(10) Financial Statements of Guarantors

QCII and our wholly owned subsidiaries, Qwest Capital Funding, Inc ("QCF") and Qwest Service Company ("QSC"), guarantee the payment of certain of each other's registered debt securities. As of June 30, 2013, each series of QCII's outstanding notes totaling $800 million 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 $981 million 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.

Allocations among Affiliates

We allocate the costs of shared services among our affiliates. These services include marketing and advertising, IT, 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 various 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 or settle its tax liabilities through a change in its general intercompany obligation 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, which are subject to valuation allowances to the extent it is not anticipated that the subsidiary will have sufficient future taxable income to utilize 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 our post-retirement health care and life insurance, and other post-employment benefit plans. 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, and 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.

Out-of-Period Adjustment

In conjunction with finalizing our 2012 Annual Report on Form 10-K, we discovered that certain transactions with affiliates had been presented incorrectly in our consolidating statements of cash flows for the period ended June 30, 2012. Specifically, the settlement of certain intercompany obligations by and between our consolidated affiliates were treated as operating cash flows, which had the effect of understating the operating cash flows for the guarantors and overstating the operating cash flows for the non-guarantors by $480 million, with offsetting effects recorded as investing and financing activities for the six months ended June 30, 2012. We considered both quantitative and qualitative factors in reaching the conclusion that the correction of the error was immaterial to our previously issued financial statements. Correcting this error affected certain entities included in our consolidating statements of cash flows but did not affect our consolidated statement of cash flows.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—	(1)	2,684	—	2,683
Operating revenues—affiliates		—	14	157	(14)	157

Total operating revenues		—	13	2,841	(14)	2,840

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—	(1)	1,178	—	1,177
Selling, general and administrative		3	14	392	—	409
Operating expenses—affiliates		—	—	208	(14)	194
Depreciation and amortization		11	—	669	—	680

Total operating expenses		14	13	2,447	(14)	2,460

OPERATING (LOSS) INCOME		(14)	—	394	—	380
OTHER INCOME (EXPENSE)
Interest expense		(12)	(18)	(111)	—	(141)
Interest expense—affiliates		(35)	(29)	(26)	27	(63)
Interest income—affiliates		—	27	—	(27)	—
Income from equity investments in subsidiaries		202	91	—	(293)	—
Other income		(1)	—	—	—	(1)

Total other income (expense)		154	71	(137)	(293)	(205)

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		140	71	257	(293)	175
Income tax (benefit) expense		2	(131)	166	—	37

NET INCOME	$	138	202	91	(293)	138

COMPREHENSIVE INCOME	$	140	202	91	(293)	140

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2012
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—	—	2,736	—	2,736
Operating revenues—affiliates		—	1	100	(1)	100

Total operating revenues		—	1	2,836	(1)	2,836

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—	—	1,213	—	1,213
Selling, general and administrative		1	1	442	—	444
Operating expenses—affiliates		—	—	151	(1)	150
Depreciation and amortization		16	—	722	—	738

Total operating expenses		17	1	2,528	(1)	2,545

OPERATING (LOSS) INCOME		(17)	—	308	—	291
OTHER INCOME (EXPENSE)
Interest expense		(25)	(16)	(113)	—	(154)
Interest expense—affiliates		(21)	(28)	(8)	27	(30)
Interest income—affiliates		—	27	—	(27)	—
Income from equity investments in subsidiaries		91	15	—	(106)	—
Net loss on early retirement of debt		—	—	(45)	—	(45)
Other income (expense)		5	—	(3)	—	2

Total other income (expense)		50	(2)	(169)	(106)	(227)

INCOME (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE		33	(2)	139	(106)	64
Income tax (benefit) expense		(4)	(93)	124	—	27

NET INCOME	$	37	91	15	(106)	37

COMPREHENSIVE INCOME	$	37	91	15	(106)	37

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—	—	5,344	—	5,344
Operating revenues—affiliates		—	8	292	(8)	292

