and other services revenues of $133 million and $74 million, respectively.

We anticipatecurrently categorize our products, services and revenues among the following three categories:

•

Strategic services, which include primarily private line (including special access), broadband, video (including DIRECTV) and Verizon Wireless services;



•

Legacy services, which include primarily local, integrated services digital network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), switched access and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations); and



•

Affiliates and other services, which consist primarily of USF surcharges and services we provide to our affiliates. We provide to our affiliates data, local services and billing and collections services that we will changealso provide to external customers. In addition, we provide to our definitions again once QCII’s merger with CenturyLink is complete in order to conform our definitions to those used by CenturyLink.

affiliates: marketing, sales and advertising services; computer system development and support services; network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax and human resources.

We have reclassified certain prior year amounts in our Annual Report on Form 10-K for        As of the year endedsuccessor date of December 31, 20092011, we served approximately 3.1 million broadband subscribers. We also operated approximately 8.5 million access lines, which are telephone lines reaching from the customers' premises to conform toa connection with the current year presentation.

PSTN. During the firstsecond quarter of 20102011, we updated our methodology for counting our subscribers and access lines where we provideto conform to the services.methodology used by CenturyLink, our ultimate parent. We now count broadband subscribers and access lines when we earn revenue associated with them.install the service. Our access linenew methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates and residential lines that are used solely to provide broadband services. Our new broadband methodologyaffiliates. It also excludes businessunbundled loops and wholesale markets customers from ourincludes stand-alone broadband subscribers.

During the first quarter of 2010 we also updated our Our new methodology for counting our partnership based video subscribers. We now count these subscribers when we earn revenue associated with them, regardless of whether we actually bill the subscribers for the services. Beginning in mid-2009 we began to earn an ongoing commission associated with video customers that we no longer bill so long as they remain active customers of DIRECTV. Because of the change in this commission we have begun to include them in our subscriber counts. This methodology change has increased our video subscribers by approximately 68,000 for the year ended December 31, 2010. We believe the methodology updates described above align our subscribers and access lines with our revenue and better reflect our ongoing operations.

We have restated our subscribers and access lines reported asmay not be comparable to those of December 31, 2009 to conform to the current year presentation. The table below quantifies these changes by segment:other companies.

We have restated our subscribers and access lines reported as of December 31, 2008 to conform to the current year presentation. The table below quantifies these changes by segment:

Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. The discussion in MD&A is presented on a combined basis for the successor periods in 2011. We believe that the discussion on a combined basis is more meaningful as it allows the results of operations to be analyzed to the annual period in 2010. This

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discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this report.

Business Trends

Our financial results were impacted by several significant trends, which are described below. We expect that these trends will continue to affect our results of operations, cash flows or financial position.

•

Strategic services.  We continue to see shifts in the makeup of our total revenues as customers move to strategic services, such as private line, broadband and video services, from legacy services, such as local and access services. Revenues from our strategic services represented 36% and 33% of our total revenues for the combined year ended December 31, 2011 and the predecessor year ended December 31, 2010, respectively, and this percentage continues to grow. We continue to focus on increasing subscribers of our broadband services particularly among consumer and small business customers. As of the successor date of December 31, 2011, we reached approximately 3.1 million broadband subscribers compared to approximately 2.9 million as of the predecessor date of December 31, 2010. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our fiber to the node, or FTTN, deployment, which allows for the delivery of higher speed broadband services than would otherwise generally be available through a more traditional telecommunications network made up of only copper wires. In addition to our FTTN deployment, we continue to expand our product offerings and enhance our marketing efforts as we compete in a maturing market in which most consumers already have broadband services. While traditional ATM based broadband services are declining, they have been more than offset by growth in fiber based broadband services. We expect these efforts will improve our ability to compete and increase our broadband revenues. Demand for our private line services continues to increase, despite our customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impact our business, we ultimately believe the growth in fiber-based special access provided to wireless carriers for backhaul will, over time, offset the decline in copper-based special access provided to wireless carriers as they migrate to Ethernet, although the timing and magnitude of this technological migration is uncertain.



•

Legacy services.  Revenues from our legacy services represented 43% and 47% of our total revenues for the combined year ended December 31, 2011 and for the predecessor year ended December 31, 2010, respectively, and continue to decline. Our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless voice and electronic mail and social networking services for traditional voice telecommunications services. We expect that these factors will continue to impact our business. Service bundling and other product promotions, as described below, continue to be some of our responses to offset the loss of revenues as a result of access line losses.



•

Service bundling and product promotions.  We offer our customers the ability to bundle multiple products and services. These customers can bundle local services with other services such as broadband, video and wireless. While our video and wireless services are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenues. However, we believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. While bundle price discounts have resulted in lower average revenues for our individual products, we believe service bundles continue to positively impact our customer retention. In addition to our bundle

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discounts, we also offer limited time promotions on our broadband service for prospective customers who want our broadband product in their bundle which further aids our ability to attract and retain customers and increase usage of our services.

•

Legacy services.Revenue from our legacy services represented 48% and 51% of our total revenue for the years ended December 31, 2010 and 2009, respectively and continues to decline. Our legacy services revenue has been, and we expect it will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For

example, many consumers are substituting cable and wireless for traditional voice telecommunications services. This has increased the number and type of competitors within our industry and has decreased our market share. We expect that these factors will continue to impact our business. Product bundling and other product promotions, as described below, continue to be some of our responses to offset the loss of revenue as a result of access line losses.

•

Product bundling and product promotions.We offer our customers, primarily consumers and small businesses, the ability to bundle multiple products and services. For example, through joint marketing and advertising efforts with our affiliates, these customers can bundle local services with other services such as broadband, video, long-distance and wireless. While video and wireless subscribers are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenue. We believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. In addition to our bundle discounts, we also offer limited time promotions on our broadband service for qualifying customers who have our broadband product in their bundle, which we believe will positively affect our acquisition volume and drive customers to purchase more expanded offerings. While bundle price discounts have resulted in lower average revenue for our individual products, we believe product bundles continue to positively impact our customer retention.

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our workload, productivity improvements, changes in the telecommunications industry and governmental regulations. Through planned reductions and normal employee attrition, we have reduced our workforce and employee-related expenses (net of severance) while achieving operational efficiencies and improving processes through automation and other innovative ways of operating our business.

•

• Operating efficiencies.  We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions. • Pension and post-retirement benefits expenses.  Our indirect parent QCII is required to recognize in its consolidated financial statements certain expenses relating to its pension and post-retirement health care and life insurance benefits plans. These expenses are calculated based on several assumptions, including among other things discount rates and expected rates of return on plan assets that are generally set at December 31 of each year. Changes in these assumptions can cause significant changes in the combined net periodic benefits expenses QCII recognizes. QCII allocates the expenses of these plans to us and certain of its other affiliates. The allocation of expenses to us is based upon the demographics of our employees and retirees compared to all the remaining participants. Changes in QCII’s assumptions can cause significant changes in the net periodic pension and post-retirement benefits expenses we recognize.

Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plancombined net periodic benefits expenses QCII recognizes. QCII allocates the expenses of these plans to us and funding laws and regulations. The amounts contributed by us through QCII are not segregated or restricted and may be used to provide benefits to other employees of QCII’s subsidiaries. Historically, QCII has only required us to pay our portioncertain of its other affiliates. The allocation of expenses to us is based upon the demographics of our employees and retirees. Changes in QCII's assumptions can cause significant changes in the net periodic pension contribution.

and post-retirement benefits expenses we recognize.


•
Disciplined capital expenditures.  Our capital expenditures continue to be focused on our strategic services such as broadband and fiber to the tower, or FTTT. FTTT is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

        

•

Disciplined capital expenditures. Our capital expenditures continue to be focused on our strategic services such as broadband. In 2011, we anticipate that our fiber investment, which includes fiber to the cell site, or FTTCS, will increase. Our projected capital expenditures for 2011 will be up to $1.3 billion. In addition, we may use lease financing in 2011 for some portion of our capital spending.

While these trends are important to understanding and evaluating our financial results, the other transactions, additional events, uncertainties and trends discussed in “Risk Factors”"Risk Factors" in Item 1A of Part I of this report may also materially impact our business operations and financial results.

Results of Operations

Overview

The following table summarizes our results of operations for the years ended December 31, 2010, 2009 and 2008 and the numberoperations:

		Successor					Predecessor			Combined			Predecessor			Increase/ (Decrease)			% Change
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Operating revenues		$	6,635					2,268			8,903			9,271			(368	)		(4	)%
Operating expenses			5,436					1,630			7,066			6,788			278			4	%
Operating income			1,199					638			1,837			2,483			(646	)		(26	)%
Other income (expense)			(307	)				(148	)		(455	)		(610	)		(155	)		(25	)%
Income tax expense			349					191			540			791			(251	)		(32	)%
Net income		$	543					299			842			1,082			(240	)		(22	)%
Employees											24,697			26,050			(1,353	)		(5	)%




Table of employees as of December 31, 2010, 2009 and 2008:Contents

        

		Years Ended December 31,												Increase/(Decrease)								% Change
		2010				2009				2008				2010 v 2009				2009 v 2008				2010 v 2009				2009 v 2008
		(Dollars in millions, except employees)
Operating revenue		$	9,271			$	9,731			$	10,388			$	(460	)		$	(657	)			(5	)%			(6	)%
Operating expenses			6,788				7,169				7,525				(381	)			(356	)			(5	)%			(5	)%
Operating income			2,483				2,562				2,863				(79	)			(301	)			(3	)%			(11	)%
Other expense (income)—net			610				641				596				(31	)			45				(5	)%			8	%
Income before income taxes			1,873				1,921				2,267				(48	)			(346	)			(2	)%			(15	)%
Income tax expense			791				724				829				67				(105	)			9	%			(13	)%
Net income		$	1,082			$	1,197			$	1,438			$	(115	)		$	(241	)			(10	)%			(17	)%
Employees (as of December 31)			26,050				27,805				30,549				(1,755	)			(2,744	)			(6	)%			(9	)%

2010 COMPARED TO 2009

Operating Revenue

Operating revenue decreased primarily due to lower legacy services revenue as a result of continued access line losses and declining revenue from our traditional WAN services. In addition, operating revenue from affiliates also decreased due to reduced services provided to affiliates. These decreases in overall operating revenue were partially offset by increased revenue in our strategic services as a result of increased volume of broadband subscribers and rates on broadband services and increased volume in private line services.

The following table compares our operating revenue for the years ended December 31, 2010 and 2009:

		Years Ended December 31,								Increase/ (Decrease)				% Change
		2010				2009				2010 v 2009				2010 v 2009
		(Dollars in millions)
Operating revenue:
Strategic services		$	3,059			$	2,900			$	159				5	%
Legacy services			4,456				4,996				(540	)			(11	)%
Affiliates and other services			1,756				1,835				(79	)			(4	)%
Total operating revenue		$	9,271			$	9,731			$	(460	)			(5	)%

The following table summarizes our broadband subscribers and videoaccess lines:

		Successor					Predecessor			% Change
		December 31, 2011					December 31, 2010			Successor 2011 v Predecessor 2010
		(in thousands)
Operational metrics:
Broadband subscribers			3,084					2,940			5	%
Access lines			8,533					9,193			(7	)%

        During the second quarter of 2011, we updated our methodology for counting our subscribers and access lines where we provide the services. We historically counted access lines at the point we billed them. However, now we count access lines when we install the service. This change in our methodology has resulted in an approximately 69,000 decrease in our successor June 30, 2011 access lines. We have not retrospectively adjusted our predecessor period access lines for this methodology adjustment as it was not reasonably practicable for us to do so. Our access line methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by customer channel as of December 31, 2010us and 2009:our affiliates. Our new methodology also excludes unbundled loops and includes stand-alone broadband subscribers. We have conformed prior periods to our current presentation, unless noted above.

