10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2007

or

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

For the transition period                    to                    

Commission file number 0-15658

LEVEL 3 COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-0210602
(State of Incorporation)	(I.R.S. Employer
	Identification No.)
1025 Eldorado Blvd., Broomfield, CO	80021
(Address of principal executive offices)	(Zip Code)

(720) 888-1000

(Registrant’s telephone number,

including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of an “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

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

The number of shares outstanding of each class of the issuer’s common stock, as of August 3, 2007:

Common Stock:  1,534,248,798 shares

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Part I - Financial Information
Item 1.	Unaudited Financial Statements:
	Consolidated Statements of Operations
	Consolidated Balance Sheets
	Consolidated Statements of Cash Flows
	Consolidated Statement of Changes in Stockholders’ Equity
	Consolidated Statements of Comprehensive Loss
	Supplementary Stockholders’ Equity Information
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
Part II - Other Information
Item 1	Legal Proceedings
Item 1A.	Risk Factors
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits
Signatures
Certifications

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions, except per share data)	2007			2006			2007			2006
Revenue:
Communications	$	1,035		$	819		$	2,072		$	1,623
Coal mining	17			16			36			34
Total revenue	1,052			835			2,108			1,657
Costs and Expenses (exclusive of depreciation and amortization shown separately below):
Cost of revenue:
Communications	437			385			887			781
Coal mining	17			14			33			30
Total cost of revenue	454			399			920			811
Depreciation and amortization	247			164			468			351
Selling, general and administrative	428			283			868			559
Restructuring and impairment charges	2			7			6			11
Total costs and expenses	1,131			853			2,262			1,732
Operating Loss	(79		)	(18)			(154		)	(75		)
Other Income (Expense):
Interest income	12			16			33			25
Interest expense	(138		)	(170		)	(303		)	(320		)
Loss on early extinguishment of debt, net	—			(55		)	(427		)	(28		)
Other, net	3			4			4			8
Total other expense	(123		)	(205		)	(693		)	(315		)
Loss from Continuing Operations Before Income Taxes	(202		)	(223		)	(847		)	(390		)
Income Tax Expense	—			(1		)	(2		)	—
Loss from Continuing Operations	(202		)	(224		)	(849		)	(390		)
Income from Discontinued Operations	—			23			—			21
Net Loss	$	(202	)	$	(201	)	$	(849	)	$	(369	)
Loss Per Share of Common Stock (Basic and Diluted):
Loss from Continuing Operations	$	(0.13	)	$	(0.25	)	$	(0.57	)	$	(0.45	)
Income from Discontinued Operations	—			.02			—			.02
Net Loss	$	(0.13	)	$	(0.23	)	$	(0.57	)	$	(0.43	)

See accompanying notes to consolidated financial statements.

2

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

(dollars in millions, except share data)	June 30, 2007			December 31, 2006
Assets
Current Assets:
Cash and cash equivalents	$	739		$	1,681
Marketable securities	68			235
Restricted cash and securities	28			46
Receivables, less allowances of $17 and $17, respectively	455			326
Other	133			101
Total Current Assets	1,423			2,389
Property, Plant and Equipment, net	6,729			6,468
Restricted Cash and Securities	92			90
Goodwill	1,295			408
Other Intangibles, net	810			511
Other Assets, net	160			128
Total Assets	$	10,509		$	9,994
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	401		$	391
Current portion of long-term debt	31			5
Accrued payroll and employee benefits	82			92
Accrued interest	124			143
Deferred revenue	171			142
Other	174			156
Total Current Liabilities	983			929
Long-Term Debt, less current portion	6,828			7,357
Deferred Revenue	772			753
Other Liabilities	592			581
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares outstanding	—			—
Common stock, $.01 par value, authorized 2,250,000,000 shares: 1,530,787,724 outstanding in 2007 and 1,178,423,105 outstanding in 2006	15			12
Additional paid-in capital	10,944			9,305
Accumulated other comprehensive income (loss)	163			(4		)
Accumulated deficit	(9,788		)	(8,939		)
Total Stockholders’ Equity	1,334			374
Total Liabilities and Stockholders’ Equity	$	10,509		$	9,994

See accompanying notes to consolidated financial statements.

3

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended June 30,
(dollars in millions)	2007			2006
Cash Flows from Operating Activities:
Net loss	$	(849	)	$	(369	)
Income from discontinued operations	—			(21)
Loss from continuing operations	(849		)	(390		)
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:
Depreciation and amortization	468			351
Gain on sale of property, plant and equipment and other assets	(2		)	(4		)
Non-cash compensation expense attributable to stock awards	48			34
Loss on extinguishment of debt, net	427			28
Non-cash impairment expenses	1			7
Amortization of debt issuance costs	8			7
Accreted interest on long-term discount debt	15			20
Accrued interest on long-term debt	(9		)	52
Change in working capital items, net of amounts acquired:
Receivables	(42		)	37
Other current assets	(26		)	(15		)
Payables	(79		)	—
Deferred revenue	41			(29		)
Other current liabilities	(68		)	(45		)
Other	3			—
Net Cash (Used in) Provided by Operating Activities of Continuing Operations	(64		)	53
Cash Flows from Investing Activities:
Capital expenditures	(325		)	(131		)
Proceeds from sales and maturities of marketable securities	288			5
Purchases of marketable securities	—			(98		)
Decrease (increase) in restricted cash and securities, net	13			(12		)
Proceeds from sale of property, plant and equipment, and other assets	2			2
Acquisitions, net of cash acquired	(622		)	(82		)
Distributions from discontinued operations	—			2
Net Cash Used in Investing Activities	(644		)	(314		)

(continued)

See accompanying notes to consolidated financial statements.

4

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

(unaudited)

	Six Months Ended June 30,
(dollars in millions)	2007			2006
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs	$	2,352		$	1,007
Proceeds from warrants and stock-based compensation plans	24			—
Equity offering	—			543
Payments and repurchases of long-term debt	(2,615		)	(104		)
Net Cash (Used in) Provided by Financing Activities	(239		)	1,446
Discontinued Operations:
Net cash provided by discontinued operating activities	—			20
Net cash used in investing activities	—			(5		)
Net effect of exchange rates on cash and cash equivalents	—			(1		)
Net Cash Provided by Discontinued Operations	—			14
Effect of Exchange Rates on Cash and Cash Equivalents	5			7
Net Change in Cash and Cash Equivalents	(942		)	1,206
Cash and Cash Equivalents at Beginning of Period:
Cash attributable to continuing operations	1,681			379
Cash attributable to discontinued operations	—			73
Cash and Cash Equivalents at End of Period:
Cash attributable to continuing operations	$	739		$	1,571
Cash attributable to discontinued operations	$	—		$	87
Supplemental Disclosure of Cash Flow Information:
Cash interest paid	$	289		$	241
Income taxes paid	1			2
Noncash Investing and Financing Activities:
Common stock issued for acquisitions	$	692		$	197
Equity issued to retire debt	879			—
Long-Term debt retired by conversion to equity	702			—
Amendment and restatement of $730 million credit facility	—			730
Long-Term debt issued in exchange transaction	—			619
Long-Term debt retired in exchange transaction	—			692

See accompanying notes to consolidated financial statements.

5

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended June 30, 2007

(unaudited)

(dollars in millions)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
Balances at December 31, 2006	$	12	$	9,305	$	(4	)	$	(8,939	)	$	374
Common Stock:
Acquisitions	1		691		—			—			692
Exercise of warrants and options	—		24		—			—			24
Stock plan grants	—		33		—			—			33
401(k) plan	—		14		—			—			14
Debt conversion to equity	2		877		—			—			879
Net Loss	—		—		—			(849		)	(849		)
Other Comprehensive Income	—		—		167			—			167
Balances at June 30, 2007	$	15	$	10,944	$	163		$	(9,788	)	$	1,334

See accompanying notes to consolidated financial statements.

6

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2007			2006			2007			2006
Net Loss	$	(202	)	$	(201	)	$	(849	)	$	(369	)
Other Comprehensive Income (Loss) Before Tax:
Foreign currency translation income and adjustment for losses included in net loss	12			23			76			30
Unrealized appreciation of available-for-sale investment	58			—			58			—
Unrealized appreciation of interest rate swap	27			—			28			—
Other	—			(5		)	5			(3		)
Other Comprehensive Income Before Income Tax	97			18			167			27
Income Tax Benefit Related to Items of Other Comprehensive Income	—			—			—			—
Other Comprehensive Income, Net of Income Taxes	97			18			167			27
Comprehensive Loss	$	(105	)	$	(183	)	$	(682	)	$	(342	)

Supplementary Stockholders’ Equity Information

(unaudited)

(dollars in millions)	Net Foreign Currency Translation Adjustment		Unrealized Appreciation of Investment and Interest Rate Swap		Other			Total
Accumulated Other Comprehensive Income (Loss):
Balance at December 31, 2006	$	29	$	—	$	(33	)	$	(4	)
Change	76		86		5			167
Balance at June 30, 2007	$	105	$	86	$	(28	)	$	163

See accompanying notes to consolidated financial statements.

7

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of Level 3 Communications, Inc. and subsidiaries (the “Company” or “Level 3”) in which it has control, which are enterprises primarily engaged in the communications and coal mining businesses.  Fifty-percent-owned mining joint ventures are consolidated on a pro rata basis.  All significant intercompany accounts and transactions have been eliminated.

The Company acquired Progress Telecom, LLC (“Progress Telecom”) on March 20, 2006; ICG Communications, Inc. (“ICG Communications”) on May 31, 2006; TelCove, Inc. (“TelCove”) on July 24, 2006; Looking Glass Networks Holding Co., Inc. (“Looking Glass”) on August 2, 2006; Broadwing Corporation (“Broadwing”) on January 3, 2007; and the Content Delivery Network services business (“CDN Business”) of SAVVIS, Inc. on January 23, 2007.  The results of operations, cash flows and financial position attributable to these acquisitions are included in the consolidated financial statements from the respective dates of their acquisition (See Note 2).

On September 7, 2006, Level 3 sold Software Spectrum, Inc. (“Software Spectrum”), the Company’s software reseller business, to Insight Enterprises, Inc. (“Insight Enterprises”).  This business comprised the remaining operations of Level 3’s information services segment in 2006.  The results of operations and cash flows for the Software Spectrum business have been classified as discontinued operations in the consolidated financial statements for all periods presented in this report (See Note 3).

The consolidated balance sheet of Level 3 at December 31, 2006 has been audited.  All other financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required for complete financial statements.

The Company’s accounting policies and certain other disclosures are set forth in the notes to the consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2006.  These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto.  The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of revenue and expenses during the reported period.  Actual results could differ from these estimates.

The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results expected for the full year.

Recently Issued Accounting Pronouncements

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2006 appropriately represent, in all material respects, the current status of the Company’s critical accounting policies, and are incorporated herein by reference.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN No. 48”), which was effective for Level 3 starting January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN No. 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods and disclosure. The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the

8

consolidated statements of operations. The adoption of FIN No. 48 did not have an effect on the Company’s consolidated results of operations or financial condition for the three and six months ended and as of June 30, 2007.

In June 2006, the FASB ratified the consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF No. 06-3”), which was effective for Level 3 starting January 1, 2007.  The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies”. If such taxes are significant and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company records USF contributions on a gross basis in its consolidated statements of operations, but records sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. Communications revenue on the consolidated statements of operations includes USF contributions totaling $17 million and $30 million for the three and six months ended June 30, 2007 and $5 million and $9 million for the three and six months ended June 30, 2006, respectively.  The adoption of EITF No. 06-3 did not have a material effect on the Company’s consolidated results of operations or financial condition for the three and six months ended and as of June 30, 2007 as the policy followed was consistent before and after adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within that fiscal year. The Company is currently assessing the potential effect that the adoption of SFAS No. 157 will have on its consolidated results of operations or financial condition.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The FASB’s stated objective in issuing this standard is as follows: “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.”  The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing whether fair value accounting is appropriate for any of its eligible items and is assessing the potential effect that the adoption of SFAS No. 159 will have on its consolidated results of operations or financial condition.

2. Acquisitions

In 2006, the Company embarked on strategies to both expand its presence in metropolitan markets and begin offering services to enterprise customers through its Business Markets Group. This strategy will allow the Company to terminate traffic over its owned facilities rather than paying third parties to terminate the traffic. The expansion into new metro markets should also provide additional opportunities to sell services to bandwidth intensive businesses on the Company’s national and international networks. In order to expedite the expansion of its metro presence and its enterprise business, Level 3 acquired Progress Telecom, ICG Communications, TelCove and Looking Glass in 2006 and Broadwing in the first quarter of 2007.  Level 3 has also embarked on a strategy to expand its content delivery network services with the acquisition of the CDN Business in the first quarter of 2007.  The results of operations attributable to each acquisition are included in the consolidated financial statements from the date of acquisition. The value of Level 3 common stock issued in connection with the acquisitions was determined based on the average closing price for Level 3 common stock two days before and two days after the date the acquisition was announced multiplied by the number of shares issued.

CDN Business Acquisition:  On January 23, 2007, Level 3 completed the acquisition of the Content Delivery Network  services business of SAVVIS, Inc. Level 3 paid $134 million in cash (including transaction costs) to acquire the assets of the

9

CDN Business, including network elements, customer contracts and intellectual property used in the CDN Business.  The purchase price was subsequently increased by less than $1 million for working capital and other contractual matters.  The Company paid this adjustment in April 2007.

Broadwing Acquisition:  On January 3, 2007, Level 3 acquired Broadwing Corporation, a publicly held provider of optical network communications services.  Under the terms of the merger agreement dated October 16, 2006, Level 3 paid $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing.  In total, Level 3 initially paid approximately $752 million of cash, including $8 million of transaction costs, and issued approximately 123 million shares of the Company’s common stock, valued at $688 million.  As part of the Broadwing acquisition, approximately 3.8 million previously issued Broadwing warrants (valued at approximately $4 million) became exercisable for approximately 5.1 million shares of Level 3 common stock.  In the second quarter of 2007, the Company subsequently reduced the total consideration paid by $4 million for insurance proceeds received in June 2007 that related to the settlement of an insurance claim that occurred prior to acquisition.

In connection with the acquisition of Broadwing, the Company guaranteed $180 million in aggregate principal amount of Broadwing Corporation’s 3.125% Convertible Senior Debentures due 2026 (the “Broadwing Debentures”) and the transaction included $24 million in capital lease obligations related primarily to a metro fiber IRU agreement.  As of February 16, 2007, the holders of $179 million in aggregate principal amount of the Broadwing Debentures converted their Broadwing Debentures into a total of 17 million shares of Level 3 common stock and approximately $105 million in cash pursuant to the terms of the indenture governing the Broadwing Debentures and the agreement whereby Level 3 acquired Broadwing.  The remaining $1 million in aggregate principal amount of the Broadwing Debentures was repurchased by Broadwing at 100% of par as required by the indenture governing the Broadwing Debentures.

Looking Glass Acquisition:  On August 2, 2006, Level 3 completed the acquisition of Looking Glass, a privately held Illinois-based telecommunications company.  The consideration paid by Level 3 consisted of approximately $13 million in cash, including $4 million of transaction costs, and approximately 21 million shares of Level 3 common stock valued at $84 million.  In addition, at the closing, Level 3 repaid approximately $67 million of Looking Glass liabilities.

Level 3 entered into certain transactions with Looking Glass prior to the acquisition of Looking Glass by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue.  As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the Looking Glass transaction by $2 million, which was the amount of the unamortized deferred revenue balance on August 2, 2006.

TelCove Acquisition:  On July 24, 2006, Level 3 completed the acquisition of TelCove, a privately held Pennsylvania-based telecommunications company. Under the terms of the agreement, Level 3 paid $446 million in cash and issued approximately 150 million shares of Level 3 common stock, valued at $623 million.  In addition, Level 3 repaid $132 million of TelCove debt.  The transaction also included $12 million in TelCove capital leases.  Also, the Company paid third party costs of approximately $15 million related to the transaction, which included certain costs incurred by TelCove.

Level 3 entered into certain transactions with TelCove prior to the acquisition of TelCove by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue.  As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the TelCove transaction by $3 million, which was the amount of the unamortized deferred revenue balance on July 24, 2006.

ICG Communications:  On May 31, 2006, Level 3 acquired all of the outstanding stock of ICG Communications, a privately held Colorado-based telecommunications company, from MCCC ICG Holdings, LLC excluding certain assets and liabilities.  Under the terms of the purchase agreement, Level 3 purchased ICG Communications for consideration consisting of approximately 26 million shares of Level 3 common stock, valued at $131 million, and approximately $45 million in cash.  The Company also incurred costs of less than $1 million related to the transaction.  Post-closing adjustments, primarily working capital and other contractual matters resulted in additional consideration of approximately $3 million.

Level 3 entered into certain transactions with ICG Communications prior to the acquisition of ICG Communications by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue.  As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and,

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accordingly, reduced the purchase price applied to the net assets acquired in the ICG Communications transaction by $1 million, which was the amount of the unamortized deferred revenue balance on May 31, 2006.

Progress Telecom:  On March 20, 2006, Level 3 completed its acquisition of all of the membership interests of Progress Telecom from PT Holding Company LLC (“PT Holding”) excluding certain specified assets and liabilities of Progress Telecom.  Progress Telecom was owned by PT Holding which is jointly owned by Progress Energy, Inc. and Odyssey Telecorp, Inc.  Under the terms of the purchase agreement, Level 3 purchased Progress Telecom for a purchase price consisting of approximately $69 million in cash and approximately 20 million shares of Level 3 common stock, valued at $66 million.  The purchase price was subsequently reduced by $2 million for working capital and other contractual matters.  The Company received payment of the $2 million adjustment in July 2006.

Level 3 entered into certain transactions with Progress Telecom prior to the acquisition of Progress Telecom by Level 3, whereby Level 3 received cash for communications services to be provided in the future and which was originally recognized as deferred revenue.  As a result of the acquisition, Level 3 can no longer amortize this deferred revenue into earnings and, accordingly, reduced the purchase price applied to the net assets acquired in the Progress Telecom transaction by $4 million, which was the amount of the unamortized deferred revenue balance on March 20, 2006.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Level 3 and the acquired businesses, on a pro forma basis, as though the companies acquired in 2006 and 2007 had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of the periods presented. The pro forma financial information for all periods presented includes the preliminary business combination accounting effect on historical revenues of the acquired companies, adjustments to depreciation on acquired property, amortization charges from acquired intangible assets, restructuring costs and acquisition costs reflected in the historical statements of operations for periods prior to Level 3’s acquisition.

	Unaudited Pro Forma Three Months Ended June 30,						Unaudited Pro Forma Six Months Ended June 30,
	2007			2006			2007			2006
	(dollars in millions, except per share data)
Revenue	$	1,052		$	1,187		$	2,109		$	2,376
Loss from Continuing Operations	$	(202	)	$	(248	)	$	(849	)	$	(440	)
Income from Discontinued Operations	—			23			—			21
Net Loss	$	(202	)	$	(225	)	$	(849	)	$	(419	)
Per share:
Loss from continuing operations	$	(0.13	)	$	(0.21	)	$	(0.57	)	$	(0.38	)
Income from discontinued operations	—			0.02			—			0.02
Net loss	$	(0.13	)	$	(0.19	)	$	(0.57	)	$	(0.36	)
Pro Forma Weighted Shares Outstanding (in thousands)	1,529,614			1,188,150			1,502,156			1,165,645

The fair value of the assets acquired and the liabilities assumed in the Broadwing and CDN Business transactions are based upon preliminary valuations as of their respective acquisition dates after reflecting other contractual purchase price adjustments and are subject to change due to further analysis of the assets acquired and liabilities assumed as well as integration plans.

During the second quarter of 2007, the Company received a revised valuation for the CDN Business that indicates a significantly higher value of the identifiable intangible assets, primarily patents and customer-related intangible assets. The identifiable intangible assets for the CDN Business increased from $23 million in the preliminary valuation to $133 million in the revised valuation as a result of additional analysis of the estimated cash flows expected to be generated from the patents and customers acquired in the CDN Business acquisition.  The increase in the value of the identifiable intangible assets for the CDN Business eliminated the $110 million of goodwill originally recorded on the transaction.

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During the second quarter of 2007, the Company also recorded purchase price allocation adjustments for the Broadwing acquisition that resulted in a net increase of $4 million to goodwill, resulting in total goodwill of $943 million for the Broadwing acquisition as of June 30, 2007.  The purchase price allocation adjustments included increases in goodwill of $8 million to record liabilities incurred by Broadwing prior to the acquisition and decreases to goodwill for the receipt of $4 million in insurance proceeds related to the settlement of an insurance claim that occurred prior to the acquisition.

The fair value of assets acquired and liabilities assumed in the Progress Telecom, ICG Communications, TelCove and Looking Glass transactions are based upon final valuations after reflecting other contractual purchase price adjustments.

