QWEST COMMUNICATIONS INTERNATIONAL INC (Form: 10-K, Received: 02/15/2011 17:11:44)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2010

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

For the transition period from to

Commission File No. 001-15577

QWEST COMMUNICATIONS INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)


Delaware		84-1339282
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1801 California Street, Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

(303) 992-1400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock ($0.01 per share, par value)		New York Stock Exchange
7 ¹ / 2 % Senior Notes due 2014—Series B (and the guarantees thereof by Qwest Services Corporation and Qwest Capital Funding, Inc.)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

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

On February 8, 2011, 1,765,304,139 shares of common stock were outstanding. The aggregate market value of the voting stock held by non-affiliates as of June 30, 2010 was $9.1 billion.

DOCUMENTS INCORPORATED BY REFERENCE:

Information required by certain portions of Part III (Items 10, 11, 12 and 13) is incorporated by reference to either a definitive proxy statement or an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days of December 31, 2010.

TABLE OF CONTENTS


	Glossary of Terms	ii

	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	20
Item 3.	Legal Proceedings	21
Item 4.	Reserved	23

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 8.	Consolidated Financial Statements and Supplementary Data	72
	Consolidated Statements of Operations	73
	Consolidated Balance Sheets	74
	Consolidated Statements of Cash Flows	75
	Consolidated Statements of Stockholders’ (Deficit) Equity and Comprehensive Income (Loss)	76
	Notes to Consolidated Financial Statements	77
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	160
Item 9A.	Controls and Procedures	160
Item 9B.	Other Information	160

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	161
Item 11.	Executive Compensation	161
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	161
Item 13.	Certain Relationships and Related Transactions, and Director Independence	161
Item 14.	Principal Accountant Fees and Services	161

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	163
	Signatures	169

GLOSSARY OF TERMS

Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this document and other documents we file with the Securities and Exchange Commission, we have provided below definitions of some of these terms.

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Access Lines . Telephone lines reaching from the customer’s premises to a connection with the public switched telephone network. Our access lines reported in this document include only those lines used to provide services to external customers and exclude lines used solely by us and our affiliates. We also exclude residential lines that are used solely to provide broadband services.

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Asynchronous Transfer Mode (ATM) . A broadband, network transport service utilizing data switches that provides a fast, efficient way to move large quantities of information.

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Broadband Services (also known as high-speed Internet services) . Services used to connect to the Internet through existing telephone lines and fiber-optic cables at higher speeds than dial-up access.

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Competitive Local Exchange Carriers (CLECs) . Telecommunications providers that compete with us in providing local voice and other services in our local service area, predominantly using our network.

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Customer Premises Equipment (CPE). Telecommunications equipment sold to a customer, usually in connection with our providing telecommunications services to that customer.

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Data Integration . Telecommunications equipment we sell that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers.

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Dedicated Internet Access (DIA) . Internet access ranging from 128 kilobits per second to 10 gigabits per second.

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Facilities expenses. Third-party telecommunications expenses we incur for using other carriers’ networks to provide services to our customers.

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Fiber to the Cell Site (FTTCS). A type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider’s broadband interconnection points to cellular sites. Fiber to the cell site services, commonly referred to as wireless backhaul, allow for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

•

Fiber to the Node (FTTN) . A type of telecommunications network that combines fiber-optic cables (which run from a telecommunication provider’s central office to a single location within a particular neighborhood or geographic area) and traditional copper wires (which run from this location to individual residences and businesses within the neighborhood or geographic area). Fiber to the node allows for the delivery of higher speed broadband services than would otherwise generally be available through a more traditional telecommunications network made up of only copper wires.

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Frame Relay . A high-speed data switching technology used primarily to interconnect multiple local networks.

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Hosting Services . The providing of space, power, bandwidth and managed services in data centers.

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Incumbent Local Exchange Carrier (ILEC) . A traditional telecommunications provider, such as our subsidiary, Qwest Corporation, that, prior to the Telecommunications Act of 1996, had the exclusive right and responsibility for providing local telecommunications services in its local service area.

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Integrated Services Digital Network (ISDN) . A telecommunications standard that uses digital transmission technology to support voice, video and data communications applications over regular telephone lines.

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Internet Protocol (IP) . Those protocols that facilitate transferring information in packets of data and that enable each packet in a transmission to “tell” the data switches it encounters where it is headed and enables the computers on each end to confirm that message has been accurately transmitted and received.

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Managed Services. Customized, turnkey solutions for integrated data, Internet and voice services offered to our business markets customers. These services include a diverse combination of emerging technology products and services, such as VoIP, Ethernet, MPLS, hosting services and advanced voice services, such as web conferencing and call center solutions. Most of these services can be performed from outside our customers’ internal networks, with an emphasis on integrating and certifying Internet security for applications and content.

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Multi-Protocol Label Switching (MPLS) . A standards-approved data networking technology that is a substitute for existing frame relay and ATM networks and that can deliver the quality of service required to support real-time voice and video, as well as service level agreements that guarantee bandwidth. We sell MPLS based services primarily to our business customers under our Qwest iQ Networking ^® trademark.

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Private Line . Direct circuit or channel specifically dedicated to a customer for the purpose of directly connecting two or more sites. Private line offers a high-speed, secure solution for frequent transmission of large amounts of data between sites.

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Public Switched Telephone Network (PSTN) . The worldwide voice telephone network that is accessible to every person with a telephone equipped with a dial tone.