Operating Revenues

		December 31,								Increase/ Decrease				% Change
		2010				2009				2010 v 2009				2010 v 2009
		(in thousands)
Broadband subscribers			2,906				2,803				103				4	%
Video subscribers			1,003				932				71				8	%
Access lines:
Mass markets			6,038				6,865				(827	)			(12	)%
Business markets			1,872				2,003				(131	)			(7	)%
Wholesale markets			945				1,057				(112	)			(11	)%
Total access lines			8,855				9,925				(1,070	)			(11	)%

		Successor					Predecessor			Combined			Predecessor			Increase/ (Decrease)			% Change
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Strategic services		$	2,406					793			3,199			3,059			140			5	%
Legacy services			2,796					1,003			3,799			4,323			(524	)		(12	)%
Affiliates and other services			1,433					472			1,905			1,889			16			1	%
Total operating revenues		$	6,635					2,268			8,903			9,271			(368	)		(4	)%

Strategic Services

Strategic services revenuerevenues increased primarily due to higher broadband revenuerevenues resulting from an increase innew subscribers andas well as an improving mix of higher priced, higher speed services. Strategicbroadband services revenue also increased due toand increased volumes in our private line services and revenue from our increased volume of Verizon Wireless subscribers, partially offset by decreased commissions on Verizon Wireless services.

Legacy Services

Legacy services revenuerevenues decreased primarily due toas a decline inresult of lower local and access services revenuerevenues due to access line loss declining demand for UNEs and reduced access services usage related to competitive pressures and product substitution, price compression and increased competition for the year ended December 31, 2010 compared to the same period in 2009.substitution. Legacy services revenues also decreased due to lower amortization of deferred revenue due to certain predecessor deferred revenue being assigned no value at the acquisition date, as well as lower revenues from our traditional WAN services, driven by industry consolidation anddue to customer migration, to more advanced technology services.product substitution and increased competition.

Affiliates and Other Services Revenue

Affiliates and other services revenue decreasedrevenues increased primarily due to reduced telecommunication services and associatedwe provided to support an affiliate's growth in its strategic service offerings. This was partially offset by reduced support provided as a result of a decline in customer demand for our affiliate’saffiliate's legacy telecommunication




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service offerings driven by technological migration and competition. In addition, we provided reduced support associated with an affiliate’s winding down of its video and data products and related services. These decreases in services were partially offset by an increase in services we provided to support an affiliate’s growth in its strategic service offerings. We estimate that the profit from services provided to our affiliates was approximately $280$200 million and $300$280 million, before income taxes for the yearscombined year ended December 31, 2011 and the predecessor year ended December 31, 2010, and 2009, respectively.

Operating Expenses

        As discussed in Note 1—Basis of Presentation and Summary of Significant Accounting Policies in Item 8 of this report, during the first quarter of 2011, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative and as a result, we reclassified previously reported amounts to conform to the current period presentation.

The following table provides further detail regardingsummarizes our operating expenses for the years ended December 31, 2010 and 2009:expenses:

		Years Ended December 31,								Increase/ (Decrease)				% Change
		2010				2009				2010 v 2009				2010 v 2009
		(Dollars in millions)
Cost of sales (exclusive of depreciation and amortization):
Employee-related costs		$	1,027			$	1,084			$	(57	)			(5	)%
Other			628				620				8				1	%
Total cost of sales			1,655				1,704				(49	)			(3	)%
Selling:
Employee-related costs			860				979				(119	)			(12	)%
Marketing, advertising and external commissions			364				401				(37	)			(9	)%
Other			233				265				(32	)			(12	)%
Total selling			1,457				1,645				(188	)			(11	)%
General, administrative and other operating:
Employee-related costs			625				627				(2	)			—	%
Taxes and fees			382				393				(11	)			(3	)%
Real estate and occupancy costs			126				134				(8	)			(6	)%
Other			476				515				(39	)			(8	)%
Total general, administrative and other operating			1,609				1,669				(60	)			(4	)%
Affiliates			194				175				19				11	%
Depreciation and amortization			1,873				1,976				(103	)			(5	)%
Total operating expenses		$	6,788			$	7,169			$	(381	)			(5	)%

		Successor					Predecessor			Combined			Predecessor			Increase/ (Decrease)			% Change
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)		$	1,833					626			2,459			2,585			(126	)		(5	)%
Selling, general and administrative			1,499					501			2,000			2,136			(136	)		(6	)%
Operating expenses—affiliates			238					52			290			194			96			49	%
Depreciation and amortization			1,866					451			2,317			1,873			444			24	%
Total operating expenses		$	5,436					1,630			7,066			6,788			278			4	%

Cost of SalesServices and Products (exclusive of depreciation and amortization)

Cost of salesservices and products (exclusive of depreciation and amortization) are costsexpenses incurred in providing products and services to our customers. These expenses include: employee-related costsexpenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and certain benefits)professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things and to which we are often required to contribute); and other cost of salesexpenses directly related to our network operations (suchnetwork.

        Cost of services and products decreased due to the amortization of certain deferred expenses being lower as professional fees, materialsa result of assigning no value to these predecessor assets at the acquisition date. Cost of services and supplies and outsourced services).

Employee-related expensesproducts also decreased primarily due to lower salaries wages and severance expenseswages related to prior year employee reductions in our network operations as we continue to adjustmanage our workforce to reflect our workload.

Selling, ExpensesGeneral and Administrative

Selling, general and administrative expenses are expenses incurred in selling products and services to our customers.customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as salaries, wages, internal commissionsproperty and certain benefits); marketing, advertisingother taxes) and fees; external commissions; bad debt expense; and other selling, expenses (such as bad debt expense, professional feesgeneral and outsourced services).administrative expenses.




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Employee-related        These expenses decreased primarily due to lower salaries, wages, severancedecreased pension expense, professional fees and internal commissions driven by lower sales headcount. Themarketing and advertising expense. This decrease in employee-related expenses was partially offset by increased expenses associated with QCII’s accelerationan increase in severance related to employee reductions, a majority of stock-based compensation.

Marketing, advertising and external commissions decreased primarilywhich was due to reduced spending associated with direct mail and media. Marketing, advertising and external commissions also decreased due to improved consumer call center expenses resulting from a migration to using internal sales call centers from using third-party sales call centers.

Other expenses decreased primarily due to lower bad debt expense and professional fees.

General, Administrative and Other Operating Expenses

General, administrative and other operating expenses are corporate overhead and other operating costs. These include: employee-related costs for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and USF charges); real estate and occupancy costs (such as rents, utility and fleet costs); and other general, administrative and other operating costs (such as professional fees, outsourced services, litigation related charges and general computer systems support services). General, administrative and other operating expenses also include our allocated shareCenturyLink's indirect acquisition of QCII’s combined net periodic pension and post-retirement expense for all eligible employees and retirees.

Employee-related expenses were flat primarily due to decreased pension and post-retirement benefits expenses offset by increased salaries and wages expenses associated with QCII’s acceleration of stock-based compensation. On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink. As the vast majority of affected employees are employed by us, QCII allocated substantially all of the expense associated with this accelerated vesting to us.

QCII allocates the expense or income of its benefit plans to us based upon demographics of our employees compared to all the remaining participants. The expense is a function of the amount of benefits earned, interest on benefit obligations, expected return on plan assets, amortization of costs and credits from prior benefit changes and amortization of actuarial gains and losses. We recorded combined net periodic expensebenefits expenses of $61 million in 2011 as compared to $125 million in 2010 as compared to $193 million in 2009. The 2009 expense is net of a $12 million gain allocated to us as a result of QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans on or after January 1, 2010. The decrease in combined net periodic benefits expensesexpense in 20102011 is primarily due to QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans, the elimination of the qualified and non-qualified pension plan death benefits for eligible beneficiaries of certain retirees and reduced interest expense, partially offset by an increase in actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred.acquisition accounting. We expect to record combined net periodic expenseincome of approximately $109$7 million in 2011.2012. The expected decrease inshift from recording combined net periodic expense in 2011 isto recording combined net periodic income was primarily due to decreased interest cost partially offset by a decrease in the expected returnnet actuarial losses. For additional information on assets.

Other expenses decreased primarily dueour pension and post-retirement benefit plans, see Note 8—Employee Benefits to lower professional and maintenance fees.our consolidated financial statements in Item 8 of this report.

Operating Expenses—Affiliates Expenses

Affiliates expenses include charges for our use of long-distance services, wholesale Internet access and insurance, occupancy charges and certain retiree benefits. Affiliates expenses increased for the years ended December 31, 2010 as compared to the prior year period. This increase in affiliates expenses was primarily due to insurance premium discounts and refunds recognized in 2009.

2009 COMPARED TO 2008

Operating Revenue

Operating revenue decreased primarily due to lower legacy services revenue as a result lower local services revenue due to continued access line losses, lower access services revenue and declining revenue frombenefits provided by our traditional WAN services. Operating revenue also decreased due to lower revenue from affiliates and other services driven by reduced support associated with an affiliate’s winding down of its wireless business. These decreases in overall operating revenue were partially offset by increased strategic services revenue as a result of increased broadband and video subscribers and our transition to selling Verizon Wireless services. We believe declining general economic conditions negatively impacted our revenue in 2009.

The following table compares our operating revenue for the years ended December 31, 2009 and 2008:

		Years Ended December 31,								Increase/ (Decrease)				% Change
		2009				2008				2009 v 2008				2009 v 2008
		(Dollars in millions)
Operating revenue:
Strategic services		$	2,900			$	2,789			$	111				4	%
Legacy services			4,996				5,615				(619	)			(11	)%
Affiliates and other services			1,835				1,984				(149	)			(8	)%
Total operating revenue		$	9,731			$	10,388			$	(657	)			(6	)%

The following table summarizes our total broadband and video subscribers and access lines by customer channel as of December 31, 2009 and 2008:

		December 31,								Increase/ Decrease				% Change
		2009				2008				2009 v 2008				2009 v 2008
		(in thousands)
Total broadband subscribers			2,803				2,574				229				9	%
Total video subscribers			932				772				160				21	%
Access lines:
Mass markets			6,865				7,807				(942	)			(12	)%
Business markets(1)			2,003				2,146				(143	)			(7	)%
Wholesale markets			1,057				1,174				(117	)			(10	)%
Total access lines			9,925				11,127				(1,202	)			(11	)%

Strategic Services

Strategic services revenue increased primarily due to an increase in broadband subscribers, partially offset by rate discounts. Strategic services revenue also increased due to selling Verizon Wireless services. An increase in video subscribers as of December 31, 2009 compared to December 31, 2008 also contributed to the increase in strategic services revenue.

Legacy Services

Legacy services revenue decreased primarily due to a decline in local and access services revenue due to access line losses and a declining demand for UNEs for the year ended December 31, 2009 compared to the same period in 2008. Legacy services revenue also decreased due to lower revenue from our traditional WAN services, driven by customer migration to more advanced technology services.

Affiliates and Other Services Revenue

Affiliates services revenue decreased primarily due to reduced support provided to an affiliate associated with the affiliate’s winding down of its wireless business as we transitioned to selling Verizon Wireless services. In addition, we had reduced support associated with an affiliate’s winding down of its video and data products and related services. These decreases in affiliates services were partially offset by an increase in services we provided to support an affiliate’s growth in strategic service offerings. We estimate that the profit from affiliates services was approximately $300 million and $380 million before income taxes for the years ended December 31, 2009 and 2008, respectively.