During the second quarter of 2007, the Company received the final valuation for the ICG Communications acquisition that included revised valuations for both the identifiable tangible and intangible assets. The fixed assets acquired for ICG Communications increased from $10 million in the preliminary valuation to $93 million in the final valuation as a result of a detailed analysis to physically identify and estimate the fair value of the fixed assets acquired. As a result of the changes to the valuation of the fixed assets, the valuation of the identifiable intangible assets decreased from $49 million in the preliminary valuation to $18 million in the final valuation.

The adjusted fair values of the assets acquired and the liabilities assumed for the companies Level 3 acquired in 2006 and 2007 are as follows. 

	CDN Business		Broadwing		Looking Glass			TelCove			ICG Communications			Progress Telecom
	(dollars in millions)
Assets:
Cash and cash equivalents	$	—	$	257	$	3		$	3		$	6		$	—
Marketable securities	—		46		—			—			—			—
Accounts receivable	—		82		8			23			7			3
Other current assets	—		19		2			5			2			2
Property, plant and equipment, net	2		240		183			796			93			77
Goodwill	—		943		—			179			73			30
Identifiable intangible assets	133		254		9			273			18			36
Other assets	—		31		1			—			5			—
Total Assets	$	135	$	1,872	$	206		$	1,279		$	204		$	148
Liabilities:
Accounts payable	$	1	$	42	$	5		$	21		$	6		$	1
Accrued payroll	1		15		1			6			2			1
Other current liabilities	—		120		9			20			10			7
Current portion of capital leases	—		2		—			3			—			1
Long-term debt	—		203		—			—			—			—
Capital leases	—		22		—			9			3			8
Deferred revenue—Acquired Company	—		13		1			—			4			—
Deferred revenue—Level 3	—		—		(2		)	(3		)	(1		)	(4		)
Other liabilities	—		15		28			7			2			—
Total Liabilities	2		432		42			63			26			14
Purchase Price	$	133	$	1,440	$	164		$	1,216		$	178		$	134

(3) Discontinued Operations

Level 3’s information services segment was comprised of Software Spectrum in 2006.  The Company sold Software Spectrum in September 2006 and, as a result, has presented it as discontinued operations in these financial statements.

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Software Spectrum

On September 7, 2006, Level 3 sold Software Spectrum, Inc. to Insight Enterprises, a leading provider of information technology products and services.  In connection with the transaction, Level 3 received total proceeds of $353 million in cash, consisting of a base purchase price of $287 million and a working capital adjustment of approximately $66 million.  The purchase price was subject to working capital and certain other post-closing adjustments.  During the fourth quarter of 2006, the Company paid $2 million to Insight Enterprises as the final working capital adjustment.  Level 3 recognized a $33 million gain on the transaction in the third quarter of 2006 after transaction costs.

The following is the summarized results of operations of the Software Spectrum business for the three and six month periods ended June 30, 2006:

	Three Months			Six Months
	Ended			Ended
	June 30, 2006			June 30, 2006
	(dollars in millions)
Revenues	$	695		$	1,140
Costs and Expenses:
Cost of revenue	627			1,032
Depreciation and amortization	3			6
Selling, general and administrative	43			80
Restructuring and impairment charges	—			1
Total costs and expenses	673			1,119
Income from Operations	22			21
Other Income, Net	3			3
Income from Operations Before Income Taxes	25			24
Income Tax Expense	(2		)	(3		)
Income from Discontinued Operations	$	23		$	21

(4) Restructuring and Impairment Charges

Restructuring Charges

During the period from December 23, 2005 through June 30, 2007, the Company initiated cumulative workforce reductions expected to affect approximately 2,200 employees in its North American communications business related to the integration of businesses acquired since December 2005.  Of the 2,200 employees, approximately 23% were expected to be legacy Level 3 employees and approximately 77% were expected to be employees of acquired businesses.

In December 2005 and during 2006, the Company initiated cumulative workforce reductions expected to affect approximately 1,200 employees in its North American communications business related to the integration of WilTel Communications Group, LLC (“WilTel”), Progress Telecom, ICG Communications, TelCove and Looking Glass into Level 3’s operations. Of the 1,200 employees, approximately 22% were expected to be employees of legacy Level 3 and 78% were expected to be employees of the acquired companies.  Separately, in January 2005, Level 3 initiated and completed workforce reductions affecting 472 employees in the legacy Level 3 business that were not related to integration of acquired businesses.

In the first quarter of 2007, Level 3 initiated additional workforce reductions expected to affect approximately 1,000 employees in its North American communications business related to the integration of Broadwing and the previous acquisitions. Of the 1,000 employees, approximately 25% were expected to be employees of legacy Level 3 and approximately 75% were expected to be employees of the acquired companies.

The accounting treatment for the severance costs associated with the workforce reductions is dependent on whether those individuals affected are former employees of the acquired companies or legacy Level 3 employees. For the period from January 1, 2006 through June 30, 2007, the Company had notified or terminated a total of 1,538 employees (430 employees of legacy Level 3 and 1,108 employees of acquired businesses) pursuant to integration activities.

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The estimated severance costs earned by employees of the acquired companies as of the acquisition date are included as a liability in the balance sheet as of the acquisition date.  The Company expects cumulative severance and related costs to total approximately $63 million for former WilTel, Progress Telecom, ICG Communications, TelCove, Looking Glass and Broadwing employees.  During the six months ended June 30, 2007, Level 3 paid $14 million of severance and related costs for these employees resulting in cumulative payments from January 1, 2006 to June 30, 2007 of $33 million for severance and related charges.

The workforce reduction attributable to the WilTel integration activity was substantially complete by the end of 2006. The workforce reductions attributable to the Progress Telecom, ICG Communications, TelCove, Looking Glass and Broadwing integration activities are expected to be substantially completed in 2007.

An analysis of the liability for the severance and related activity associated with the integration of the acquired companies follows:

	Severance and Related Costs for Acquired Company Employees
	Number of Employees		Amount
			(in millions)
Balance December 31, 2004	—		$	—
2005 Accruals	765		26
Balance December 31, 2005	765		26
2006 Accruals	445		12
2006 Change in Estimate	(277	)	(8		)
2006 Payments	(547	)	(19		)
Balance December 31, 2006	386		11
2007 Accruals	750		33
2007 Payments	(561	)	(14		)
Balance June 30, 2007	575		$	30

Severance costs attributable to legacy Level 3 employees are recorded as a restructuring charge in the statement of operations once the employees are notified that their position will be eliminated and the severance arrangements are communicated to the employee.  For the three and six months ended June 30, 2007, the Company recorded approximately $1 million and $5 million, respectively, in restructuring charges for affected legacy Level 3 employees.  As of June 30, 2007, the Company had remaining obligations of less than $1 million for those legacy Level 3 employees terminated or notified.

A summary of the restructuring charges and related activity for legacy Level 3 employees follows:

	Severance and Related Costs for Legacy Level 3 Employees
	Number of Employees		Amount			Facilities Related Amount
			(in millions)			(in millions)
Balance December 31, 2004	—		$	—		$	16
2005 Charges	472		15			(1		)
2005 Payments	(472	)	(15		)	(3		)
Balance December 31, 2005	—		—			12
2006 Charges	248		5			—
2006 Payments	(242	)	(5		)	(2		)
Balance December 31, 2006	6		—			10
2007 Charges	182		5			—
2007 Payments	(153	)	(5		)	—
Balance June 30, 2007	35		$	—		$	10

Impairment Charges

The Company recognized non-cash impairment charges of $1 million in both the three and six months ended June 30, 2007, respectively.  These non-cash impairment charges resulted from the decision to terminate certain information technology projects in the communications business which had been previously capitalized. These projects have identifiable costs which Level 3 can separately evaluate for impairment. The costs incurred for these projects, including capitalized labor, were impaired as the carrying value of these projects were not expected to provide any future benefit to the Company.

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Non-cash impairment charges were $4 million and $7 million for the three and six months ended June 30, 2006, respectively.  In the second quarter of 2006, Level 3 recognized $4 million of non-cash impairment charges primarily related to excess land of the communications business held for sale in Germany.  This charge resulted from the difference between the recorded carrying value and the estimated market value of the land.  In addition, the Company recognized $3 million of non-cash impairment charges in the first quarter of 2006 that resulted from the decision to terminate projects for certain voice services and certain information technology projects in the communications business.

(5) Loss Per Share

The Company had a loss from continuing operations for the three and six months ended June 30, 2007 and 2006. Therefore, the effect of the approximately 314 million and 480 million shares issuable pursuant to the convertible debt securities outstanding at June 30, 2007 and 2006, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive to the computation. In addition, the effect of approximately 54 million and 52 million stock options, outperform stock options, restricted stock units and warrants outstanding at June 30, 2007 and 2006, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive to the computation.

The following details the loss per common share calculations for Level 3 for the three and six months ended June 30, 2007 and 2006 (dollars in millions, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Loss from Continuing Operations	$	(202	)	$	(224	)	$	(849	)	$	(390	)
Income from Discontinued Operations	—			23			—			21
Net Loss	$	(202	)	$	(201	)	$	(849	)	$	(369	)
Total Number of Weighted Average Common Shares Outstanding used to Compute Basic and Diluted Earnings (Loss) Per Share (in thousands)	1,529,614			881,155			1,499,555			851,700
Earnings (Loss) Per Share of Level 3 Common Stock (Basic and Diluted):
Loss from Continuing Operations	$	(0.13	)	$	(0.25	)	$	(0.57	)	$	(0.45	)
Income from Discontinued Operations	—			0.02			—			0.02
Net Loss	$	(0.13	)	$	(0.23	)	$	(0.57	)	$	(0.43	)

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(6) Marketable Securities

In 2005, the Company invested $10 million in Infinera Corporation (“Infinera”) and accounted for this investment using the cost method and included the investment in long-term other assets. On June 7, 2007, Infinera completed its initial public offering (“IPO”) and its common stock began trading publicly on the NASDAQ Global Market.

As a result of the Infinera IPO on June 7, 2007, the Company has classified the Infinera investment on its balance sheet as a current marketable security that is available for sale, subject to compliance with applicable U.S. federal securities laws. The fair value of the Infinera common stock as of June 30, 2007 is approximately $68 million. An unrealized gain on the investment in Infinera totaling $58 million was recorded in the second quarter of 2007 and is included in Other Comprehensive Income. In connection with Infinera’s IPO, Level 3 entered into a “lock-up” agreement with Infinera’s underwriters which restricts the Company’s ability to sell the stock until December 7, 2007.

(7) Receivables

Receivables at June 30, 2007 and December 31, 2006 were as follows:

	Communications			Coal		Total
	(dollars in millions)
June 30, 2007
Accounts Receivable—Trade	$	465		$	7	$	472
Allowance for Doubtful Accounts	(17		)	—		(17		)
Total	$	448		$	7	$	455
December 31, 2006
Accounts Receivable—Trade	$	337		$	6	$	343
Allowance for Doubtful Accounts	(17		)	—		(17		)
Total	$	320		$	6	$	326

The Company recognized bad debt expense in selling, general and administrative expenses of $3 million and $6 million in the three and six months ended June 30, 2007, respectively, and less than $1 million in each of the three and six month periods ended June 30, 2006, respectively. The Company reduced accounts receivable and the allowance for doubtful accounts by $7 million in the six months ended June 30, 2007 for previously reserved amounts the Company wrote off as uncollectible.

(8) Property, Plant and Equipment, net

Costs associated directly with expansions and improvements to the communications network and customer installations, including employee related costs, have been capitalized. The Company generally capitalizes costs associated with network construction, provisioning of services and software development.

Capitalized labor and related costs associated with employees and contract labor working on capital projects were approximately $28 million and $54 million for the three and six months ended June 30, 2007, respectively.

Capitalized labor and related costs associated with employees and contract labor working on capital projects were approximately $16 million and $26 million for the three and six months ended June 30, 2006, respectively.

The Company continues to develop business support systems required for its business. The external direct costs of software, materials and services, and payroll and payroll related expenses for employees directly associated with the project incurred when developing the business support systems are capitalized and included in the capitalized costs above. Upon completion of a project, the total cost of the business support system is amortized over an estimated useful life of three years.

During the second quarter of 2007, the Company received the final valuation for the ICG Communications acquisition that included revised valuations for identifiable tangible assets. As a result, the fixed assets acquired for ICG Communications

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increased from $10 million in the preliminary valuation to $93 million in the final valuation as a result of a detailed analysis to physically identify and estimate the fair value of the fixed assets acquired.

During the second quarter of 2006, Level 3 determined that the period the Company expects to use its existing fiber is longer than the remaining useful life as originally estimated.  As a result, the Company extended the depreciable life of its existing fiber from 7 years to 12 years.  This change in estimate, effected as of April 1, 2006, was accounted for prospectively, in accordance with SFAS No. 154, “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”), and reduced depreciation expense by $18 million in the second quarter of 2006.  In addition, this change in estimate reduced net loss from continuing operations and net loss by $18 million, or approximately $0.02 cents per share in the second quarter of 2006.

Depreciation expense was $213 million and $410 million for the three and six months ended June 30, 2007, respectively.  Depreciation expense was $149 million and $316 million for the three and six months ended June 30, 2006, respectively.

(9) Goodwill

Goodwill at June 30, 2007 and December 31, 2006 was as follows (dollars in millions):

	June 30, 2007		December 31, 2006
XCOM	$	30	$	30
McLeod	40		40
Progress Telecom	30		32
ICG Communications	73		127
TelCove	179		179
Broadwing	943		—
	$	1,295	$	408

The Company segregates identifiable intangible assets acquired in a business combination from goodwill. Goodwill is not amortized and the carrying amount of the goodwill and indefinite-lived intangible assets must be evaluated at least annually for impairment using a fair value based test. An assessment of the carrying value of the goodwill and indefinite-lived intangible assets attributable to the communications business was performed as of December 31, 2006 and indicated that the assets were not impaired.

The final purchase price valuations for the Progress Telecom, ICG Communications and TelCove acquisitions indicated that the purchase price exceeded the fair value of the identifiable assets acquired and liabilities assumed and resulted in goodwill of $30 million, $73 million and $179 million, respectively. The final purchase price valuation for ICG Communications was received in the second quarter of 2007.  As a result of the revisions to the fixed asset and customer-related intangible asset valuations described in Note 2, the goodwill recorded in connection with the ICG Communications acquisition was reduced from $127 million based on the preliminary valuation to $73 million based on the final valuation.

The preliminary purchase price valuation for the Broadwing acquisition indicated that the purchase price exceeded the fair value of the identifiable assets acquired and liabilities assumed and resulted in goodwill of $943 million as of June 30, 2007. As described in Note 2, the Company made purchase price allocation adjustments for the Broadwing acquisition in the second quarter of 2007 that resulted in a net increase of $4 million to the goodwill recorded for Broadwing.

As also described Note 2, the Company received a revised valuation report for the CDN Business that resulted in increased valuations for patents and customer-related intangible assets and resulted in the elimination of the $110 million of goodwill preliminarily recorded for the CDN Business acquisition in the first quarter of 2007.

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The final valuation of the assets acquired and liabilities assumed in the Looking Glass transaction indicated that the fair value of the identifiable net assets acquired exceeds the consideration paid to the former owners by $24 million which reduced the fair value of long-lived assets acquired in the transaction on a pro-rata basis. Also, during the fourth quarter of 2006 Level 3 recorded a $24 million liability for unfavorable leases attributable to Looking Glass.

(10) Other Intangibles, net

Other Intangibles, net at June 30, 2007 and December 31, 2006 were as follows (dollars in millions):

	June 30, 2007		December 31, 2006
360networks	$	2	$	3
Sprint	—		5
Telverse	7		10
Genuity	3		6
WilTel	127		135
Progress Telecom	31		33
ICG Communications	15		47
TelCove	251		264
Looking Glass	8		8
Broadwing	240		—
CDN Business	126		—
	$	810	$	511

On January 23, 2007, Level 3 completed the acquisition of the CDN Business. In the first quarter of 2007, the preliminary valuation of the assets acquired in the CDN Business transaction indicated a value of $23 million for patents and customer-related intangible assets. As described in Note 2, during the second quarter of 2007 the Company received a revised valuation for the CDN Business that indicated a significant increase in the value of the identifiable intangible assets, primarily patents and customer-related intangible assets. The identifiable intangible assets for the CDN Business increased from $23 million in the preliminary valuation to $133 million in the revised valuation as a result of additional analysis of the estimated cash flows expected to be generated from the patents and customers acquired in the CDN Business acquisition.  The increase in the value allocated to the identifiable intangible assets for the CDN Business eliminated the $110 million of goodwill recorded on the transaction in the first quarter of 2007. The estimated useful lives for the patent and customer-related intangible assets range from four to ten years.

On January 3, 2007, Level 3 completed the acquisition of Broadwing. A preliminary valuation of the assets acquired in the Broadwing transaction indicated a value of $254 million for wholesale and enterprise customer-related intangible assets. Level 3 had initially assigned an estimated useful life of ten years to the customer-related intangible assets. During June 2007, the Company completed a review of the estimated useful lives of the customer-related intangible assets for the Broadwing acquisition that resulted in a reduction of the estimated useful lives from ten years to six to eight years.  This change in estimate, effected as of June 1, 2007, was accounted for prospectively and increased amortization expense by approximately $1 million during the second quarter of 2007.

On August 2, 2006, Level 3 completed the acquisition of Looking Glass. The final valuation of the assets acquired in the Looking Glass transaction as of the acquisition date, indicated wholesale customer-related intangibles of approximately $9 million with an estimated useful life of eight years. During June 2007, the Company completed a review of the estimated useful life of the customer-related intangible asset for the Looking Glass acquisition that resulted in a reduction of the estimated useful life from eight years to six years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively and increased amortization expense by less than $1 million during the second quarter of 2007.

On July 24, 2006, Level 3 completed the acquisition of TelCove. The final valuation of the assets acquired in the TelCove transaction as of the acquisition date, indicated wholesale and enterprise customer-related intangible assets of approximately $253 million, with lives ranging from nine to 13 years and other intangible assets of approximately $20 million with an indefinite life.  During June 2007, the Company completed a review of the estimated useful lives of the customer-related intangible assets for the TelCove acquisition that resulted in a reduction of the estimated useful lives from nine to 13 years to six

18

to eight years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively and increased amortization expense by approximately $1 million during the second quarter of 2007.

On May 31, 2006, Level 3 completed the acquisition of ICG Communications. A preliminary valuation of the assets acquired in the ICG Communications transaction indicated a value of $49 million for wholesale customer-related intangible assets with an estimated useful life of 15 years.  As described in Note 2, during the second quarter of 2007 the Company received the final valuation for the ICG Communications acquisition that included revised valuations for both the identifiable tangible and intangible assets. As a result of the changes to the valuation of the fixed assets, the valuation of the identifiable intangible assets decreased from $49 million in the preliminary valuation to $18 million in the final valuation.  During June 2007, the Company completed a review of the estimated useful life of the customer-related intangible asset for the ICG Communications acquisition that resulted in a reduction in the estimated useful life from 15 years to six years. This change in estimate, effected as of June 1, 2007, was accounted for prospectively and increased amortization expense by less than $1 million during the second quarter of 2007 after taking into consideration the reduced valuation of the ICG Communications customer-related intangible assets.

On March 20, 2006, Level 3 completed the acquisition of Progress Telecom. A final valuation of the assets acquired in the Progress Telecom acquisition resulted in a value of $36 million for customer-related intangible assets with an estimated useful life of eight years.

As described above, in June 2007 the Company completed a review of the estimated useful lives used for amortization of the customer-related intangible assets for the ICG Communications, Looking Glass, TelCove and Broadwing acquisitions.  As a result of the review, the Company revised the useful lives used for amortization of customer-related intangible assets as described above.  This change in estimate, effected as of June 1, 2007, was accounted for prospectively in accordance with SFAS No. 154, and increased amortization expense in the aggregate by approximately $2 million in total during the second quarter of 2007.

Intangible asset amortization expense was $34 million and $58 million for the three and six months ended June 30, 2007, respectively.  Intangible asset amortization expense was $15 million and $35 million for the three and six months ended June 30, 2006, respectively.  The amortization expense related to intangible assets currently recorded on the Company’s books for each of the five succeeding years is estimated to be the following for the years ended December 31: second half of 2007—$66 million; 2008—$124 million; 2009—$120 million; 2010—$119 million; 2011—$118 million and thereafter—$211 million.

