Summary of LEVEL 3 COMMUNICATIONS INC

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 Company's Form 10-K, as amended, for the year ended December 31, 2011 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, as amended, for the year ended December 31, 2011 filed with the Securities and Exchange Commission and Item 1A in Part II of this Form 10-Q. Executive Summary
Overview
The Company is a facilities-based provider of a broad range of communications services. Revenue for communications services is generally recognized on a monthly basis as these services are provided. For contracts involving private line, wavelength and dark fiber services, Level 3 may receive up-front payments for services to be delivered for a period of generally 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.
On October 4, 2011, a wholly owned subsidiary of Level 3 completed its amalgamation with Global Crossing and the amalgamated entity became an indirect wholly owned subsidiary of the Company through a tax free, stock for stock transaction (the "Amalgamation"). In addition, after the close of business on October 19, 2011, Level 3 completed a 1 for 15 reverse stock split as previously approved by the Company's stockholders in connection with its announcement to transfer the listing of its common stock to the New York Stock Exchange on October 20, 2011. The reverse stock split automatically combined every fifteen shares of issued and outstanding Level 3 common stock into one share of common stock without any change in the par value per share. All share and per share references for all periods presented have been adjusted to give effect to the reverse stock split.
Level 3, through its two 50% owned joint-venture surface mines, one each in Montana and Wyoming, sold coal primarily through long-term contracts with public utilities. In November 2011, Level 3 completed the sale of its coal mining business to Ambre Energy Limited as part of its long-term strategy to focus on core business operations. As a result of the transaction, all of the assets and liabilities associated with the coal mining business have been removed from Level 3's balance sheet. The financial results of the coal mining business are included in the Company's consolidated results of operations through the date of sale, and all periods presented have been revised to reflect the presentation within discontinued operations.
Business Strategy and Objectives
The Company pursues the strategies discussed in Item 1. Business, "Business Overview and Strategy" as discussed in its Form 10-K, as amended, for the year ended December 31, 2011. In particular, with respect to strategic financial objectives, the Company focuses its attention on the following:
• growing Core Network Services revenue by increasing sales;

• continually improving the customer experience to increase customer retention and reduce customer churn;

• completing the integration of acquired businesses;

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• reducing network costs and operating expenses;

• achieving sustainable generation of positive cash flows from operations in excess of capital expenditures;

• continuing to show improvement in Adjusted EBITDA (as defined in this Item below) as a percentage of revenue;

• concentrating its capital expenditures on those technologies and assets that enable the Company to develop its Core Network Services;

• managing Wholesale Voice Services for margin contribution; and

• refinancing its future debt maturities.

The Company's management continues to review all existing lines of business and service offerings to determine how those lines of business and service offerings enhance the Company's focus on delivery of communications services and meeting its financial objectives. To the extent that certain lines of business or service offerings are not considered to be compatible with the delivery of the Company's services or with meeting its financial objectives, Level 3 may exit those lines of business or stop offering those services in part or in whole. The successful integration of acquired businesses into Level 3, including Global Crossing, is important to the success of Level 3. The Company must identify synergies and integrate acquired networks and support organizations, while maintaining the service quality levels expected by customers to realize the anticipated benefits of any acquisition. Successful integration of any acquired businesses will depend on the Company's ability to manage the operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage, and eliminate redundant and excess costs to fully realize the expected synergies. If the Company is not able to efficiently and effectively integrate any businesses or operations it acquires, the Company may experience material negative consequences to its business, financial condition or results of operations.
The Company has also been focused on improving its liquidity, financial condition, and extending the maturity dates of certain debt.
In October 2012, Level 3 Financing, Inc. refinanced its existing $650 million Tranche B II and $550 million Tranche B III Term Loans under its existing senior secured credit facility through the creation of a new term loan in the aggregate principal amount of $1.2 billion (the "Tranche B-II 2019 Term Loan"). The Company used the net proceeds from the Tranche B-II 2019 Term Loan, along with cash on hand, to repay Level 3 Financing, Inc.'s $650 million Tranche B II and $550 million Tranche B III Term Loans under the existing credit agreement maturing in September 2018. See Note 13 - Subsequent Events in the notes to the consolidated financial statements for additional information.
In September 2012, the Company fully repaid the outstanding principal of its Commercial Mortgage due 2015 along with accrued interest which was approximately $63 million. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information.
In August 2012, the Company completed the offering of $300 million aggregate principal amount of its 8.875% Senior Notes due 2019 in a private offering. The net proceeds from the offering of the notes will be used for general corporate purposes, including the potential repurchase, redemption, repayment or refinancing of the Company's and its subsidiaries' existing indebtedness from time to time. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information.
Also in August 2012, Level 3 Financing, Inc. completed the offering of $775 million aggregate principal amount of its 7% Senior Notes due 2020 in a private offering. The net proceeds from the offering of the notes, along with cash on hand, were used to redeem all of the Company's outstanding 8.75% Senior Notes due 2017, including the payment of accrued interest and applicable premiums. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information.