Operating Expenses

The following table provides further detail regarding our operating expenses for the years ended December 31, 2009 and 2008:

		Years Ended December 31,								Increase/ (Decrease)				% Change
		2009				2008				2009 v 2008				2009 v 2008
		(Dollars in millions)
Cost of sales (exclusive of depreciation and amortization):
Employee-related costs		$	1,084			$	1,231			$	(147	)			(12	)%
Other			620				668				(48	)			(7	)%
Total cost of sales			1,704				1,899				(195	)			(10	)%
Selling:
Employee-related costs			979				1,063				(84	)			(8	)%
Marketing, advertising and external commissions			401				456				(55	)			(12	)%
Other			265				293				(28	)			(10	)%
Total selling			1,645				1,812				(167	)			(9	)%
General, administrative and other operating:
Employee-related costs			627				459				168				37	%
Taxes and fees			393				372				21				6	%
Real estate and occupancy costs			134				156				(22	)			(14	)%
Other			515				569				(54	)			(9	)%
Total general, administrative and other operating			1,669				1,556				113				7	%
Affiliates			175				185				(10	)			(5	)%
Depreciation and amortization			1,976				2,073				(97	)			(5	)%
Total operating expenses		$	7,169			$	7,525			$	(356	)			(5	)%

Cost of Sales (exclusive of depreciation and amortization)

Employee-related costs decreased primarily due to lower salaries, wages and benefits related to employee reductions in our network operations as we continued to manage our workforce to our workload. In addition, severance expense decreased because we terminated fewer employees in 2009 as compared to 2008.

Other cost of sales decreased primarily due to lower professional fees and network expenses due to our continued focus on managing costs associated with our network, along with decreased volumes.

Selling Expenses

Employee-related costs decreased due to lower salaries and wages related to prior period employee reductions, and decreased internal commissions driven by lower sales headcount and lower attainment of sales targets. These decreases were partially offset by increases in severance expenses.

Marketing, advertising and external commissions decreased primarily due to reduced spending associated with direct mail and media, along with the migration to internal sales call centers from using third-party sales call centers.

Other selling costs decreased primarily due to lower professional fees as a result of a favorable rate change in credit processing fees and other cost savings initiatives.

General, Administrative and Other Operating Expenses

Employee-related costs increased primarily due to an increase in pension and post-retirement benefits expenses. We recorded combined net periodic benefits expense of $193 million and net periodic benefits income of $13 million for the years ended December 31, 2009 and 2008, respectively. The 2009 expense is net of a $12 million gain allocated to us as a result of QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans on or after January 1, 2010. The shift from recording combined net periodic income to recording combined net periodic expense was primarily due to a decrease in expected return on plan assets as a result of lower plan asset values and an increase in net actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred.

Taxes and fees increased as a result of a $40 million favorable property tax settlement and other favorable adjustments recorded in 2008. These increases were partially offset by lower USF charges resulting from continued access line erosion and a decrease in current year property taxes.

Real estate and occupancy costs decreased primarily due to lower fuel costs, resulting from fewer miles driven and lower fuel prices. Real estate and occupancy costs also decreased because we had fewer operating leases in 2009 as compared to 2008.

Other expenses decreased primarily due to lower professional fees, the 2008 impairments of certain assets related to QCII’s transition to selling Verizon Wireless services and decreased supplies expense due to cost cutting measures.

Affiliates Expenses

Affiliates expenses decreased primarily due to reduced insurance costs driven by decreases in our workforce, and reduced support charges from our wireless affiliate partially offset by increases in wholesale Internet access in support of our broadband services.affiliates.

Depreciation and Amortization

The following table provides detail regarding depreciation and amortization expense for the years ended December 31, 2010, 2009 and 2008:expense:

		Years Ended December 31,												Increase/(Decrease)								% Change
		2010				2009				2008				2010 v 2009				2009 v 2008				2010 v 2009				2009 v 2008
		(Dollars in millions)
Depreciation and amortization:
Depreciation		$	1,639			$	1,752			$	1,855			$	(113	)		$	(103	)			(6	)%			(6	)%
Amortization			234				224				218				10				6				4	%			3	%
Total depreciation and amortization		$	1,873			$	1,976			$	2,073			$	(103	)		$	(97	)			(5	)%			(5	)%

Although our capital expenditures fluctuate from year to year, we continue to see decreased depreciation expense due to significantly lower capital expenditures and the changing mix of our investment in property, plant and equipment since 2002. If we do not significantly shorten our estimates of the useful lives of our assets, we expect that our depreciation expense will continue to decrease for the foreseeable future. Amortization expense increased due to an increase in internally developed capitalized software.

Effective January 1, 2009, we changed our estimates of the economic lives of certain copper cable and telecommunications equipment assets. These changes resulted in additional depreciation expense of approximately $36 million and reduced net income, net of deferred taxes, by $22 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. These assets were fully depreciated as of December 31, 2009.

Other Consolidated Results

The following table provides detail regarding other expense (income)—net and income tax expense for the years ended December 31, 2010, 2009 and 2008:

		Years Ended December 31,												Increase/(Decrease)								% Change
		2010				2009				2008				2010 v 2009				2009 v 2008				2010 v 2009				2009 v 2008
		(Dollars in millions)
Other expense (income)—net:
Interest expense on long-term borrowings—net		$	615			$	632			$	589			$	(17	)		$	43				(3	)%			7	%
Other—net			(5	)			9				7				(14	)			2				nm				29	%
Total other expense (income)—net		$	610			$	641			$	596			$	(31	)		$	45				(5	)%			8	%
Income tax expense		$	791			$	724			$	829			$	67			$	(105	)			9	%			(13	)%

		Successor					Predecessor			Combined			Predecessor			Increase/ (Decrease)			% Change
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Depreciation		$	914					393			1,307			1,652			(345	)		(21	)%
Amortization			952					58			1,010			221			789			nm
Total depreciation and amortization		$	1,866					451			2,317			1,873			444			24	%

---

nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

Other Expense (Income)—Net

Interest expense on long-term borrowings—net decreased in 2010 compared to 2009 primarily due to a decrease in interest expense on        As of April��1, 2011, our interest rate hedges partially offset by increased interest expenseproperty, plant and equipment was recorded at fair value and as a result net property, plant and equipment decreased $2.499 billion due to CenturyLink's indirect acquisition of higher average debt levels.us. The decrease in asset value resulted in lower depreciation expense for the combined year ended December 31, 2011. The accounting for CenturyLink's indirect acquisition of us also resulted in an additional $5.699 billion in amortizable intangible customer relationship assets, which resulted in an additional $598 million of amortization expense for the combined year ended December 31, 2011. In addition, capitalized software was recorded at a fair value of $1.702 billion, an increase of $887 million, resulting in amortization expense of $412 million for the combined year ended December 31, 2011 as compared to $221 million for the predecessor year ended December 31, 2010.




Table of Contents

Other Consolidated Results

        The following table summarizes other income (expense) and income tax expense:

		Successor					Predecessor			Combined			Predecessor			Increase/ (Decrease)			% Change
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Interest expense		$	(299	)				(150	)		(449	)		(615	)		(166	)		(27	)%
Other income (expense)			(8	)				2			(6	)		5			nm			nm
Total other income (expense)		$	(307	)				(148	)		(455	)		(610	)		(155	)		25	%
Income tax expense		$	349					191			540			791			(251	)		(32	)%

---

nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

Other Income (Expense)

        Interest expense on long-term borrowings—net increaseddecreased in 2009 compared to 2008the combined year ended December 31, 2011 primarily due to the issuanceamortization of $811 millionthe net premium associated with our long-term debt, which resulted from the accounting for CenturyLink's indirect acquisition of new debt in the second quarter of 2009, partially offset by decreased interest as a result of maturities and decreasing interest rates on floating rate debt.us.

Other—net includes, among other things, interest income, income tax penalties, other interest expense (such as interest on income taxes), and equity method investment losses. The change in other—net in 2010 compared to 2009 is due to more equity method investment losses in 2009. The change in other—net in 2009 compared to 2008 is due to more investment equity method investment losses in 2009, partially offset by a decrease in tax related interest from uncertain tax positions.

Income Tax Expense

The effective income tax rate is the provision for income taxes as a percentage of income before income taxes. Our effective income tax rate for the combined year ended December 31, 2011 and the predecessor years ended December 31, 2010 and 2009 was 39%, 42% and 2008 was 42%, 38% and 37%, respectively.

Income tax expense for the year ended December 31, 2010 increased by $67 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and the tax treatment of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation.

Among other things, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted, which increased our effective tax rate for the year ended December 31, 2010 by 2.9 percentage points.

On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink. CertainCenturyLink's acquisition of QCII. However, certain of the expenses that were allocated to us for this acceleration are not deductible for income tax purposes and as such they increased our effective tax rate for the year ended December 31, 2010 by 1.1 percentage points.

Income tax expense in 2009 compared to 2008 decreased due to the decrease in income before income taxes.




Liquidity and Capital Resources

We are a wholly owned subsidiaryTable of QSC, which is a wholly owned subsidiary of QCII. As such, factors relating to, or affecting, QCII’s liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market’s perception of us. QCII and its consolidated subsidiaries had total borrowings—net of $11.947 billion and $14.200 billion as of December 31, 2010 and 2009, respectively.

QCII has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time and are classified as short-term borrowings.

Near-Term ViewContents

We expect that our cash on hand and expected net cash generated by operating activities will exceed our cash needs over the next 12 months. At December 31, 2010, we held cash and cash equivalents of $192 million, and QCII had an additional $180 million in cash and cash equivalents as well as $1.035 billion available under its currently undrawn revolving credit facility (referred to as the Credit Facility). The Credit Facility will be terminated at the time of the closing of QCII’s merger with CenturyLink.

During the year ended December 31, 2010, our net cash generated by operating activities totaled $3.235 billion. For the coming 12 months, our expected financing and investing cash needs include:

capital expenditures of approximately $1.3 billion;

$825 million of debt maturing in September 2011; and

dividends to QSC.

We have significant discretion in how we use our cash to pay for capital expenditures and for other costs of our business, as only a minority of our capital expenditures is dedicated to preservation activities or government mandates. We evaluate capital expenditure projects based on expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. If we are not successful in maintaining or increasing our net cash generated by operating activities in the near term, we may use this discretion to decrease our capital expenditures, which may impact future years’ operating results and cash flows. Also, we lease certain facilities and equipment under various capital lease arrangements when the

leasing arrangements are more favorable to us than purchasing the assets. For the year ended December 31, 2010, we entered into capital leases for approximately $116 million of assets, which allowed us to reduce our initial cash outlays. We may continue to use lease financing for some portion of our capital spending.

At December 31, 2010, our current liabilities exceeded our current assets by $1.716 billion. This working capital deficit increased $1.242 billion as compared to our working capital deficit at December 31, 2009. The increase was primarily due to dividends declared to QSC, capital expenditures and the reclassification of non-current borrowings to current, partially offset by net income before depreciation and amortization.

In general, we intend to refinance our debt as it matures, but would need to do so in a manner consistent with the terms of QCII’s merger agreement with CenturyLink. Any time we deem conditions favorable, we may attempt to improve our liquidity position by accessing debt markets in a manner designed to create positive economic value. The unstable economy may impair our ability to refinance maturing debt at terms that are as favorable as those from which we previously benefited or at terms that are acceptable to us.

