Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries, including Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1, 2011 and including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15, 2011.

All references to "Notes" in this Item 2 refer to the Notes to Consolidated Financial Statements included in Item 1 of this quarterly report.

Certain statements in this report constitute forward-looking statements. See "Risk Factors" in Item 1A of Part II of this report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the first six months of the year are not indicative of the results of operations that might be expected for the entire year.

We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line (including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless, and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security monitoring services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.

As of June 30, 2012, we operated 14.1 million access lines in 37 states, and served 5.8 million broadband subscribers. During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include business and wholesale subscribers instead of only retail and small business subscribers. We have restated our previously reported amounts to reflect this change. Our access line methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. Our methodology also excludes unbundled loops and includes stand-alone broadband subscribers. Our methodology for counting access lines may not be comparable to those of other companies. We also operate 52 data centers throughout North America, Europe and Asia.

Our consolidated financial statements include the accounts of CenturyLink, Inc. ("CenturyLink") and its majority-owned subsidiaries. These subsidiaries include Savvis beginning July 15, 2011, and Qwest beginning April 1, 2011. For more information, see Note 2-Acquisitions. Due to the significant size of these acquisitions, direct comparisons of our results of operations for the three and six months ended June 30, 2012 to the three and six months ended June 30, 2011 are less meaningful than usual. We discuss below, under "Segment Results", certain trends that we believe are significant to the combined company.

We have recognized the assets and liabilities of Savvis based on our estimates of their acquisition date fair values. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations

in sufficient detail necessary to arrive at the final estimates of the fair value of Savvis' assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. The fair values of certain tangible assets, intangible assets, contingent liabilities and residual goodwill are the most significant areas not yet finalized and therefore are subject to change. We expect to complete our final fair value determinations no later than the third quarter of 2012. Our final fair value determinations may be significantly different than those reflected in this report.

In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively. References to "Legacy CenturyLink", when used in reference to a comparison of our consolidated results for the six months ended June 30, 2012 and 2011, mean the business we operated prior to the Qwest and Savvis acquisitions, and, when used in reference to a comparison of our consolidated results for the three months ended June 30, 2012 and 2011, mean the business we operated immediately prior to the Savvis acquisition.

We have incurred operating expenses related to our acquisition of Savvis in July 2011, Qwest in April 2011 and Embarq Corporation ("Embarq") in July 2009. These expenses are reflected in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations as summarized below.

                                         Three Months Ended
                                              June 30,            Six Months Ended June 30,
                                        2012           2011          2012            2011
                                                      (Dollars in millions)
Cost of services and products
(exclusive of depreciation and
amortization):
Integration and other expenses
associated with acquisitions             $    4             13              8             25
Severance expenses, accelerated
recognition of share-based awards
and retention compensation
associated with acquisitions                  -             13              -             15

                                         $    4             26              8             40

Selling, general and
administrative:
Integration and other expenses
associated with acquisitions             $    5            104             14            122
Severance expenses, accelerated
recognition of share-based awards
and retention compensation
associated with acquisitions                  3            136             29            139

                                         $    8            240             43            261

This table does not include costs incurred by Qwest or Savvis prior to being acquired by us. Based on current plans and information, we estimate that, in relation to our Qwest acquisition, we expect integration expenses to be less than $800 million (which includes approximately $440 million of cumulative expenses incurred through June 30, 2012) and our capital expenditures associated with integration activities will approximate $200 million (which includes approximately $50 million of cumulative capital expenditures incurred through June 30, 2012). We anticipate that the amount of our integration costs in future quarters will vary substantially based on integration activities conducted during those periods, and could in certain cases be significantly higher than those incurred by us during the three months ended June 30, 2012.

Effective April 1, 2012, in order to more effectively leverage the strategic assets from our recent acquisitions of Embarq, Qwest and Savvis to better serve our business and government customers, we restructured our business into the following operating segments:

º •
º Regional markets, which consists primarily of providing products and services to local, government, residential consumers, small to medium-sized businesses and regional enterprise customers;

º •
º Wholesale markets, which consists primarily of providing products and services to other domestic and international communications providers;

º •
º Enterprise markets-network, which consists primarily of providing network communications products and services to national and international enterprise and government customers; and

º •
º Enterprise markets-data hosting, which consists primarily of providing colocation, managed hosting and cloud services to national and international enterprise and government customers.

We report financial information separately for each of these segments; however, as described in further detail below, our segment information does not include capital expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis. As we continue to integrate our recent acquisitions, we plan to make additional changes to the way we assess performance and make decisions about allocating resources, which will likely further change our segment reporting. Our segment results are not necessarily indicative of the results of operations that our segments would have achieved had they operated as stand-alone entities during the periods presented. For additional information about our segments, see Note 9-Segment Information and "Results of Operations-Segment Results" below.

Results of Operations

    The following table summarizes the results of our consolidated operations
for the three and six months ended June 30, 2012 and 2011, presented in a manner
that we believe will be useful for understanding the relevant trends affecting
our business. Our operating results include operations of Savvis for periods
after July 15, 2011 and Qwest for periods after April 1, 2011.