Total operating revenues		—	8	5,636	(8)	5,636

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—	4	2,280	—	2,284
Selling, general and administrative		22	10	815	—	847
Operating expenses—affiliates		—	—	376	(8)	368
Depreciation and amortization		23	—	1,339	—	1,362

Total operating expenses		45	14	4,810	(8)	4,861

OPERATING (LOSS) INCOME		(45)	(6)	826	—	775
OTHER INCOME (EXPENSE)
Interest expense		(25)	(35)	(222)	—	(282)
Interest expense—affiliates		(71)	(56)	(54)	53	(128)
Interest income—affiliates		—	53	1	(53)	1
Income from equity investments in subsidiaries		386	207	—	(593)	—
Other income		4	—	—	—	4

Total other income (expense)		294	169	(275)	(593)	(405)

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		249	163	551	(593)	370
Income tax (benefit) expense		(6)	(223)	344	—	115

NET INCOME	$	255	386	207	(593)	255

COMPREHENSIVE INCOME	$	258	386	207	(593)	258

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—	—	5,461	—	5,461
Operating revenues—affiliates		—	3	214	(3)	214

Total operating revenues		—	3	5,675	(3)	5,675

OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—	—	2,388	—	2,388
Selling, general and administrative		3	3	922	—	928
Operating expenses—affiliates		—	—	302	(3)	299
Depreciation and amortization		34	—	1,445	—	1,479

Total operating expenses		37	3	5,057	(3)	5,094

OPERATING (LOSS) INCOME		(37)	—	618	—	581
OTHER INCOME (EXPENSE)
Interest expense		(64)	(34)	(226)	—	(324)
Interest expense—affiliates		(22)	(54)	(11)	53	(34)
Interest income—affiliates		—	53	—	(53)	—
Income from equity investments in subsidiaries		217	60	—	(277)	—
Net loss on early retirement of debt		—	—	(37)	—	(37)
Other income (expense)		13	—	(10)	—	3

Total other income (expense)		144	25	(284)	(277)	(392)

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		107	25	334	(277)	189
Income tax (benefit) expense		(7)	(192)	274	—	75

NET INCOME	$	114	217	60	(277)	114

COMPREHENSIVE INCOME	$	114	217	60	(277)	114

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING BALANCE SHEETS
JUNE 30, 2013
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	12	28	21	—	61
Accounts receivable, less allowance		14	—	1,186	—	1,200
Notes receivable—affiliates		—	1,413	—	(1,413)	—
Advances to affiliates		174	1,842	—	(193)	1,823
Deferred income taxes, net		—	358	148	—	506
Other		—	—	377	—	377

Total current assets		200	3,641	1,732	(1,606)	3,967
Net property, plant and equipment		—	—	9,147	—	9.147
Goodwill		—	—	10,123	—	10,123
Customer relationships, net		—	—	5,358	—	5,358
Other intangible assets, net		41	—	1,122	—	1,163
Investments in subsidiaries		14,408	12,935	—	(27,343)	—
Deferred income taxes, net		1,332	589	—	(1,921)	—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		1,623	—	—	(1,619)	4
Other		36	8	326	—	370

TOTAL ASSETS	$	17,640	17,173	27,808	(32,489)	30,132

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	—	—	100	—	100
Notes payable—affiliates		1,925	1,413	729	(1,413)	2,654
Accounts payable		10	—	696	—	706
Accounts payable—affiliates		—	—	193	(193)	—
Accrued expenses and other liabilities		197	27	641	—	865
Advance billings and customers deposits		—	—	446	—	446

Total current liabilities		2,132	1,440	2,805	(1,606)	4,771

LONG-TERM DEBT		845	1,007	7,634	—	9,486

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenues		—	—	200	—	200
Benefit plan obligations, net		3,625	—	6	—	3,631
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		—	289	1,330	(1,619)	—
Deferred income taxes		—	—	2,581	(1,921)	660
Other		156	29	317	—	502

Total deferred credits and other liabilities		3,781	318	4,434	(3,540)	4,993
Stockholder's equity		10,882	14,408	12,935	(27,343)	10,882

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	17,640	17,173	27,808	(32,489)	30,132