Long-Term View

We have historically operated with a working capital deficit due to our practice of declaring and paying regular cash dividends to QSC, and it is likely that we will operate with a working capital deficit in the future. As discussed below, we continue to generate substantial cash from operations. We believe that these cash flows, combined with continued access to the capital markets to refinance debt as it comes due, will provide sufficient liquidity to continue our planned investing and financing activities.

Debt

We have a significant amount of debt maturing in the next several years, including $825 million maturing in 2011, $1.500 billion maturing in 2012, $750 million maturing in 2013 and $600 million in 2014. We believe that we will continue to have access to capital markets to refinance our debt as necessary. In general, we intend to refinance our debt as it matures.

The Credit Facility, which makes available to QCII $1.035 billion of additional credit subject to certain restrictions as described below, is currently undrawn and expires in September 2013. The Credit Facility has 13 lenders, with commitments ranging from $25 million to $100 million. QCII’s merger agreement with CenturyLink allows QCII to draw on the facility with the intent to repay the borrowings within 90 days. This facility has a cross payment default provision, and this facility and certain other debt issues of QCII and its other subsidiaries also have cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments could occur if:

QCII fails to pay any indebtedness when due in an aggregate principal amount greater than $100 million;

any indebtedness is accelerated in an aggregate principal amount greater than $100 million; or

judicial proceedings are commenced to foreclose on any of QCII’s assets that secure indebtedness in an aggregate principal amount greater than $100 million.

Upon a cross default, the creditors of a material amount of QCII’s debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due to those creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if, in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated. As a wholly owned subsidiary of QCII, in the event of such a cross-default or cross-acceleration, our business operations and financial condition could be affected, potentially impacting our credit ratings and access to the capital markets.

The Credit Facility also contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the legal matters discussed in “Legal Proceedings” in Item 3 of this report. In addition, to the extent that QCII’s earnings before interest, taxes, depreciation and amortization, or EBITDA (as defined in QCII’s debt covenants), is reduced by cash settlements or judgments relating to the matters discussed in that note, QCII’s debt to consolidated EBITDA ratios under certain debt agreements will be adversely affected. This could reduce QCII’s liquidity and flexibility due to potential restrictions on drawing on its Credit Facility and potential restrictions on incurring additional debt under certain provisions of its debt agreements. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to capital markets.

We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets), but would need to do so in a manner consistent with the terms of QCII’s merger agreement with CenturyLink, if:

revenue and cash provided by operations significantly decline;

unstable economic conditions continue to persist;

competitive pressures increase;

we are required to contribute a material amount of cash to QCII’s pension plan; or

QCII becomes subject to significant judgments or settlements in one or more of the matters discussed in “Legal Proceedings” in Item 3 of this report.

Pension Plan

Benefits paid by QCII’s pension plan are paid through a trust. This pension plan is measured annually at December 31. The accounting unfunded status of the pension plan was $585 million at December 31, 2010. Cash funding requirements can be significantly impacted by earnings on investments, the discount rate, changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations.

Substantially all of our employees participate in the QCII pension plan. Historically, QCII has only required us to pay our portion of its pension contribution. Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII’s affiliates. See additional information about QCII’s pension benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Post-Retirement Benefits

Certain of QCII’s post-retirement health care and life insurance benefits plans are unfunded. As of December 31, 2010, the unfunded status of all of QCII’s post-retirement benefit plans was $2.522 billion. A trust holds assets that are used to help cover the health care costs of retirees who are former occupational (also referred to as union) employees.

QCII did not make any cash contributions to this trust in 2010 and does not expect to make any significant cash contributions to this trust in the future. QCII therefore anticipates that the majority of the costs that have historically been paid out of this trust will need to be paid by us at some point in the future. As of December 31,

2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. In 2009 QCII estimated that the trust would be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, QCII still believes that the more liquid assets in the trust will be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for its eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII’s estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. The benefits reimbursed from plan assets were $186 million in 2010.

Our employees may become eligible to participate in the QCII post-retirement plan. The amounts contributed by us through QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII’s affiliates. Historically, QCII has only required us to pay our portion of its post-retirement contribution. See additional information about QCII’s post-retirement benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Historical View

The following table summarizes cash flow activities for the years ended December 31, 2010, 2009 and 2008:

		Years Ended December 31,												Increase/(Decrease)								% Change
		2010				2009				2008				2010 v 2009				2009 v 2008				2010 v 2009				2009 v 2008
		(Dollars in millions)
Cash flows:
Provided by operating activities		$	3,235			$	3,167			$	3,479			$	68			$	(312	)			2	%			(9	)%
Used for investing activities			1,256				1,100				1,402				156				(302	)			14	%			(22	)%
Used for financing activities			2,801				1,286				2,136				1,515				(850	)			118	%			(40	)%

Operating Activities

Cash provided by operating activities increased in 2010 as compared to 2009 primarily due to decreased tax-related payments to QSC as a result of changes in bonus depreciation tax laws. Cash provided by operating activities also increased in 2010 as compared to 2009 due to lower payments for employee-related expenses resulting from reduced headcount. These increases in cash provided by operating activities were partially offset by a decline in cash received from customers as a result of decreased revenue.

Cash provided by operating activities decreased in 2009 as compared to 2008 primarily due to increased tax-related payments to QSC as a result of our utilization in 2008 of deferred tax assets acquired as a result of QCII merging into us two of QSC’s other wholly owned subsidiaries.

Investing Activities

Cash used for investing activities increased in 2010 as compared to 2009 primarily due to increased capital expenditures. The increase in capital spending was due to a cautious investment climate in late 2008 and early 2009, increased spending on our strategic initiatives and timing of cash payments. We may continue to use lease financing in 2011 for some portion of our capital spending. Our capital expenditures continue to be focused on our strategic services such as broadband. In 2011, we anticipate that our fiber investment, which includes fiber to the cell site, or FTTCS, will increase. Our projected capital expenditures for 2011 will be up to $1.3 billion.

Cash used for investing activities decreased in 2009 as compared to 2008 primarily due to lower capital expenditures. Lower capital spending was the result of initiatives related to decreasing per unit capital costs, a slowdown in new housing construction, which was down 40% as compared to 2008, and other lower customer-driven capital requirements. We also took advantage of favorable interest rates and increased our capital leasing activity, which further reduced our cash payments for capital equipment.

Financing Activities

For the year ended December 31, 2010, we paid $2.260 billion in dividends to QSC and we repaid $534 million of long-term borrowings (including current maturities).

For the year ended December 31, 2009, we paid $2.000 billion in dividends to QSC, issued $811 million of new debt resulting in aggregate net proceeds of $738 million and repaid $25 million of long-term borrowings including current maturities.

For the year ended December 31, 2008, we paid $2.000 billion in dividends to QSC, repaid $347 million of long-term borrowings including current maturities, and received equity infusions of $231 million.

We may continue to declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC. We were in compliance with all provisions and covenants of our borrowings as of December 31, 2010. For additional information on our 2010 and 2009 financing activities, see Note 8—Borrowings to our consolidated financial statements in Item 8 of this report.

Letters of Credit

We maintain letter of credit arrangements with various financial institutions for up to $57 million. We had outstanding letters of credit of approximately $51 million as of December 31, 2010. On January 18, 2011, QCII entered into $7 million of additional letters of credit.

Credit Ratings

Due to our general expectation that we will refinance our debt maturities, our credit ratings can have significant impact on our liquidity and capital resources. Debt ratings by the various rating agencies reflect each agency’s opinion of the ability of the issuers to repay debt obligations as they come due. In general, lower ratings result in higher borrowing costs and impaired ability to borrow under acceptable terms. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.

The table below summarizes our long-term debt ratings as of December 31, 2010:

		December 31, 2010
Moody’s			Baa3
S&P			BBB-
Fitch			BBB-

Since QCII’s announcement of its pending merger with CenturyLink:

on August 13, 2010, Moody’s Investors Service upgraded our rating from Ba1 to Baa3 (investment grade);

Standard & Poor’s placed our rating on “CreditWatch” with developing implications, meaning that S&P could raise, maintain or lower the rating; and

Fitch Ratings affirmed its previous rating of BBB- with a stable outlook.

With respect to Moody’s, a rating of Baa indicates that the security is subject to moderate credit risk, is considered medium grade and as such may possess certain speculative characteristics. The “1, 2, 3” modifiers show relative standing within the major categories, 1 being the highest, or best, modifier in terms of credit quality.

With respect to S&P and Fitch, a rating of BBB indicates that there are currently expectations of adequate protection. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category. The plus and minus symbols show relative standing within major categories.

While we have been able to obtain financing historically and our ratings have improved since QCII’s pending merger with CenturyLink was announced, given our current credit ratings our ability to raise additional capital under acceptable terms and conditions may be impaired.

Risk Management

We are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We have used derivative financial instruments to manage our interest rate risk exposure on our debt and we may employ them in the future.

Near-Term Maturities

As of December 31, 2010, we had $825 million of long-term notes maturing in the subsequent 12 months. We would be exposed to changes in interest rates at any time that we choose to refinance any of this debt. A hypothetical increase of 100 basis points in the interest rate on a refinancing of the entire current portion of long-term notes would decrease annual pre-tax earnings by approximately $8 million.

Floating-Rate Debt

As of December 31, 2010, we had $750 million of floating interest rate debt outstanding, all of which was exposed to changes in interest rates. The exposure for these instruments is linked to the London Interbank Offered Rate, or LIBOR. A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease annual pre-tax earnings by approximately $8 million.

Investments

As of December 31, 2010, our cash and investments managed by QSC included $188 million invested in highly liquid cash-equivalent instruments and $52 million invested in currently non-liquid auction rate securities. As interest rates change, so will the interest income derived from these instruments. Assuming that these investment balances were to remain constant, a hypothetical decrease of 100 basis points in interest rates would decrease annual pre-tax earnings by approximately $2 million.

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as of December 31, 2010:

		Payments Due by Period
		2011				2012				2013				2014				2015				2016 and Thereafter				Total
		(Dollars in millions)
Future contractual obligations(1):
Debt and lease payments:
Long-term debt		$	825			$	1,500			$	750			$	600			$	400			$	3,893			$	7,968
Capital lease and other obligations			52				46				39				28				16				3				184
Interest on long-term borrowings and capital leases(2)			597				463				380				363				301				2,945				5,049
Operating leases			88				59				40				34				29				67				317
Total debt and lease payments			1,562				2,068				1,209				1,025				746				6,908				13,518
Other long-term liabilities			3				2				2				2				2				43				54
Purchase commitments:
Telecommunications and information technology			2				2				2				1				1				1				9
Advertising, promotion and other services(3)			64				41				31				27				24				44				231
Total purchase commitments			66				43				33				28				25				45				240
Non-qualified pension obligation(4)			2				2				2				2				2				21				31
Total future contractual obligations		$	1,633			$	2,115			$	1,246			$	1,057			$	775			$	7,017			$	13,843

(1)	The table does not include:

costs that are contingent upon completion of QCII’s pending merger with CenturyLink;

our open purchase orders as of December 31, 2010. These purchase orders are generally at fair value, are generally cancelable without penalty and are part of normal operations;

other long-term liabilities, such as accruals for legal matters and income taxes, that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;

affiliate cash funding requirements for pension benefits payable to certain eligible current and future retirees allocated to us by QCII. The accounting unfunded status of QCII’s pension plan was $585 million at December 31, 2010. Benefits paid by QCII’s qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as QCII is not able to reliably estimate required contributions to the trust. QCII’s cash funding requirements can be significantly impacted by earnings on investments, the discount rate changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes

in the plan and funding laws and regulations. Substantially all of our employees participate in the QCII pension plan. The amounts contributed by us through QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII’s affiliates. Historically, QCII has only required us to pay our portion of its required pension contribution;

affiliate post-retirement benefits payable to certain eligible current and future retirees. Although we had an affiliate liability recorded on our balance sheet as of December 31, 2010 representing our allocated net benefit obligation for post-retirement benefits, not all of this amount is a contractual obligation. Certain of these plans are unfunded and net payments made by us totaled $112 million in 2010, including payments for benefits that are not contractual obligations. Assuming our future proportionate share of QCII’s total post-retirement benefits payments is consistent with an average of our proportionate share over the prior three years, total undiscounted future payments estimated to be made by us for benefits that are both contractual obligations and non-contractual obligations are approximately $4.0 billion over approximately 80 years. However, this estimate is impacted by various actuarial and market assumptions, and ultimate payments will differ from this estimate. In 1989, a trust was created and funded by QCII to help cover the health care costs of retirees who are former occupational employees. QCII did not make any cash contributions to this trust in 2010 and does not expect to make any significant cash contributions to this trust in the future. QCII anticipates that the majority of the costs that have historically been paid out of this trust will need to be paid by us at some point in the future. As of December 31, 2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. In 2009 QCII estimated that the trust would be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, QCII still believes that the more liquid assets in the trust will be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for QCII’s eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII’s estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. The benefits reimbursed from plan assets were $186 million in 2010. See additional information on our benefits plans in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report;

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase goods and services. Assuming we exited these contracts in 2011, termination fees for these contracts would be $31 million. In the normal course of business, we believe the payment of these fees is remote; and

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

(2)	Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective as of December 31, 2010.