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(11) Long-Term Debt

At June 30, 2007 and December 31, 2006, long-term debt was as follows:

(dollars in millions)	June 30, 2007			December 31, 2006
Senior Secured Term Loan due 2014 (7.605%)	$	1,400		$	—
Senior Secured Term Loan due 2011	—			730
Senior Notes due 2008 (11.0%)	20			78
Senior Euro Notes due 2008 (10.75%)	5			65
Senior Discount Notes due 2010	—			488
Senior Euro Notes due 2010	—			137
Senior Notes due 2010	—			96
Senior Notes due 2010 (11.5%)	13			692
Fair value adjustment on Senior Notes due 2010	(1		)	(60		)
Senior Notes due 2011 (10.75%)	3			3
Floating Rate Senior Notes due 2011 (11.705%)	6			150
Issue discount on Senior Notes due 2011	—			(4		)
Senior Notes due 2013 (12.25%)	550			550
Issue discount on Senior Notes due 2013	(2		)	(2		)
Senior Notes due 2014 (9.25%)	1,250			1,250
Issue premium on Senior Notes due 2014	11			11
Floating Rate Senior Notes due 2015 (9.15%)	300			—
Senior Notes due 2017 (8.75%)	700			—
Convertible Senior Notes due 2010 (2.875%)	374			374
Convertible Senior Notes due 2011 (5.25%)	345			345
Convertible Senior Notes due 2011 (10.0%)	275			880
Convertible Senior Notes due 2012 (3.5%)	335			335
Convertible Senior Discount Notes due 2013 (9.0%)	287			275
Convertible Subordinated Notes due 2009 (6.0%)	362			362
Convertible Subordinated Notes due 2010 (6.0%)	514			514
Commercial Mortgage due 2015 (6.86%)	70			70
Capital leases	42			23
	6,859			7,362
Less current portion	(31		)	(5		)
	$	6,828		$	7,357

Debt for Equity Exchanges

In January 2007, in two separate transactions, Level 3 completed the exchange of $605 million in aggregate principal amount of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3’s common stock. The shares of the Company’s common stock issued pursuant to these announced exchanges are exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended. The Company recognized a $177 million loss on extinguishment of debt for the exchanges.  Included in the loss was approximately $1 million of unamortized debt issuance costs.

Senior Note Issuance

On February 14, 2007, Level 3 Financing, Inc., a wholly owned subsidiary of Level 3 (“Level 3 Financing”), issued $700 million of its 8.75% Senior Notes due 2017 and $300 million of its Floating Rate Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt and to fund the cost of construction, installation, acquisition, lease, development or improvement of other assets to be used in Level 3’s communications business.  See a detailed description of the notes below.

Senior Secured Term Loan Refinancing

In March 2007, Level 3 Financing refinanced its senior secured credit agreement and received net proceeds of $1.382 billion. The proceeds from this transaction were used to repay the existing $730 million Senior Secured Term Loan due 2011 and

20

other debt. The effect of this transaction was to increase the amount of senior secured debt from $730 million to $1.4 billion, reduce the interest rate on that debt from the London Interbank Offering Rate (“LIBOR”) plus 3.00% to LIBOR plus 2.25% and extend the final maturity from 2011 to 2014. The Company recognized a $10 million loss on this transaction related to unamortized debt issuance costs.  See a detailed description of the Senior Secured Term Loan due 2014 below.

Interest Rate Swap

Level 3 has floating rate long-term debt.  These obligations expose the Company to variability in interest payments due to changes in interest rates.  If interest rates increase, interest expense increases.  Conversely, if interest rates decrease, interest expense also decreases.  On March 13, 2007, Level 3 Financing entered into two interest rate swap agreements to hedge the interest payments on $1 billion notional amount of floating rate debt.  The two interest rate swap agreements are with different counterparties and are for $500 million each.  The transactions are effective beginning April 13, 2007 and mature on January 13, 2014.  Under the terms of the interest rate swap transactions, Level 3 receives interest payments based on rolling three month LIBOR terms and pays interest at the fixed rate of 4.93% under one arrangement and 4.9175% under the other.  Level 3 has designated the interest rate swap agreements as a cash flow hedge on the interest payments for $1 billion of floating rate debt.  Level 3 evaluates the effectiveness of the hedge on a quarterly basis.  The Company does not enter into derivative instruments for any purpose other than cash flow hedging.

The fair market value of the interest rate swap agreements was $28 million as of June 30, 2007.  The change in the fair market value of the interest rate swap agreements is reflected in Other Comprehensive Income due to the fact that the interest rate swap agreements are designated as an effective cash flow hedge of $1 billion notional amount of the Company’s floating rate debt. The interest rate swap agreements have resulted in interest savings of $1 million in each of the three and six month periods ended June 30, 2007.

Redemptions and Repurchases

On March 13, 2007, the Company redeemed using cash the entire $722 million of outstanding principal amount of the following debt issuances and recognized a loss on extinguishment of debt totaling $54 million on the redemption transactions:

·Redeemed $488 million of outstanding 12.875% Senior Notes due 2010 at a price equal to 102.146% of the principal amount and recognized a $12 million loss on extinguishment of debt consisting of a $10 million cash loss and $2 million in unamortized debt issuance costs.  Accrued interest paid at the time of redemption totaled less than $1 million.

·Redeemed $96 million of outstanding 11.25% Senior Notes due 2010 at a price equal to 101.875% of the principal amount and recognized a $3 million loss on extinguishment of debt consisting of a $2 million cash loss and $1 million in unamortized debt issuance costs.  Accrued interest paid at the time of redemption totaled less than $1 million.

·Redeemed $138 million (€104 million) of outstanding 11.25% Senior Euro Notes due 2010 at a price equal to €101.875 per €1,000 of principal amount and recognized a $39 million loss on extinguishment of debt consisting of a $38 million cash loss and $1 million in unamortized debt issuance costs.  Accrued interest paid at the time of redemption totaled less than $1 million (less than €1 million).

On March 15, 2007, the respective issuers repurchased using cash, through tender offers, $941 million of the outstanding principal amounts of the following debt issuances and recognized a loss on extinguishment of debt totaling $186 million on the repurchase transactions:

·Repurchased $144 million of its outstanding Floating Rate Senior Notes due 2011 at a price equal to $1,080 per $1,000 principal amount of the notes, which included $1,050 as the tender offer consideration and $30 as a consent payment, and recognized an $18 million loss on extinguishment of debt consisting of a $12 million cash loss and $6 million in unamortized debt issuance costs and unamortized discount.  Accrued interest paid at the time of repurchase totaled $8 million.

·Repurchased $59 million of its outstanding 11% Senior Notes due 2008 at a price equal to $1,054.28 per $1,000 principal amount of the notes, which included $1,024.28 as the tender offer consideration and $30 as a consent payment, and recognized a $3 million loss on extinguishment of debt consisting of a $3 million cash loss and less than $1 million in unamortized debt issuance costs.  Accrued interest paid at the time of repurchase totaled $3 million.

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·Repurchased $677 million of its outstanding 11.5% Senior Notes due 2010 at a price equal to $1,115.26 per $1,000 principal amount of the notes, which included $1,085.26 as the tender offer consideration and $30 as a consent payment, and recognized a $141 million loss on extinguishment of debt consisting of a $78 million cash loss and $63 million in unamortized debt issuance costs and unamortized discount.  Accrued interest paid at the time of repurchase totaled $3 million.

·Repurchased $61 million (€46 million) of its outstanding 10.75% Senior Euro Notes due 2008 at a price equal to €1,061.45 per €1,000 of principal amount of the notes, which included €1,031.45 as the tender offer consideration and €30 as a consent payment, and recognized a $24 million loss on extinguishment of debt consisting of a $24 million cash loss and less than $1 million in unamortized debt issuance costs.  Accrued interest paid at the time of repurchase totaled $3 million (€2 million).

In connection with the tender offers completed in the first quarter of 2007, Level 3 and Level 3 Financing obtained consents to certain proposed amendments to the respective indentures governing the notes that are subject to the tender offer transactions described above to eliminate substantially all of the covenants, amend certain repurchase rights, certain discharge rights and certain events of default and related provisions contained in those indentures.

On February 23, 2007, Level 3 Financing completed a consent solicitation with respect to certain amendments to the indenture governing Level 3 Financing’s outstanding 12.25% Senior Notes due 2013 that allowed for the incurrence of debt based upon a multiple of cash flow available for fixed charges on a “pro forma” basis giving effect to any acquisition, merger or consolidation completed prior to February 1, 2007.  Additional debt as permitted under the amended indenture was incurred in March 2007.  In connection with the consent solicitation, the Company paid consent fees totaling approximately $2 million which were capitalized as additional debt issuance costs and will be amortized over the remaining life of the related debt issuances using the effective interest method.

Conversion of Broadwing Corporation 3.125% Convertible Senior Debentures due 2026

On February 17, 2007, Level 3’s wholly-owned subsidiary, Broadwing, completed the repurchase of $1 million aggregate principal amount of Broadwing’s outstanding 3.125% Convertible Senior Debentures due 2026 (the “Debentures”). The indenture governing the Debentures required Broadwing to make the offer to repurchase the Debentures as a result of the Company’s acquisition of Broadwing on January 3, 2007.

As a result of the acquisition, each $1,000 principal amount of the Debentures was convertible at the option of the holder into $492.77 in cash and 80.789 shares of Level 3 common stock, representing a conversion price equal to the consideration payable to Broadwing stockholders in the acquisition of (i) $8.18 in cash per share of Broadwing, multiplied by 60.241, and (ii) 1.3411 shares of Level 3 common stock, multiplied by 60.241.  Additionally, as a result of the acquisition, a make-whole premium was payable on Debentures converted prior to February 17, 2007, consisting of (i) 14.969 additional shares of Level 3 common stock and (ii) an additional $91.31 in cash per $1,000 principal amount of Debentures.

Holders owning $179 million aggregate principal amount of the Debentures converted those Debentures into a total of approximately 17 million shares of Level 3 common stock and also received approximately $105 million in cash.  As a result of these conversions and the repurchase discussed above, as of February 17, 2007, the Debentures are no longer outstanding.  There was no gain or loss recognized due to the fact that, under purchase accounting, the liability for the notes was valued at the total cost to retire the obligation.

Capital Leases

As part of the Broadwing transaction completed on January 3, 2007, the Company now includes in its financial statements certain capital lease obligations of Broadwing totaling $24 million, related primarily to a metro fiber IRU agreement.  The capital leases mature at various dates through 2022.

Debt Instruments

Senior Secured Term Loan due 2014

On March 13, 2007, Level 3, as guarantor, Level 3 Financing, as borrower, Merrill Lynch Capital Corporation, as administrative agent and collateral agent, and certain other agents and certain lenders entered into a Credit Agreement, pursuant to which the

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lenders extended a $1.4 billion senior secured term loan (“Senior Secured Term Loan due 2014”) to Level 3 Financing. The term loan matures on March 13, 2014 and has an interest rate of LIBOR plus an applicable margin of 2.25% per annum.

Interest on the Senior Secured Term Loan due 2014 accrues at the three month LIBOR plus 2.25% per annum and is payable in cash quarterly on April 13, July 13, October 13 and January 13 of each year, in arrears, beginning July 13, 2007. The interest rate was 7.605% at June 30, 2007.  See discussion of the interest rate swap agreement earlier in this footnote.

Level 3 Financing’s obligations under this term loan are, subject to certain exceptions, secured by certain assets of the Company; and certain of the Company’s material domestic subsidiaries that are engaged in the telecommunications business. The Company and these subsidiaries have also guaranteed the obligations of Level 3 Financing under the Senior Secured Term Loan due 2014. During the second quarter of 2007, Level 3 Communications, LLC and its material domestic subsidiaries obtained all material governmental authorizations and consents required in order for them to pledge certain of their assets and guarantee the Senior Secured Term Loan due 2014.  The guarantee was entered into by Level 3 Communications, LLC and its material domestic subsidiaries on June 28, 2007.

The Senior Secured Term Loan due 2014 includes certain negative covenants which restrict the ability of the Company, Level 3 Financing and any restricted subsidiary to engage in certain activities. The Senior Secured Term Loan due 2014 also contains certain events of default. It does not require the Company or Level 3 Financing to maintain specific financial ratios or other financial metrics.

Level 3 used a portion of the original net proceeds after transaction costs to repay Level 3 Financing’s $730 million Senior Secured Term Loan due 2011 under that certain credit agreement dated June 27, 2006.  In addition, Level 3 used a portion of the net proceeds to fund the purchase of certain of its existing debt securities.

Debt issuance costs of $18 million were capitalized and are being amortized to interest expense over the term of the Senior Secured Term Loan due 2014 using the effective interest method.

8.75% Senior Notes Due 2017 and Floating Rate Senior Notes Due 2015

On February 14, 2007, Level 3 Financing received $982 million of net proceeds after transaction costs, from a private offering of $700 million aggregate principal amount of its 8.75% Senior Notes due 2017 (the “8.75% Senior Notes”) and $300 million aggregate principal amount of its Floating Rate Senior Notes due 2015 (the “2015 Floating Rate Senior Notes”). The 8.75% Senior Notes and the 2015 Floating Rate Senior Notes are senior unsecured obligations of Level 3 Financing, ranking equal in right of payment with all other senior unsecured obligations of Level 3 Financing. Level 3 Communications, Inc. and Level 3 Communications, LLC have guaranteed the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes. Interest on the 8.75% Senior Notes accrues at 8.75% interest per year and is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 8.75% Senior Notes will be due on February 15, 2017. Interest on the 2015 Floating Rate Senior Notes accrues at LIBOR plus 3.75% per annum, reset semi-annually. The interest rate was 9.15% at June 30, 2007. Interest on the 2015 Floating Rate Senior notes is payable semi-annually in cash on February 15th and August 15th beginning August 15, 2007. The principal amount of the 2015 Floating Rate Senior Notes will be due on February 15, 2015.

On February 14, 2006, Level 3, Level 3 Financing and the initial purchasers of the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes entered into a registration rights agreement relating to the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes pursuant to which Level 3 and Level 3 Financing agreed to file an exchange offer registration statement with the Securities and Exchange Commission.  The Company’s exchange offer registration statement for these notes was declared effective by the Securities and Exchange Commission on July 6, 2007. Under the terms of the registration rights agreement, Level 3 Financing would have been required to pay “Special Interest” in the event of a registration default. The exchange offer expired on August 7, 2007, and is expected to be completed on August 13, 2007. As a result, Level 3 will have met the requirements of the registration rights agreement.

A portion of the debt represented by the 8.75% Senior Notes and the 2015 Floating Rate Senior Notes will constitute purchase money indebtedness under the indentures of Level 3 and the portion of the net proceeds that constitutes purchase money indebtedness will be used solely to fund the cost of construction, installation, acquisition, lease, development or improvement of

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any assets to be used in the Company’s communications business, including the cash purchase price of any past, pending or future acquisitions.

At any time prior to February 15, 2012, Level 3 Financing may redeem all or a part of the 8.75% Senior Notes upon not less than 30 nor more than 60 days’ prior notice, at a redemption price equal to 100% of the principal amount of the 8.75% Senior Notes so redeemed plus the 8.75% Applicable Premium as of, and accrued and unpaid interest thereon (if any) to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

With respect to the 8.75% Senor Notes, “8.75% Applicable Premium” means on any redemption date, the greater of (1) 1.0% of the principal amount of such 8.75% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) 104.375% of the principal amount of such 8.75% Senior Notes plus (ii) all required interest payments due on such 8.75% Senior Notes through February 15, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 8.75% Senior Notes) as of such redemption date plus 50 basis points, over (b) the principal amount of such 8.75% Senior Notes.

The 8.75% Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2012 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

Year	Redemption Price
2012	104.375	%
2013	102.917	%
2014	101.458	%
2015	100.000	%

At any time or from time to time on or prior to February 15, 2010, Level 3 Financing may redeem up to 35% of the original aggregate principal amount of the 8.75% Senior Notes at a redemption price equal to 108.75% of the principal amount of the 8.75% Senior Notes so redeemed, plus accrued and unpaid interest thereon (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), with the net cash proceeds contributed to the capital of Level 3 Financing of one or more private placements to persons other than affiliates of Level 3 or underwritten public offerings of common stock of Level 3 resulting, in each case, in gross proceeds of at least $100 million in the aggregate; provided, however, that at least 65% of the original aggregate principal amount of the 8.75% Senior Notes would remain outstanding immediately after giving effect to such redemption. Any such redemption shall be made within 90 days of such private placement or public offering upon not less than 30 nor more than 60 days’ prior notice.

At any time prior to February 15, 2009, Level 3 Financing may redeem all or a part of the Floating Rate Senior Notes, upon not less than 30 nor more than 60 days’ prior notice, at a redemption price equal to 100% of the principal amount of the Floating Rate Senior Notes so redeemed plus the Applicable Premium as of, and accrued and unpaid interest thereon (if any) to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

With respect to the Floating Rate Senior Notes, “Applicable Premium” means, on any redemption date, the greater of (1) 1.0% of the principal amount of such Floating Rate Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of 102% of the principal amount of such Floating Rate Senior Notes, plus (ii) all required interest payments due on such Floating Rate Senior Notes through February 15, 2009 (excluding accrued but unpaid interest to the redemption date), such interest payments to be determined in accordance with the indenture governing the Floating Rate Senior Notes assuming that LIBOR in effect on the date of the applicable redemption notice would be the applicable LIBOR in effect through February 15, 2009, computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the Floating Rate Senior Notes) as of such redemption date plus 50 basis points, over (b) the principal amount of such Floating Rate Senior Notes.

The Floating Rate Senior Notes are subject to redemption at the option of Level 3 Financing in whole or in part, at any time or from time to time, on or after February 15, 2009 at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve months beginning February 15, of the years indicated below:

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Year	Redemption Price
2009	102.0	%
2010	101.0	%
2011	100.0	%

At any time or from time to time on or prior to February 15, 2009, Level 3 Financing may redeem up to 35% of the original aggregate principal amount of the Floating Rate Senior Notes at a redemption price equal to 100.0% of the principal amount of the Floating Rate Senior Notes so redeemed, plus a premium equal to the interest rate on the Floating Rate Senior Notes applicable on the date that notice of the redemption is given, plus accrued and unpaid interest thereon (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), with the net cash proceeds contributed to the capital of Level 3 Financing of one or more private placements to persons other than affiliates of Level 3 or underwritten public offerings of common stock of Level 3 resulting, in each case, in gross proceeds of at least $100 million in the aggregate; provided, however, that at least 65% of the original aggregate principal amount of the Floating Rate Senior Notes would remain outstanding immediately after giving effect to such redemption. Any such redemption shall be made within 90 days of such private placement or public offering upon not less than 30 nor more than 60 days’ prior notice.

9.25% Senior Notes Due 2014

On October 30, 2006 and December 28, 2006, Level 3, Level 3 Financing and the initial purchasers of the 9.25% Senior Notes Due 2014 entered into a registration rights agreement relating to the 9.25% Senior Notes Due 2014 pursuant to which Level 3 and Level 3 Financing agreed to file an exchange offer registration statement with the Securities and Exchange Commission.  The Company’s exchange offer registration statement for these notes was declared effective by the Securities and Exchange Commission on May 17, 2007 and the exchange offer relating to these notes was subsequently completed. Level 3 has met the requirements of the registration rights agreement as of June 30, 2007.

Debt Maturities

The Company’s contractual obligations at June 30, 2007 related to debt, including capital leases and excluding issue discounts and fair value adjustments,  will require estimated cash payments during each of the five succeeding years of the following for the years ended December 31:  2007—$4 million; 2008—$31 million; 2009—$366 million; 2010—$971 million; 2011—$631 million and thereafter—$4,848 million.

(12) Employee Benefit Plans

The Company recognized in net loss from continuing operations a total of $24 million and $48 million of non-cash compensation for the three and six months ended June 30, 2007, respectively.  The Company recognized in net loss from continuing operations a total of $20 million and $34 million of non-cash compensation for the three and six months ended June 30, 2006, respectively. In addition, included in discontinued operations for the three and six months ended June 30, 2006, is non-cash compensation expense of $1 million and $2 million, respectively.

During the second quarter of 2006, the October 2005 and January 2006 grants of Outperform Stock Option (“OSO”) units were revalued using May 15, 2006 as the grant date, in accordance with SFAS No. 123R, and resulted in a $6 million increase in non-cash compensation expense.  As stated in the Company’s proxy materials for its 2006 Annual Meeting of Stockholders, over the course of the years since April 1, 1998, the compensation committee of the Company’s Board of Directors had administered the 1995 Stock Plan under the belief that the action of the Company’s Board of Directors to amend and restate that plan effective April 1, 1998 had the effect of extending the original term of the Plan to April 1, 2008.  After a further review of the terms of the plan, however, the compensation committee determined that an ambiguity could exist as to the date of the expiration of the plan. To remove any ambiguity, the Board of Directors sought the approval of the Company’s stockholders to amend the plan to extend the term of the plan by five years to September 25, 2010.  This approval was obtained at the 2006 Annual Meeting of Stockholders held on May 15, 2006.

The Company capitalized $1 million of non-cash compensation for those employees and contractors directly involved in the construction of the network, installation of customers or development of the business support systems for each of the three and six month periods ended June 30, 2007.  The Company capitalized $1 million of non-cash compensation for those employees and contractors directly involved in the construction of the network, installation of customers or development of the business support systems for each of the three and six month periods ended June 30, 2006.

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SFAS No. 123R requires the benefit of tax deductions in excess of recognized compensation expense be reported as a financing cash flow if the tax benefits are expected to be realizable. As the Company is currently in a net operating loss position and does not expect to generate net income in the near term, Level 3’s management does not expect to realize tax benefits from share-based compensation for the foreseeable future.

The following table summarizes non-cash compensation expense and capitalized non-cash compensation for the three and six months ended June 30, 2007 and 2006.

