QCII and two of its subsidiaries, Qwest Capital Funding, Inc ("QCF") and QSC, guarantee the payment of certain of each other's registered debt securities. As of the successor date of September 30, 2012, each series of QCII's outstanding notes totaling approximately $1.4 billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCF and QSC (the "QCII Guaranteed Notes"). These notes are guaranteed through their respective maturity dates, the latest of which is in April 2018. In addition, each series of QCF's outstanding notes totaling approximately $1 billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCII (the "QCF Guaranteed Notes"). These notes are guaranteed through their respective maturity dates, the latest of which is in February 2031. The guarantees described above are full and unconditional and joint and several. A significant amount of QCII's and QSC's income and cash flow are generated by their subsidiaries. As a result, the funds necessary to meet their debt service or guarantee obligations are provided in large part by distributions or advances from their subsidiaries.

The following information sets forth our condensed consolidating statements of operations, balance sheets and statements of cash flows for the periods indicated. The information for QCII is presented on a stand-alone basis, information for QSC and QCF is presented on a combined basis and information for all of our other non-guarantor subsidiaries is presented on a combined basis. Each entity's investments in its subsidiaries, if any, are presented under the equity method. The consolidating statements of operations and balance sheets include the effects of consolidating adjustments to our subsidiaries' tax provisions and the related income tax assets and liabilities in the QSC and QCII results. Both QSC and QCF are 100% owned by QCII, and QCF is a finance subsidiary of QCII. Other than as already described in this note, the accounting principles used to determine the amounts reported in this note are the same as those used in our consolidated financial statements.

CenturyLink periodically restructures the internal capital structure of its subsidiaries, including QCII and its subsidiaries, based on the needs of its business.

We allocate the costs of shared services among our affiliates. These services include marketing and advertising, information technology, product and technical services as well as general support services. The allocation of these costs is based on estimated market values or fully distributed cost ("FDC"). Most of our affiliate services are priced by applying an FDC methodology. FDC rates are determined using salary rates, which include payroll taxes, employee benefits, facilities and overhead costs. Whenever possible, costs are directly assigned to the affiliate that uses the service. If costs cannot be directly assigned, they are allocated among all affiliates based on cost usage measures; or if no cost usage measure is available, these costs are allocated based on a general allocator. From time to time, we adjust the basis for allocating the costs of a shared service among our affiliates. Such changes in allocation methodologies are generally billed prospectively.

Under our tax allocation policy, we treat our subsidiaries as if they were separate taxpayers. The policy requires that each subsidiary pay its tax liabilities in cash based on that subsidiary's separate return taxable income. To the extent a subsidiary has taxable losses, the subsidiary does not pay any amount and therefore retains the benefit of the losses. Subsidiaries are also included in the combined state tax returns we file and the same payment and allocation policy applies.

Eligible employees of our subsidiaries participate in the QCII pension and non-qualified pension plan and may become eligible to participate in the post-retirement health care and life insurance, and other post-employment benefit plans sponsored by CenturyLink. The amounts contributed by our subsidiaries are not segregated or restricted to pay amounts due to their employees and may be used to provide benefits to our other employees or employees of other subsidiaries. We allocate the cost of pension, non-qualified pension, post-retirement health care and life insurance benefits and the associated obligations and assets to our subsidiaries and determine the subsidiaries' required contributions. The allocation is based upon demographics of each subsidiary's employees compared to all participants. In determining the allocated amounts, we make numerous assumptions. Changes in any of our assumptions could have a material impact on the expense allocated to our subsidiaries.

During the first quarter of 2012, in connection with post-acquisition systems integration activities, CenturyLink changed certain cash management processes applicable to us. Therefore, we now present the balances related to these cash management transactions on a net basis with our other affiliate transactions.

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—		—		2,712		—		2,712
Operating revenues—affiliates		—		—		113		—		113

Total operating revenues		—		—		2,825		—		2,825

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—		—		1,227		—		1,227
Selling, general and administrative		2		—		382		—		384
Operating expenses—affiliates		—		—		165		—		165
Depreciation and amortization		15		—		712		—		727

Total operating expenses		17		—		2,486		—		2,503

OPERATING (LOSS) INCOME		(17	)	—		339		—		322
OTHER INCOME (EXPENSE)
Interest expense		(21	)	(17	)	(109	)	—		(147	)
Interest expense—affiliates		(26	)	(28	)	(11	)	28		(37	)
Interest income—affiliates		—		28		—		(28	)	—
Income from equity investments in subsidiaries		144		75		—		(219	)	—
Net gain (loss) on early retirement of debt		12		—		(13	)	—		(1	)
Other (expense) income		(14	)	—		14		—		—