(3)

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.

(4)	Non-qualified pension payment estimates assume we pay the same proportionate share of QCII’s total payments as the average we paid over the prior three years.

Off-Balance Sheet Arrangements

We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we do not engage in leasing, hedging, research and development services, or other relationships that expose us to any significant liabilities that are not reflected on the face of the consolidated financial statements or in the Future Contractual Obligations table above.

Critical Accounting Policies and Estimates

        Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. For additional information on the application of theseoperations related to (i) business combinations; (ii) goodwill, customer relationships and other significant accounting policies, see Note 2—Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of this report.intangible assets; (iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) intercompany revenues and expenses; (vi) affiliates transactions; and (vii) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require significant judgments, assumptions or estimates. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, intercompany allocations and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We believe that the estimates, judgments and assumptions made when accounting for the items described below are reasonable, based on information available at the time they are made. However, there can be no assurance that actual results will not differ from those estimates.

Business Combinations

        We have accounted for CenturyLink's indirect acquisition of us under the acquisition method of accounting, whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at the acquisition date. The portion of the purchase price in excess of the estimated fair value of the net tangible and separately identifiable intangible assets acquired represents goodwill. The allocation of the purchase price related to CenturyLink's indirect acquisition of us involves estimates and judgments by our management that may be adjusted during the measurement period, but in no case beyond one year from the acquisition date. The fair values recorded are made based on management's best estimates and assumptions. In arriving at the fair values of assets acquired and liabilities assumed, we consider the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our estimates may also include assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment, and industry and economic trends. Small changes in the underlying assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our results of operations.

        Our acquisition resulted in the assignment of the aggregate consideration to the assets acquired and liabilities assumed based on preliminary estimates of their acquisition date fair values. The fair value of the aggregate consideration transferred exceeded the acquisition date fair value of the recorded tangible and intangible assets and assumed liabilities by an estimated $9.453 billion, which has been recognized as goodwill. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair values of the acquired assets and assumed liabilities, along with the related allocations to goodwill and intangible assets. The amounts recorded related to the acquisition are preliminary and subject to revision pending the final fair valuation analysis. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011.

Goodwill, Customer Relationships and Other Intangible Assets

        We are required to review goodwill recorded in business combinations for impairment at least annually, or more frequently if events or a change in circumstances indicate that an impairment may have occurred. We are required to write-down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill




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impairment is September 30. The impairment testing is done at the reporting unit level; in reviewing the criteria for reporting units when allocating the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that we are one reportable unit.

        We early adopted the provisions of Accounting Standards Update ("ASU") 2011-08, Testing Goodwill for Impairment, during the third quarter of 2011, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to ourcarrying value (including goodwill). If the estimated fair valueis greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value. We elected to early adopt the provisions of ASU 2011-8 and perform a qualitative assessment as of our September 30 measurement date given the six month proximity of the goodwill impairment measurement date and the acquisition date resulting in the creation of the goodwill.

        As a result of CenturyLink's indirect acquisition of us and the related acquisition accounting, the carrying value of our assets and liabilities equaled our fair value as of April 1, 2011. A decrease in our fair value in excess of a reduction in our carrying value will result in us having a carrying value in excess of our fair value, which may result in an impairment of our goodwill. There is significant judgment in estimating the fair value of the company. The factors that most significantly impact our estimate of fair value include forecasted cash flows and a risk adjusted discount rate. The applicable risk adjusted discount rate is impacted by the market risk free rate of return and our risk rating.

        The qualitative analysis included assessing the impact of changes in certain factors from April 1, 2011 (the acquisition date on which all assets and liabilities were assigned a fair value) to September 30, 2011 (the goodwill impairment testing date), including (i) changes in forecasted operating results and comparing actual results to those utilized in the April 1, 2011 fair value assignment; (ii) changes in our weighted average cost of capital from April 1, 2011 to September 30, 2011; (iii) changes in the industry or our competitive environment since the acquisition date; (iv) changes in the overall economy, our market share and interest rates since the acquisition date; (v) trends in the stock price of CenturyLink and related market capitalization and enterprise values; (vi) trends in peer companies total enterprise value metrics; (vii) control premiums paid for recent industry transactions; and (viii) additional factors such as a management turnover, changes in regulation and changes in litigation matters.

        Based on our qualitative assessment, we concluded that it was more likely than not that the estimated fair value of our reporting unit exceeded its carrying value as of the successor date of September 30, 2011 and thus, determined it was not necessary to perform the two step goodwill impairment test. We believe the more impactful assessments include our actual results compared to those forecasted as of the successor date of April 1, 2011 and the decline in our weighted average cost of capital since April 1, 2011. To date, our actual operating results have been comparable to those forecasted as of April 1, 2011 and, as of December 31, 2011, we believe the forecasted results of future periods are not materially different than those used as of April 1, 2011.

        Our weighted average cost of capital declined 100 basis points from the April 1, 2011 valuation to the September 30, 2011 testing date, which would serve to increase the estimated fair value of the reporting unit when utilizing a discounted cash flow methodology. Based on our review of all other qualitative factors, we concluded there were no other significant economic, industry, operational or performance-related changes from April 1, 2011 to September 30, 2011 that would adversely impact our qualitative assessment.




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        Should our future operating results not meet forecasted expectations or should our weighted average cost of capital increase significantly in the future, we may be required to assess our goodwill for impairment prior to the next required testing date of September 30, 2012. In addition, we cannot assure that other adverse conditions will not trigger future goodwill impairment testing or an impairment charge. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment testing. These factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our ultimate parent's, CenturyLink, stock price and resulting market capitalization; (iii) changes in the discount rate; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of regulatory actions; and (vi) a significant adverse change in legal factors or in the overall business climate. We will continue to monitor certain events that impact our operations to determine if an interim assessment of goodwill impairment should be performed prior to the next required testing date of September 30, 2012.

Property, Plant and Equipment

        Property, plant and equipment acquired since the acquisition date is stated at original cost plus the estimated value of any associated legally or contractually required retirement obligations.

        We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, replacement history and assumptions about technology evolution to estimate the remaining life of our asset base. The changes in our estimates incorporated as a result of our most recent review did not have a material impact on the level of our depreciation expense.

        Due to rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications plant, equipment and software requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates. The effect of a one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $180 million or increased depreciation by approximately $260 million, respectively.

        We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions.

Pension and Post-Retirement Benefits

        Substantially all of our employees participate in the QCII pension plan. QCII also maintains a non-qualified pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in QCII's post-retirement health care and life insurance benefit plans. QCII allocates the expense relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits and the associated obligations and assets to us and determines our cash contribution. The amounts contributed by us through QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII's affiliates. Historically, QCII has only required us to pay our portion of its required pension contribution. The allocation of expense to us is based upon demographics of our employees and retirees compared to all the remaining participants. However, significant year over year changes in




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QCII's funded status affecting accumulated other comprehensive income may not have a significant initial impact on the affiliate receivable or payable that is allocated to us.

        In computing the pension and post-retirement health care and life insurance benefits expenses and obligations, the most significant assumptions QCII makes include discount rate, expected rate of return on plan assets, health care trend rates and QCII's evaluation of the legal basis for plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees' unions can also significantly impact the amount of expense we record.

        Changes in any of the above factors QCII made in computing the pension and post-retirement health care and life insurance benefit expenses could impact general, administrative and other operating expenses and the affiliate benefits receivable or payable allocated to us as described above. For further discussion of the QCII pension, non-qualified pension and post-retirement benefit plans and the critical accounting estimates, see QCII's Annual Report on Form 10-K for the year ended December 31, 2011.

Intercompany Revenue and ChargesExpenses

We charge our affiliates based on tariffed rates for telecommunications and data services and either fully distributed cost or market rates for other services. Our fully distributed costs methodology includes employee costs, facilities costs, overhead costs and a return on investment component.

Our affiliates charge us for services rendered by their employees primarily by applying the fully distributed cost methodology discussed above. Our affiliates also contract services from third parties on our behalf. For these services, the third parties bill our affiliates who in turn charge us for our respective share of these third-party expenses.

The methodologies discussed above for determining affiliates revenue and charges are based on rules that the FCC adopted pursuant to the Communications Act, as amended by the Telecommunications Act. We believe the accounting estimates related to affiliates revenue and charges are “critical"critical accounting estimates”estimates" because determining market rates and determining the allocation methodology and the supporting allocation factors: (i) requires judgment and is subject to refinement as facts and circumstances change or as new cost drivers are identified, (ii) are based on regulatory rules which are subject to change and (iii) QCII occasionally changes which affiliates provide them services which can impact overall costs and related affiliates charges, all of which require significant judgment and assumptions.

Affiliates Transactions

We record intercompany charges at the amounts billed to us by our affiliates. Regulatory rules require certain expenses to be recorded at market price or fully distributed cost, as more fully described in Note 16—Related Party Transactions to our consolidated financial statements in Item 8 of this report.cost. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.

Because of the significance of the services we provide to our affiliates and our other affiliates transactions, the resultresults of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.




Loss Contingencies and Litigation Reserves

QCII and we are involved in several material legal proceedings, as described in more detail in “Legal Proceedings” in Item 3Table of this report. We assess potential losses in relation to any such matters to which we are a party and in relation to other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted. If a loss is considered reasonably possible, we disclose the item and any determinable estimate of the loss if material but we do not recognize any expense for the potential loss.

For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. The overall tax liability recorded for uncertain tax positions as of December 31, 2010 and 2009 considers the anticipated utilization of any applicable tax credits.