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in millions)	2007			2006			2007			2006
OSO	$	9		$	13		$	18		$	17
Restricted Stock	8			4			15			10
401(k) Match Expense	8			5			16			9
401(k) Discretionary Grant Plan	—			—			—			1
	25			22			49			37
Capitalized Non-cash Compensation	(1		)	(1		)	(1		)	(1		)
	24			21			48			36
Discontinued Operations	—			(1		)	—			(2		)
	$	24		$	20		$	48		$	34

Non-qualified Stock Options and Warrants

The Company has not granted non-qualified stock options (“NQSOs”) since 2000. As of June 30, 2007, all NQSOs previously granted were fully vested and the compensation expense had been fully recognized in the consolidated statements of operations. At June 30, 2007, there were approximately 4.5 million NQSOs outstanding with exercise prices ranging from $1.76 to $8.00. The weighted average exercise price of the NQSOs outstanding was $5.81 at June 30, 2007.

In connection with the acquisition of Broadwing, approximately 4 million previously issued Broadwing warrants were convertible into approximately 5 million shares of Level 3 common stock at a weighted average exercise price of $5.76 per share of Level 3 common stock.  During the first quarter of 2007, approximately 3 million of the Broadwing warrants were exercised to purchase approximately 4 million shares of Level 3 common stock and resulted in proceeds to the Company totaling approximately $23 million.  As of June 30, 2007, approximately 700,000 Broadwing warrants remain outstanding and are convertible into approximately 1 million shares of Level 3 common stock at a weighted average exercise price of $5.38 per share.

Outperform Stock Options

The fair value of the OSO units granted is calculated by applying a modified Black-Scholes model with the assumptions identified below. The Company utilized a modified Black-Scholes model due to the additional variables required to calculate the effect of the success multiplier of the OSO program. The Company believes that given the relative short life of the options and the other variables used in the model, the modified Black-Scholes model provides a reasonable estimate of the fair value of the OSO units at the time of grant.

	Six Months Ended June 30
	2007		2006
S&P 500 Expected Dividend Yield Rate	1.78	%	1.78	%
Expected Life	3 years		3.4 years
S&P 500 Expected Volatility Rate	12	%	12	%
Level 3 Common Stock Expected Volatility Rate	55	%	55	%
Expected S&P 500 Correlation Factor	.28		.28
Calculated Theoretical Value	146	%	153	%
Estimated Forfeiture Rate	11.88	%	10.19	%

The fair value of each OSO grant equals the calculated theoretical value multiplied by the Level 3 common stock price on the grant date.

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The expected life data was stratified based on levels of responsibility within the Company prior to April 1, 2007. The theoretical value used was determined using the weighted average exercise behavior for these groups of employees. Volatility assumptions were derived using historical data as well as current market data.

As part of a comprehensive review of its long-term compensation program completed in the first quarter of 2007, beginning on April 1, 2007, OSO units are awarded monthly to employees in mid-management level and higher positions, have a three year life, will vest 100% on the third anniversary of the date of the award and will fully settle on that date. OSO units awarded beginning April 1, 2007 are valued as of the first day of each month. Recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007, thus the expected life of all such OSO units is three years.

As a result of the long-term compensation review that was being completed, OSO units were not awarded to participants during the first quarter of 2007.  During the second quarter of 2007, the Company awarded 2.1 million OSO units to participants. As of June 30, 2007, the Company had not reflected $24 million of unamortized compensation expense in its financial statements for previously granted OSO units. The weighted average period over which this cost will be recognized is 2.15 years.

Transactions involving OSO units in the six months ended June 30, 2007 are summarized in the table below. The Option Price per Unit identified in the table below represents the initial strike price, as determined on the day prior to the OSO grant date for those grants.

	Units		Option Price Per Unit		Weighted Average Initial Strike Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term
							(in millions)
Balance January 1, 2007	15,285,495		$	2.03 - $6.66	$	3.93	$	82.7	2.54 years
OSO’s granted	2,151,561		$	5.56 - $6.10	$	5.96
OSO’s cancelled	(302,738	)	$	2.03 - $6.66	$	4.61
OSO’s expired	(1,039,522	)	$	2.03 - $6.66	$	5.04
OSO’s exercised	(1,417,881	)	$	2.03 - $5.39	$	2.85
Balance June 30, 2007	14,676,915		$	2.03 - $6.66	$	4.24	$	62.4	2.32 years
OSO’s exercisable (“vested”):
June 30, 2007	8,621,732		$	2.03 - $6.66	$	3.57	$	54.8	1.89 years

In the table above, the weighted average initial strike price represents the values used to calculate the theoretical value of OSO units on the grant date and the intrinsic value represents the value of OSO units that have outperformed the S&P 500® Index as of June 30, 2007.

The total realized value of OSO units exercised for the three and six months ended June 30, 2007 was approximately $3 million and $15 million, respectively. The number of shares of Level 3 stock issued upon exercise of an OSO unit varies based upon the relative performance of Level 3’s stock price and the S&P 500® Index between the initial grant date and exercise date of the OSO unit.

At June 30, 2007, based on the Level 3 common stock price and post-multiplier values, the Company was obligated to issue 9.4 million shares for vested and exercisable OSOs as the percentage increase in the Level 3 stock price exceeded the percentage increase in the S&P 500® Index for certain grants.

Restricted Stock and Units

Employees will continue to receive restricted stock units under the revised compensation program. During the first six months of 2007, approximately 5.5 million restricted stock shares or restricted stock units were awarded to certain employees and non-employee members of the Board of Directors. The restricted stock units and shares were granted to the recipients at no cost. Restrictions on transfer lapse over one to four year periods. The fair value of restricted stock units and shares awarded in the first six months of 2007 of $34 million was calculated using the value of Level 3 common stock on the grant date and is being amortized over the restriction lapse periods of the awards. As of June 30, 2007, the total compensation cost related to nonvested restricted stock or restricted stock units not yet recognized was $42 million, and the weighted average period over which this cost will be recognized is 2.92 years.

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For the six months ended June 30, 2007, the changes in restricted stock and restricted stock units are shown in the following table:

	Number		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2006	19,450,727		$	2.76
Stock and units granted	5,502,905		6.10
Lapse of restrictions	(6,099,382	)	2.43
Stock and units forfeited	(1,009,403	)	3.22
Nonvested at June 30, 2007	17,844,847		$	3.88

The Weighted Average Grant Date Fair Value of restricted stock and restricted stock units granted during the six months ended June 30, 2007 and 2006 was $6.10 and $4.03, respectively. The total fair value of restricted stock and restricted stock units for which restrictions lapsed during the six months ended June 30, 2007 and 2006 were $15 million and $15 million, respectively.

401(k) Plan

The Company and its subsidiaries offer their qualified employees the opportunity to participate in a defined contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code (“401(k) Plan”). Each employee is eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $15,500 in 2007. The Company matches 100% of employee contributions up to 7% of eligible earnings or applicable regulatory limits for employees of the communications businesses.

The Company’s matching contributions are made with Level 3 common stock based on the closing stock price on each pay date. The Company’s matching contributions are made through units in the Level 3 Stock Fund, which represent shares of Level 3 common stock. The Level 3 Stock Fund is the mechanism that is used for Level 3 to make employer matching and other contributions to employees through the Level 3 401(k) plan. Employees are not able to purchase units in the Level 3 Stock Fund. Employees are able to diversify the Company’s matching contribution as soon as it is made, even if they are not fully vested. The Company’s matching contributions will vest ratably over the first three years of service or over such shorter period until the employee has completed three years of service at such time the employee is then 100% vested in all Company matching contributions. The Company made 401(k) Plan matching contributions of $8 million and $16 million for the three and six months ended June 30, 2007, respectively, and $5 million and $9 million for the three and six months ended June 30, 2006, respectively. The Company’s matching contributions were recorded as selling, general and administrative expenses.

The Company made a discretionary contribution to the 401(k) plan in Level 3 common stock for the year ended December 31, 2006 equal to three percent of eligible employees’ earnings. The 2006 discretionary contribution was made into the employees’ 401(k) accounts during the first quarter of 2007.

The Company merged the TelCove 401(k) plan assets into the Level 3 plan on January 2, 2007.

The Broadwing employees began contributing to the Level 3 plan on March 1, 2007. There were no matching cash contributions for Broadwing for the period of January 3, the date of acquisition, through March 1, 2007. The Broadwing plan assets were merged into the Level 3 plan on March 1, 2007.

The CDN Business employees began contributing to the Level 3 plan on January 23, 2007, the date of acquisition. The CDN Business did not have a separate 401(k) plan and as a result no assets will be merged into the Level 3 plan.

(13) Income Taxes

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The adoption of FIN No. 48 did not affect the Company’s liability for unrecognized tax benefits as no new uncertain tax positions were recognized. The Company’s liability for unrecognized tax benefits totaled $22 million and $18 million at June 30, 2007 and January 1, 2007, respectively. The Company increased the liability for unrecognized tax benefits by $4 million during the first six months of 2007 to reflect liabilities for unrecognized tax benefits related to acquired companies and to reflect accrued interest and penalties for the period.

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The Company or at least one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999. The Internal Revenue Service commenced an examination of the Company’s U.S. income tax returns for 1999 through 2001. The audit is currently in the appeals process and a resolution is possible within the next 12 months. The Company does not expect that any settlement or payment that may result from the audit will have a material effect on the Company’s results of operations or cash flows.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense on the consolidated statements of operations. The Company recognized interest and penalties of $1 million and $1 million during the three and six months ended June 30, 2007, respectively and $1 million and $1 million during the three and six months ended June 30, 2006, respectively. The Company’s liability for unrecognized tax benefits includes approximately $10 million and $8 million of accrued interest and penalties at June 30, 2007 and January 1, 2007, respectively.

Included in the balance at June 30, 2007 and January 1, 2007, is $4 million and $1 million of tax positions related to recently acquired companies, the disallowance of which would affect the valuation of the assets and or liabilities acquired and therefore would not affect the annual effective income tax rate. The Company does not expect the liability for unrecognized tax benefits will change significantly during the next twelve months ended June 30, 2008; however, actual changes in the liability for unrecognized tax benefits could be different than currently expected.

(14) Industry and Geographic Data

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” defines operating segments as components of an enterprise for which separate financial information is available and which is evaluated regularly by the Company’s chief operating decision maker, or decision making group, in deciding how to allocate resources and assess performance. Operating segments are managed separately and represent separate business units that offer different products and serve different markets. The Company’s current reportable segments include: communications and coal mining (See Note 1). Other primarily includes corporate assets and overhead not attributable to a specific segment. In the third quarter of 2006, the Company exited the information services business as a result of the sale of Software Spectrum. Segment information has been revised due to reclassification of the information services businesses as discontinued operations in the consolidated financial statements (See Note 3).

Effective January 1, 2007, the Company has reflected cash, cash equivalents and marketable securities in the respective segments which hold the related cash, cash equivalents and marketable securities. Prior year balances have been reclassified to conform to the current period presentation.

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

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

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

29

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

The data presented in the following tables includes information for the three and six months ended June 30, 2007 and 2006 for all statement of operations and cash flow information presented, and as of June 30, 2007 and December 31, 2006 for all balance sheet information presented. Information related to the acquired businesses is included from their respective acquisition dates. Revenue and the related expenses are attributed to countries based on where services are provided.

Industry and geographic segment financial information follows. Certain prior year information has been reclassified to conform to the 2007 presentation.

	Communications		Coal Mining		Other			Total
	(dollars in millions)
Three Months Ended June 30, 2007
Revenue:
North America	$	975	$	17	$	—		$	992
Europe	60		—		—			60
	$	1,035	$	17	$	—		$	1,052
Adjusted EBITDA:
North America	$	178	$	—	$	(1	)
Europe	16		—		—
	$	194	$	—	$	(1	)
Capital Expenditures:
North America	$	155	$	—	$	—		$	155
Europe	15		—		—			15
	$	170	$	—	$	—		$	170
Depreciation and Amortization:
North America	$	227	$	2	$	—		$	229
Europe	18		—		—			18
	$	245	$	2	$	—		$	247
Six Months Ended June 30, 2007
Revenue:
North America	$	1,957	$	36	$	—		$	1,993
Europe	115		—		—			115
	$	2,072	$	36	$	—		$	2,108
Adjusted EBITDA:
North America	$	333	$	2	$	(1	)
Europe	29		—		—
	$	362	$	2	$	(1	)
Capital Expenditures:
North America	$	300	$	—	$	—		$	300
Europe	25		—		—			25
	$	325	$	—	$	—		$	325
Depreciation and Amortization:
North America	$	430	$	3	$	—		$	433
Europe	35		—		—			35
	$	465	$	3	$	—		$	468

30

	Communications		Coal Mining		Other			Total
	(dollars in millions)
Three Months Ended June  30, 2006
Revenue:
North America	$	774	$	16	$	—		$	790
Europe	45		—		—			45
	$	819	$	16	$	—		$	835
Adjusted EBITDA:
North America	$	162	$	2	$	(2	)
Europe	8		—		—
	$	170	$	2	$	(2	)
Capital Expenditures:
North America	$	62	$	1	$	—		$	63
Europe	10		—		—			10
	$	72	$	1	$	—		$	73
Depreciation and Amortization:
North America	$	144	$	1	$	—		$	145
Europe	19		—		—			19
	$	163	$	1	$	—		$	164
Six Months Ended June 30, 2006
Revenue:
North America	$	1,536	$	34	$	—		$	1,570
Europe	87		—		—			87
	$	1,623	$	34	$	—		$	1,657
Adjusted EBITDA:
North America	$	293	$	3	$	(3	)
Europe	24		—		—
	$	317	$	3	$	(3	)
Capital Expenditures:
North America	$	112	$	1	$	—		$	113
Europe	18		—		—			18
	$	130	$	1	$	—		$	131
Depreciation and Amortization:
North America	$	310	$	2	$	—		$	312
Europe	39		—		—			39
	$	349	$	2	$	—		$	351

31

	Communications		Coal Mining		Other		Total
	(dollars in millions)
Identifiable Assets
June 30, 2007
North America	$	9,565	$	111	$	12	$	9,688
Europe	821		—		—		821
	$	10,386	$	111	$	12	$	10,509
December 31, 2006
North America	$	9,043	$	127	$	18	$	9,188
Europe	806		—		—		806
	$	9,849	$	127	$	18	$	9,994

	Communications		Coal Mining		Other		Total
	(dollars in millions)
Long-Lived Assets (excluding Goodwill)
June 30, 2007
North America	$	6,964	$	71	$	—	$	7,035
Europe	756		—		—		756
	$	7,720	$	71	$	—	$	7,791
December 31, 2006
North America	$	6,362	$	88	$	—	$	6,450
Europe	747		—		—		747
	$	7,109	$	88	$	—	$	7,197
Goodwill
June 30, 2007
North America	$	1,295	$	—	$	—	$	1,295
Europe	—		—		—		—
	$	1,295	$	—	$	—	$	1,295
December 31, 2006
North America	$	408	$	—	$	—	$	408
Europe	—		—		—		—
	$	408	$	—	$	—	$	408

Communications revenue is grouped into three main categories: 1) Core Communications Services (including transport and infrastructure services, wholesale IP and data services, voice services and Level 3 Vyvx services) 2) Other Communications Services (including managed modem and its related reciprocal compensation and legacy managed IP services), and 3) SBC Contract Services.

32

	Services
	Core		Other		SBC Contact Services		Total
	(dollars in millions)
Communications Revenue
Three Months Ended June 30, 2007
North America	$	829	$	70	$	76	$	975
Europe	59		1		—		60
	$	888	$	71	$	76	$	1,035
Six Months Ended June 30, 2007
North America	$	1,645	$	153	$	159	$	1,957
Europe	113		2		—		115
	$	1,758	$	155	$	159	$	2,072
Three Months Ended June 30, 2006
North America	$	377	$	119	$	278	$	774
Europe	44		1		—		45
	$	421	$	120	$	278	$	819
Six Months Ended June 30, 2006
North America	$	725	$	241	$	570	$	1,536
Europe	85		2		—		87
	$	810	$	243	$	570	$	1,623

In the third quarter of 2006, Level 3 announced the formation of four customer-facing groups to better serve the changing needs of customers in growing markets and drive growth across the organization:

·The Wholesale Markets Group services the communications needs of large national and global service providers, including carriers, cable companies, wireless companies, and voice service providers. These customers typically integrate Level 3 services into their own products and services to offer to their end user customers. Revenue from the Wholesale Markets Group represented 56% and 57% of Core Communications revenue for the three and six months ended June 30, 2007, respectively.

·The Business Markets Group targets enterprise customers and regional carriers who value a local, professional sales force. Specific customer markets include small, medium, and large businesses, local and regional carriers, state and local government entities, and higher education institutions and consortia. Revenue from the Business Markets Group represented 27% and 26% of Core Communications revenue for the three and six months ended June 30, 2007, respectively.

·The Content Markets Group focuses on serving media and content companies with large and growing bandwidth needs. Customers in this market include video distribution companies, providers of gaming, mega-portals, software service providers, social networking providers, as well as more traditional media distribution companies such as broadcasters, television networks and sports leagues. Revenue from the Content Markets Group represented 10% of Core Communications revenue in both the three and six months ended June 30, 2007.

·The European Markets Group serves large European consumers of bandwidth, including the largest European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors. Revenue from the European Markets Group represented 7% of Core Communications revenue in both the three and six months ended June 30, 2007.

The Company believes that the alignment around customer markets should allow it to drive growth while enabling it to better focus on the needs of the customers. Each group is supported by the dedicated sales, marketing, service management, customer facing operations, and necessary support resources required to execute and increase revenue in these key markets.

33

The majority of North American revenue consists of services delivered within the United States. The majority of European revenue consists of services delivered within the United Kingdom, but also includes France and Germany. Transoceanic revenue is allocated to Europe.

The following information provides a reconciliation of Net Income (Loss) to Adjusted EBITDA by operating segment, as defined by the Company, for the three and six months ended June 30, 2007 and 2006:

Three Months Ended June 30, 2007

	Communications			Coal Mining			Other			Discontinued Information Services
	(dollars in millions)
Net Income (Loss)	$	(199	)	$	(2	)	$	(1	)	$	—
Income Tax Provision (Benefit)	—			—			—			—
Total Other (Income) Expense	123			—			—			—
Non-Cash Impairment Charge	1			—			—			—
Depreciation and Amortization Expense	245			2			—			—
Non-Cash Compensation Expense	24			—			—			—
Adjusted EBITDA	$	194		$	—		$	(1	)	$	—

Six Months Ended June 30, 2007

	Communications			Coal Mining			Other			Discontinued Information Services
	(dollars in millions)
Net Income (Loss)	$	(846	)	$	(2	)	$	(1	)	$	—
Income Tax Provision (Benefit)	1			1			—			—
Total Other (Income) Expense	693			—			—			—
Non-Cash Impairment Charge	1			—			—			—
Depreciation and Amortization Expense	465			3			—			—
Non-Cash Compensation Expense	48			—			—			—
Adjusted EBITDA	$	362		$	2		$	(1	)	$	—

Three Months Ended June 30, 2006

	Communications			Coal Mining		Other			Discontinued Information Services
	(dollars in millions)
Net Income (Loss)	$	(224	)	$	1	$	(1	)	$	23
Income from Discontinued Operations	—			—		—			(23		)
Income Tax Provision (Benefit)	—			—		1			—
Total Other (Income) Expense	207			—		(2		)	—
Non-Cash Impairment Charge	4			—		—			—
Depreciation and Amortization Expense	163			1		—			—
Non-Cash Compensation Expense	20			—		—			—
Adjusted EBITDA	$	170		$	2	$	(2	)	$	—

34

Six Months Ended June 30, 2006

	Communications			Coal Mining		Other			Discontinued Information Services
	(dollars in millions)
Net Income (Loss)	$	(390	)	$	1	$	(1	)	$	21
Income from Discontinued Operations	—			—		—			(21		)
Income Tax Provision (Benefit)	(1		)	—		1			—
Total Other (Income) Expense	318			—		(3		)	—
Non-Cash Impairment Charge	7			—		—			—
Depreciation and Amortization Expense	349			2		—			—
Non-Cash Compensation Expense	34			—		—			—
Adjusted EBITDA	$	317		$	3	$	(3	)	$	—

(15) Commitments, Contingencies and Other Items

Right of Way Litigation

In April 2002, Level 3 Communications, Inc., and two of its subsidiaries were named as defendants in Bauer, et. al. v. Level 3 Communications, LLC, et al., a purported class action covering 22 states, filed in state court in Madison County, Illinois. In July 2001, Level 3 was named as a defendant in Koyle, et. al. v. Level 3 Communications, Inc., et. al., a purported two state class action filed in the U.S. District Court for the District of Idaho. In November of 2005, the court granted class certification only for the state of Idaho, which decision is on appeal. In September 2002, Level 3 Communications, LLC and Williams Communications, LLC were named as defendants in Smith et. al. v. Sprint Communications Company, L.P., et al., a purported nationwide class action filed in the United States District Court for the Northern District of Illinois. In April 2005, the Smith plaintiffs filed a Fourth Amended Complaint which did not include Level 3 or Williams Communications, Inc. as a party, thus ending both companies’ involvement in the Smith case. On February 17, 2005, Level 3 Communications, LLC and Williams Communications, LLC were named as defendants in McDaniel, et. al., v. Qwest Communications Corporation, et al., a purported class action covering 10 states filed in the United States District Court for the Northern District of Illinois. These actions involve the companies’ right to install its fiber optic cable network in easements and right-of-ways crossing the plaintiffs’ land. In general, the companies obtained the rights to construct their networks from railroads, utilities, and others, and have installed their networks along the rights-of-way so granted. Plaintiffs in the purported class actions assert that they are the owners of lands over which the companies’ fiber optic cable networks pass, and that the railroads, utilities, and others who granted the companies the right to construct and maintain their networks did not have the legal authority to do so. The complaints seek damages on theories of trespass, unjust enrichment and slander of title and property, as well as punitive damages. The companies have also received, and may in the future receive, claims and demands related to rights-of-way issues similar to the issues in these cases that may be based on similar or different legal theories. To date, other than as noted above, all adjudicated attempts to have class action status granted on complaints filed against the companies or any of their subsidiaries involving claims and demands related to rights-of-way issues have been denied.