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Unbundled Network Elements (UNEs) . Discrete elements of our network that are sold or leased to competitive telecommunications providers and that may be combined to provide their retail telecommunications services.

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Universal Service Funds (USF) . Federal and state funds established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things. As a telecommunications provider, we are often required to contribute to these funds.

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Virtual Private Network (VPN) . A private network that operates securely within a public network (such as the Internet) by means of encrypting transmissions.

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Voice over Internet Protocol (VoIP) . An application that provides real-time, two-way voice communication similar to our traditional voice services that originates in the Internet protocol over a broadband connection and often terminates on the PSTN.

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Wide Area Network (WAN) . A communications network that covers a wide geographic area, such as a state or country. A WAN typically extends a local area network outside the building, over telephone common carrier lines to link to other local area networks in remote locations, such as branch offices or at-home workers and telecommuters.

iii

Unless the context requires otherwise, references in this report to “Qwest,” “we,” “us,” the “Company” and “our” refer to Qwest Communications International Inc. and its consolidated subsidiaries, and references in this report to “QCII” refer to Qwest Communications International Inc. on an unconsolidated, stand-alone basis.

PART I

ITEM 1. BUSINESS

We offer data, Internet, video and voice services nationwide and globally. We operate the majority of our business in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

We were incorporated under the laws of the State of Delaware in 1997. Our principal executive offices are located at 1801 California Street, Denver, Colorado 80202, and our telephone number is (303) 992-1400.

On April 21, 2010, we entered into a merger agreement whereby CenturyLink, Inc., or CenturyLink, will acquire us in a tax-free, stock-for-stock transaction. Under the terms of the agreement, our stockholders will receive 0.1664 shares of CenturyLink common stock for each share of our common stock they own at closing. Based on our and CenturyLink’s number of outstanding shares as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and our stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, we received notification from the Department of Justice and the Federal Trade Commission that we received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. We have received most of the necessary approvals from state public service or public utility commissions, but we still need approvals from the Federal Communications Commission, or FCC, and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, we currently expect to receive all required approvals in the first quarter and are planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, we may be obligated to pay CenturyLink a termination fee of $350 million.

For a discussion of certain risks applicable to our business, financial condition and results of operations, see “Risk Factors” in Item 1A of this report. The financial information in this section should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.

Financial and Operational Highlights

The table below provides a summary of some of our financial highlights.


	Years Ended December 31,
	2010			2009		2008
	(Dollars in millions, except per share amounts)
Operating results:
Operating revenue	$	11,730		$	12,311	$	13,475
Operating expenses		9,729			10,336		11,378
Income before income taxes		450			903		1,051
Net (loss) income		(55	)		662		652
(Loss) earnings per common share:
Basic	$	(0.03	)	$	0.38	$	0.38
Diluted	$	(0.03	)	$	0.38	$	0.37

Cash flow data:
Cash provided by operating activities	$	3,367		$	3,307	$	2,931
Expenditures for property, plant and equipment and capitalized software		1,488			1,409		1,777
Dividends paid		555			551		556


	December 31,
	2010			2009
	(Dollars in millions)
Balance sheet data:
Cash and cash equivalents	$	372		$	2,406
Total borrowings—net ⁽¹⁾		11,947			14,200
Working capital deficit ⁽²⁾		(1,649	)		(483	)
Total stockholders’ deficit		(1,655	)		(1,178	)

(1)

Total borrowings—net is the sum of current portion of long-term borrowings and long-term borrowings—net on our consolidated balance sheets. For total obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations” in Item 7 of this report.

(2)	Working capital deficit is the amount by which our current liabilities exceed our current assets.

The table below presents some of our operational metrics.


	December 31,
	2010		2009		2008
	(in thousands)
Operational metrics ⁽¹⁾ :
Total broadband subscribers		2,914		2,812		2,652
Total video subscribers		1,003		940		814
Total wireless subscribers		1,086		838		658
Total access lines		8,855		9,925		11,127

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” in Item 7 in this report.

Operations

We operate our business through the following three segments: business markets, mass markets and wholesale markets. We group our products and services among three major categories, including:

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strategic services, which include primarily private line, broadband, Qwest iQ Networking ^® , hosting, video (including DIRECTV), Verizon Wireless services and voice over Internet Protocol, or VoIP;

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legacy services, which include primarily local, long-distance, access, traditional wide area network, or WAN, and integrated services digital network, or ISDN, services; and

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data integration, which is telecommunications equipment we sell that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers.

We also sold Qwest-branded wireless services until October 31, 2009, and included those services as a fourth major category for 2009 and prior years. You can find more detailed information about our segments and major product and service categories below under the heading “Products, Services and Customers.”