To the extent we have recorded tax liabilities that are more or less than the actual liability that ultimately results from the resolution of an uncertain tax position, our earnings will be increased or decreased accordingly. Also, as we become aware of new interpretations of relevant tax laws and as we discuss our interpretations with taxing authorities, we may in the future change our assessments of the sustainability of an uncertain tax position or of the amounts that may be sustained upon audit. We believe that the estimates, judgments and assumptions made in accounting for these matters are reasonable, based on information currently available. However, as our assessments change and as uncertain tax positions are resolved, the impact to our consolidated financial statements could be material.Contents

DeferredIncome Taxes

We        Until April 1, 2011, we were included in the consolidated federal income tax return of QCII. Since CenturyLink's acquisition of QCII on April 1, 2011, we are included in the consolidated federal income tax return of QCII.CenturyLink. Under QCII’sCenturyLink's tax allocation policy, QCIICenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by QCII,CenturyLink and the same payment and allocation policy applies.

Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken and the resulting tax basis, are more likely than not to be sustained if they are audited by taxing authorities. Also,

assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. These matters, and others,other matters involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

        We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, we rely on our recent history of pre-tax earnings, estimated timing of future deductions and benefits represented by the deferred tax assets and our forecasts of future earnings, the latter two of which involve the exercise of significant judgment. As of the successor date of December 31, 2011, we concluded that it was more likely than not that we would realize the majority of our deferred tax assets; therefore, our valuation allowance did not require material adjustments. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 12- Income Taxes for additional information.

Recently Issued Accounting Pronouncements

        In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated financial statements as




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our qualitative analysis as of September 30, 2011, indicated that more likely than not, the fair value of our single reporting unit exceeded its carrying value as of that date.

        In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.

Liquidity and Capital Resources

Overview

        We are a wholly owned subsidiary of QSC, which is a direct wholly owned subsidiary of QCII and as of April 1, 2011, became an indirect wholly owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

        CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time and are classified as short-term loans. Under these arrangements, the majority of our cash balance is transferred on a daily basis to CenturyLink as a short-term affiliate loan. From time to time we may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Given our upgrade to an investment grade rating on April 1, 2011, our debt covenants do not limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.

        As of the successor date of December 31, 2011, our current liabilities exceeded our current assets by $918 million compared to $3.734 billion as of April 1, 2011. Our working capital deficit decreased $2.816 billion primarily due to net income before depreciation, amortization and net proceeds from our long term debt issuances, partially offset by capital expenditures and dividends declared to QSC. We have historically operated with a working capital deficit due to our practice of declaring and paying regular cash dividends to QSC. As long as we continue declaring cash dividends to QSC, it is likely that we will continue to operate with a working capital deficit in the future. We anticipate that any future liquidity needs not met through our cash provided by operating activities and amounts due to us from CenturyLink could be met through capital contributions or loans from CenturyLink.

Debt and Other Financing Arrangements

        Until April 1, 2011, QCII had a revolving credit facility, which made available to us $1.035 billion of additional credit subject to certain restrictions. That credit facility was terminated in conjunction with CenturyLink's acquisition of QCII. In January 2011, CenturyLink entered into a new four-year revolving credit facility (the "Credit Facility") that allows CenturyLink to borrow up to $1.700 billion including $400 million of letter of credit capacity, for the general corporate purposes of itself and its




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subsidiaries. CenturyLink also maintains a separate letter of credit arrangement with a financial institution to which we have access. As of the successor date of December 31, 2011, CenturyLink had approximately $1.4 billion and $31 million available for future use under the Credit Facility and the separate letter of credit arrangement, respectively.

        As of the successor date of December 31, 2011, our long-term debt (including current maturities) totaled $8.325 billion, compared to $8.012 billion outstanding as of the predecessor date of December 31, 2010. Substantially all of the $313 million increase in our debt is attributable to our recent debt issuances offset by repayments of maturing long-term debt.

        Subject to market conditions, from time to time we expect to continue to issue debt securities to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned us by the three major credit rating agencies, among other factors.

        On October 4, 2011, we issued $950 million aggregate principal amount of our 6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points. In October 2011, we used the net proceeds from this offering, together with the $557 million of net proceeds received on September 21, 2011 from the debt issuance described below and available cash, to redeem the $1.500 billion aggregate principal amount of our 8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.

        On September 21, 2011, we issued $575 million aggregate principal amount of our 7.50% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $557 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.

        On June 8, 2011, we issued $661 million aggregate principal amount of our 7.375% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $642 million. The notes are our unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. We used the net proceeds, together with available cash, to redeem $825 million aggregate principal amount of our 7.875% Notes due 2011 and to pay related fees and expenses.

        We were in compliance with all provisions and covenants of our debt agreements as of the successor date of December 31, 2011. See Note 4—Long-Term Debt to our consolidated financial statements in Item 8 of this report for additional information about our long-term debt.




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Future Contractual Obligations

        The following table summarizes our estimated future contractual obligations as of the successor date of December 31, 2011:

		2012			2013			2014			2015			2016			2017 and thereafter			Total
		(Dollars in millions)
Long-term debt, including current maturities and capital lease obligations		$	64			805			634			420			812			5,270			8,005
Interest on long-term debt and capital leases(1)			553			536			518			458			408			6,207			8,680
Operating leases			50			33			27			22			18			36			186
Purchase commitments(2)			70			47			33			30			30			35			245
Non-qualified pension obligation			2			2			2			2			2			18			28
Other			2			2			2			2			1			31			40
Total future contractual obligations(3)		$	741			1,425			1,216			934			1,271			11,597			17,184

---

(1)

Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective at December 31, 2011.



(2)

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.



(3)

The table does not include:



•

our open purchase orders as of the successor date of December 31, 2011. These purchase orders are generally at fair value, and are generally cancelable without penalty;



•

other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;



•

affiliate cash funding requirements for pension benefits payable to certain eligible current and future retirees allocated to us by QCII. Benefits paid by QCII's qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as QCII is not able to reliably estimate required contributions to the trust. QCII's cash funding projections are discussed further below;



•

affiliate post-retirement benefits payable to certain eligible current and future retirees. Not all of QCII's post-retirement benefit obligation amount is a contractual obligation and are not contractual obligations of ours and therefore are not reported in the table. See additional information on QCII's benefits plans in Note 8—Employee Benefits Item 8 of QCII's annual report on Form 10-K;



•

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase goods and services. Assuming we exited these contracts in 2012, termination fees for these contracts would be $56 million. In the normal course of business, we believe the payment of these fees is likely to be remote; and




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•

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

Capital Expenditures

        We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash generated by operating activities and regulatory considerations.

        Our capital expenditures continue to be focused on our strategic services primarily our broadband services. In 2012, we anticipate that our fiber investment, which includes fiber to the tower, or FTTT, will be similar to that spent in 2011. FTTT is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

Pension and Post-Retirement BenefitsPost-retirement Benefit Obligations

Substantially all        QCII is subject to material obligations under its existing defined benefit pension and other post-retirement benefit plans. As of the April 1, 2011, the acquisition date, QCII recognized liabilities for the accounting unfunded status of pension and other post-retirement benefit obligations of $627 million and $2.706 billion, respectively. See Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this report for additional information about our pension and other post-retirement benefit arrangements.

        A substantial portion of our employees participate in the QCII pension plan. Historically, QCII also maintains a non-qualifiedhas only required us to pay our portion of its pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in QCII’s post-retirement health care and life insurance benefit plans. QCII allocates the expense relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits and the associated obligations and assets to us and determines our cash contribution. The amounts contributed by us through QCIIOur contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII’sQCII's affiliates. Historically, QCII has only required us to pay our portion of its required

        Benefits paid by QCII's qualified pension contribution. The allocation of expense to us is based upon demographics of our employees and retirees compared to all the remaining participants. However, significant year over yearplan are paid through a trust. Cash funding requirements can be significantly impacted by earnings on investments, discount rates, changes in QCII’s funded status affecting accumulated other comprehensive income mayplan benefits and funding laws and regulations. QCII opted to make a contribution of $307 million in December 2011, and therefore, will not havebe required to make a contribution in 2012 based on current funding laws and regulations. Although potentially significant initial impactin the aggregate, QCII currently expects that plan contributions in 2013 and beyond will decrease from the 2011 contribution amount. However, the actual amount of required plan contributions in 2013 and beyond will depend on the affiliate receivable or payable that is allocated to us.earnings on investments, discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations.

In computing the pension and        Certain of QCII's post-retirement health care and life insurance benefits expenses and obligations,plans are unfunded. A trust holds assets that are used to help cover the most significant assumptions QCII makes include discount rate, expected rate of return on plan assets, health care trend rates and QCII’s evaluationcosts of certain retirees. As of the legal basis for plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees’ unions can also significantly impact the amount of expense we record.

Changes in any of the above factors QCII made in computing the pension and post-retirement health care and life insurance benefit expenses could impact general, administrative and other operating expenses and the affiliate benefits receivable or payable allocated to us as described above. For further discussion of the QCII pension, non-qualified pension and post-retirement benefit plans and the critical accounting estimates, see QCII’s Annual Report on Form 10-K for the year ended December 31, 2010.

Revenue Recognition and Related Reserves

We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If the elements are deemed separable and separate earnings processes exist, total consideration is allocated to each element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If these criteria are not satisfied, the total advance payment is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period.

We believe that the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are “critical accounting estimates” because: (i) they require management to make assumptions about how long we will retain customers; (ii) the assessment of whether bundled elements are separable is subjective; (iii) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (iv) the assessment of whether bundled elements are separable may result in revenue being reported in different periods than significant portions of the related costs.

As the telecommunications market experiences greater competition and customers shift from traditional land-based telecommunications services to wireless and Internet-based services, our estimated customer relationship period could decrease and we will accelerate the recognition of deferred revenue and related costs over a shorter estimated customer relationship period.

Economic Lives of Assets to be Depreciated or Amortized

We perform annual internal studies or reviews to determine depreciable lives for our property, plant and equipment. These studies utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution, and, in certain instances, actuarially determined probabilities to calculate the remaining life of our asset base.

Due to rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications plant, equipment and software requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates. The effect of a one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $230 million or increased depreciation by approximately $310 million, respectively. The effect of a one half year increase or decrease in the estimated remaining useful lives of our capitalized software would have decreased amortization by approximately $30 million or increased amortization by approximately $40 million, respectively.

Recoverability of Long-Lived Assets

We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions. We believe our estimates are reasonable, based on information available at the time they were made. However, if our estimates of our future cash flows had been different, we may have concluded that some of our long-lived assets were not recoverable, which would likely have caused us to record a material impairment charge. Also, if our future cash flows are significantly lower than our projections we may determine at some futuresuccessor date that some of our long-lived assets are not recoverable.

Derivative Financial Instruments

As of December 31, 2010, we did not have any derivative financial instruments. However, we sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed 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 the variability in the borrower’s overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in2011, the fair value of the borrower’s overall debt portfoliotrust assets was $643 million; however, a portion of these assets is comprised of investments with restricted liquidity. QCII estimates that the more liquid assets in the trust will be adequate to provide continuing reimbursements for covered post-retirement health care costs for approximately four years. Thereafter, covered benefits will be paid either directly by QCII or from the trust as the remaining assets become liquid. This projected four year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits.




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Other Matters

        CenturyLink and QCII are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As a wholly owned subsidiary of CenturyLink and QCII, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's and QCII's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters

Historical Information

        The following table summarizes cash flow activities:

		Successor					Predecessor			Combined			Predecessor			Increase / (Decrease)
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2011			Year Ended December 31, 2010			Combined 2011 v Predecessor 2010
		(Dollars in millions)
Net cash provided by operating activities		$	2,201					869			3,070			3,235			(165	)
Net cash used in investing activities			(1,191	)				(335	)		(1,526	)		(1,256	)		270
Net cash used in financing activities			(1,208	)				(525	)		(1,733	)		(2,801	)		(1,068	)

        Net cash provided by operating activities decreased primarily due to changes in interest rates.