It is still too early for the Company to reach a conclusion as to the ultimate outcome of these actions. However, management believes that the Company and its subsidiaries have substantial defenses to the claims asserted in all of these actions (and any similar claims which may be named in the future), and intends to defend them vigorously if a satisfactory form of settlement is not approved.

Broadwing Class Action

Between May 7, 2001 and June 15, 2001, nine class action lawsuits were filed in the United States District Court for the Southern District of New York (the “District Court”) against several hundred issuers and underwriters.  The allegations relevant to Broadwing relate to its initial public offering on behalf of all persons who purchased Broadwing stock between July 28, 2000 and the filing of the complaints. The complaints include as defendants: Broadwing, its directors and officers who signed the registration statement in connection with its initial public offering, and certain of the underwriters that participated in the initial public offering. Broadwing’s directors and officers have since been dismissed from the case, without prejudice. The complaints allege that the registration statement and prospectus relating to the Broadwing initial public offering contained material misrepresentations and/or omissions in that those documents did not disclose (1) that certain of the underwriters had solicited and received undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of the Broadwing common stock in the initial public offering and (2) that

35

certain of the underwriters had entered into arrangements with some investors that were designed to distort and/or inflate the market price for the Broadwing common stock in the aftermarket following the initial public offering. Insofar as they relate to Broadwing, the complaints ask the court to award to members of the class the right to rescind their purchases of Broadwing’s common stock (or to be awarded rescissory damages if the class member has sold the Broadwing stock) and prejudgment and post-judgment interest, reasonable attorneys’ and experts witness’ fees and other costs.

On February 15, 2005, the District Court granted preliminary approval of a proposed settlement agreement between the plaintiffs and all issuer defendants, including Broadwing. The proposed settlement was a $1 billion guaranteed settlement. The insurance companies for these defendants agreed to pay up to $1 billion dollars in total to the extent that judgment is rendered for the plaintiffs. If the plaintiffs had succeeded in recovering more than $1 billion from the underwriters, the companies that went public, such as Broadwing, would not have to pay any additional amounts. The defendants’ insurance companies would have been paying the settlement that was subject to the final approval of the district court.

On April 21, 2006, one of the underwriters sued in this class action, JPMorgan Chase, announced a settlement with plaintiffs for $425 million. On April 24, 2006, a fairness hearing on the proposed settlement was held in which the District Court did not rule on the proposed settlement, but instead took the proposed settlement under advisement. In an appeal by a series of underwriters from the District Court decision to grant class certification in this matter the Second Circuit Court of Appeals (“Second Circuit”) issued an opinion on December 5, 2006, reversing the District Court and de-certifying the class.  On January 7, 2007, plaintiffs filed a petition for rehearing with the Second Circuit with respect to the class certification issue, and the Second Circuit denied that petition on April, 9, 2007.  The effect of the decertification of the class is that the proposed settlement cannot go forward.  However, notwithstanding the positive developments for the defendants in this action, the parties are continuing to negotiate to determine if an appropriate resolution can be reached.

Negotiations are ongoing and any potential settlement will require new class certification motions, which are currently due at the end of September 2007.  Limited discovery relating to the focus cases will be undertaken while settlement discussions proceed.  Should no settlement be reached, the Company believes that it has meritorious defenses to plaintiffs’ allegations and will vigorously assert those defenses.

Other Litigation

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

Letters of Credit

It is customary in Level 3’s industries to use various financial instruments in the normal course of business. These instruments include items such as letters of credit. Letters of credit are conditional commitments issued on behalf of Level 3 in accordance with specified terms and conditions. As of June 30, 2007, Level 3 had outstanding letters of credit of approximately $35 million, which are collateralized by cash and which are reflected on the consolidated balance sheet as restricted cash.

(16) Condensed Consolidating Financial Information

As discussed in Note 11, Level 3 Financing has issued senior notes as described below:

·In October 2003, Level 3 Financing issued $500 million of 10.75% Senior Notes due 2011. The 10.75% Senior Notes were registered with the Securities and Exchange Commission in 2005.  The Company repurchased $497 million of the 10.75% notes in 2006.

·In March 2006, Level 3 Financing issued $150 million of Floating Rate Senior Notes due 2011 and $250 million of 12.25% Senior Notes due 2013. The Company repurchased $144 million of the Floating Rate Senior Notes due 2011 in 2007.

·In April 2006, Level 3 Financing issued an additional $300 million of 12.25% Senior Notes due 2013.

·In October 2006, Level 3 Financing issued $600 million of 9.25% Senior Notes due 2014 and in December 2006 issued an additional $650 million of 9.25% Senior Notes due 2014.

36

·In February 2007, Level 3 Financing issued $700 million of 8.75% Senior Notes due 2017 and $300 million of Floating Rate Senior Notes due 2015.

The notes discussed above are unsecured obligations of Level 3 Financing; however, they are fully and unconditionally guaranteed on an unsecured senior basis by Level 3 Communications, Inc. and Level 3 Communications, LLC.

In addition, Level 3 Financing’s 12.25% Senior Notes due 2013,  Floating Rate Senior Notes due 2011 and 9.25% Senior Notes due 2014 are guaranteed by Broadwing Financial Services, Inc., a wholly owned subsidiary of Level 3 Communications, Inc.  As a result of this guarantee, the Company has included Broadwing Financial Services, Inc. in the condensed consolidating financial information below.

In conjunction with the registration of the 10.75% Senior Notes, Floating Rate Senior Notes due 2011, 12.25% Senior Notes due 2013, 9.25% Senior Notes due 2014, 8.75% Senior Notes due 2017 and Floating Rate Senior Notes due 2015 the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered.”

Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2007 and 2006 follow. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Communications, Inc. These transactions are eliminated in the consolidated results of the Company.

37

Condensed Consolidating Statements of Operations
For the three months ended June 30, 2007
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Broadwing Financial Services, Inc.			Other Subsidiaries			Eliminations			Total
	(dollars in millions)
Revenue	$	—		$	—		$	346		$	—		$	744		$	(38	)	$	1,052
Costs and Expenses:
Cost of Revenue	—			—			135			—			355			(36		)	454
Depreciation and Amortization	—			—			89			—			158			—			247
Selling, General and Administrative	—			—			345			—			85			(2		)	428
Restructuring and Impairment Charges	—			—			1			—			1			—			2
Total Costs and Expenses	—			—			570			—			599			(38		)	1,131
Operating Income (Loss)	—			—			(224		)	—			145			—			(79		)
Other Income (Loss), net:
Interest Income	—			—			10			—			2			—			12
Interest Expense	(40		)	(95		)	—			(1		)	(2		)	—			(138		)
Interest Income (Expense) Affiliates, net	188			249			(453		)	—			16			—			—
Equity in Net Earnings (Losses) of Subsidiaries	(350		)	(504		)	135			—			—			719			—
Other Income (Expense)	—			—			2			—			1			—			3
Other Income (Loss)	(202		)	(350		)	(306		)	(1		)	17			719			(123		)
Income (Loss) from Continuing Operations Before Income Taxes	(202		)	(350		)	(530		)	(1		)	162			719			(202		)
Income Tax Expense	—			—			—			—			—			—			—
Income (Loss) from Continuing Operations	(202		)	(350		)	(530		)	(1		)	162			719			(202		)
Income (Loss) from Discontinued Operations	—			—			—			—			—			—			—
Net Income (Loss)	$	(202	)	$	(350	)	$	(530	)	$	(1	)	$	162		$	719		$	(202	)

38

Condensed Consolidating Statements of Operations
For the six months ended June 30, 2007
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Broadwing Financial Services, Inc.			Other Subsidiaries			Eliminations			Total
	(dollars in millions)
Revenue	$	—		$	—		$	700		$	27		$	1,483		$	(102	)	$	2,108
Costs and Expenses:
Cost of Revenue	—			—			269			—			722			(71		)	920
Depreciation and Amortization	—			—			170			—			298			—			468
Selling, General and Administrative	2			—			665			27			205			(31		)	868
Restructuring and Impairment Charges	—			—			5			—			1			—			6
Total Costs and Expenses	2			—			1,109			27			1,226			(102		)	2,262
Operating Income (Loss)	(2		)	—			(409		)	—			257			—			(154		)
Other Income (Loss), net:
Interest Income	1			—			27			—			5			—			33
Interest Expense	(123		)	(174		)	—			(1		)	(5		)	—			(303		)
Interest Income (Expense) Affiliates, net	400			474			(905		)	—			31			—			—
Equity in Net Earnings (Losses) of Subsidiaries	(726		)	(998		)	223			—			—			1,501			—
Other Income (Expense)	(399		)	(28		)	4			—			—			—			(423		)
Other Income (Loss)	(847		)	(726		)	(651		)	(1		)	31			1,501			(693		)
Income (Loss) from Continuing Operations Before Income Taxes	(849		)	(726		)	(1,060		)	(1		)	288			1,501			(847		)
Income Tax Expense	—			—			—			—			(2		)	—			(2		)
Income (Loss) from Continuing Operations	(849		)	(726		)	(1,060		)	(1		)	286			1,501			(849		)
Income (Loss) from Discontinued Operations	—			—			—			—			—			—			—
Net Income (Loss)	$	(849	)	$	(726	)	$	(1,060	)	$	(1	)	$	286		$	1,501		$	(849	)

39

Condensed Consolidating Statements of Operations
For the three months ended June 30, 2006
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Other Subsidiaries			Eliminations			Total
	(dollars in millions)
Revenue	$	—		$	—		$	323		$	575		$	(63	)	$	835
Costs and Expenses:
Cost of Revenue	—			—			139			321			(61		)	399
Depreciation and Amortization	—			—			83			81			—			164
Selling, General and Administrative	2			—			198			85			(2		)	283
Restructuring and Impairment Charges	—			—			3			4			—			7
Total Costs and Expenses	2			—			423			491			(63		)	853
Operating Income (Loss)	(2		)	—			(100		)	84			—			(18		)
Other Income (Loss), net:
Interest Income	5			—			10			1			—			16
Interest Expense	(111		)	(58		)	—			(1		)	—			(170		)
Interest Income (Expense) Affiliates, net	218			166			(389		)	5			—			—
Equity in Net Earnings (Losses) of Subsidiaries	(311		)	(365		)	59			—			617			—
Other Income (Expense)	—			(54		)	2			1			—			(51		)
Other Income (Loss)	(199		)	(311		)	(318		)	6			617			(205		)
Income (Loss) from Continuing Operations Before Income Taxes	(201		)	(311		)	(418		)	90			617			(223		)
Income Tax Expense	—			—			—			(1		)	—			(1		)
Income (Loss) from Continuing Operations	(201		)	(311		)	(418		)	89			617			(224		)
Income from Discontinued Operations	—			—			—			23			—			23
Net Income (Loss)	$	(201	)	$	(311	)	$	(418	)	$	112		$	617		$	(201	)

40

Condensed Consolidating Statements of Operations
For the six months ended June 30, 2006
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Other Subsidiaries			Eliminations			Total
	(dollars in millions)
Revenue	$	—		$	—		$	643		$	1,123		$	(109	)	$	1,657
Costs and Expenses:
Cost of Revenue	—			—			271			644			(104		)	811
Depreciation and Amortization	—			—			192			159			—			351
Selling, General and Administrative	2			—			384			178			(5		)	559
Restructuring and Impairment Charges	—			—			7			4			—			11
Total Costs and Expenses	2			—			854			985			(109		)	1,732
Operating Income (Loss)	(2		)	—			(211		)	138			—			(75		)
Other Income (Loss), net:
Interest Income	9			—			13			3			—			25
Interest Expense	(222		)	(95		)	—			(3		)	—			(320		)
Interest Income (Expense) Affiliates, net	427			324			(767		)	16			—			—
Equity in Net Earnings (Losses) of Subsidiaries	(609		)	(784		)	101			—			1,292			—
Other Income (Expense)	28			(54		)	2			4			—			(20		)
Other Income (Loss)	(367		)	(609		)	(651		)	20			1,292			(315		)
Income (Loss) from Continuing Operations Before Income Taxes	(369		)	(609		)	(862		)	158			1,292			(390		)
Income Tax (Expense) Benefit	—			—			—			—			—			—
Income (Loss) from Continuing Operations	(369		)	(609		)	(862		)	158			1,292			(390		)
Income from Discontinued Operations	—			—			—			21			—			21
Net Income (Loss)	$	(369	)	$	(609	)	$	(862	)	$	179		$	1,292		$	(369	)

41

Condensed Consolidating Balance Sheets as of June 30, 2007 and December 31, 2006 follow:

Condensed Consolidating Balance Sheets
June 30, 2007

(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Broadwing Financial Services, Inc.			Other Subsidiaries		Eliminations		Total
	(dollars in millions)
Assets
Current Assets:
Cash and cash equivalents	$	—		$	25		$	643		$	—		$	71	$	—	$	739
Marketable securities	66			—			—			—			2		—		68
Restricted cash and securities	—			—			19			—			9		—		28
Accounts receivable, net	—			—			139			—			316		—		455
Due from (to) affiliates	10,236			8,242			(19,891		)	20			1,393		—		—
Other	8			8			50			—			67		—		133
Total Current Assets	10,310			8,275			(19,040		)	20			1,858		—		1,423
Property, Plant and Equipment, net	—			—			3,271			—			3,458		—		6,729
Restricted Cash and Securities	17			—			—			—			75		—		92
Goodwill and Other Intangibles, net	—			—			161			—			1,944		—		2,105
Investment in Subsidiaries	(6,416		)	(10,467		)	4,268			—			—		12,615		—
Other Assets, net	21			91			12			—			36		—		160
Total Assets	$	3,932		$	(2,101	)	$	(11,328	)	$	20		$	7,371	$	12,615	$	10,509
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable	$	—		$	—		$	156		$	—		$	245	$	—	$	401
Current portion of long-term debt	25			—			—			1			5		—		31
Accrued payroll and employee benefits	—			—			74			—			8		—		82
Accrued interest	27			96			—			—			1		—		124
Deferred revenue	—			—			104			—			67		—		171
Other	—			1			55			—			118		—		174
Total Current Liabilities	52			97			389			1			444		—		983
Long-Term Debt, less current portion	2,504			4,218			—			20			86		—		6,828
Deferred Revenue	—			—			648			—			124		—		772
Other Liabilities	42			—			205			—			345		—		592
Stockholders’ Equity (Deficit)	1,334			(6,416		)	(12,570		)	(1		)	6,372		12,615		1,334
Total Liabilities and Stockholders’ Equity (Deficit)	$	3,932		$	(2,101	)	$	(11,328	)	$	20		$	7,371	$	12,615	$	10,509

42

Condensed Consolidating Balance Sheets
December 31, 2006
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Other Subsidiaries		Eliminations		Total
	(dollars in millions)
Assets
Current Assets:
Cash and cash equivalents	$	15		$	12		$	1,592		$	62	$	—	$	1,681
Marketable securities	235			—			—			—		—		235
Restricted cash and securities	—			—			31			15		—		46
Accounts receivable, net	—			—			97			229		—		326
Due from (to) affiliates	11,183			6,432			(18,631		)	1,016		—		—
Other	17			6			41			37		—		101
Total Current Assets	11,450			6,450			(16,870		)	1,359		—		2,389
Property, Plant and Equipment, net	—			—			3,268			3,200		—		6,468
Restricted Cash and Securities	17			—			—			73		—		90
Goodwill and Other Intangibles, net	—			—			44			875		—		919
Investment in Subsidiaries	(6,419		)	(10,170		)	2,639			—		13,950		—
Other Assets, net	43			41			12			32		—		128
Total Assets	$	5,091		$	(3,679	)	$	(10,907	)	$	5,539	$	13,950	$	9,994
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable	$	—		$	1		$	160		$	230	$	—	$	391
Current portion of long-term debt	—			—			—			5		—		5
Accrued payroll and employee benefits	—			—			59			33		—		92
Accrued interest	93			49			—			1		—		143
Deferred revenue	—			—			98			44		—		142
Other	1			2			56			97		—		156
Total Current Liabilities	94			52			373			410		—		929
Long-Term Debt, less current portion	4,581			2,688			—			88		—		7,357
Deferred Revenue	—			—			628			125		—		753
Other Liabilities	42			—			199			340		—		581
Stockholders’ Equity (Deficit)	374			(6,419		)	(12,107		)	4,576		13,950		374
Total Liabilities and Stockholders’ Equity (Deficit)	$	5,091		$	(3,679	)	$	(10,907	)	$	5,539	$	13,950	$	9,994

43

Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2007 and 2006 follow:

Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2007
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Broadwing Financial Services, Inc.			Other Subsidiaries			Eliminations		Total
	(dollars in millions)
Net Cash Provided by (Used in) Operating Activities	$	(162	)	$	(117	)	$	(166	)	$	(14	)	$	395		$	—	$	(64	)
Cash Flows from Investing Activities:
Proceeds from sale and maturity of marketable securities	235			—			—			—			53			—		288
Decrease (increase) in restricted cash and securities	—			—			6			—			7			—		13
Capital expenditures	—			—			(136		)	—			(189		)	—		(325		)
Acquisitions, net of cash acquired	—			—			(883		)	—			261			—		(622		)
Proceeds from sale of property, plant and equipment and other assets	—			—			1			—			1			—		2
Net Cash Provided by (Used in) Investing Activities	235			—			(1,012		)	—			133			—		(644		)
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs	—			2,352			—			—			—			—		2,352
Payments and repurchases of long-term debt	(1,619		)	(887		)	—			—			(109		)	—		(2,615		)
Proceeds from warrants and stock-based compensation plans	24			—			—			—			—			—		24
Increase (decrease) due from affiliates, net	1,507			(1,335		)	227			14			(413		)	—		—
Net Cash Provided by (Used in) Financing Activities	(88		)	130			227			14			(522		)	—		(239		)
Net Cash Used in Discontinued Operations	—			—			—			—			—			—		—
Effect of Exchange Rates on Cash and Cash Equivalents	—			—			2			—			3			—		5
Net Change in Cash and Cash Equivalents	(15		)	13			(949		)	—			9			—		(942		)
Cash and Cash Equivalents at Beginning of Period	15			12			1,592			—			62			—		1,681
Cash and Cash Equivalents at End of Period	$	—		$	25		$	643		$	—		$	71		$	—	$	739

44

Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2006
(unaudited)

	Level 3 Communications, Inc.			Level 3 Financing, Inc.			Level 3 Communications, LLC			Other Subsidiaries			Eliminations		Total
	(dollars in millions)
Net Cash Provided by (Used in) Operating Activities of Continuing Operations	$	(171	)	$	(69	)	$	(18	)	$	311		$	—	$	53
Cash Flows from Investing Activities:
Proceeds from sale and maturity of marketable securities	—			5			—			—			—		5
Purchases of marketable securities	—			—			(98		)	—			—		(98		)
Decrease (increase) in restricted cash and securities	—			—			—			(12		)	—		(12		)
Capital expenditures	—			—			(68		)	(63		)	—		(131		)
Acquisition, net of cash acquired	—			—			(88		)	6			—		(82		)
Distributions from discontinued operations, net	—			—			—			2			—		2
Proceeds from sale of property, plant and equipment and other assets	—			—			2			—			—		2
Net Cash Provided by (Used in) Investing Activities	—			5			(252		)	(67		)	—		(314		)
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs	326			681			—			—			—		1,007
Payments and repurchases of long-term debt	(51		)	(53		)	—			—			—		(104		)
Equity offering	543			—			—			—			—		543
Increase (decrease) due from affiliates, net	(666		)	(556		)	1,468			(246		)	—		—
Net Cash Provided by (Used in) Financing Activities	152			72			1,468			(246		)	—		1,446
Net Cash Provided by Discontinued Operations	—			—			—			14			—		14
Effect of Exchange Rates on Cash and Cash Equivalents	—			—			8			(1		)	—		7
Net Change in Cash and Cash Equivalents	(19		)	8			1,206			11			—		1,206
Cash and Cash Equivalents at Beginning of Period (includes cash of discontinued operations)	37			8			275			132			—		452
Cash and Cash Equivalents at End of Period	$	18		$	16		$	1,481		$	143		$	—	$	1,658

(17) Subsequent Event

Servecast Acquisition

On July 11, 2007, Level 3 acquired Servecast Limited (“Servecast”), a Dublin-based provider of live and on-demand video management and streaming services for broadband and mobile platforms.  Level 3 paid approximately €33 million, or approximately $45 million, in cash to complete the acquisition of Servecast.