We have reclassified certain prior year amounts in our Annual Report on Form 10-K for the year ended December 31, 2009 to conform to the current year presentation. Our revenue by segment, including a breakdown of our revenue by major product and service category, is as follows:


	Years Ended December 31,						% of Operating Revenue
	2010		2009		2008		2010			2009			2008
	(Dollars in millions)
Operating revenue by category:
Business markets:
Strategic services	$	1,709	$	1,584	$	1,401		14	%		13	%		11	%
Legacy services		1,724		1,887		2,058		15	%		15	%		15	%

Total strategic and legacy services		3,433		3,471		3,459		29	%		28	%		26	%
Data integration		604		557		570		5	%		5	%		4	%

Total business markets revenue		4,037		4,028		4,029		34	%		33	%		30	%

Mass markets:
Strategic services	$	1,495	$	1,398	$	1,333		13	%		11	%		10	%
Legacy services		3,164		3,510		3,953		27	%		29	%		29	%

Total strategic and legacy services		4,659		4,908		5,286		40	%		40	%		39	%
Qwest-branded wireless services ⁽¹⁾		—		112		460		—	%		1	%		4	%

Total mass markets revenue		4,659		5,020		5,746		40	%		41	%		43	%

Wholesale markets:
Strategic services	$	1,285	$	1,235	$	1,251		11	%		10	%		9	%
Legacy services		1,369		1,678		2,092		12	%		14	%		16	%

Total wholesale markets revenue		2,654		2,913		3,343		23	%		24	%		25	%

Total segment revenue		11,350		11,961		13,118		97	%		97	%		97	%
Other revenue (primarily USF surcharges)		380		350		357		3	%		3	%		3	%

Total operating revenue	$	11,730	$	12,311	$	13,475		100	%		100	%		100	%

(1)

As noted above, we stopped selling Qwest-branded wireless services on October 31, 2009. The decrease in Qwest-branded wireless services revenue in 2009 as compared to 2008 was primarily due to our transition to selling Verizon Wireless services. We categorize net revenue from Verizon Wireless services as strategic services revenue.

Substantially all of our revenue comes from customers located in the United States, and substantially all of our long-lived assets are located in the United States.

For additional financial information about our segments including total segment income for each of our segments, see Note 16—Segment Information to our consolidated financial statements in Item 8 of this report. We do not allocate our assets among our segments and therefore do not report total assets by segment.

Products, Services and Customers

Our products and services include a variety of data, Internet and voice services. Through our strategic partnerships with DIRECTV and Verizon Wireless, we also offer satellite digital television and wireless services to customers in our local service area. As noted above, we operate our business through three segments: business markets, mass markets and wholesale markets. We group our products and services among three major categories: strategic services, legacy services and data integration. Revenue from our strategic services represented 38% of our total revenue for the year ended December 31, 2010, and these services are a growing source of revenue. We also sold Qwest-branded wireless services until October 31, 2009 and included those services as a fourth major category for 2009 and prior years.

We offer our business markets and mass markets customers the ability to bundle together several products and services. For example, we offer our mass markets customers integrated and unlimited local and long-distance services. These customers can also bundle two or more services such as broadband, video (including DIRECTV), voice and Verizon Wireless services . We believe these customers value the convenience of, and price discounts associated with, receiving multiple services through a single company.

Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper cables, fiber-optic broadband cables and other equipment. The majority of our network is located in our local service area. Within our local service area, our network serves approximately 8.9 million access lines in 14 states and forms a portion of the public switched telephone network, or PSTN.

Business Markets

Our business markets customers include enterprise and government customers. Enterprise customers consist of local, national and global businesses.

Described below are the key products and services that we sell to our business markets customers. We sell these products and services through direct sales, partnership relationships and arrangements with third-party sales agents.

Strategic Services

Our business markets customers use our strategic services to access the Internet and Internet-based services, as well as to connect to private networks and to conduct internal and external data transmissions such as transferring files from one location to another. We also provide value-added services and integrated solutions that make communications more secure, reliable and efficient for our business markets customers. These services include primarily private line, Qwest iQ Networking ^® , hosting, broadband and VoIP services. Our marketing and sales efforts with respect to business markets customers increasingly focus on these growth services.

Private line . Our business markets customers use private line as a direct circuit or channel specifically dedicated for the purpose of directly connecting two or more sites. Private line offers a high-speed, secure solution for frequent transmission of large amounts of data between sites.

Qwest iQ Networking ^® . Qwest iQ Networking ^® is a Multi-Protocol Label Switching, or MPLS,-based service. MPLS is standards-approved data networking technology, compatible with existing asynchronous

transfer mode, or ATM, and frame relay networks that can deliver the quality of service required to support real-time voice and video, as well as service level agreements that guarantee bandwidth. This technology allows network operators a great deal of flexibility to divert and route traffic around link failures, congestion and bottlenecks.

Hosting . Hosting includes providing space, power, bandwidth and managed services in data centers. We also offer a variety of server and application management, back-up, disaster recovery, and professional web design services. We currently operate 17 hosting centers, or CyberCenters ^SM , in 11 metropolitan areas.

Broadband . We offer our business markets customers broadband services that allow them to connect to the Internet through their existing telephone lines and fiber-optic cables at higher speeds than dial-up access. Substantially all of our broadband customers are located within our local service area.

VoIP . Our business markets customers use VoIP, a real-time, two-way voice communication service (similar to our traditional voice services) that originates in the Internet protocol over a broadband connection and often terminates on the PSTN.

Legacy Services

Our business markets legacy services include local, long-distance, traditional WAN services (including ATM, frame relay, dedicated Internet access, or DIA, and virtual private network, or VPN) and ISDN services. We originate, transport and terminate local services within our local service area. Local services consist primarily of basic local exchange and switching services. Long-distance services include domestic and international long-distance services and toll free services. Our international long-distance services include voice calls that either terminate or originate with our customers in the United States.

Data Integration

We also provide data integration to our business markets customers. Data integration involves the sale of telecommunications equipment located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and other business customers.

Mass Markets

Our mass markets customers include consumers and small businesses.