We recognize all derivatives on our consolidated balance sheets at fair value. We generally designate the derivativedecreased cash payments received from customers as either a cash flow hedge or a fair value hedge on the date on which we enter into the derivative instrument. Cash flows from derivative instruments that are cash flow hedges or fair value hedges are classified in cash flows from operations.

For a derivative that is designated as and meets allresult of the required criteria for a cash flow hedge, we record in accumulated other comprehensive income, which is included in accumulated deficit in our consolidated balance sheets, any changesdecreased revenues in the fair value ofcombined year ended December 31, 2011 compared to the derivative. We then reclassify 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, we record those amounts immediately in other expense (income)—net in our consolidated statements of operations. For a derivative that is designated as and meets all of the required criteria for a fair value hedge, we record in other expense (income)—net in our consolidated statements of operations the changes in fair value of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)—net.

We assess quarterly whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item or whether our initial assumption of no ineffectiveness is still valid. If we determine that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or our assumption of no ineffectiveness is no longer valid, then we discontinue hedge accounting with respect to that derivative prospectively. We record immediately in earnings changes in the fair value of derivatives that are not designated as hedges.

predecessor year ended December 31, 2010. For additional information about our operating results, see "Results of Operations" above.

        Net cash used in investing activities increased in the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 primarily due to increases in short-term affiliate loans resulting from the majority of our cash balance being transferred on a daily basis to CenturyLink and payments for property, plant and equipment.

        Net cash used in financing activities decreased primarily due to $2.126 billion of net proceeds from the issuance of debt, as well as a $830 million decrease in dividends paid to QSC for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010. This decrease was partially offset by a $1.848 billion increase in payments of long-term debt for the combined year ended December 31, 2011 compared to the predecessor year ended December 31, 2010. For additional information regarding our derivative financial instruments,financing activities, see Note 9—Derivative Financial Instruments4—Long-Term Debt to our consolidated financial statements in Item 8 of this report.

Recently Issued Accounting PronouncementsCertain Matters Related to CenturyLink's Acquisition of QCII

In October 2009,        Effective after CenturyLink's indirect acquisition of us, we are included in the FASB issued Accounting Standards Update, or ASU, Number 2009-13, “Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangementsconsolidated federal income tax return of CenturyLink. CenturyLink is in the process of developing a consensuspost-acquisition intercompany agreement for allocation of consolidated income tax liabilities. We will continue to account for income tax expense on a stand-alone basis. We are also included in certain combined state tax returns filed by CenturyLink and the same accounting will apply.

        As the successor date of December 31, 2011, we had paid certain costs that were associated with the CenturyLink acquisition. These costs include compensation costs comprised of retention bonuses




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and severance. The final amounts and timing of the FASB Emerging Issues Task Force.” This ASU establishescompensation costs to be paid is partially dependent upon personnel decisions that continue to be made as part of the continuing integration. These amounts may be material.

        In accounting for the CenturyLink's indirect acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $8.688 billion as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair value our debt securities exceeded their stated principal balances on the acquisition date by $672 million, which is being recognized as a new selling price hierarchyreduction to use when allocatinginterest expense over the sales priceremaining terms of a multiple element arrangement between delivered and undelivered elements. This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules.the debt.

Market Risk

        We are requiredexposed to adopt this ASU prospectivelymarket risk from changes in interest rates on our variable rate long-term debt obligations. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.

        From time to time over the past several years, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for newfixed interest rates or materially modified agreements(ii) to swap obligations to pay fixed interest rates for variable interest rates; however, as of January  1,the successor date of December 31, 2011 we had no such instruments outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. We do not hold or issue derivative financial instruments for trading or speculative purposes. Management periodically reviews our exposure to interest rate fluctuations and implements strategies to manage the exposure.

        As of the successor date of December 31, 2011, we have approximately $8.1 billion (excluding capital lease and other obligations) of long-term debt outstanding, 91% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $750 million of floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $8 million.

        Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed as of the successor date of December 31, 2011. The adoption

Off-Balance Sheet Arrangements

        We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of this ASU will not have a material effect on ourthe consolidated financial positionstatements or results of operations.in the Future Contractual Obligations table above or (ii) discussed under the heading "Market Risk" above.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The information in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management”Market Risk" in Item 7 of this report is incorporated herein by reference.




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ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder


Qwest Corporation:

We have audited the accompanying consolidated balance sheets of Qwest Corporation and subsidiaries (the Company) as of December 31, 2011(Successor date) and 2010 and 2009,(Predecessor date) and the related consolidated statements of operations, stockholder’sstockholder's (deficit) equity and comprehensive income, and cash flows for the periods from April 1, 2011 to December 31, 2011 (Successor period), and from January 1, 2011 to March 31, 2011 (Predecessor period) and each of the years in the three-yeartwo-year period ended December 31, 2010.2010 (Predecessor periods). These consolidated financial statements are the responsibility of the Company’sCompany'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 Qwest Corporation and subsidiaries as of December 31, 2011 (Successor period) and 2010 and 2009,(Predecessor date) and the results of their operations and their cash flows for the periods from April 1, 2011 to December 31, 2011 (Successor period), and from January 1, 2011 to March 31, 2011 and each of the years in the three-yeartwo-year period ended December 31, 2010 (Predecessor periods), in conformity with U.S. generally accepted accounting principles.

        As discussed in note 2 to the consolidated financial statements, effective April 1, 2011, CenturyLink, Inc. acquired all of the outstanding stock of Qwest Corporation's indirect parent, Qwest Communications International Inc., in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

/s/ KPMG LLP


KPMG LLP
Denver, Colorado
March 2, 2012

February 21, 2011




QWEST CORPORATION

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QWEST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS




		Successor					Predecessor
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
		(Dollars in millions)
OPERATING REVENUES
Operating revenues		$	5,419					1,870			7,700			8,075
Operating revenues—affiliates			1,216					398			1,571			1,656
Total operating revenues			6,635					2,268			9,271			9,731
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization)			1,833					626			2,585			2,796
Selling, general and administrative			1,499					501			2,136			2,222
Operating expenses—affiliates			238					52			194			175
Depreciation and amortization			1,866					451			1,873			1,976
Total operating expenses			5,436					1,630			6,788			7,169
OPERATING INCOME			1,199					638			2,483			2,562
OTHER INCOME (EXPENSE)
Interest expense			(299	)				(150	)		(615	)		(632	)
Other income (expense)			(8	)				2			5			(9	)
Total other income (expense)			(307	)				(148	)		(610	)		(641	)
INCOME BEFORE INCOME TAX EXPENSE			892					490			1,873			1,921
Income tax expense			349					191			791			724
NET INCOME		$	543					299			1,082			1,197

   

		Years Ended December 31,
		2010				2009				2008
		(Dollars in millions)
Operating revenue:
Operating revenue		$	7,700			$	8,075			$	8,576
Operating revenue—affiliates			1,571				1,656				1,812
Total operating revenue			9,271				9,731				10,388
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)			1,655				1,704				1,899
Selling			1,457				1,645				1,812
General, administrative and other operating			1,609				1,669				1,556
Affiliates			194				175				185
Depreciation and amortization			1,873				1,976				2,073
Total operating expenses			6,788				7,169				7,525
Operating income			2,483				2,562				2,863
Other expense (income)—net:
Interest expense on long-term borrowings—net			615				632				589
Other—net			(5	)			9				7
Total other expense (income)—net			610				641				596
Income before income taxes			1,873				1,921				2,267
Income tax expense			791				724				829
Net income		$	1,082			$	1,197			$	1,438

The See accompanying notes are an integral part of theseto consolidated financial statements.




QWEST CORPORATION

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QWEST CORPORATION

CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME




		Successor					Predecessor
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
		(Dollars in millions)
NET INCOME		$	543					299			1,082			1,197
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on investments and other, net of tax			—					1			(4	)		9
Other comprehensive income			—					1			(4	)		9
COMPREHENSIVE INCOME		$	543					300			1,078			1,206

   

		December 31,
		2010				2009
		(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents		$	192			$	1,014
Accounts receivable—net of allowance of $48 and $53, respectively			720				774
Accounts receivable—affiliates			193				71
Deferred income taxes—net			159				167
Prepaid expenses and other			197				245
Total current assets			1,461				2,271
Property, plant and equipment—net			10,132				10,638
Capitalized software—net			913				880
Prepaid pension—affiliates			899				952
Other			281				297
Total assets		$	13,686			$	15,038
LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term borrowings		$	871			$	515
Accounts payable			463				419
Accounts payable—affiliates			242				201
Dividends payable—Qwest Services Corporation			140				100
Accrued expenses and other			909				941
Current portion of post-retirement, other post-employment benefits and other—affiliates			180				176
Deferred revenue and advance billings			372				393
Total current liabilities			3,177				2,745
Long-term borrowings—net of unamortized debt discount and other of $140 and $155, respectively			7,141				7,871
Post-retirement, other post-employment benefits and other—affiliates			2,501				2,573
Deferred income taxes—net			1,327				1,127
Other			371				410
Total liabilities			14,517				14,726
Commitments and contingencies (Note 17)
Stockholder’s (deficit) equity:
Common stock—one share without par value, owned by Qwest Services Corporation			11,425				11,346
Accumulated deficit			(12,256	)			(11,034	)
Total stockholder’s (deficit) equity			(831	)			312
Total liabilities and stockholder’s (deficit) equity		$	13,686			$	15,038

The See accompanying notes are an integral part of theseto consolidated financial statements.




QWEST CORPORATION

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QWEST CORPORATION

CONSOLIDATED BALANCE SHEETS


		Successor					Predecessor
		December 31, 2011					December 31, 2010
		(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	3					192
Accounts receivable, less allowance of $42 and $48			712					720
Short-term affiliate loans			198					—
Deferred income taxes, net			168					159
Other			98					181
Total current assets			1,179					1,252
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment			8,457					44,205
Accumulated depreciation			(915	)				(34,045	)
Net property, plant and equipment			7,542					10,160
GOODWILL AND OTHER ASSETS
Goodwill			9,453					—
Customer relationships, net			5,101					—
Other intangible assets, net			1,460					888
Other			197					270
Total goodwill and other assets			16,211					1,158
TOTAL ASSETS		$	24,932					12,570
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt		$	64					871
Accounts payable			654					679
Accounts payable—affiliates, net			189					205
Dividends payable—Qwest Services Corporation			310					140
Accrued expenses and other liabilities
Salaries and benefits			257					326
Other taxes			221					193
Other			129					170
Advance billings and customer deposits			273					372
Total current liabilities			2,097					2,956
LONG-TERM DEBT			8,261					7,141
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net			2,860					1,327
Affiliates obligations, net			1,572					1,602
Other			255					375
Total deferred credits and other liabilities			4,687					3,304
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDER'S EQUITY (DEFICIT )
Common stock—one share without par value, owned by Qwest Services Corporation			9,972					11,425
Accumulated deficit			(85	)				(12,256	)
Total stockholder's equity (deficit)			9,887					(831	)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)		$	24,932					12,570

See accompanying notes to consolidated financial statements.