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Level 3 Financing, Inc. refinanced its existing $1.4 billion Tranche A Term Loan under its existing senior secured credit facility through the creation of new term loans in the aggregate principal amount of $1.415 billion (the "New Term Loans") in August 2012. The Company used the net proceeds from the New Term Loans, along with cash on hand, to repay Level 3 Financing, Inc.'s $1.4 billion Tranche A Term Loan under the existing credit agreement maturing in March 2014 and used remaining net proceeds to repay $15 million in principal amount plus premium for existing vendor financing obligations. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information.

In March 2012, the Company exchanged approximately $100 million aggregate principal amount of its outstanding 15% Convertible Senior Notes due 2013 for approximately 3.7 million shares of Level 3's common stock into which the notes were convertible plus an additional 1.7 million shares for a total of approximately 5.4 million shares. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information.

In January 2012, Level 3 Financing, Inc. issued $900 million aggregate principal amount of its 8.625% Senior Notes due 2020 in a private transaction. A portion of the net proceeds from the offering were used in February 2012 to redeem all of Level 3 Financing's outstanding 9.25% Senior Notes due 2014 in aggregate principal amount of $807 million. See Note 8 - Long-Term Debt in the notes to the consolidated financial statements for additional information. The Company will continue to look for opportunities to improve its financial position and focus its resources on growing revenue and managing costs for the business.

Revenue and Service Offering
                                Three Months Ended September 30,      Nine Months Ended September 30,
(dollars in millions)               2012               2011                2012               2011
Core Network Services:
 North America - Wholesale
Channel                        $         381     $          334     $          1,144     $         993
 North America - Enterprise
Channel                                  627                341                1,858               995
 EMEA - Wholesale Channel                 89                 51                  272               152
 EMEA - Enterprise Channel                80                 31                  240                87
 EMEA - U.K. Government
Channel                                   41                  -                  131                 -
 Latin America - Wholesale
Channel                                   36                  1                  103                 3
 Latin America - Enterprise
Channel                                  141                  -                  415                 1
Total Core Network Services    $       1,395     $          758     $          4,163     $       2,231
Wholesale Voice Services and
Other                                    195                169                  599               523
Total Revenue                  $       1,590     $          927     $          4,762     $       2,754

Total revenue consists of:
• Core Network Services revenue from colocation and data center services, transport and fiber, IP and data services, and voice services.

• Wholesale Voice Services and Other revenue from long distance voice services, revenue from managed modem and its related intercarrier compensation services and revenue from the "SBC Master Services Agreement," which was obtained through an acquisition in 2005.

Core Network Services revenue represents higher margin services and Wholesale Voice Services and Other revenue represents lower margin services. Core Network Services revenue requires different levels of investment and focus and provides different contributions to the Company's operating results than Wholesale Voice Services and

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Other revenue. Management of Level 3 believes that growth in revenue from its Core Network Services is critical to the long-term success of its business. The Company also believes it must continue to effectively manage gross margin contribution from the Wholesale Voice Services component and the positive cash flows from the Other revenue component of Wholesale Voice Services and Other revenue. The Company believes that trends in its communications business are best gauged by analyzing revenue changes in Core Network Services.

Core Network Services
Growth in transport and fiber 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 monthly payments or up-front payments for private line, wavelength or dark fiber services. The Company is focused on providing end-to-end transport and fiber services to its customers to directly connect customer locations with a private network. Pricing for end-to-end metropolitan transport services have been relatively stable. For intercity transport and fiber services, the Company continues to experience pricing pressure in locations where a large number of carriers co-locate their facilities. An increase in demand may be offset by declines in unit pricing.
Colocation and data center services allow customers to place their network equipment and servers in suitable environments maintained by the Company with high-speed links providing on net access to more than 45 countries. These services are secure, redundant and flexible to fit the varying needs of the Company's customers. Services include hosting network equipment used to transport high speed data and voice over Level 3's global network; providing managed IT services (hosting), installation, maintenance, storage and monitoring of enterprise services; and providing comprehensive IT outsource solutions.