Servecast offers publishing and distribution tools for video rights holders to monetize their digital assets.  These tools enable customers to manage, protect, deliver and track online audio and video content.  Servecast provides a self-service platform that supports multiple stream rates, languages, currencies and formats.

45

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Level 3 Communications, Inc. and its subsidiaries (“Level 3” or the “Company”) consolidated financial statements (including the notes thereto), included elsewhere herein and the Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.

This document contains forward looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to the Company. When used in this document, the words “anticipate”, “believe”, “plan”, “estimate” and “expect” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this document. For a more detailed description of these risks and factors, please see the Company’s Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission and Item 1A in this Form 10-Q.

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

Communications Services

The Company is a facilities based provider of a broad range of communications services.  Revenue for communications services is recognized on a monthly basis as these services are provided.  For contracts involving private line, wavelengths and dark fiber services, Level 3 may receive up-front payments for services to be delivered for a period of up to 20 years.  In these situations, Level 3 defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract.

The Company separates its communication services into three categories:

·Core Communications Services

·Other Communications Services

·SBC Contract Services

Each category of revenue is in a different phase of the service life cycle, requiring different levels of investment and focus and providing different contributions to the Company’s Adjusted EBITDA.  Management of Level 3 believes that growth in revenue from its Core Communications Services is critical to the long-term success of its communications business.  At the same time, the Company believes it must continue to manage effectively the positive cash flows from its SBC Contract Services and its Other Communications Services including the Company’s mature managed modem business and its related reciprocal compensation.  The Core Communications Services group includes transport and infrastructure, IP and data services, voice and Level 3 Vyvx video and advertising distribution services.  The Other Communications Services group includes managed modem and related reciprocal compensation and the legacy managed IP service business.  The SBC Contract Services product group includes all the revenues related to the SBC Master Services Agreement contract, which was obtained in the December 23, 2005 acquisition of WilTel Communications Group, LLC (“WilTel”) .

The Company’s transport and infrastructure services include colocation services, metropolitan and intercity wavelengths, private line, dark fiber, professional services, metro ethernet and transoceanic services.  Growth in transport and infrastructure revenue is largely dependent on increased demand for bandwidth services and available capital of companies requiring communications capacity for their own use or in providing capacity as a service provider to their customers.  These expenditures may be in the form of up-front payments or monthly payments for primarily private line, wavelength or dark fiber services.  An increase in demand may be partially offset by declines in unit pricing.

IP and data services primarily include the Company’s high speed Internet access service, dedicated Internet access (“DIA”) service, frame relay services, virtual private network (“VPN”) services, ethernet services and content delivery network (“CDN”) services.  Level 3’s Internet access service is a high quality and high-speed Internet access service offered in a variety of capacities.  The Company’s IP-VPN services permit businesses of any size to replace multiple networks with a single, cost-effective solution that greatly simplifies the converged transmission of voice, video, and data.

46

The conversion from narrow band dial-up services to higher speed broadband services continues to increase demand for the Company’s Core communications services. Revenue growth in this area is dependent on the continued increase in usage by both enterprises and consumers and the pricing environment. An increase in the reliability and security of information transmitted over the Internet and declines in the cost to transmit data have resulted in increased utilization of e-commerce or web based services by businesses. This market is currently characterized by significant price compression and very high levels of unit growth rates, resulting in growth in absolute revenue.

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

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

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

For live events where the location is not known in advance, such as breaking news stories in remote locations, the Company provides an integrated satellite and fiber-optic network-based service to transmit the content to its customers. Most of Level 3 Vyvx’s customers for these services contract for the service on an event-by-event basis; however, there are some customers who have purchased a dedicated point-to-point service which enables these customers to transmit programming at any time.

Level 3 Vyvx also distributes advertising spots to radio and television stations throughout the U.S., both electronically and in physical form. Customers for these services can utilize a network-based method for aggregating, managing, storing and distributing content for content owners and rights holders.

The Company expects to continue to develop its content distribution services through the acquisition of the Content Delivery Network (“CDN”) services business (“CDN Business”) which it purchased in the first quarter of 2007 from SAVVIS, Inc. for $134 million in cash (including transaction costs) and the acquisition of Servecast Ltd. which it purchased on July 11, 2007 for approximately $45 million in cash. The Company believes that the addition of the CDN Business with its strong, broad portfolio of patents will help the Company secure its commercial efforts in the CDN market in which a number of competitors have significant, patented intellectual property.

The Company’s Other Communications Services are mature services that are not areas of emphasis for the Company. Other Communications Services currently include managed modem, related reciprocal compensation and legacy managed IP services.

The Company and its customers continue to see consumers migrate from narrow band dial-up services to higher speed broadband services as the narrow band market matures. Additionally, America Online, a primary consumer of the Company’s dial-up services, announced a strategic change in its approach to its dial-up internet access business that has accelerated the loss of its dial-up subscribers. During the first half of 2007, the America Online strategy accelerated the decline in managed modem revenue and is expected to contribute to further declines in managed modem revenue in the second half of 2007 and  beyond. The Company recognized approximately $46 million and $100 million of managed modem revenue in the three and six months ended June 30, 2007, respectively, an approximate 40% and 36% decline from the $77 million and $156 million of managed modem revenue recognized in the three and six months ended June 30, 2006, respectively. The declines in managed modem revenue from America Online in the first half of 2007 have been offset to some extent by an increase in market share as a result of certain competitors exiting segments of this business in the second half of 2006 and first quarter of 2007. Level 3 believes that the low-cost structure of its network will enable it to compete for new business in the declining, but still significant, managed modem market.

47

Level 3 receives compensation from other carriers when it terminates traffic originating on those carriers’ networks. This reciprocal compensation is based on interconnection agreements with the respective carriers or rates mandated by the FCC. The Company earns the majority of its reciprocal compensation revenue from providing managed modem services.  The Company is also beginning to receive increasing amounts of reciprocal compensation from its voice services.

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

The SBC Contract Services Agreement was an agreement between SBC Services Inc. and WilTel and was obtained in the WilTel acquisition in December 2005. Recently, SBC Services Inc. became a subsidiary of AT&T Inc., (together “SBC”). WilTel and SBC amended their agreement in June 2005 to run through 2009. The Company recognized approximately $76 million and $159 million of revenue under the SBC Contract Services Agreement during the three and six months ended June 30, 2007, respectively. The agreement provides a gross margin purchase commitment of $335 million from December 2005 through the end of 2007, and $75 million from January 2008 through the end of 2009. Through June 30, 2007, SBC had satisfied $325 million of the initial $335 million gross margin purchase commitment, and therefore the remaining minimum gross margin commitment under the agreement as of June 30, 2007 was approximately $10 million for the period through the end of 2007, and $75 million from January 2008 through the end of 2009. Originating and terminating access charges paid to local phone companies are passed through to SBC in accordance with a formula that approximates cost.

Additionally, the SBC Contract Services Agreement provides for the payment of $50 million from SBC if certain performance criteria are met by Level 3. The Company met the required performance criteria and recorded revenue of $25 million in 2006 under the agreement. During the first and second quarter of 2007, the Company also met the required monthly performance criteria and recorded revenue under the agreement of $3 million and $6 million for the three and six months ended June 30, 2007, respectively.  Level 3 is eligible to earn another $19 million during the remainder of 2007 if it meets the performance criteria. Of the annual amounts, 50% is based on monthly performance criteria and the remaining 50% is based on performance criteria for the full year. The Company expects to earn the remaining performance payment during 2007.

As a result of the reductions in SBC Contract Services revenue and the overall increase in revenue from acquisition activity, concentration of revenue among a limited number of customers has decreased compared to previous periods and is expected to continue to decline during the remainder of 2007.  However, if Level 3 would lose one or more major customers, or if one or more major customers significantly decreased its orders for Level 3 services, the Company’s communications business could be materially and adversely affected.

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

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

·Completing the integration of acquired businesses

·Growing revenue in Core Communications Services

·Developing its metro network strategy and enterprise business

·Continuing to show improvements in Adjusted EBITDA as a percentage of revenue

·Managing cash flows provided by its Other Communications Services and SBC Contract Services.

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

48

The Company completed the initial planned deployment of the next generation of optical transport technology in its North American and European networks in the fourth quarter of 2005 and early in the first quarter of 2006, respectively.  The Company also decided to deploy the technology for additional routes in North America and Europe and completed the deployments on these routes in 2006.  The Company completed an upgrade of its IP backbone technology in the fourth quarter of 2005. Level 3 believes that this deployment of new equipment to the existing network equipment will allow the Company to both increase the amount of traffic it carries over the network and lower the cost of providing services.

To expand its service offerings in Europe, the Company is investing approximately $20 million for a dark fiber based expansion in nine European markets. Portions of this expansion were completed in 2006 and the first half of 2007.  The Company expects to complete the remainder of the expansion in the second half of 2007. The dark fiber is expected to replace or supplement existing wavelength capacity.

The communications industry continues to consolidate. Level 3 has participated in this process with the acquisitions of WilTel in 2005; Progress Telecom, LLC (“Progress Telecom”); ICG Communications, Inc. (“ICG Communications”);  TelCove, Inc. (“TelCove”) and Looking Glass Networks Holding Co., Inc. (“Looking Glass”) in 2006; and Broadwing Corporation (“Broadwing”) and the CDN Business in January 2007. On July 11, 2007, Level 3 acquired Servecast Ltd., a Dublin, Ireland provider of live and on-demand video management and streaming services for broadband and mobile platforms. Level 3 will continue to evaluate consolidation opportunities and could make additional acquisitions in the future.

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

During the second quarter of 2007, the Company did see an increase in service activation times as a result of continuing to use the multiple order entry and provisioning processes and systems that were operated by the acquired companies.  This increase in service activation cycle time had a negative effect on the rate of Core Communications Services revenue growth during the second quarter of 2007.  As a result of consolidating key operational functions and organizations as part of the integration effort, the Company’s operating environment has become more complex in the short term.

The Company has ongoing process and system development work that is being implemented as part of the integration efforts that is expected to provide significant improvements to operations.  The processes and systems under development are expected to be deployed beginning in the third quarter of 2007, with additional deployments scheduled through 2008.  While the operational benefits vary by each project, the Company expects to realize meaningful improvements to its operating environment during the second half of 2007.  The Company is also taking current steps to improve the interim processes and systems to address the increase in service activation times and expects to see improvement in our operations over the course of the third and fourth quarter of 2007.

Level 3 has embarked on a strategy to expand its current metro presence. The strategy will allow the Company to increasingly terminate traffic over its owned metro facilities rather than paying third parties to terminate the traffic. Level 3’s ability to provide high-speed bandwidth directly to customer facilities is expected to be a competitive advantage.  The Company intends to offer a broad range of services in these markets and concentrate its sales efforts on bandwidth intensive businesses. The expansion into new metro markets should also provide additional opportunities to sell services on the Company’s national and international networks. This new metro strategy includes the acquisitions of Progress Telecom, ICG Communications, TelCove and Looking Glass. As part of its metro strategy, and as a result of the acquisition of TelCove in the third quarter of 2006 and Broadwing in the first quarter of 2007, the Company is also targeting enterprise customers directly through its recently created Business Markets Group described in more detail below. With the acquisition of the CDN Business in the first quarter of 2007 and Servecast Ltd in July 2007, Level 3 embarked on a strategy to expand its CDN services.

The anticipated change in the composition of the Company’s revenue will require the Company to manage operating expenses carefully and concentrate its capital expenditures on those technologies and assets that will enable the Company to develop its Core Communications Services further and replace the decline in revenue and earnings from Other Communications Services and SBC Contract Services.

In the third quarter of 2006, Level 3 announced the formation of four customer-facing groups to better serve the changing needs of customers in growing markets and drive growth across the organization:

·The Wholesale Markets Group services the communications needs of large national and global service providers, including carriers, cable companies, wireless companies, and voice service providers. These customers typically integrate Level 3 services into their own products and services to offer to their end user customers. Revenue from the Wholesale Markets Group represented 56% and 57% of Core Communications revenue for the three and six months ended June 30, 2007, respectively.

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

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Markets Group represented 27% and 26% of Core Communications revenue for the three and six months ended June 30, 2007, respectively.

·The Content Markets Group focuses on serving media and content companies with large and growing bandwidth needs. Customers in this market include video distribution companies, providers of gaming, mega-portals, software service providers, social networking providers, as well as more traditional media distribution companies such as broadcasters, television networks and sports leagues. Revenue from the Content Markets Group represented 10% of Core Communications revenue for both the three and six months ended June 30, 2007.

·The European Markets Group serves large European consumers of bandwidth, including the European and international carriers, large system integrators, voice service providers, cable operators, Internet service providers, content providers, and government and education sectors. Revenue from the European Markets Group represented 7% of Core Communications revenue for both the three and six months ended June 30, 2007.

The Company believes that the alignment around customer markets should allow it to drive growth while enabling it to better focus on the needs of the customers. Each group is supported by the dedicated sales, marketing, service management, customer facing operations, and necessary support resources required to execute and increase revenue in these key markets.

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

In January 2007, in two separate transactions, the Company completed the exchange of $605 million of outstanding principal of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3’s common stock.  The Company recognized a $177 million loss on the exchanges in the first quarter of 2007.

In February 2007, Level 3 Financing, Inc., a wholly owned subsidiary of Level 3 (“Level 3 Financing”) issued $700 million of its 8.75% Senior Notes due 2017 and $300 million of its Floating Rate Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt and to fund the cost of construction, installation, acquisition, lease, development or improvement of other assets to be used in Level 3’s communications business.

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

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

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

·$96 million of 11.25% Senior Notes due 2010 at a price equal to 101.875 of the principal amount.

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

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

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

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

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

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

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

In the first quarter, for total cash consideration of $106 million and equity consideration of 17 million shares of common stock (valued at $97 million) all of Broadwing’s outstanding $180 million aggregate principal amount of 3.125% Convertible Senior Debentures due 2026 were retired.  These debentures were issued by Broadwing prior to Level 3’s acquisition of Broadwing on January 3, 2007.  There was no gain or loss recognized due to the fact that, under purchase accounting, the liability for the notes was valued at the total cost to retire the obligation.

The Company will continue to look for opportunities to improve its financial position in 2007 and focus its resources on growing revenue and managing costs for the communications business.

Information Services

The Company completed the disposition of its remaining subsidiary in the information services business, Software Spectrum, Inc. on September 7, 2006.  The results of operations and financial position for Software Spectrum, Inc. are reflected as discontinued operations for all periods presented in this report.

Coal Mining

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

Critical Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2006 appropriately represent, in all material respects, the current status of the Company’s critical accounting policies, and are incorporated herein by reference.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN No. 48”), which was effective for Level 3 starting January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN No. 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods and disclosure. The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations. The adoption of FIN No. 48 did not have an effect on the Company’s consolidated results of operations or financial condition for the three and six months ended and as of June 30, 2007.

In June 2006, the FASB ratified the consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF No. 06-3”), which was effective for Level 3 starting January 1, 2007.  The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies”. If such taxes are significant and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company currently records USF contributions on a gross basis in its consolidated statements of operations, but records sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. Communications revenue on the consolidated statements of operations includes USF contributions totaling $17 million and $30 million for the three

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and six months ended June 30, 2007, respectively, and $5 million and $9 million for the three and six months ended June 30, 2006, respectively.  The adoption of EITF No. 06-3 did not have a material effect on the Company’s consolidated results of operations or financial condition for the three and six months ended and as of June 30, 2007 as the policy followed was consistent before and after adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within that fiscal year. The Company is currently assessing the potential effect that the adoption of SFAS No. 157 will have on its consolidated results of operations or financial condition.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The FASB’s stated objective in issuing this standard is as follows: “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.”  The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing whether fair value accounting is appropriate for any of its eligible items and is assessing the potential effect that the adoption of SFAS No. 159 will have on its consolidated results of operations or financial condition.

Results of Operations for the Three and Six months Ended June 30, 2007 and 2006:

	Three Months Ended								Six Months Ended
	June 30,			June 30,			Change		June 30,			June 30,			Change
(dollars in millions)	2007			2006			%		2007			2006			%
Revenue:
Communications	$	1,035		$	819		26	%	$	2,072		$	1,623		28	%
Coal mining	17			16			6	%	36			34			6	%
Total revenue	1,052			835			26	%	2,108			1,657			27	%
Costs and Expenses:
Cost of revenue (exclusive of depreciation and amortizaton shown separately below):
Communications	437			385			14	%	887			781			14	%
Coal mining	17			14			21	%	33			30			10	%
Cost of revenue	454			399			14	%	920			811			13	%
Depreciation and amortization	247			164			51	%	468			351			33	%
Selling, general and administrative	428			283			51	%	868			559			55	%
Restructuring and non-cash impairment charges	2			7			(71	)%	6			11			(45	)%
Total costs and expenses	1,131			853			33	%	2,262			1,732			31	%
Operating Loss	(79		)	(18		)	339	%	(154		)	(75		)	105	%
Other Income (Expense):
Interest income	12			16			(25	)%	33			25			32	%
Interest expense	(138		)	(170		)	(19	)%	(303		)	(320		)	(5	)%
Loss on extinguishment of debt, net	—			(55		)	(100	)%	(427		)	(28		)	1425	%
Other, net	3			4			(25	)%	4			8			(50	)%
Total other income (expense)	(123		)	(205		)	(40	)%	(693		)	(315		)	120	%
Loss from Continuing Operations Before Income Taxes	(202		)	(223		)	(9	)%	(847		)	(390		)	117	%
Income Tax Expense	—			(1		)	(100	)%	(2		)	—			—
Loss from Continuing Operations	(202		)	(224		)	(10	)%	(849		)	(390		)	118	%
Income from Discontinued Operations	—			23			(100	)%	—			21			(100	)%
Net Loss	$	(202	)	$	(201	)	0	%	$	(849	)	$	(369	)	130	%

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Communications revenue is separated into three categories:

·Core Communications Services  (including transport and infrastructure services, wholesale IP and data services, voice services and Level 3 Vyvx services)

·Other Communications Services (including managed modem and its related reciprocal compensation and legacy managed IP services)

·SBC Contract Services

Revenue attributable to these service categories is provided in the following table:

	Three Months Ended						Six Months Ended
	June 30,		June 30,		Change		June 30,		June 30,		Change
(dollars in millions)	2007		2006		%		2007		2006		%
Core Communications Services :
Transport and Infrastructure	$	420	$	217	94	%	$	826	$	415	99	%
Wholesale IP and Data	143		67		113	%	287		131		119	%
Voice	292		107		173	%	581		205		183	%
Level 3 Vyvx	33		30		10	%	64		59		8	%
	888		421		111	%	1,758		810		117	%
Other Communications Services:
Managed Modem	46		77		(40	)%	100		156		(36	)%
Reciprocal Compensation	19		28		(32	)%	42		54		(22	)%
Managed IP	6		15		(60	)%	13		33		(61	)%
	71		120		(41	)%	155		243		(36	)%
SBC Contract Services	76		278		(73	)%	159		570		(72	)%
Total Communications Revenue	$	1,035	$	819	26	%	$	2,072	$	1,623	28	%

Communications Revenue for the Three Months Ended June 30, 2007 and 2006:

The 111% increase in Core Communications Services revenue in the second quarter of 2007 compared to the second quarter of 2006 is due to growth in the Company’s revenue from existing services as well as revenue from the TelCove, Looking Glass, Broadwing and CDN Business acquisitions.  The Company purchased Progress Telecom in March 2006, ICG Communications in May 2006, TelCove in July 2006 and Looking Glass in August 2006.  In January 2007, the Company purchased Broadwing and the CDN Business. During 2006 and the first half of 2007, the Company integrated the operations of WilTel, Progress Telecom, ICG Communications, TelCove, Looking Glass, Broadwing and the CDN business into the Level 3 business. As a result, separate revenue information for these acquired companies is no longer reported other than for the SBC Contract Services revenue acquired from WilTel.

As described earlier, the growth in Core Communications Services revenue was lower than expected during the second quarter of 2007 as a result of an increase in service activation times.  The increased service activation times were a result of continuing to use the multiple order entry and provisioning processes and systems that were operated by the acquired companies. The Company is currently taking steps to improve the interim processes and systems to address the increase in service activation times and expects to see improvement in our operations over the course of the third and fourth quarter of 2007 that will result in increased growth in Core Communications Services revenue.

Transport and infrastructure revenue increased 94% in the second quarter of 2007 compared to the second quarter of 2006. The increase was primarily due to the acquisitions of ICG Communications, TelCove, Looking Glass and Broadwing as well as growth from existing services.  In addition, increased demand in the cable and carrier market segments for complex nationwide solutions and colocation capacity in large markets contributed to the revenue growth in the second quarter of 2007 compared to the same period last year.