Total other income (expense)		95		58		(119	)	(219	)	(185	)

INCOME (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE		78		58		220		(219	)	137
Income tax (benefit) expense		(5	)	(86	)	145		—		54

NET INCOME	$	83		144		75		(219	)	83

COMPREHENSIVE INCOME	$	83		144		75		(219	)	83

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—		—		2,744		—		2,744
Operating revenues—affiliates		—		2		29		(10	)	21

Total operating revenues		—		2		2,773		(10	)	2,765

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—		—		1,185		—		1,185
Selling, general and administrative		3		2		520		—		525
Operating expenses—affiliates		—		—		46		(10	)	36
Depreciation and amortization		20		—		776		—		796

Total operating expenses		23		2		2,527		(10	)	2,542

OPERATING (LOSS) INCOME		(23	)	—		246		—		223
OTHER INCOME (EXPENSE)
Interest expense		(43	)	(17	)	(98	)	—		(158	)
Interest expense—affiliates		(4	)	(22	)	—		26		—
Interest income—affiliates		—		26		—		(26	)	—
Income from equity investments in subsidiaries		90		18		—		(108	)	—
Other (expense) income		(1	)	(1	)	2		—		—

Total other income (expense)		42		4		(96	)	(108	)	(158	)

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		19		4		150		(108	)	65
Income tax (benefit) expense		(13	)	(84	)	130		—		33

NET INCOME	$	32		88		20		(108	)	32

COMPREHENSIVE INCOME	$	32		88		20		(108	)	32

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—		—		8,173		—		8,173
Operating revenues—affiliates		—		3		327		(3	)	327

Total operating revenues		—		3		8,500		(3	)	8,500

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—		—		3,615		—		3,615
Selling, general and administrative		5		3		1,304		—		1,312
Operating expenses—affiliates		—		—		467		(3	)	464
Depreciation and amortization		49		—		2,157		—		2,206

Total operating expenses		54		3		7,543		(3	)	7,597

OPERATING (LOSS) INCOME		(54	)	—		957		—		903
OTHER INCOME (EXPENSE)
Interest expense		(85	)	(51	)	(335	)	—		(471	)
Interest expense—affiliates		(48	)	(82	)	(22	)	81		(71	)
Interest income—affiliates		—		81		—		(81	)	—
Income from equity investments in subsidiaries		361		135		—		(496	)	—
Net gain (loss) on early retirement of debt		12		—		(50	)	—		(38	)
Other (expense) income		(1	)	—		4		—		3

Total other income (expense)		239		83		(403	)	(496	)	(577	)

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		185		83		554		(496	)	326
Income tax (benefit) expense		(12	)	(278	)	419		—		129

NET INCOME	$	197		361		135		(496	)	197

COMPREHENSIVE INCOME	$	197		361		135		(496	)	197

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—		—		5,507		—		5,507
Operating revenues—affiliates		—		5		44		(22	)	27

Total operating revenues		—		5		5,551		(22	)	5,534

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—		—		2,326		—		2,326
Selling, general and administrative		8		5		1,168		—		1,181
Operating expenses—affiliates		—		—		90		(22	)	68
Depreciation and amortization		42		—		1,556		—		1,598

Total operating expenses		50		5		5,140		(22	)	5,173

OPERATING (LOSS) INCOME		(50	)	—		411		—		361
OTHER INCOME (EXPENSE)
Interest expense		(87	)	(35	)	(186	)	—		(308	)
Interest expense—affiliates		(8	)	(45	)	1		52		—
Interest income—affiliates		—		52		—		(52	)	—
Income (loss) from equity investments in subsidiaries		157		(34	)	—		(123	)	—
Net loss on early retirement of debt		—		—		(1	)	—		(1	)
Other (expense) income		(1	)	(1	)	2		—		—

Total other income (expense)		61		(63	)	(184	)	(123	)	(309	)

INCOME (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE		11		(63	)	227		(123	)	52
Income tax (benefit) expense		(8	)	(215	)	256		—		33

NET INCOME (LOSS)	$	19		152		(29	)	(123	)	19

COMPREHENSIVE INCOME (LOSS)	$	19		152		(29	)	(123	)	19

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—		—		2,846		—		2,846
Operating revenues—affiliates		—		2		9		(11	)	—