IP and data services primarily include the Company's high speed Internet protocol service ("IP"), dedicated Internet access ("DIA") service, virtual private network ("VPN") services, content delivery network ("CDN") service, media delivery service, Vyvx broadcast service, Converged Business Network service, Asynchronous Transfer mode ("ATM") and frame relay services. Level 3's IP and high speed IP service is high quality and is offered in a variety of capacities. The Company's VPN service permits 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. This convergence to a single platform can be obtained without sacrificing the quality of service or security levels of traditional ATM and frame relay offerings. VPN service also permits customers to prioritize network application traffic so that high priority applications, such as voice and video, are not compromised in performance by the flow of low priority applications such as email.

The Company believes that one of the largest sources of future incremental demand for the Company's Core Network Services will be from customers that are seeking to distribute their feature rich content or video over the Internet. Revenue growth in this area is dependent on the continued increase in demand from customers 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. Although the pricing for data services is currently relatively stable, the IP market is generally characterized by price compression and high unit growth rates depending upon the type of service. The Company experienced price compression in the high-speed IP and voice services markets in 2011, which has continued in 2012.

The following provides a discussion of the Company's Core Network Services revenue in terms of the enterprise and wholesale channels.

• The enterprise channel includes large, multi-national enterprises requiring large amounts of bandwidth to support their business operations, such as financial services companies, healthcare companies, content providers, and portal and search engine companies. It also includes medium enterprises and regional service providers who buy services regionally or locally, as well as government markets, including the U.S. federal government, the systems integrators supporting the U.S. federal government, U.S. state and local

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governments, academic consortia, and certain academic institutions. Included in the enterprise channel, but broken out separately in the table above, is the U.K. government channel, which includes revenue primarily from the government sector in the U.K.
• The wholesale channel includes revenue from incumbent and alternative carriers in each of the regions, global carriers, wireless carriers, cable companies, satellite companies, and voice service providers.

The Company believes that the alignment of Core Network Services around channels should allow it to drive growth while enabling it to better focus on the needs of its customers. Each of these channels is supported by dedicated employees in sales. Each of these channels is also supported by non-dedicated, centralized service delivery and management, product management and development, corporate marketing, global network services, engineering, information technology, and corporate functions, including legal, finance, strategy and human resources. Wholesale Voice Services and Other
The Company offers wholesale voice services that target large and existing markets. The revenue potential for wholesale voice services is large; however, the pricing 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 wholesale voice services is being targeted by many competitors, several of which are larger and have more financial resources than the Company. The Company also has other revenue derived from mature services that are not critical areas of emphasis for the Company, including revenue from managed modem and its related intercarrier compensation services and SBC Contract Services, which includes revenue from the "SBC Master Services Agreement," which was obtained in the December 2005 acquisition of WilTel Communications Group, LLC. 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. The Company expects ongoing declines in the other revenue component of Wholesale Voice Services and Other similar to what has been experienced over the past several years.
The Company receives compensation from other carriers when it terminates traffic originating on those carriers' networks. This intercarrier compensation is based on interconnection agreements with the respective carriers or rates mandated by the Federal Communications Commission ("FCC"). The Company has interconnection agreements in place for the majority of traffic subject to intercarrier compensation. Along with addressing other matters, on November 18, 2011, the FCC established a prospective intercarrier compensation framework for terminating switched access and Voice Over Internet Protocol ("VoIP") traffic, with elements of it becoming effective beginning on December 29, 2011. Under the framework, most terminating switched access charges and all intercarrier compensation charges are capped at current levels, and will be reduced to zero over, as relevant to Level 3, a six year transition period beginning July 1, 2012. Several states, industry groups, and other telecommunications carriers filed petitions in federal court for reconsideration of the framework with the FCC, although the outcome of those petitions is unpredictable. A majority of the Company's existing intercarrier compensation revenue is associated with agreements that have expired terms, but remain effective in evergreen status. As these and other interconnection agreements expire, the Company will continue to evaluate simply allowing them to continue in evergreen status (so long as the counterparty allows the same) or negotiating new agreements. The Company earns intercarrier compensation revenue from providing managed modem services, which are declining. The Company also receives intercarrier compensation from its voice services. In this case, intercarrier compensation is reported within Core Network Services revenue.
For a detailed description of the Company's broad range of communications services, please see Item 1. Business - "Our Services Offerings" of the Company's Form 10-K, as amended, for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