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QWEST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Successor					Predecessor
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
		(Dollars in millions)
OPERATING ACTIVITIES
Net income		$	543					299			1,082			1,197
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,866					451			1,873			1,976
Deferred income taxes			150					76			241			(137	)
Provision for uncollectible accounts			44					17			70			85
Long-term debt (premium) discount amortization			(133	)				3			11			8
Changes in current assets and liabilities:
Accounts receivable			(71	)				18			(22	)		48
Accounts payable			(47	)				(20	)		51			19
Accounts receivable and payable—affiliates, net			(108	)				93			(81	)		—
Accrued income and other taxes			(36	)				50			(16	)		(122	)
Other current assets and other current liabilities, net			(6	)				(89	)		11			10
Changes in other noncurrent assets and liabilities			11					(36	)		15			27
Changes in other noncurrent assets and liabilities—affiliates			(53	)				—			7			44
Other, net			41					7			(7	)		12
Net cash provided by operating activities			2,201					869			3,235			3,167
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software			(1,036	)				(341	)		(1,240	)		(1,106	)
Changes in interest in investments managed by Qwest Services Corporation			—					4			(17	)		13
Changes in short-term affiliate loans			(157	)				—			—			—
Other, net			2					2			1			(7	)
Net cash used in investing activities			(1,191	)				(335	)		(1,256	)		(1,100	)
FINANCING ACTIVITIES
Payments of long-term debt			(2,368	)				(14	)		(534	)		(25	)
Net proceeds from issuance of long-term debt			2,126					—			—			738
Dividends paid to Qwest Services Corporation			(900	)				(530	)		(2,260	)		(2,000	)
Other, net			(66	)				19			(7	)		1
Net cash used in financing activities			(1,208	)				(525	)		(2,801	)		(1,286	)
Net (decrease) increase in cash and cash equivalents			(198	)				9			(822	)		781
Cash and cash equivalents at beginning of period			201					192			1,014			233
Cash and cash equivalents at end of period		$	3					201			192			1,014
Supplemental cash flow information:
Income taxes (paid to) refunded from Qwest Services Corporation, net		$	(327	)				116			(677	)		(968	)
Interest paid (net of capitalized interest of $8, $3, $12 and $10)		$	(464	)				(149	)		(603	)		(597	)

   

		Years Ended December 31,
		2010				2009				2008
		(Dollars in millions)
Operating activities:
Net income		$	1,082			$	1,197			$	1,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,873				1,976				2,073
Deferred income taxes			241				(137	)			215
Provision for bad debt—net			70				85				83
Other non-cash charges—net			5				17				41
Changes in operating assets and liabilities:
Accounts receivable			(22	)			48				3
Accounts receivable—affiliates			(9	)			55				(68	)
Prepaid expenses and other current assets			67				10				29
Accounts payable, accrued expenses and other current liabilities			(3	)			28				(112	)
Accounts payable, accrued expenses and other current liabilities—affiliates			(66	)			(163	)			(71	)
Deferred revenue and advance billings			(29	)			(39	)			(36	)
Other non-current assets and liabilities including affiliates			26				90				(116	)
Cash provided by operating activities			3,235				3,167				3,479
Investing activities:
Expenditures for property, plant and equipment and capitalized software			(1,240	)			(1,106	)			(1,404	)
Changes in interest in investments managed by Qwest Services Corporation			(17	)			13				(13	)
Other			1				(7	)			15
Cash used for investing activities			(1,256	)			(1,100	)			(1,402	)
Financing activities:
Proceeds from long-term borrowings			—				738				—
Repayments of long-term borrowings, including current maturities			(534	)			(25	)			(347	)
Repayments of long-term borrowings, including current maturities—affiliates			—				—				(22	)
Dividends paid to Qwest Services Corporation			(2,260	)			(2,000	)			(2,000	)
Equity infusions from Qwest Services Corporation			—				—				231
Other			(7	)			1				2
Cash used for financing activities			(2,801	)			(1,286	)			(2,136	)
Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents			(822	)			781				(59	)
Beginning balance			1,014				233				292
Ending balance		$	192			$	1,014			$	233

TheSee accompanying notes are an integral part of theseto consolidated financial statements.




QWEST CORPORATION

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QWEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDER’SSTOCKHOLDER'S EQUITY (DEFICIT) EQUITY


AND COMPREHENSIVE INCOME

		Successor					Predecessor
		Nine Months Ended December 31, 2011					Three Months Ended March 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
		(Dollars in millions)
COMMON STOCK
Balance at beginning of period		$	9,973					11,425			11,346			11,326
Asset transfers			(1	)				—			79			20
Balance at end of period			9,972					11,425			11,425			11,346
ACCUMULATED DEFICIT
Balance at beginning of period			—					(12,256	)		(11,034	)		(10,540	)
Net income			543					299			1,082			1,197
Dividends declared to Qwest Services Corporation			(628	)				(1,000	)		(2,300	)		(1,700	)
Change in other comprehensive income			—					1			(4	)		9
Balance at end of period			(85	)				(12,956	)		(12,256	)		(11,034	)
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)		$	9,887					(1,531	)		(831	)		312

		Common Stock				Accumulated Deficit				Total				Comprehensive Income
		(Dollars in millions)
Balance as of December 31, 2007		$	11,132			$	(9,762	)		$	1,370
Net income			—				1,438				1,438			$	1,438
Dividends declared on common stock			—				(2,200	)			(2,200	)
Other comprehensive income—net of taxes:
Unrealized loss on derivative instruments, net of deferred taxes of $3			—				(6	)			(6	)			(6	)
Unrealized loss on auction rate securities and other, net of deferred taxes of $5			—				(8	)			(8	)			(8	)
Total comprehensive income—net														$	1,424
Equity infusions from Qwest Services Corporation			231				—				231
Other net asset transfers			(37	)			(2	)			(39	)
Balance as of December 31, 2008			11,326				(10,540	)			786
Net income			—				1,197				1,197			$	1,197
Dividends declared on common stock			—				(1,700	)			(1,700	)
Other comprehensive income—net of taxes:
Unrealized gain on derivative instruments, net of deferred taxes of $4			—				7				7				7
Unrealized gain on auction rate securities and other, net of deferred taxes of $1			—				2				2				2
Total comprehensive income—net														$	1,206
Other net asset transfers			20				—				20
Balance as of December 31, 2009			11,346				(11,034	)			312
Net income			—				1,082				1,082			$	1,082
Dividends declared on common stock			—				(2,300	)			(2,300	)
Other comprehensive income—net of taxes:
Unrealized loss on derivative instruments, net of deferred taxes of $1			—				(1	)			(1	)			(1	)
Unrealized loss on auction rate securities and other, net of deferred taxes of $2			—				(3	)			(3	)			(3	)
Total comprehensive income—net														$	1,078
Other net asset transfers			79				—				79
Balance as of December 31, 2010		$	11,425			$	(12,256	)		$	(831	)

TheSee accompanying notes are an integral part of theseto consolidated financial statements.




QWEST CORPORATION

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QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the Years Ended December 31, 2010, 2009 and 2008

Unless the context requires otherwise, references in this report to “QC”"QC" refer to Qwest Corporation, references to “Qwest,” “we,” “us,” the “Company”"Qwest," "we," "us," and “our”"our" refer to Qwest Corporation and its consolidated subsidiaries, references to “QSC”"QSC" refer to our direct parent company, Qwest Services Corporation and its consolidated subsidiaries, and references to “QCII”"QCII" refer to QSC's direct parent company and our ultimateindirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries and references to "CenturyLink" refer to QCII's direct parent company and our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries.

Note 1: Business(1) Basis of Presentation and BackgroundSummary of Significant Accounting Policies

Basis of Presentation

We offerare an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local, network access, private line (including special access), broadband, data, Internet,wireless and video services. In certain local and voiceregional markets, we also provide local access and fiber transport services withinto competitive local exchange carriers.

        We generate the majority of our revenues from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

CenturyLink Merger

On April 21, 2010, QCII entered into a merger agreement whereby CenturyLink, Inc. (“CenturyLink”) will acquire QCII in a tax-free, stock-for-stock transaction. Under the terms of the agreement, QCII’s stockholders will receive 0.1664 shares of CenturyLink common stock for each share of QCII’s common stock they own at closing. Based on QCII’s and CenturyLink’s number of outstanding shares as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and QCII’s stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, QCII and CenturyLink received notification from the Department of Justice and the Federal Trade Commission that they received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. QCII and CenturyLink have received most of the necessary approvals from state public service or public utility commissions, but they still need approvals from the Federal Communications Commission (“FCC”) and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, QCII currently expects to receive all required approvals in the first quarter and is planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, QCII may be obligated to pay CenturyLink a termination fee of $350 million.

We are wholly owned by QSC, which is wholly owned by QCII. Our operations are included in the consolidated operations of QCII and generally account for the majority of QCII’s consolidated revenue. In addition to our operations, QCII maintains a national telecommunications network. Through its fiber-optic network, QCII provides the following products and services that we do not provide:

Data integration;

Dedicated Internet access;

Hosting services;

Long-distance services that allow calls that cross telecommunications geographical areas;

Managed services;

Multi-protocol label switching; and

Voice over Internet Protocol, or VoIP.

For certain products and services we provide, and for a variety of internal communications functions, we use parts of QCII’s telecommunications network to transport voice and data traffic. Through its network, QCII also

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

provides nationally and globally some data and Internet access services that are similar to services we provide within our local service area. These services include private line and our traditional wide area network (“WAN”) services, which consist of asynchronous transfer mode (“ATM”) and frame relay.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.

Reclassifications        On April 1, 2011, our indirect parent QCII became a wholly owned subsidiary of CenturyLink, Inc. in a tax-free, stock-for-stock transaction. Although we continued as a surviving corporation and legal entity after the acquisition, the accompanying consolidated statements of operations, comprehensive income, cash flows and stockholder's equity (deficit) are presented for two periods: predecessor and successor, which relates to the period preceding the acquisition and the period succeeding the acquisition. On the date of the acquisition, April 1, 2011, our assets and liabilities were recognized at their fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the "successor period". This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

During the first quarter of 2010,2011, we changed the definitions we use to classify expenses as cost of sales,services and products and selling, expenses or general administrative and other operating expensesadministrative, and as a result, certain expenses in our consolidated statements of operations for the prior year have beenwe reclassified previously reported amounts to conform to the current yearperiod presentation. We revised our definitions so that our expense classifications are more consistent with the expense classifications used by our new ultimate parent company, CenturyLink. These revisions resulted in the reclassification of $930 million and $1.092 billion from selling, general and administrative to cost of services and products for the predecessor years ended December 31, 2010 and 2009, respectively. Our newcurrent definitions of these expenses are as follows:

•

Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents




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•

Cost of sales (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers and affiliates. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages and certain benefits); equipment sales expenses (such as modem expenses); rents and utilities expenses incurred by our network operations; fleet expenses; and other expenses directly related to our network operations (such as professional fees and outsourced services).


QWEST CORPORATION

•

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) Basis of Presentation and Summary of Significant Accounting Policies (Continued) and utilities expenses; equipment sales expenses (such as modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our network. • Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, and affiliates. These expenses include: employee-related expenses directly attributable to selling products or services (such as salaries, wages, internal commissions and certain benefits); marketing and advertising; external commissions; bad debt expense; and other selling expenses (such as professional fees and outsourced services).

•

General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and universal service funds (“USF”) charges); rents and utilities expenses incurred by our administrative offices; and other general, administrative and other operating expenses (such as professional fees). These expenses also include our combined net periodic pension and post-retirement benefits expenses for all eligible employees and retirees allocated to us from QCII.

These definitions reflect changes primarily to reclassify expenses for: rent and utilities incurred by our network operations; fleet; network and supply chain management; and insurance and risk management from general, administrative and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to cost of sales, where theseselling products or services and employee-related expenses are more aligned with how we now manage our business. We believe these changes allow users of our financial statements to better understand our expense structure.for administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.