                            Three Months Ended June 30,        Six Months Ended June 30,
                              2012               2011            2012             2011
                                   (Dollars in millions except per share amounts)
 Operating revenues        $      4,612              4,406           9,222            6,102
 Operating expenses               3,955              3,926           7,911            5,158

 Operating income                   657                480           1,311              944
 Other income
 (expense)                        (534)              (294)           (857)            (419)
 Income tax expense                  49                 71             180              199

 Net income                $         74                115             274              326

 EARNINGS PER COMMON
 SHARE
 Basic                     $        .12                .19             .44              .72
 Diluted                   $        .12                .19             .44              .72

The following table summarizes certain of our operational metrics:

                                    As of June 30,       Increase/
                                    2012       2011      (Decrease)     % Change
                                                  (in thousands)
          Broadband subscribers      5,763      5,519            244           4%
          Access lines              14,145     15,057          (912)         (6)%
          Employees                 47,100     48,400        (1,300)         (3)%

During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include business and wholesale subscribers instead of only retail and small business subscribers. We have restated our previously reported amounts to reflect this change.

During the last several years, we have experienced revenue declines (excluding the impact of acquisitions) primarily due to declines in access lines, intrastate access rates and minutes of use. Prior to its acquisition, Qwest had experienced similar declines in its revenues. To mitigate these declines, we remain focused on efforts to, among other things:

º •
º promote long-term relationships with our customers through bundling of integrated services;

º •
º provide new services, such as video, cloud hosting, managed hosting, colocation services and other additional services that may become available in the future due to advances in technology or improvements in our infrastructure;

º •
º provide our broadband and premium services to a higher percentage of our customers;

º •
º pursue acquisitions of additional assets if available at attractive prices;

º •
º increase usage of our networks; and

º •
º market our products and services to new customers.

We currently categorize our products, services and revenues among the following four categories:

º •
º Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and business customers who require dedicated equipment to transmit large amounts of data between sites), Multi-Protocol Label Switching ("MPLS") (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), voice over Internet Protocol ("VoIP") and Verizon Wireless services;

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

º •
º Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers; and

º •
º Other, which consists primarily of universal service fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.

The following tables summarize our operating revenues:

                            Three Months Ended June,             Increase / (Decrease)
                             2012             2011         CenturyLink       Savvis     Total
                                                 (Dollars in millions)
 Strategic services       $      2,076            1,726               72         278       350
 Legacy services                 2,100            2,280            (180)           -     (180)
 Data integration                  170              152               18           -        18
 Other                             266              248               18           -        18

 Total operating
 revenues                 $      4,612            4,406             (72)         278       206

                         Six Months Ended June,                 Increase / (Decrease)
                          2012            2011        CenturyLink     Qwest     Savvis     Total
                                                 (Dollars in millions)
 Strategic services    $     4,132           2,265             116     1,207        544     1,867
 Legacy services             4,243           3,275           (280)     1,248          -       968
 Data integration              315             183              16       116          -       132
 Other                         532             379              21       132          -       153

 Total operating
 revenues              $     9,222           6,102           (127)     2,703        544     3,120

As noted in the tables above, total operating revenues for the three months ended June 30, 2012 increased due to our acquisition of Savvis and increased for the six months ended June 30, 2012 due to our acquisitions of Qwest and Savvis. Legacy CenturyLink operating revenues decreased $72 million and $127 million during the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011. This decrease was primarily attributable to declines in legacy services revenues, principally due to the continuing loss of access lines in our markets. We believe the decline in the number of access lines was primarily due to the displacement of traditional wireline telephone services by other competitive products and services. We estimate that our access lines loss will be between 5.7% and 6.3% in 2012. Our legacy services revenues were also negatively impacted in 2012 by the continued migration of customers to bundled service offerings at lower effective rates. The decreases in our legacy services revenues were partially offset by higher revenues from strategic services revenues. Ethernet, MPLS and broadband services accounted for a majority of the growth in strategic services revenues.

Further analysis of our operating revenues by segment is provided below in "Segment Results."

Our operating expenses increased substantially for the six months ended June 30, 2012, in comparison to 2011 primarily due to our acquisitions of Qwest and Savvis.

The following tables summarize our operating expenses:

                                 Three Months Ended
                                      June 30,                   Increase / (Decrease)
                                 2012           2011       CenturyLink       Savvis     Total
                                                   (Dollars in millions)
Cost of services and
products (exclusive of
depreciation and
amortization)                   $  1,912          1,781             (12)         143       131
Selling, general and
administrative                       835            968            (207)          74     (133)
Depreciation and
amortization                       1,208          1,177             (44)          75        31

Total operating expenses        $  3,955          3,926            (263)         292        29

                      Six Months Ended June 30,                 Increase / (Decrease)
                        2012             2011         CenturyLink     Qwest     Savvis     Total
                                                (Dollars in millions)
Cost of services
and products
(exclusive of
depreciation and
amortization)        $      3,789            2,407              17     1,082        283     1,382
Selling, general
and
administrative              1,706            1,205           (125)       483        143       501
Depreciation and
amortization                2,416            1,546            (21)       741        150       870

Total operating
expenses             $      7,911            5,158           (129)     2,306        576     2,753

For the three and six months ended June 30, 2012, Legacy CenturyLink cost of services and products (exclusive of depreciation and amortization) were relatively unchanged as compared to the comparable periods in 2011. During the periods, we experienced decreases in severance and salaries and wages, which were partially offset by a paid time off accounting adjustment for Legacy Qwest union employees and increases in CPE costs, professional fees, and USF contribution rates.