Described below are the key products and services that we sell to our mass markets customers. We sell these products and services using a variety of channels, including our sales and call centers, our website, telemarketing and retail stores and kiosks.

Strategic Services

Our mass markets customers generally use our strategic services to access the Internet, Internet-based services and video services. These strategic services include primarily broadband, video (including DIRECTV) and Verizon Wireless services. Our marketing and sales efforts with respect to our mass markets customers increasingly focus on these growth services.

Broadband . Our broadband services allow customers to connect to the Internet through their existing telephone lines and fiber-optic cables at higher speeds than dial-up access. Substantially all of our broadband customers are located within our local service area.

Video . Our video services include primarily satellite digital television. These services are offered under an arrangement with DIRECTV that allows us to market, sell and bill for its services under its brand name. Our current arrangement with DIRECTV has an initial five-year term ending in 2014 and automatically renews for one-year terms thereafter unless terminated by one of the parties. Although DIRECTV will have the right to terminate the arrangement upon the closing of the CenturyLink merger, we expect to be able to continue to provide DIRECTV services after the merger.

Verizon Wireless services . Our wireless services are offered under an arrangement with Verizon Wireless that allows us to market, sell, and bill for its services under its brand name, primarily to customers who buy these services as part of a bundle with one or more of our other products and services. This arrangement allows us to sell the full complement of Verizon Wireless services. We began selling Verizon Wireless services in the third quarter of 2008. Our current arrangement with Verizon Wireless has a five-year term ending in 2013 and is terminable by either party thereafter. Although Verizon Wireless will have the right to terminate the arrangement upon the closing of the CenturyLink merger, we expect to be able to continue to provide Verizon Wireless services after the merger.

Legacy Services

We offer our mass markets customers legacy services, consisting primarily of local and long-distance services. We originate, transport and terminate local services within our local service area. Local services consist of primarily basic local exchange and switching services. We also provide enhanced features with our local exchange services, such as caller ID, call waiting, call return, 3-way calling, call forwarding and voice mail.

Wholesale Markets

Our wholesale markets customers are other telecommunications carriers and resellers that purchase our products and services in large quantities to sell to their customers or that purchase our access services that allow them to connect their customers and their networks to our network.

Described below are the key products and services that we sell to our wholesale markets customers. We sell these products and services through direct sales, partnership relationships and arrangements with third-party sales agents.

Strategic Services

Nearly all of the strategic services revenue we generate from wholesale markets customers is from private line services. Our wholesale customers use our private line services to connect their customers and their networks to our network. We also provide private line services to wireless service providers that use our fiber to the cell site services, commonly referred to as wireless backhaul, to support their next generation wireless networks.

Legacy Services

Our wholesale markets legacy services include local, long-distance, access and traditional WAN services. Local services include primarily unbundled network elements, or UNEs, which allow our wholesale customers to use our network or a combination of our network and their own networks to provide voice and data services to their customers. Our local services also include network transport, billing services and access to our network by other telecommunications providers and wireless carriers. These services allow other telecommunications companies to provide telecommunications services that originate or terminate on our network. Long-distance services include domestic and international long-distance services.

Access services include fees that we charge to other telecommunications providers to connect their customers and their networks to our network so that they can provide long-distance, transport, data, wireless and Internet services.

Other

We also generate other operating revenue from USF surcharges and the leasing and subleasing of space in our office buildings, warehouses and other properties. We centrally manage this revenue, and consequently it is not assigned to any of our three segments described above. The majority of our real estate properties are located in our local service area.

Importance, Duration and Effect of Patents, Trademarks and Copyrights

Either directly or through our subsidiaries, we own or have licenses to various patents, trademarks, trade names, copyrights and other intellectual property necessary to conduct our business. We believe it is unlikely that we could lose any intellectual property rights that are material to our business.

Competition

We compete in a rapidly evolving and highly competitive market, and we expect intense competition to continue. Regulatory developments and technological advances have increased opportunities for alternative communications service providers, which in turn have increased competitive pressures on our business. These alternate providers often face fewer regulations and have lower cost structures than we do. In addition, the telecommunications industry has experienced some consolidation and several of our competitors have consolidated with other telecommunications providers. The resulting consolidated companies are generally larger, have more financial and business resources and have greater geographical reach than we currently do.

Business Markets

As discussed below, competition for many of our business markets services is based in part on bundled offerings. We believe business markets customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. As such, we continue to focus on expanding and improving our bundled offerings.

Strategic Services

In providing strategic services to our business markets customers, we compete primarily with national telecommunications providers, such as AT&T Inc. and Verizon Communications Inc. We also compete with smaller telecommunications providers, regional providers and wireless providers, as well as large integrators that provide customers with data services thereby taking traffic off of our network.

Competition for business markets strategic services is driven by price and bundled offerings. Private line and Qwest iQ Networking ^® services also compete on network reach and reliability, while hosting, broadband and VoIP services also compete on bandwidth and quality.

Legacy Services

Although our status as an incumbent local exchange carrier, or ILEC, continues to provide us some advantages in providing local services in our local service area, we continue to face significant competition in this market. In providing local services, we compete primarily with competitive local exchange carriers, or CLECs, and competition is based primarily on price and bundled offerings. We also face competition from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable companies, as a result of product substitution.