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Hurricane Sandy
Level 3's business has been affected by Hurricane Sandy in the Northeast region of the United States during the fourth quarter of 2012. Level 3 continues to address issues affecting its network and to restore services to customers affected by the storm. In addition, revenue from Level 3's usage-based services may be adversely affected by storm-related business interruptions affecting its customers. The timing of the installation of services ordered by customers and Level 3's resulting revenue may also be adversely affected by limitations on the ability of third party access providers to provision services in the region on a timely basis. It is not possible at this time to estimate the effect that the storm may have on Level 3's operating results in the fourth quarter of 2012. Based on information that is available to management on the date of this report, Level 3 does not expect that the direct and indirect effects that the storm has on its operating results in the fourth quarter of 2012 will be significant; however, it is possible that this expectation could change once additional information regarding the effect of the storm damage is available.

Critical Accounting Policies
Refer to Item 7 of the Company's Form 10-K, as amended, for the year ended December 31, 2011 for a description of the Company's critical accounting policies.

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Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011:

                                Three Months Ended September 30,              Nine Months Ended September 30,
                                                              Change                                        Change
(dollars in millions)           2012             2011            %            2012             2011           %

Revenue                    $     1,590       $      927          72  %   $     4,762       $     2,754        73  %

Cost of Revenue                    642              342          88  %         1,947             1,046        86  %
Depreciation and
Amortization                       185              203          (9 )%           563               612        (8 )%
Selling, General and
Administrative                     619              375          65  %         1,851             1,089        70  %
Restructuring Charges                6                -          NM               14                 -        NM
Total Costs and Expenses         1,452              920          58  %         4,375             2,747        59  %
Operating Income                   138                7          NM              387                 7        NM
Other Income (Expense):
Interest income                      -                -          NM                2                 -        NM
Interest expense                  (188 )           (178 )         6  %          (558 )            (495 )      13  %
Loss on extinguishment
of debt, net                       (49 )            (30 )        63  %          (110 )             (73 )      51  %
Other, net                         (54 )             (1 )        NM              (52 )               5        NM
Total Other Expense               (291 )           (209 )        39  %          (718 )            (563 )      28  %
Loss Before Income Taxes          (153 )           (202 )       (24 )%          (331 )            (556 )     (40 )%
Income Tax Expense                 (13 )             (6 )       117  %           (35 )             (36 )      (3 )%
Loss from Continuing
Operations                        (166 )           (208 )       (20 )%          (366 )            (592 )     (38 )%
Income (Loss ) from
Discontinued Operations,
Net                                  -                1        (100 )%             -                (1 )    (100 )%
Net Loss                   $      (166 )     $     (207 )       (20 )%   $      (366 )     $      (593 )     (38 )%

NM - Not meaningful

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Discussion of all significant variances:

Total Revenue by Service Offering
                           Three Months Ended September 30,         Nine Months Ended September 30,
 (dollars in millions)      2012         2011       Change %         2012           2011       Change %
Core Network Services    $   1,395     $   758         84 %     $       4,163     $ 2,231         87 %
Wholesale Voice
Services and Other             195         169         15 %               599         523         15 %
Total Revenue            $   1,590     $   927         72 %     $       4,762     $ 2,754         73 %

Revenue increased 72% to $1.590 billion in the three months ended September 30, 2012 from $927 million in the same period of 2011 and increased 73% to $4.762 billion in the nine months ended September 30, 2012 from $2.754 billion in the same period of 2011. The increase is primarily driven by the additional revenue associated with the Global Crossing acquisition completed in the fourth quarter of 2011. Excluding revenue from the Global Crossing acquisition, revenue from enterprise customers contributed to the growth in Core Network Services revenue.

The Company experienced growth in each of its service offerings during the three and nine months ended September 30, 2012 compared to the same periods in 2011 as a result of the Global Crossing acquisition. Excluding revenue from the Global Crossing acquisition, revenue growth in IP and data services and voice services during the three and nine months ended September 30, 2012 was driven primarily by end customer demand for content delivery over the internet and enterprise bandwidth, as well as increased usage for voice services. Growth in transport and fiber services and colocation and data center services was more modest during the three and nine months ended September 30, 2012.

Core Network Services revenue increased in the North America, EMEA and Latin America regions during the three and nine months ended September 30, 2012 compared to the same periods of 2011 primarily as a result of the Global Crossing acquisition. Excluding revenue from the Global Crossing acquisition, . . .