Wholesale IP and data revenue increased 113% in the second quarter of 2007 compared to the second quarter of 2006.  The increase was primarily due to customers obtained in the acquisitions of ICG Communications, TelCove and Looking Glass in 2006 and the acquisition of Broadwing in January 2007. Wholesale IP and data revenue also increased due to traffic growth in North America from new and existing customers that exceeded the rate of price compression experienced in the second  quarter of 2007.  During the second quarter of 2007, the Company also implemented new, reduced pricing under the terms of a contract renewal for its largest wholesale IP and data customer which reduced the level of wholesale IP and data revenue

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growth in the second quarter of 2007. Continued revenue growth in the Company’s VPN service also contributed to the increase in wholesale IP and data revenue during the second quarter of 2007.

Level 3’s voice revenue increased 173% in the second quarter of 2007 compared to the second quarter of 2006. The increase is primarily attributable to the operations acquired in the TelCove, ICG Communications and Broadwing acquisitions, particularly domestic and international voice termination services, and growth in Level 3’s existing wholesale and VoIP-related services including voice termination, local inbound, enhanced local and toll free services. The growth in voice revenue during the second quarter of 2007 was lower than expected due to longer than expected customer activation times and lower than expected wholesale voice revenues. Voice revenues for the second quarter of 2007 and 2006 include $6 million and less than $1 million of reciprocal compensation, respectively.

Level 3 Vyvx revenue increased 10% in the second quarter of 2007 compared to the second quarter of 2006.  The increase was a result of the continued demand for high-definition broadcast services in sports, news and entertainment.

Core Communications Services revenue for the second quarter of 2007 and 2006 includes $2 million and $1 million in termination revenue, respectively. The Company expects to recognize termination revenue in the future if customers desire to renegotiate contracts or are required to terminate service. The Company is not able to estimate the specific value of these types of transactions until they occur, but does not currently expect to recognize significant termination revenue for the foreseeable future. The Company expects growth in Core Communications Services revenue to accelerate during the third and fourth quarters of 2007 as a result of the Broadwing and CDN Business acquisitions completed in January 2007, expected increases in demand for the Company’s Core Communications Services and improvement in customer activation times.

Managed modem revenue declined 40% to $46 million in the second quarter of 2007 compared to the same period in 2006 as a result of the continued migration from narrow band dial-up services to higher speed broadband services by end user customers. This change has resulted in a decline in the demand for managed modem ports. America Online, the Company’s largest managed modem customer, continued to reduce the number of ports it purchases from Level 3 at an accelerated rate in the second quarter of 2007.  In addition to the port cancellation provisions, the contracts with America Online contain market-pricing provisions that have the effect of lowering revenue as Level 3 is obligated to provide America Online a reduced per port rate if Level 3 offers another customer better pricing for a lower volume of comparable services. The declines in managed modem revenue from America Online have been partially offset by increases in market share as a result of certain competitors exiting segments of the managed modem business in the second half of 2006 and the first quarter of 2007. The Company expects managed modem revenue to continue to decline in the future primarily due to an increase in the number of subscribers migrating to broadband services and potential pricing concessions as contracts are renewed.

Reciprocal compensation revenue from managed modem services declined 32% to $19 million in the second quarter of 2007 compared to the second quarter of 2006 as a result of the continuing decline in demand for managed modem services. The Company has historically earned the majority of its reciprocal compensation revenue from managed modem services. Level 3 has interconnection agreements in place for the majority of traffic subject to reciprocal compensation. The majority of the Company’s interconnection agreements provide rate structures through 2007. Level 3 continues to negotiate new interconnection agreements or amendments to its existing interconnection agreements with its local carriers. As a result of the Company’s acquisitions of WilTel, TelCove and Broadwing, the Company has started to generate a portion of its reciprocal compensation revenue from voice services. For the full year ending December 31, 2007, up to 30% of the Company’s total reciprocal compensation revenue is expected to be earned from voice services, which are included in Core Communications Services revenue. To the extent that the Company is unable to sign new interconnection agreements or signs new agreements containing lower rates, or there is a significant decline in the Company’s managed modem dial-up business, or FCC or state regulations change such that carriers are not required to compensate other carriers for terminating ISP-bound traffic, reciprocal compensation revenue may decline significantly over time.

Managed IP services revenue declined 60% to $6 million in the second quarter of 2007 compared to the second quarter of 2006.  The Company’s legacy managed IP services business consists primarily of a business that was acquired in 2003. To date, the Company has not invested in this service and is not actively looking for new customers. The decline in revenue is attributable to the disconnection of service by existing customers. The Company expects this trend to continue through the remainder of 2007.

SBC Contract Services revenue decreased 73% to $76 million in the second quarter of 2007 compared to second quarter of 2006 as expected due to the migration of the SBC traffic to the AT&T network. The SBC Contract Services agreement was

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obtained in December 2005 as part of the WilTel acquisition. Under the terms of the agreement, SBC has gross margin purchase commitments through 2009. As of June 30, 2007, the remaining minimum gross margin commitment under the agreement to be utilized during the remainder of 2007 was approximately $10 million, and $75 million from January 2008 through the end of 2009. Additionally, the SBC Contract Services agreement provides for the payment of $50 million if certain performance criteria are met by Level 3. Level 3 earned $25 million of this amount in 2006 and is eligible to earn an additional $25 million in 2007. Of the $25 million annual amount, 50% is based on monthly performance and the remaining 50% is based on performance criteria for the full year. The Company met the required monthly performance criteria during the three and six month periods ending June 30, 2007 and 2006 and recognized approximately $3 million and $6 million of performance bonus in each period, respectively.  The Company expects SBC revenue to decline over the remainder of 2007 and beyond. However, SBC must still comply with the minimum gross margin commitments under the terms of the contract through 2009.

Communications Revenue for the Six Months Ended June 30, 2007 and 2006:

The 117% increase in Core Communications Services revenue for the six months ended June 30, 2007 compared to the same period in 2006 is due to growth in the Company’s revenue from existing services as well as revenue from the Progress, ICG Communications, TelCove, Looking Glass, Broadwing and CDN acquisitions.

Transport and infrastructure revenue increased 99% for the six months ended June 30, 2007 compared to the same period in 2006. The increase was primarily due to the acquisitions of Progress, ICG Communications, TelCove, Looking Glass and Broadwing and growth from existing services.

Wholesale IP and data revenue increased 119% for the six months ended June 30, 2007 compared to the same period in 2006.  The increase was primarily due to customers obtained in the acquisitions of Progress, ICG Communications, TelCove and Looking Glass in 2006 and the acquisition of Broadwing in January 2007. Wholesale IP and data revenue also increased due to traffic growth in North America from new and existing customers and continued revenue growth in the Company’s VPN service.

Level 3’s voice revenue increased 183% for the six months ended June 30, 2007 compared to the same period in 2006. The increase is primarily attributable to the voice product revenues from the TelCove, ICG Communications and Broadwing acquisitions and growth in Level 3’s existing wholesale voice and VoIP-related services in both North America and Europe.

Level 3 Vyvx revenue increased 8% for the six months ended June 30, 2007 compared to the same period in 2006.  The increase was a result of the continued demand for high-definition broadcast services in sports, news and entertainment .

Core Communications Services revenue for the six months ended June 30, 2007 and 2006 includes $2 million and $1 million of termination revenue, respectively.

Managed modem revenue declined 36% to $100 million for the six months ended June 30, 2007 compared to the same period in 2006 as a result of the continued migration from narrow band dial-up services to higher speed broadband services by end user customers. As discussed earlier, America Online continued to reduce the number of ports it purchased from Level 3.

Reciprocal compensation revenue from managed modem services declined 22% to $42 million for the six months ended June 30, 2007 compared to the same period in 2006 as a result of the continuing decline in demand for managed modem services.

Managed IP services revenue declined 61% to $13 million for the six months ended June 30, 2007 compared to the same period in 2006.  As discussed earlier, to date the Company has not invested in this service and the decline in revenue is attributable to the disconnection of service by existing customers.

SBC Contract Services revenue decreased 72% to $159 million for the six months ended June 30, 2007 compared to the same period in 2006 as expected due to the migration of the SBC traffic to the AT&T network as described above.

Coal mining revenue increased 6% to $17 million in the second quarter of 2007 compared to the second quarter of 2006.   The increase was primarily due to overall higher selling prices at each mine combined with a small increase in sales from higher priced contracts and slightly greater overall volume from each mine.  For the six months ended June 30, 2007 coal revenue increased 6% to $36 million compared to the same period in 2006.  The increase was attributable to higher average selling prices at each mine.

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Cost of Revenue for the communications business, as a percentage of revenue, for the second quarter of 2007 and the second quarter of 2006 was 42% and 47%, respectively. The decrease in second quarter 2007 cost of revenue, as a percentage of revenue, is primarily attributable to the continued decrease in SBC Contract Services revenue from the second quarter of 2006 to the second quarter of 2007. The margins for SBC Contract Services revenue are lower than the margins earned on other components included in Core and Other Communications Services revenue. Also contributing to the decrease in second quarter 2007 cost of revenue, as a percentage of revenue, is cost of revenue synergy savings that have been achieved as a result of acquisition integration efforts.  The Company believes that cost of revenue synergy savings of $60 million on an annualized basis have been achieved through the end of the second quarter of 2007.

Communications cost of revenue, as a percentage of revenue, for the six months ended June 30, 2007 and 2006 was 43% and 48%, respectively.  The decrease is primarily due to the reduction in SBC Contract Services revenue and the impact of cost of revenue synergies achieved in the first six months of 2007 as described above.

Offsetting the decrease in cost of revenue, as a percentage of revenue, for both the three and six month periods ending June 30, 2007 was higher cost of revenue services from the Broadwing acquisition. Overall, the Company expects cost of revenue, as a percentage of revenue, to decline during the third and fourth quarters of 2007 and on an overall basis for 2007 as the lower margin revenue under SBC Contract Services continues to decline and as the Company realizes the expected additional cost of revenue synergies from the acquisitions during the second half of 2007.  The Company expects that by the end of 2007, cost of revenue, as a percentage of revenue, will decline to approximately 40%.

Coal mining cost of revenue, as a percentage of revenue, increased to 100% for the second quarter of 2007 compared to 88% in the second quarter of 2006 and increased to 92% for the six months ended June 30, 2007 compared to 88% for the six months ended June 30, 2006.  The increase in cost of revenue, as a percentage of revenue, for each time period was due to planned maintenance on a dragline at one mine that was started in June 2007.  Additionally, one mine experienced higher costs related to overburden removal.

Depreciation and Amortization expense increased 51% to $247 million for the second quarter of 2007 compared to the second quarter of 2006.  The increase is primarily attributable to the increased depreciation and amortization expense recognized on communications tangible and intangible assets that were acquired through acquisitions completed in 2006 and 2007, as well as depreciation expense on the approximately $97 million increase in capital expenditures for the second quarter of 2007 compared to the second quarter of 2006.

In addition, during the second quarter of 2007, the Company reviewed and adjusted the estimated useful lives used for amortization of customer-related intangible assets for the ICG Communications, TelCove, Looking Glass and Broadwing acquisitions effective June 1, 2007. This resulted in increased amortization expense for the second quarter of 2007 totaling approximately $2 million.  Also during the second quarter of 2007, the Company recorded increased amortization expense of approximately $7 million related to the intangible assets for the CDN Business acquisition as a result of changes in the purchase price allocation.

Depreciation and amortization expense for the six months ended June 30, 2007 increased 33% to $468 million compared to the same period in 2006.  The increase is primarily attributable to the transactions and factors described above for the second quarter.  The increase in depreciation expense for the six months ended June 30, 2007 was partially offset by a $44 million decrease in depreciation expense compared to the six months ended June 30, 2006 attributable to the increase in estimated useful lives for network fiber and IP and transmission equipment implemented in the second and third quarters of 2006.

Due to the acquisitions completed in 2006 and 2007, the increased capital expenditures expected in the second half of 2007 compared to the same period in 2006 and the changes in intangible asset amortization expense described above, the Company expects depreciation and amortization expenses for the remainder of 2007 to be higher compared to the depreciation and amortization expense recognized in the same periods in 2006 and the first six months of 2007.

Selling, General and Administrative expenses increased 51% to $428 million in the second quarter of 2007 compared to the second quarter of 2006. This increase is primarily attributable to the inclusion of expenses associated with the operations acquired in the ICG Communications, TelCove and Looking Glass transactions in 2006 and the Broadwing and CDN Business transactions in January 2007. Specifically, increases in compensation, bonus and employee related costs, network related costs and facility-based expenses all contributed to the increase in selling, general and administrative expenses in the second quarter of 2007.

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Included in selling, general and administrative expenses for the second quarter of 2007 and 2006 were $24 million and $20 million, respectively, of non-cash compensation expenses related to grants of outperform stock options and other stock-based compensation awards.  Included in the second quarter 2006 non-cash compensation expense of $20 million was $6 million related to the revaluation of the October 2005 and January 2006 grants using May 15, 2006 as the revised grant date, in accordance with SFAS No. 123R. As stated in the Company’s proxy materials for its 2006 Annual Meeting of Stockholders, over the course of the years since April 1, 1998, the compensation committee of the Company’s Board of Directors had administered the 1995 Stock Plan under the belief that the action of the Company’s Board of Directors to amend and restate that plan effective April 1, 1998 had the effect of extending the original term of the Plan to April 1, 2008.  After a further review of the terms of the plan, however, the compensation committee determined that an ambiguity could exist as to the date of the expiration of the plan. To remove any ambiguity, the Board of Directors sought the approval of the Company’s stockholders to amend the plan to extend the term of the plan by five years to September 25, 2010.  This approval was obtained at the 2006 Annual Meeting of Stockholders held on May 15, 2006.

After taking into account the $6 million impact of the grants revalued using a May 15, 2006 grant date as discussed above, non-cash compensation increased $10 million from the second quarter of 2006 to the second quarter of 2007. The higher non-cash compensation expense recognized in the second quarter of 2007 is due to an increase in the value of the outperform stock options and restricted stock units associated with the increasing price of the Level 3 common stock over the course of 2006 and the increased number of restricted stock units and outperform stock options granted to employees in prior quarters.

As part of a comprehensive review of its long-term compensation program completed in the first quarter of 2007, beginning on April 1, 2007, OSO units are awarded monthly to employees in mid-management level and higher positions, have a three year life, will vest 100% on the third anniversary of the date of the award and will fully settle on that date. OSO units awarded beginning April 1, 2007 are valued as of the first day of each month. Recipients have no discretion on the timing to exercise OSO units granted on or after April 1, 2007, thus the expected life of all such OSO units is three years.

During the second quarter of 2007, the Company began issuing restricted stock units and outperform stock options to eligible employees again. There were no grants made to eligible employees in the first quarter of 2007.  The outperform stock options and restricted stock units granted in the second quarter of 2007 included the shares that would have normally been issued to eligible employees in the first quarter of 2007.

Selling, general and administrative expenses increased 55% to $868 million for the six months ended June 30, 2007 compared to the same period in 2006.  This increase is primarily attributable to the factors described above. Selling, general and administrative expenses for the first quarter of 2006 included a $7 million property tax benefit related to the Company’s facilities in the United Kingdom.

Included in operating expenses for the first half of 2007 and 2006 were $48 million and $34 million, respectively, of non-cash compensation expense related to grants of outperform stock options and restricted stock units.  The increase in non-cash compensation expense for the period is primarily due to the factors described above.

The Company expects selling, general and administrative expenses to increase in 2007 on an overall basis compared to 2006 as a result of the inclusion of a full year of expenses for the 2006 acquisitions of Progress Telecom, ICG Communications, TelCove and Looking Glass and the inclusion of nearly a full year of expenses for the January 2007 acquisitions of Broadwing and the CDN Business. The Company expects that in the second half of 2007 the savings from integration synergies from the Broadwing acquisition will result in reduced selling, general and administrative expenses as compared to the first half of 2007.

Restructuring and Impairment Charges declined 71% to $2 million in the second quarter of 2007 compared to the second quarter of 2006. The Company recognized severance charges of $1 million and $3 million in the second quarter of 2007 and 2006, respectively, related to workforce reductions in the communications business in North America. The employees affected by the workforce reductions in the second quarter of 2007 were both legacy Level 3 and legacy WilTel employees impacted by the integration of companies acquired by Level 3 in 2006 and January 2007.

The Company recognized non-cash impairment charges of $1 million and $4 million in the second quarter of 2007 and 2006, respectively.  The non-cash impairment charge of $1 million in the second quarter of 2007 was primarily related to previously capitalized costs of certain information technology development projects no longer used by the Company. The non-cash impairment charge of $4 million in the second quarter of 2006 was primarily related to excess land of the

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communications business deemed available for sale in Germany.  This charge resulted from the difference between the recorded carrying value and the estimated market value of the land.

Restructuring and impairment charges declined 45% to $6 million for the six months ended June 30, 2007 compared to the same period in 2006.  The Company recognized severance charges of $5 million and $4 million for the first six months of 2007 and 2006, respectively, related to workforce reductions in the communications business in North America as a result of integration of acquired companies.

The Company recognized non-cash impairment charges of $1 million and $7 million for the six months ended June 30, 2007 and 2006, respectively.  The non-cash impairment charge of $1 million in the first six months of 2007 was primarily related to previously capitalized costs of certain information technology development projects no longer used by the Company. The non-cash impairment charge of $7 million in the six months ended June 30, 2006 was primarily related to excess land of the communications business deemed available for sale in Germany and the decision to terminate projects for certain voice services and information technology projects in the communications business.  The costs incurred for these projects, including capitalized labor, were impaired as the Company did not expect to utilize the assets in the future.

The Company expects to continue to record restructuring charges during the remainder of 2007 in connection with the integration of the metro network businesses acquired in 2006 and the Broadwing acquisition completed in January 2007.

The Company continues to periodically conduct comprehensive reviews of the long-lived assets of its businesses, specifically communication assets deployed along its intercity and metro networks and in its gateway facilities.  It is possible that assets may be identified as impaired and impairment charges may be recorded to reflect the realizable value of these assets in future periods.

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

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

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

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

Note 14 of the consolidated financial statements provides a reconciliation of Adjusted EBITDA for each of the Company’s operating segments.

Adjusted EBITDA for the communications business was $194 million and $170 million for the second quarter of 2007 and 2006, respectively. The increase is primarily attributable to the Adjusted EBITDA contribution from the operations acquired

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in the ICG Communications, TelCove, Looking Glass, Broadwing and CDN Business transactions, growth in the Company’s Core Communications Services revenue and the benefits of cost of revenue and operating expense synergies realized in the second quarter of 2007 from integration activities, partially offset by declines in other communications services revenue, SBC contract services revenue and costs of integration incurred during the second quarter of 2007 as compared to the second quarter of 2006.

Adjusted EBITDA for the communications business was $362 million and $317 million for the six months ended June 30, 2007 and 2006, respectively.  The increase is primarily due to the factors described above.

Adjusted EBITDA for the Company’s mining and other businesses ranged from negative $1 million to $1 million for each of the three and six month periods ended June 30, 2007 and 2006 and did not have a significant impact on the Company’s operations.

The Company expects Adjusted EBITDA to increase in the third and fourth quarter of 2007 compared to the same periods in 2006 based on the following:

·Inclusion of a full year of results for Progress Telecom, ICG Communications, TelCove and Looking Glass acquisitions.

·Inclusion of the results of the January 2007 acquisitions of Broadwing and the CDN Business.

·Continued growth in Core Communications Services.

·The benefit of integration synergies from the Broadwing acquisition which are expected to result in reduced cost of revenue and reduced selling, general and administrative expenses in the second half of 2007.

·Reduction in integration costs in the second half of 2007.

Interest Income decreased 25% to $12 million in the second quarter of 2007 compared to the second quarter of 2006. The decrease in interest income was due to a decrease in the average invested balance partially offset by an increase in the average return on the portfolio.  The Company’s average return on its portfolio increased to 5.1% in the second quarter of 2007 compared to 4.3% in the second quarter of 2006. The average portfolio balance decreased to $948 million in the second quarter of 2007 compared to $1.650 billion in second quarter of 2006.

Interest income increased 32% to $33 million for the six months ended June 30, 2007 compared to the same period in 2006.  The $8 million increase was due primarily to an increase in the average return on the portfolio.  The average invested balance was approximately the same during both periods.  The Company’s average return on its portfolio increased to 5.0% in the first half of 2007 compared to 4.0% in the first half of 2006. The average portfolio balance during both periods was approximately $1.3 billion. Pending utilization of cash and cash equivalents, the Company invests its funds primarily in government and government agency securities and money market funds. The investment strategy generally provides lower yields on the funds than on alternative investments, but reduces the risk to principal in the short term prior to these funds being used in the Company’s business.

Interest Expense decreased 19% to $138 million in the second quarter of 2007 compared to the second quarter of 2006. Interest expense decreased primarily as a result of offsetting interest expense impacts attributable to the following debt issuances, debt for equity exchanges, debt redemptions and debt repurchases transactions:

Interest expense increased as a result of the following debt issuances:

·$335 million of 3.5% Convertible Senior Notes due 2012 issued in June 2006.

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

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

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

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

·$497 million of 10.75% Senior Notes due 2011 repurchased in December 2006.