In providing long-distance services to our business markets customers, we compete primarily with national telecommunications providers, such as AT&T Inc. and Verizon Communications Inc. These competitors often

have significant name recognition in the national long-distance markets and also have substantial financial and technological resources that allow them to compete more effectively against us. We also increasingly compete with wireless providers and broadband service providers, including cable companies and VoIP providers. Competition in the long-distance market is based primarily on price and product bundled offerings.

Some of our competitors are subject to fewer regulations than we are, which affords them competitive advantages against us. Under federal regulations, telecommunication providers are able to interconnect their networks with ours, resell our services or lease separate parts of our network in order to provide competitive services. Generally, we have been required to provide these functions and services at wholesale rates, which allows our competitors to sell their services at lower prices. However, these rules have been and continue to be reviewed by state and federal regulators. For additional discussion of regulations affecting our business, see “Regulation” below. In addition, wireless and broadband service providers generally are subject to less or no regulation, which may allow them to operate with lower costs than we are able to operate.

In providing other legacy services, such as traditional WAN services and ISDN, we compete primarily with national telecommunications providers and cable companies. Competition for these other legacy services is based primarily on price and bundled offerings.

Data Integration

In providing data integration to our business markets customers, we compete primarily with large integrators, equipment providers and national telecommunication providers. Competition is based on package offerings, and as such we focus on providing these customers individualized and customizable packages. We provide some of our data integration through packages that include other strategic and legacy services. As such, in providing data integration we often face many of the same competitive pressures as we face in providing strategic and legacy services, as discussed above.

Mass Markets

As discussed below, competition for many of our mass markets services is based in part on bundled offerings. We believe mass markets customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. As such, we continue to focus on expanding and improving our bundled offerings.

Strategic Services

In providing broadband services to our mass markets customers, we compete primarily with cable companies, wireless providers and other broadband service providers. Competition is based on price, bandwidth, service, promotions and bundled offerings. In reselling DIRECTV video services, we compete primarily with cable and other satellite companies as well as other sales agents and resellers. Competition is based on price, content, quality, promotions and bundled offerings. Many of our competitors for these strategic services are not subject to the same regulatory requirements as we are, and therefore they are able to avoid significant regulatory costs and obligations.

The market for wireless services is highly competitive. In reselling Verizon Wireless services, we compete with national and regional carriers as well as other sales agents and resellers. We market and sell wireless services to customers who are buying these services as part of a bundle with one or more of our other services. Competition is based on coverage area, price, services, features, handsets, technical quality and customer service.

Legacy Services

Although our status as an ILEC continues to provide us some advantages in providing local services in our local service area, we increasingly face significant competition in this market. An increasing number of consumers are willing to substitute cable and wireless for traditional voice telecommunications services. This has

led to an increase in the number and type of competitors within our industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local and long-distance services from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers, CLECs and independent telephone companies.

Competition for mass markets customers is based primarily on pricing, packaging of services and features, quality of service and meeting customer care needs. In addition, we and our competitors continue to develop and deploy more innovative product bundling, enhanced features and combined billing options in an effort to retain and gain customers. While we rely on reseller or sales agency arrangements to provide some of our bundled services, some of our competitors are able to provide all of their bundled services directly, which may provide them a competitive advantage. We believe our mass markets customers value the convenience of, and price discounts associated with, receiving multiple services through a single company.

Similar to the competitive market for business markets customers, many of our competitors for mass markets customers are subject to fewer regulations than we are and are therefore afforded competitive advantages against us, as discussed above.

Wholesale Markets

Strategic Services

In providing private line services to our wholesale markets customers, we compete primarily with national telecommunications providers, such as AT&T Inc. and Verizon Communications Inc. Additionally we are experiencing increased competition for private line services from cable companies. A small number of our wholesale markets customers are important contributors to this segment’s revenue.

Competition for private line services is based primarily on price, as well as network reach, bandwidth, quality, reliability and customer service. Although we are experiencing intense competition in this market, we believe we are favorably positioned due to our strong presence in our local service area.

Legacy Services

The market for wholesale legacy services is highly competitive. In providing long-distance services to our wholesale customers, we compete primarily with national telecommunications and VoIP providers. Competition in the wholesale long-distance market is based primarily on price; however customer service, quality and reliability can also be influencing factors. Our resale and UNE customers are experiencing the same competition with CLECs for local services customers as we are, as discussed in mass markets and business markets above. We also compete with some of our own wholesale markets customers that are deploying their own networks to provide customers with local services. By doing so, these competitors take traffic off of our network.

We provide access services to other telecommunications providers to connect their customers and their networks to our network so that they can provide long-distance, transport, data, wireless and Internet services. We face significant competition for access services from CLECs, cable companies, resellers and wireless service providers. Our access service customers face competitive pressures in their businesses that are similar to those we face with respect to strategic and legacy services. To the extent that these competitive pressures result in decreased demand for their services, demand for our access services also declines.

Regulation

We are subject to significant regulation by the FCC, which regulates interstate communications, and state utility commissions, which regulate intrastate communications. These agencies issue rules to protect consumers and promote competition; they set the rates that telecommunication companies charge each other for exchanging

traffic; and they have established funds (called universal service funds) to support provision of services to high-cost areas. In most states, local voice service, switched and special access services, and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region. In addition, we are required to maintain licenses with the FCC and with utility commissions in most states. Laws and regulations in many states restrict the manner in which a licensed entity can interact with affiliates, transfer assets, issue debt and engage in other business activities, and many mergers and acquisitions require approval by the FCC and some state commissions.