Total operating revenues		—		2		2,855		(11	)	2,846

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—		—		1,178		—		1,178
Selling, general and administrative		3		2		551		—		556
Operating expenses—affiliates		—		—		11		(11	)	—
Depreciation and amortization		—		—		533		—		533

Total operating expenses		3		2		2,273		(11	)	2,267

OPERATING (LOSS) INCOME		(3	)	—		582		—		579
OTHER INCOME (EXPENSE)
Interest expense		(56	)	(19	)	(152	)	—		(227	)
Interest expense—affiliates		(1	)	(26	)	(1	)	28		—
Interest income—affiliates		—		28		—		(28	)	—
Income from equity investments in subsidiaries		272		226		—		(498	)	—
Other (expense) income		—		(1	)	6		—		5

Total other income (expense)		215		208		(147	)	(498	)	(222	)

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)		212		208		435		(498	)	357
Income tax expense (benefit)		1		(64	)	209		—		146

NET INCOME	$	211		272		226		(498	)	211

COMPREHENSIVE INCOME	$	218		272		226		(498	)	218

	QCII(1)

	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	38	16	—		54
Accounts receivable, less allowance		38	—	1,199	—		1,237
Advances to affiliates		—	549	521	(300	)	770
Notes receivable—affiliates		—	1,413	—	(1,413	)	—
Deferred income taxes, net		—	380	169	—		549
Other		24	—	310	—		334

Total current assets		62	2,380	2,215	(1,713	)	2,944
Net property, plant and equipment		—	—	9,117	—		9,117
Goodwill		—	—	10,123	—		10,123
Customer relationships, net		—	—	6,059	—		6,059
Other intangible assets, net		77	—	1,278	—		1,.355
Investments in subsidiaries		14,429	13,863	—	(28,292	)	—
Deferred income taxes, net		1,103	983	—	(2,086	)	—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		2,748	76	960	(3,784	)	—
Other		41	7	342	—		390

TOTAL ASSETS	$	18,460	17,309	30,094	(35,875	)	29,988

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	550	—	857	—		1,407
Accounts payable		2	—	763	—		765
Accounts payable—affiliates, net		262	38	—	(300	)	—
Notes payable—affiliates		1,300	1,413	685	(1,413	)	1,985
Accrued expenses and other liabilities		273	36	800	—		1,109
Advance billings and customers deposits		—	—	433	—		433

Total current liabilities		2,387	1,487	3,538	(1,713	)	5,699
LONG-TERM DEBT		889	1,008	6,952	—		8,849
DEFERRED CREDITS AND OTHER LIABILITIES
Benefit plan obligations, net		3,102	—	—	—		3,102
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		1,032	353	2,399	(3,784	)	—
Deferred income taxes, net		—	—	2,832	(2,086	)	746
Other		165	32	510	—		707

Total deferred credits and other liabilities		4,299	385	5,741	(5,870	)	4,555
STOCKHOLDER'S EQUITY		10,885	14,429	13,863	(28,292	)	10,885

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	18,460	17,309	30,094	(35,875	)	29,988

	QCII(1)

	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	40	8	—		48
Accounts receivable, less allowance		15	2	1,184	—		1,201
Accounts receivable—affiliates, net		211	336	36	(583	)	—
Advances to affiliates		184	1,694	400	(1,536	)	742
Deferred income taxes, net		—	438	121	—		559
Other		—	19	259	(13	)	265

Total current assets		410	2,529	2,008	(2,132	)	2,815
Net property, plant and equipment		—	—	9,461	—		9,461
Goodwill		—	—	10,123	—		10,123
Customer relationships, net		—	—	6,788	—		6,788
Other intangible assets, net		126	—	1,461	—		1,587
Investments in subsidiaries		14,856	13,999	—	(28,855	)	—
Deferred income taxes, net		1,102	1,390	117	(2,609	)	—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		2,851	76	955	(3,882	)	—
Other		36	7	338	—		381

TOTAL ASSETS	$	19,381	18,001	31,251	(37,478	)	31,155

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	—	—	117	—		117
Current debt—affiliates		122	1,413	—	(1,535	)	—
Accounts payable		4	19	950	—		973
Accounts payable—affiliates, net		360	42	23	(31	)	394
Dividends payable—affiliates		200	—	310	(310	)	200
Accrued expenses and other liabilities		272	40	700	(1	)	1,011
Accrued expenses and other—affiliates		1	62	192	(255	)	—
Advance billings and customers deposits		—	—	400	—		400