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2012
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	11	59	17	—	87
Accounts receivable, less allowance		10	—	1,167	—	1,177
Advances to affiliates		—	938	223	(661)	500
Notes receivable—affiliates		—	1,413	—	(1,413)	—
Deferred income taxes, net		—	272	201	—	473
Other		8	—	321	(9)	320

Total current assets		29	2,682	1,929	(2,083)	2,557
Net property, plant and equipment		—	—	9,127	—	9,127
Goodwill		—	—	10,123	—	10,123
Customer relationships, net		—	—	5,822	—	5,822
Other intangible assets, net		64	—	1,213	—	1,277
Investments in subsidiaries		14,322	13,478	—	(27,800)	—
Deferred income taxes, net		1,336	931	—	(2,267)	—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		1,697	—	—	(1,693)	4
Other		37	7	292	—	336

TOTAL ASSETS	$	17,485	17,098	28,506	(33,843)	29,246

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	—	—	856	—	856
Notes payable—affiliates		1,322	1,413	701	(1,413)	2,023
Accounts payable		—	1	695	(9)	687
Accounts payable—affiliates		661	—	—	(661)	—
Accrued expenses and other liabilities		178	57	689	—	924
Advance billings and customers deposits		—	—	452	—	452

Total current liabilities		2,161	1,471	3,393	(2,083)	4,942

LONG-TERM DEBT		849	1,008	6,915	—	8,772

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenues		—	—	192	—	192
Benefit plan obligations, net		3,699	—	—	—	3,699
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		—	270	1,423	(1,693)	—
Deferred income taxes		—	—	2,761	(2,267)	494
Other		152	27	344	—	523

Total deferred credits and other liabilities		3,851	297	4,720	(3,960)	4,908
Stockholder's equity		10,624	14,322	13,478	(27,800)	10,624

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	17,485	17,098	28,506	(33,843)	29,246

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
Net cash provided by (used in) operating activities	$	(77)	453	1,170	—	1,546
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—	—	(801)	—	(801)
Changes in advances to affiliates		(174)	(904)	223	(468)	(1,323)
Other, net		300	750	—	(1,050)	—

Net cash (used in) provided by investing activities		126	(154)	(578)	(1,518)	(2,124)

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt		—	—	752	—	752
Payments of long-term debt		—	—	(811)	—	(811)
Changes in notes payable—affiliates		603	—	28	—	631
Changes in advances from affiliates		(651)	(30)	193	468	(20)
Dividends paid to parent		—	(300)	(750)	1,050	—

Net cash provided by (used in) financing activities		(48)	(330)	(588)	1,518	552

Net (decrease) increase in cash and cash equivalents		1	(31)	4	—	(26)
Cash and cash equivalents at beginning of period		11	59	17	—	87

Cash and cash equivalents at end of the period	$	12	28	21	—	61

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(UNAUDITED)

	QCII(1)

	(Dollars in millions)
Net cash provided by (used in) operating activities	$	(415)	339	1,167	(13)	1,078
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—	—	(752)	—	(752)
Changes in advances to affiliates—notes		184	280	278	(73)	669
Changes in advances to affiliates—accounts		—	(632)	(1,700)	2,332	—
Proceeds from sale of property		—	—	133	—	133

Net cash provided by (used in) investing activities		184	(352)	(2,041)	2,259	50

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt		—	—	897	—	897
Payments of long-term debt		(1,299)	—	(952)	—	(2,251)
Early retirement of debt costs		(49)	—	(128)	—	(177)
Changes in advances from affiliates—notes		(122)	—	583	122	583
Changes in advances from affiliates—accounts		1,701	—	480	(2,368)	(187)

Net cash (used in) provided by financing activities		231	—	880	(2,246)	(1,135)

Net (decrease) increase in cash and cash equivalents		—	(13)	6	—	(7)
Cash and cash equivalents at beginning of period		—	40	8	—	48

Cash and cash equivalents at end of the period	$	—	27	14	—	41

(1): QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.
(2): QSC is a guarantor of the QCII Guaranteed Notes.
(3): QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.