In this section, we describe potentially significant regulatory changes that we face, including: state commission review of the rates we charge for local telephone service and FCC proposals to reform universal service funds, change the rates carriers charge each other for exchanging traffic, and change the rates we can charge for special access services.

Interconnection

In our local service area, we are required by law to interconnect with other telecommunications providers and to allow competing local exchange carriers to resell our services and use our facilities as unbundled network elements. State commissions periodically conduct proceedings to change the rates we are allowed to charge for these services, and those proceedings can result in changes to our revenue from wholesale markets customers.

Intercarrier Compensation and Access Pricing

The FCC has initiated a number of proceedings that could affect the rates and charges for services that we sell to or purchase from other carriers and for traffic that we exchange with other carriers. The FCC has been considering comprehensive reform of these charges, known as “intercarrier compensation,” in a proceeding that could result in fundamental changes in the charges we collect from and pay to other carriers. This proceeding may not be completed for some time. State commissions also periodically open proceedings to change the rates that we or other local carriers charge to terminate and originate intrastate calls. The FCC, state commissions and federal courts are also reviewing intercarrier compensation issues relating to IP services, including whether we should pay intercarrier compensation to carriers for traffic bound for Internet service providers that cross local exchange boundaries (known as “VNXX traffic”) and whether VoIP providers must pay carrier access charges. In 2010, we received approximately $350 million in switched access revenue (which includes a significant amount of related services not subject to these proceedings), and we paid a greater amount to other carriers for switched access. The majority of switched access revenue is included in wholesale markets legacy revenue.

The FCC also has an open proceeding to examine whether rates should be reduced for high-capacity facilities that local exchange carriers, like Qwest, sell to other companies. Some parties have proposed changes to the FCC’s rules that would significantly reduce our revenues from these facilities. This proceeding remains pending before the FCC. In 2010, we received approximately $1.4 billion for interstate special access services (excluding digital subscriber line), but not all of that revenue is at issue in the FCC’s special access proceeding. Of the approximately $1.4 billion interstate special access services revenue, approximately $1.1 billion is included in wholesale markets strategic revenue while approximately $300 million is located in business markets strategic revenue. Most proposals submitted in the proceeding would impact only lower-capacity services and not higher-capacity fiber-based services, and many proposals would impact services only in geographic areas where the FCC has granted us pricing flexibility. If the FCC does mandate lower prices, we will benefit from lower prices for the special access services we purchase from other carriers, which totaled $550 million in 2010. The majority of this amount is included in business markets facilities expenses.

Regulatory proceedings are pending in numerous jurisdictions regarding rural local exchange carriers that have inflated the demand for their terminating services by entering into arrangements with companies providing free calling services. We have disputed and withheld payment on the charges billed by many of these rural carriers. The FCC released an order in 2009 ruling in our favor that a rural provider’s interstate switched access

tariffs did not apply to this traffic. In another case brought by us against several rural carriers, the Iowa Utilities Board issued an order in our favor in 2009 ruling that the rural carriers’ intrastate switched access tariffs did not apply to this traffic. Other proceedings addressing these matters are pending before the FCC, the Minnesota state commission and federal courts. The developments in 2010 in those cases were consistent with the favorable 2009 orders.

Universal Service

The FCC maintains a number of universal service programs that are intended to ensure affordable telephone service for all Americans, including low-income consumers and those living in rural areas that are costly to serve, and ensure access to advanced telecommunications services for schools, libraries and rural health care providers. These programs, which totaled over $7 billion annually in recent years, are funded through contributions by interstate telecommunications carriers, which are generally passed through to their end-users. The FCC is actively considering a new contribution methodology, which, if adopted, could significantly increase our universal service contributions. While we would have the right to pass these charges on to our customers, the additional charges could affect the demand for certain telecommunications services.

In 2010, we received approximately $67 million in federal universal service high-cost subsidies. The majority of this amount is included in mass markets legacy revenue. The FCC is actively considering changes in the structure and distribution methodology of its universal service programs. The FCC is also considering whether to reconfigure its universal service funds to support broadband services. The resolution of these proceedings ultimately could affect the amount of universal service support we receive.

In 2010, we received approximately $82 million in state universal service high-cost subsidies. Almost all of this amount is included in mass markets legacy revenue. State commissions and legislatures may review and alter their respective state universal service programs, and, as a result, our distributions may be affected.

Network Neutrality

In December 2010, the FCC issued network neutrality rules applicable to providers of broadband Internet access services. In general, network neutrality refers to government policies designed to safeguard and promote an open Internet. As written, the FCC’s rules do not materially impact our business operations, but the FCC indicated that it would decide in later cases the extent to which broadband providers like Qwest can charge content providers for enhancing or prioritizing their traffic when it is being delivered to Qwest’s broadband customers.

Employees


	December 31,						Increase/(Decrease)						% Change
	2010		2009		2008		2010 v 2009			2009 v 2008			2010 v 2009			2009 v 2008
Management employees		14,164		14,581		15,792		(417	)		(1,211	)		(3	)%		(8	)%
Occupational employees		14,179		15,557		17,145		(1,378	)		(1,588	)		(9	)%		(9	)%

Total employees		28,343		30,138		32,937		(1,795	)		(2,799	)		(6	)%		(8	)%

Our occupational employees are covered by collective bargaining agreements with the Communications Workers of America, or CWA, and the International Brotherhood of Electrical Workers, or IBEW. Our current four-year agreements with the CWA and IBEW expire on October 6, 2012. See the discussion of risks relating to our labor relations in “Risk Factors—Other Risks Relating to Qwest” in Item 1A of this report.