Total current liabilities		959	1,576	2,692	(2,132	)	3,095
LONG-TERM DEBT		2,767	1,009	8,403	—		12,179
DEFERRED CREDITS AND OTHER LIABILITIES
Benefit plan obligations, net		3,198	—	—	—		3,198
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		1,031	344	2,507	(3,882	)	—
Deferred income taxes, net		—	223	3,016	(2,609	)	630
Other		150	31	596	—		777

Total deferred credits and other liabilities		4,379	598	6,119	(6,491	)	4,605
STOCKHOLDER'S EQUITY		11,276	14,818	14,037	(28,855	)	11,276

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	19,381	18,001	31,251	(37,478	)	31,155

	QCII(1)

	(Dollars in millions)
Net cash (used in) provided by operating activities	$	(479	)	(169	)	2,678		(13	)	2,017
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—		—		(1,121	)	—		(1,121	)
Changes in advances to affiliates		395		221		(733	)	89		(28	)
Dividends received from subsidiaries		750		700		—		(1,450	)	—
Proceeds from sale of property		—		—		133		—		133

Net cash provided by (used in) investing activities		1,145		921		(1,721	)	(1,361	)	(1,016	)

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt		—		—		896		—		896
Payments of long-term debt		(1,302	)	—		(1,459	)	—		(2,761	)
Early retirement of debt costs		—		—		(178	)	—		(178	)
Dividends paid to CenturyLink Inc.		(750	)	(750	)	(700	)	1,450		(750	)
Changes in notes payable—affiliates		—		—		—		1,985		1,985
Changes in accounts payable—affiliates		1,386		(4	)	492		(2,061	)	(187	)

Net cash used in financing activities		(666	)	(754	)	(949	)	1,374		(995	)

Net (decrease) increase in cash and cash equivalents		—		(2	)	8		—		6
Cash and cash equivalents at beginning of period		—		40		8		—		48

Cash and cash equivalents at end of the period	$	—		38		16		—		54

	QCII(1)

	(Dollars in millions)
Net cash (used in) provided by operating activities	$	(130	)	188		1,486		—		1,544
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—		—		(748	)	—		(748	)
Cash infusion to subsidiaries		—		(348	)	—		348		—
Changes in advances to affiliates		—		(351	)	(822	)	28		(1,145	)
Dividends received from subsidiaries		400		790		—		(1,190	)	—
Other, net		—		—		3		—		3

Net cash provided by (used in) investing activities		400		91		(1,567	)	(814	)	(1,890	)

FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term affiliate debt		30		(2	)	—		(28	)	—
Net proceeds from issuance of long-term debt		—		—		1,200		—		1,200
Payments of long-term debt		—		—		(877	)	—		(877	)
Early retirement of debt costs		—		—		(13	)	—		(13	)
Cash infusion from parent		—		—		348		(348	)	—
Dividends paid to parent		(300	)	(400	)	(790	)	1,190		(300	)
Other, net		—		—		(18	)	—		(18	)

Net cash used in financing activities		(270	)	(402	)	(150	)	814		(8	)

Net increase in cash and cash equivalents		—		(123	)	(231	)	—		(354	)
Cash and cash equivalents at beginning of period		—		183		241		—		424

Cash and cash equivalents at end of the period	$	—		60		10		—		70

	QCII(1)

	(Dollars in millions)
Net cash provided by (used in) operating activities	$	7		(62	)	828		4		777
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—		—		(410	)	—		(410	)
Changes in interest in investments managed by QSC		—		(3	)	3		—		—
Cash infusion to subsidiaries		—		(191	)	—		191		—
Changes in advances to affiliates		—		180		1		(181	)	—
Dividends received from subsidiaries		—		590		—		(590	)	—
Other, net		—		—		2		—		2

Net cash provided by (used in) investing activities		—		576		(404	)	(580	)	(408	)

FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term affiliate debt		119		(300	)	—		181		—
Payments of long-term debt		—		(179	)	(24	)	—		(203	)
Dividends paid		(141	)	—		—		—		(141	)
Cash infusion from parent		—		—		191		(191	)	—
Dividends paid to parent		—		—		(590	)	590		—
Other, net		15		—		16		(4	)	27

Net cash used in financing activities		(7	)	(479	)	(407	)	576		(317	)

Net increase in cash and cash equivalents		—		35		17		—		52
Cash and cash equivalents at beginning of period		—		148		224		—		372

Cash and cash equivalents at end of the period	$	—		183		241		—		424