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

·$488 million of 12.875% Senior Notes due 2010 redeemed in March 2007.

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

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

·$144 million of Floating Rate Notes due 2011 repurchased in March 2007.

·$59 million of 11% Senior Notes due 2008 repurchased in March 2007.

·$677 million of 11.5% Senior Notes due 2010 repurchased in March 2007.

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

Interest expense decreased 5% to $303 million for the six months ended June 30, 2007 compared to the same period in 2006. The decrease in interest expense of $17 million is due primarily to the debt transactions described above.

Level 3 expects interest expense to decrease during the second half of 2007 compared to the first half of 2007 based on the overall net effect of the 2006 and 2007 financing transactions described above.

Loss on Extinguishment of Debt was less than $1 million for the second quarter of 2007 compared to $55 million for the second quarter of 2006.  The second quarter 2006 loss on extinguishment of debt was a result of the $55 million loss realized on the amendment and restatement of the Company’s senior secured credit agreement due 2011 completed in June 2006.

Loss on extinguishment of debt was $427 million and $28 million for the six months ended June 30, 2007 and 2006, respectively.  The loss on extinguishment of debt for the six months ended June 30, 2006 was the result of a $27 million gain on a first quarter 2006 debt exchange transaction, offset by a $55 million loss realized on the amendment and restatement of the Company’s senior secured credit agreement due 2011 described above.  The loss on extinguishment of debt for the six months ended June 30, 2007 consisted of the following:

·$177 million loss recognized for the January 2007 exchange of $605 million of 10% Convertible Senior Notes due 2011 for approximately 197 million shares of the Company’s common stock. The loss included $1 million of unamortized debt issuance costs.

·$10 million loss recognized for the March 2007 refinancing of the Company’s $730 million Senior Secured Term Loan due 2011 into a $1.4 billion Senior Secured Term Loan due 2014.  The loss consisted of unamortized debt issuance costs associated with the previous $730 million Senior Secured Term Loan due 2011.

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

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

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

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

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

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

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

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

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

The Company may enter into additional transactions in 2007 to repurchase or exchange existing debt that may result in gains or losses on the extinguishment of debt.

Other, net decreased 25% to $3 million in the second quarter of 2007 compared to the second quarter of 2006.  Other, net decreased 50% to $4 million for the six months ended June 30, 2007 compared to the same period in 2006.  Other, net is primarily comprised of gains and losses on the sale of marketable securities and non-operating assets, realized foreign currency gains and losses and other income.

Income Tax Expense was less than $1 million and $1 million for the second quarter of 2007 and 2006, respectively.  Income tax expense was $2 million and less than $1 million for the six months ended June 30, 2007 and 2006, respectively.  The Company incurs income tax expense attributable to income in various Level 3 subsidiaries, including Coal, that are required to file state or foreign income tax returns on a separate legal entity basis.  The Company also recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Income from Discontinued Operations in the three and six months ended June 30, 2006 was related to the discontinued operations of the Company’s Information Services segment.  The Company sold Software Spectrum, Inc. to Insight Enterprises, Inc. in September 2006.  There were no gains or losses from discontinued operations recognized in the first half of 2007 and Software Spectrum, Inc.’s results of operations for the three and six months ended June 30, 2006 resulted in income from discontinued operations of $23 million and $21 million, respectively.

Financial Condition—June 30, 2007

Cash flows provided by (used in) operating activities of continuing operations, investing activities and financing activities for the six months ended June 30, 2007 and 2006, respectively are summarized as follows (dollars in millions):

	Six Months Ended
	June 30,			June 30,
(dollars in millions)	2007			2006			Change
Net Cash (Used in) Provided by Operating Activities of Continuing Operations	$	(64	)	$	53		$	(117	)
Net Cash Used in Investing Activities	(644		)	(314		)	(330		)
Net Cash (Used in) Provided by Financing Activities	(239		)	1,446			(1,685		)
Net Cash Provided by Discontinued Operations	—			14			(14		)
Effect of Exchange Rates on Cash	5			7			(2		)
Net Change in Cash and Cash Equivalents	$	(942	)	$	1,206		$	(2,148	)

Operating Activities of Continuing Operations

Cash used in operating activities of continuing operations increased by $117 million in the six months ended June 30, 2007 compared to the same period in 2006.  The increase in the use of cash was primarily due to fluctuations in working capital balances which resulted in an incremental use of cash of $122 million compared to the same period in 2006.  The increase in cash used in operating activities is primarily due to the changes in accounts receivable, accounts payable and other current liabilities, partially offset by an increase in deferred revenue.  The Company expects that changes in working capital will be a source of cash in the third and fourth quarters of 2007.

Investing Activities

Cash used in investing activities increased by $330 million in the six months ended June 30, 2007 compared to the same period in 2006.  The increase in the use of cash was primarily due to the cash used for the acquisitions of Broadwing of $489 million (net of cash acquired of $257 million) and the CDN business of $133 million. In addition, capital expenditures increased $194 million from $131 million in the first six months of 2006 to $325 million in the first six months of 2007.  The increase in capital expenditures was related to new customer installations and integration activities in the communications

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business. During the first six months of 2007, $288 million of marketable securities held by the Company matured and restricted securities decreased by $13 million. During the first half of 2006, the Company purchased marketable securities totaling $98 million.

Financing Activities

Cash provided by financing activities decreased $1.685 billion to a $239 million use of cash in the six months ended June 30, 2007 compared to the same period in 2006.  Included in cash flows from financing activities is $2.352 billion of net proceeds from the issuance of:

·$300 million of Floating Rate Senior Notes due 2015 in February 2007.

·$700 million of 8.75% Senior Notes due 2017 in February 2007.

·$1.4 billion Senior Secured Credit Facility due 2014 in March 2007.

The Company used proceeds from these offerings along with cash on hand to retire or refinance approximately $2.497 billion aggregate principal amount of debt.  Total cash consideration paid to retire or refinance this debt was $2.615 billion.  The Company also issued approximately 214 million shares of its common stock, valued at $879 million, to retire $702 million of debt. Financing activities also include proceeds of $24 million from the exercise of warrants associated with the Broadwing transaction and other equity-based instruments.  During the first half of 2006, the Company raised $543 million in net proceeds from an equity offering, raised $1.007 billion in net proceeds from long-term debt offerings and repaid $104 million of debt.

Liquidity and Capital Resources

The Company incurred operating losses from continuing operations of $79 million and $154 million for the three and six months ended June 30, 2007, respectively.  The Company used $141 million and $389 million of cash for operating activities and capital expenditures for the three and six months ended June 30, 2007. This compared to operating losses from continuing operations of $18 million and $75 million for the three and six months ended June 30, 2006.  The Company used $13 million and $78 million of cash for operating activities and capital expenditures for the three and six months ended June 30, 2006.  The Company expects that the communications business will continue to consume cash in 2007.  However, the amount of cash consumed is expected to decline during the third and fourth quarters of 2007 based on expected growth in core communications services revenue and the benefit from cost of revenue and operating expense synergies.

For the remainder of 2007, the Company expects its costs will continue to exceed revenue and it will continue to consume cash primarily due to interest payments and capital expenditures. The Company expects Adjusted EBITDA to improve in the third and fourth quarters of 2007 primarily as a result of the synergies and integration activities associated with prior period acquisitions and the 2007 acquisitions of Broadwing and the CDN business, as well as growth in Core Communications Services revenue that is expected to be partially offset by reductions in Other Communications and SBC Contract Services revenue.  Interest payments are expected to decrease in the second half of 2007 compared to the first half of 2007 based on financing and other capital markets transactions completed through June 30, 2007. Capital expenditures for 2007 are expected to range from $600 million to $650 million and will consist of $100 million to $150 million of base capital expenditures (estimated capital required to keep the network operating efficiently and product development), approximately $75 million to $100 million of capital expenditures for integration and approximately $400 million to $425 million of success-based capital expenditures associated with incremental revenue. The majority of the Company’s ongoing capital expenditures are expected to be success-based, or tied to incremental revenue. The Company does not have any significant principal amounts due on its outstanding debt until 2010. As of June 30, 2007, the Company had debt of $31 million and $366 million that matures in 2008 and 2009, respectively.

Level 3 has approximately $807 million of cash, cash equivalents and marketable securities on hand at June 30, 2007. In addition, $120 million of current and non-current restricted securities are used to collateralize outstanding letters of credit, long-term debt, certain operating obligations of the Company or certain reclamation liabilities associated with the coal business. Based on information available at this time, management of the Company believes that the Company’s current liquidity and anticipated future cash flows from operations will be sufficient to fund its business.

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The Company may elect to secure additional capital in the future, at acceptable terms, to improve its liquidity or fund acquisitions. In addition, in an effort to reduce future cash interest payments, as well as future amounts due at maturity or to extend debt maturities, Level 3 or its affiliates may, from time to time, issue new debt, enter into debt for debt, debt for equity or cash transactions to purchase its outstanding debt securities in the open market or through privately negotiated transactions. Level 3 will evaluate any such transactions in light of then existing market conditions and the possible dilutive effect to stockholders. The amounts involved in any such transaction, individually or in the aggregate, may be material.

In January 2007, in two separate transactions, the Company completed the exchange of $605 million of its 10% Convertible Senior Notes due 2011 for a total of 197 million shares of Level 3’s common stock.  The Company recognized a $177 million loss on the exchanges in the first quarter of 2007.

In February 2007, Level 3 Financing issued $700 million of its 8.75% Senior Notes due 2017 and $300 million of its Floating Rate Senior Notes due 2015 and received net proceeds of $982 million. The proceeds from these private offerings were used to refinance certain Level 3 Financing debt and to fund the cost of construction, installation, acquisition, lease, development or improvement of other assets to be used in Level 3’s communications business.

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

During the first quarter of 2007, the Company redeemed the outstanding principal amount of the following debt issuances totaling $722 million:

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

·$96 million of 11.25% Senior Notes due 2010 at a price equal to 101.875 of the principal amount.

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

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

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

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

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

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

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

In the first quarter, for total cash consideration of $106 million and equity consideration of 17 million shares of common stock (valued at $97 million) all of Broadwing’s outstanding $180 million aggregate principal amount of 3.125% Convertible Senior Debentures due 2026 were retired.  These debentures were issued by Broadwing prior to Level 3’s acquisition of Broadwing on January 3, 2007.  There was no gain or loss recognized due to the fact that under purchase accounting, the liability for the notes was valued at the total cost to retire the obligation.

In addition to raising capital through the debt and equity markets, the Company may sell or dispose of existing businesses, investments or other non-core assets. In 2005 and 2006, the Company completed the sale of its two businesses that comprised

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its Information Services segment for total cash proceeds of $433 million and common stock from one of the purchasers valued at $3 million.

The communications industry continues to consolidate. Level 3 has participated in this process with the acquisitions of several companies in 2006, as well as Broadwing and the CDN Business in the first quarter of 2007. Level 3 will continue to evaluate consolidation opportunities and could make additional acquisitions in the future.

On January 3, 2007, Level 3 acquired Broadwing, a publicly held provider of optical network communications services. Under the terms of the merger agreement dated October 16, 2006, Level 3 paid $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing. In total, Level 3 initially paid approximately $752 million of cash (including transaction costs) and issued approximately 123 million shares of Level 3 common stock, valued at $688 million.  As part of the transaction, approximately 4 million previously issued Broadwing warrants (valued at approximately $4 million) became exercisable into approximately 5 million shares of Level 3 common stock. In the second quarter of 2007, the Company subsequently reduced the total consideration paid by $4 million for insurance proceeds received in June 2007 that related to the settlement of an insurance claim that occurred prior to acquisition.

On January 23, 2007, the Company acquired the Content Delivery Network services business of SAVVIS, Inc. Under the terms of the agreement, Level 3 paid $134 million in cash (including transaction costs) to acquire certain assets, including network elements, customer contracts, and intellectual property used in the CDN Business.

On July 11, 2007, Level 3 acquired Servecast Limited (“Servecast”), a Dublin-based provider of live and on-demand video management services for broadband and mobile platforms. Level 3 paid approximately €33 million, or approximately $45 million, in cash to complete the acquisition of Servecast.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk

Level 3 is subject to market risks arising from changes in interest rates and foreign exchange rates. As of June 30, 2007, the Company had borrowed a total of $1.7 billion primarily under a Senior Secured Term Loan due 2014 and Floating Rate Senior Notes due 2015 that bear interest at LIBOR rates plus an applicable margin. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the debt instruments. The weighted average interest rate on the variable rate instruments at June 30, 2007, was approximately 7.89%.

On March 13, 2007, Level 3 Financing entered into two interest rate swap agreements to hedge the interest payments on $1 billion notional amount of floating rate debt.  The two interest rate swap agreements are with different counterparties and are for $500 million each.  The interest rate swap agreements are effective beginning April 13, 2007 and mature on January 13, 2014.  Under the terms of the interest rate swap agreement, Level 3 receives interest payments based on rolling three month LIBOR terms and pays interest at the fixed rate of 4.93% under one arrangement and 4.9175% under the other.  Level 3 has designated the interest rate swap agreements as a cash flow hedge on the interest payments for $1 billion of floating rate debt.

For the remaining variable rate debt a hypothetical increase in the variable portion of the weighted average rate by 1% (i.e. a weighted average rate of 8.89%) would increase annual interest expense of the Company by approximately $7.0 million. At June 30, 2007, the Company had $5.1 billion (excluding discounts) of fixed rate debt bearing a weighted average interest rate of 7.84%. A decline in interest rates in the future will not benefit the Company with respect to the fixed rate debt due to the terms and conditions of the loan agreements that would require the Company to repurchase the debt at specified premiums if redeemed early.

The Company’s business plan includes operating telecommunications network businesses in Europe.  As of June 30, 2007, the Company had invested significant amounts of capital in the region for its communications business.  The Company does not make use of financial instruments to minimize its exposure to foreign currency fluctuations.

Indicated changes in interest rates are based on hypothetical movements and are not necessarily indicative of the actual results that may occur.  Future earnings and losses will be affected by actual fluctuations in interest rates and foreign currency rates.

Item 4.        Controls and Procedures

(a) Disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2007.  Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s controls and procedures are effective and are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules there under, is recorded, processed,

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summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Internal controls.  As a result of its acquisition of Progress Telecom, LLC on March 20, 2006; ICG Communications, Inc. on May 31, 2006; TelCove, Inc. on July 24, 2006; Looking Glass Networks Holding Co., Inc. on August 2, 2006; Broadwing Corporation on January 3, 2007 and the Content Delivery Network services business of SAVVIS, Inc. on January 23, 2007, Level 3 has expanded its internal controls over financial reporting to include the consolidation of the results of operations as well as acquisition related accounting and disclosures for each acquisition.  As a result of the integration activities associated with the acquisitions, the Company has also expanded its internal controls over financial reporting to include certain processes and systems of the acquired companies that were integrated during the first six months of 2007.  There were no other changes in Level 3’s internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three and six months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1         Legal Proceedings

The Company has provided an update to legal proceedings involving the Company in Note 15 of the consolidated financial statements contained in Part I, Item 1, of this Form 10-Q.  This disclosure is hereby incorporated by reference.

Item 1A      Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in Level 3’s Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in Level 3’s Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to Level 3 or that it currently deems to be immaterial also may materially adversely affect Level 3’s business, financial condition and/or operating results.  The Risk Factors included in the Company’s Form 10-K for the year ended December 31, 2006, have not materially changed other than as set forth below.

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

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

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

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

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

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

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

We had substantial deficiencies of earnings to cover fixed charges of approximately $813 million for the six months ended June 30, 2007.  We had deficiencies of earnings to cover fixed charges of $722 million for the fiscal year ended December 31, 2006, $634 million for the fiscal year ended December 31, 2005, $409 million for the fiscal year ended December 31, 2004, $681 million for the fiscal year 2003 and $936 million for the fiscal year 2002.

Level 3 may not be able to repay its existing debt; failure to do so or refinance the debt could prevent Level 3 from implementing its strategy and realizing anticipated profits.

If Level 3 were unable to refinance its debt or to raise additional capital on acceptable terms, Level 3’s ability to operate its business would be impaired. As of June 30, 2007, Level 3 had an aggregate of approximately $6.851 billion of long-term debt on a consolidated basis, excluding discount and fair value adjustments and including current maturities, and approximately $1.334 billion of stockholders’ equity. Level 3’s ability to make interest and principal payments on its debt and borrow additional funds on favorable terms depends on the future performance of the business. If Level 3 does not have enough cash flow in the future to make interest or principal payments on its debt, Level 3 may be required to refinance all or a part of its debt or to raise additional capital. Level 3 cannot assure you that it will be able to refinance its debt or raise additional capital on acceptable terms.

Item 4.        Submission of Matters to a Vote of Security Holders

At the Company’s annual meeting of stockholders held on May 24, 2007, the following matters were submitted to a vote:

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1.Election of three Class I Directors and three Class III Directors to the Board of Directors of Level 3 Communications, Inc. for a one-year term until the 2008 Annual Meeting of Stockholders:

	In Favor	Withheld
Class I Directors:
James Q Crowe	1,381,967,291	12,296,761
Robert E. Julian	1,361,704,897	32,559,155
Walter Scott, Jr.	1,372,797,457	21,466,595
Class III Directors:
Arun Netravali	1,382,706,884	11,557,168
John T. Reed	1,368,023,825	26,240,227
Michael B. Yanney	1,375,334,499	18,929,553

Each of the Class I and Class III Directors was re-elected to the Board of Directors of Level 3 Communications, Inc. for a one year term.

2.To approve the grant to the Level 3 Board of Directors of discretionary authority to amend the Company’s amended and restated Certificate of Incorporation to effect a reverse stock split at one of four ratios:

Affirmative votes	1,335,663,112
Negative votes	56,202,930
Abstain	2,398,010
Broker non-vote	—

The proposal to grant the Board of Directors of Level 3 Communications, Inc. the discretionary authority to amend the Company’s amended and restated Certificate of Incorporation to effect a reverse stock split at one of four ratios was approved.

3.To adopt a stockholder proposal to eliminate the supermajority provisions in  Level 3 Communications, Inc.’s Restated Certificate of Incorporation and By-laws:

Affirmative votes	639,138,277
Negative votes	458,624,295
Abstain	3,979,895
Broker non-vote	292,521,585

The stockholder proposal to eliminate the supermajority provisions in Level 3 Communications, Inc.’s Restated Certificate of Incorporation and By-laws was approved.

Item 6.        Exhibits

(a)Exhibits filed as part of this report are listed below.

12	Statements Re Computation of Ratios
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LEVEL 3 COMMUNICATIONS, INC.
Dated:  August 9, 2007	/s/ Eric J. Mortensen
	Eric J. Mortensen
	Senior Vice President, Controller
	and Principal Accounting Officer

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EX-12

Exhibit 12

STATEMENTS RE COMPUTATION OF RATIOS

STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS

LEVEL 3 COMMUNICATIONS, INC.

	Six Months Ended June 30,						Fiscal Year Ended
	2007			2006			2006			2005			2004			2003			2002
Loss from Continuing Operations Before Taxes	$	(847	)	$	(390	)	$	(790	)	$	(702	)	$	(477	)	$	(746	)	$	(991	)
(Earnings) Losses of Equity Investees	—			—			—			—			—			(3		)	(13		)
Interest on Debt, Net of Capitalized Interest	303			320			648			530			485			567			560
Amortization of Capitalized Interest	34			34			68			68			68			68			68
Interest Expense Portion of Rental Expense	32			17			44			25			29			31			20
Earnings (Losses) Available for Fixed Charges	$	(478	)	$	(19	)	$	(30	)	$	(79	)	$	105		$	(83	)	$	(356	)
Interest on Debt	$	303		$	320		$	648		$	530		$	485		$	567		$	560
Preferred Dividends	—			—			—			—			—			—			—
Interest Expense Portion of Rental Expense	32			17			44			25			29			31			20
Total Fixed Charges	$	335		$	337		$	692		$	555		$	514		$	598		$	580
Ratio of Earnings to Fixed Charges	—			—			—			—			—			—			—
Deficiency	$	(813	)	$	(356	)	$	(722	)	$	(634	)	$	(409	)	$	(681	)	$	(936	)

EX-31.1

Exhibit 31.1

CERTIFICATIONS*

I, James Q. Crowe, certify that:

1.I have reviewed this Form 10-Q of Level 3 Communications, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ James Q. Crowe

James Q. Crowe

Chief Executive Officer

* Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14(a) and 15d-14(a).

EX-31.2

Exhibit 31.2

CERTIFICATIONS*

I, Sunit S. Patel, certify that:

1.I have reviewed this Form 10-Q of Level 3 Communications, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ Sunit S. Patel

Sunit S. Patel

Chief Financial Officer

* Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14(a) and 15d-14(a).

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Form 10-Q of Level 3 Communications, Inc. (the “Company”) for the three and six months ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Q. Crowe, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James Q. Crowe

James Q. Crowe

Chief Executive Officer

August 9, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Form 10-Q of Level 3 Communications, Inc. (the “Company”) for the three and six months ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sunit S. Patel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Sunit S. Patel

Sunit S. Patel

Chief Financial Officer

August 9, 2007