Website Access and Important Investor Information

Our website address is www.qwest.com , and we routinely post important investor information in the “Investor Relations” section of our website at investor.qwest.com . The information contained on, or that may be accessed through, our website is not part of this annual report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports in the “Investor Relations” section of our website under the heading “SEC Filings.” These reports are available on our website as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission, or SEC.

We have adopted written codes of conduct that serve as the code of ethics applicable to our directors, officers and employees, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002, the rules of the SEC promulgated thereunder and the New York Stock Exchange rules. In the event that we make any changes to, or provide any waivers from, the provisions of our code of conduct applicable to our principal executive officer and senior financial officers, we intend to disclose these events on our website or in a report on Form 8-K within four business days of such event.

These codes of conduct, as well as copies of our guidelines on significant governance issues and the charters of our audit committee, compensation and human resources committee and nominating and governance committee, are available in the “Corporate Governance” section of our website at investor.qwest.com/corporate-governance or in print to any stockholder who requests them by sending a written request to our Corporate Secretary at Qwest Communications International Inc., 1801 California Street, Denver, Colorado 80202.

Special Note Regarding Forward-Looking Statements

This Form 10-K contains or incorporates by reference forward-looking statements about our financial condition, operating results and business. These statements include, among others:

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statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenue, decreased expenses and avoided expenses and capital or other expenditures; and

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statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.

These statements may be made expressly in this document or may be incorporated by reference to other documents we have filed or will file with the SEC. You can find many of these statements by looking for words such as “may,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this document or in documents incorporated by reference in this document.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in “Risk Factors” in Item 1A of this report.

These risk factors should be considered in connection with any written or oral forward-looking statements that we or persons acting on our behalf may issue. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intentions as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

ITEM 1A. RISK FACTORS

Risks Relating to our Pending Merger with CenturyLink

Our merger with CenturyLink is subject to closing conditions, including government approvals, which could result in additional conditions that adversely affect us or which could cause the merger to be delayed or abandoned.

The completion of the CenturyLink merger is subject to certain closing conditions, including the absence of injunctions or other legal restrictions and the absence of a material adverse effect on either company. In addition, the merger remains subject to a number of regulatory approvals. We have received most of the necessary approvals from state public service or public utility commissions, but we still need approvals from the FCC and several other state public service or public utility commissions. These regulatory entities could impose requirements or obligations as conditions for their approvals. Despite our best efforts, we may not be able to satisfy the various closing conditions and obtain the necessary approvals. In addition, any required conditions to these approvals could adversely affect the combined company or could result in the delay or abandonment of the merger.

Failure to complete the CenturyLink merger could negatively impact us.

If the CenturyLink merger is not completed, we would still remain liable for significant transaction costs and the focus of our management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of a completed merger. Depending on the reasons for not completing the merger, we could also be required to pay CenturyLink a termination fee of $350 million. For these and other reasons, a failed merger could adversely affect our business, operating results or financial condition. In addition, the trading price of our securities could be adversely affected to the extent that the current price reflects an assumption that the merger will be completed.

While the CenturyLink merger is pending, we are subject to business uncertainties and contractual restrictions that could adversely affect our business.

Our employees, customers and suppliers may have uncertainties about the effects of the merger. Although we have taken actions designed to reduce any adverse effects of these uncertainties, these uncertainties may impair our ability to attract, retain and motivate key employees and could cause customers, suppliers and others that deal with us to try to change our existing business relationships.

The pursuit of the merger and preparations for integration have placed and will continue to place a significant burden on many employees and internal resources. If, despite our efforts, key employees depart because of these uncertainties and burdens, or because they do not wish to remain with a combined company, our business and operating results could be adversely affected.

While the merger is pending, some of our customers could delay or forgo purchasing decisions and suppliers could seek additional rights or benefits from us. In addition, the merger agreement restricts us from taking certain actions with respect to our business and financial affairs without CenturyLink’s consent, and these restrictions could be in place for an extended period of time if the merger is delayed. For these and other reasons, the pendency of the merger could adversely affect our business, operating results or financial condition.

If completed, our merger with CenturyLink may not achieve the intended results.

The merger will involve the combination of two companies that currently operate as independent public companies. The combined company will need to devote management attention and resources to integrate our and CenturyLink’s businesses. In addition, the combined company may face difficulties with the integration process. For example:

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the combined company may not realize the anticipated cost savings and operating synergies at expected levels or in the expected timeframe;

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existing customers and suppliers may decide not to do business with the combined company;

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the costs of integrating our policies, procedures, operations, technologies and systems with those of CenturyLink could be higher than expected;

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the integration process could consume significant time and attention on the part of the combined company’s management, thereby diverting attention from day-to-day operations; or

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the combined company may not be able to integrate employees from the two companies while maintaining existing levels of sales, customer service and operational support.

For these and other reasons, the merger may not achieve the intended results.

Risks Affecting Our Business

Increasing competition, including product substitution, continues to cause access line losses, which has adversely affected and could continue to adversely affect our operating results and financial condition.

We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. We are facing greater competition from cable companies, wireless providers, resellers and sales agents (including ourselves) and facilities-based providers using their own networks as well as those leasing parts of our network. In addition, regulatory developments over the past several years have generally increased competitive pressures on our business. Due to some of these and other factors, we continue to lose access lines.