Legacy CenturyLink's selling, general and administrative expenses decreased for the three and six months ended June 30, 2012 primarily due to a decrease in severance and integration expenses relating to our recent acquisitions. As discussed in the "overview" section, our selling general and administrative expenses for the three and six months ended June 30, 2011 included substantial severance and integration costs related to the Qwest acquisition. See Note 2-Acquisitions.

Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical company systems. This transition resulted in an estimated $20 million to $30 million increase in the amount of labor capitalized as an asset compared to the amount that would have been capitalized if Qwest had continued to use its legacy systems and a corresponding estimated $20 million to $30 million decrease in operating expenses for the six months ended June 30, 2012. This change is expected to result in an estimated operating expense reduction of approximately $30 million to $50 million for the year ending December 31, 2012.

Excluding the effects of the acquisitions of Qwest and Savvis, depreciation and amortization expense for Legacy CenturyLink decreased due to annual updates of our depreciation rates for capitalized assets, as partially offset by net growth in capital assets.

Further analysis of our operating expenses by segment is provided below in "Segment Results."

     Other Consolidated Results

    The following tables summarize our total other income (expense) and income
tax expense:

                             Three Months Ended June 30,          Increase / (Decrease)
                                2012             2011        CenturyLink      Savvis    Total
                                                  (Dollars in millions)
Interest expense              $    (335)            (280)              48           7       55
Net loss on early
retirement of debt                 (202)              (1)             201           -      201
Other income (expense)                 3             (13)            (17)           1     (16)

Total other income
(expense)                     $    (534)            (294)             232           8      240

Income tax expense                    49               71              nm          nm     (21)




                        Six Months Ended June 30,                Increase / (Decrease)
                          2012             2011         CenturyLink     Qwest    Savvis    Total
                                                 (Dollars in millions)
Interest expense       $      (678)            (408)               88      169        13      270
Net loss on early
retirement of debt            (194)              (1)              201      (8)         -      193
Other income
(expense)                        15             (10)             (25)      (1)         1     (25)

Total other income
(expense)              $      (857)            (419)              264      160        14      438

Income tax expense              180              199               nm       nm        nm     (18)

Interest expense increased for the three and six months ended June 30, 2012, compared to the three and six months ended June 30, 2011, primarily due to increased levels of debt and a substantial reduction in the amount of debt premium amortization. Since our acquisition of Qwest, certain of its debt securities have carried premiums, which have been retired during the six months ended June 30, 2012, causing a reduction in the amortization of those premiums. These increases were partially offset by a decrease in interest expense due to the retirement of several debt securities, which in some cases were refinanced with debt securities with lower interest rates.

In the second quarter of 2012, our subsidiaries Embarq and Qwest Corporation ("QC") completed premium-priced cash tender offers for the purchase of certain of their respective outstanding debt securities, resulting in an aggregate loss of $193 million. Also in the second quarter of 2012, Embarq and our subsidiary Qwest Communications International Inc. ("QCII") redeemed certain of their respective outstanding debt securities which resulted in a net loss of $9 million.

In the first quarter of 2012, QCII redeemed certain of its outstanding debt securities, which resulted in a gain of $8 million.

Other income (expense) reflects certain items not directly related to our core operations, including our share of income from our 49% interest in a cellular partnership, interest income, gains and losses from non-operating asset dispositions and impairments and foreign currency gains and losses. Other income (expense) was greater for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2012 primarily due to the recognition of a one-time $16 million fee paid in June 2011 relating to the acquisition of Savvis.

Income Tax Expense

Income tax expense for the six months ended June 30, 2012 and 2011 was $180 million and $199 million, respectively, or an effective tax rate of 39.7% and 37.9%, respectively.

Segment Results

    We have restated previously reported segment results due to the
above-described reorganization of our business. Segment results are summarized
below:

                              Three Months Ended June 30,      Six Months Ended June 30,
                                 2012             2011           2012             2011
                                                 (Dollars in millions)
Total segment revenues         $    4,346            4,158           8,690            5,723
Total segment expenses              2,024            1,821           4,002            2,385

Total segment income           $    2,322            2,337           4,688            3,338

Total margin percentage               53%              56%             54%              58%
Regional markets:
Revenues                       $    2,477            2,540           4,963            3,677
Expenses                            1,048            1,043           2,079            1,500

Income                         $    1,429            1,497           2,884            2,177

Margin percentage                     58%              59%             58%              59%
Wholesale markets:
Revenues                       $      944              980           1,905            1,362
Expenses                              286              304             573              401
. . .