We are continually evaluating our responses to these competitive pressures. Some of our more recent responses are expanded broadband capabilities and strategic partnerships. We also remain focused on customer service and providing customers with simple and integrated solutions, including, among other things, product bundles and packages. However, we may not be successful in these efforts. We may not be able to distinguish our offerings and service levels from those of our competitors, and we may not be successful in integrating our product offerings, especially products for which we act as a reseller or sales agent such as wireless and video services. Our operating results and financial condition would be adversely affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently stem or offset our continuing access line losses and our revenue declines significantly without corresponding cost reductions. If this occurred, our ability to service debt, pay other obligations and enhance shareholder returns would also be adversely affected.

Unfavorable general economic conditions in the United States could negatively impact our operating results and financial condition.

Unfavorable general economic conditions, including the unstable economy and the current credit market environment, could negatively affect our business. While it is often difficult for us to predict the impact of general economic conditions on our business, these conditions could adversely affect the affordability of and consumer demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or forgo purchases of our products and services. One or more of these circumstances could cause our revenue to decline. Also, our customers may encounter financial hardships or may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us. If that were to occur, we could be required to increase our allowance for doubtful accounts, and the number of days outstanding for our accounts receivable could increase. In addition, as discussed below under the heading “Risks Affecting our Liquidity,” due to the unstable economy and the current credit market environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. For these reasons, among others, if the current economic conditions persist or decline, this could adversely affect our operating results and financial condition, as well as our ability to service debt, pay other obligations and enhance shareholder returns.

Consolidation among other participants in the telecommunications industry may allow our competitors to compete more effectively against us, which could adversely affect our operating results and financial condition.

The telecommunications industry has experienced some consolidation, and several of our competitors have consolidated with other telecommunications providers. This consolidation results in competitors that are larger and better financed and affords our competitors increased resources and greater geographical reach, thereby enabling those competitors to compete more effectively against us. We have experienced and expect further increased pressures as a result of this consolidation and in turn have been and may continue to be forced to respond with lower profit margin product offerings and pricing plans in an effort to retain and attract customers. These pressures could adversely affect our operating results and financial condition, as well as our ability to service debt, pay other obligations and enhance shareholder returns.

Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial condition.

The telecommunications industry is experiencing significant technological changes, and our ability to execute our business plans and compete depends upon our ability to develop and deploy new products and services. The development and deployment of new products and services could also require substantial expenditure of financial and other resources in excess of contemplated levels. If we are not able to develop new products and services to keep pace with technological advances, or if those products and services are not widely accepted by customers, our ability to compete could be adversely affected and our market share could decline. Any inability to keep up with changes in technology and markets could also adversely affect our operating results and financial condition, as well as our ability to service debt, pay other obligations and enhance shareholder returns.

Our reseller and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and operating results.

We rely on reseller and sales agency arrangements with other companies to provide some of the services that we sell to our customers, including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time or if these other companies fail to fulfill their contractual obligations to us or our customers, we may have difficulty finding alternative arrangements and our customers may experience disruptions to their services. In addition, as a reseller or sales agent, we do not control the availability, retail price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control all of the marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact our ability to market and sell their products and services, our business plans and goals and our reputation could be negatively impacted. If these reseller and sales agency arrangements are unsuccessful due to one or more of these risks, our business and operating results may be adversely affected.

Third parties may claim we infringe upon their intellectual property rights, and defending against these claims could adversely affect our profit margins and our ability to conduct business.

From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. Responding to these claims may require us to expend significant time and money defending our use of affected technology, may require us to enter into licensing agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay damages. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and adversely affect the way we conduct business.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of the KPNQwest litigation could have a material adverse impact on our financial condition and operating results, on the trading price of our debt and equity securities and on our ability to access the capital markets.

As described in “Legal Proceedings” in Item 3 of this report, the KPNQwest matters present material and significant risks to us. In the aggregate, the plaintiffs in the KPNQwest matters have sought billions of euros (equating to billions of dollars) in damages. In addition, the outcome of one or more of these matters could have a negative impact on the outcomes of the other matters. We continue to defend against these matters vigorously and are currently unable to provide any estimate as to the timing of their resolution.

We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from these matters. The ultimate outcomes of these matters are still uncertain, and substantial settlements or judgments in these matters could have a significant impact on us. The magnitude of such settlements or judgments resulting from these matters could materially and adversely affect our financial condition and ability to meet our debt obligations, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of any such settlements or judgments may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets.

Further, there are other material proceedings pending against us as described in “Legal Proceedings” in Item 3 of this report that, depending on their outcome, may have a material adverse effect on our financial position. Thus, we can give no assurances as to the impacts on our operating results or financial condition as a result of these matters.

We operate in a highly regulated industry and are therefore exposed to restrictions on our manner of doing business and a variety of claims relating to such regulation.

We are subject to significant regulation by the FCC, which regulates interstate communications, and state utility commissions, which regulate intrastate communications. Generally, we must obtain and maintain certificates of authority from the FCC and regulatory bodies in most states where we offer regulated services, and we are subject to numerous, and often quite detailed, requirements under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are always in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on customer complaints or on their own initiative. See additional information about regulations affecting our business in “Business—Regulation” in Item 1 of this report.

Regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. The state legislatures and state utility commissions in our local service area have adopted reduced or modified forms of regulation for retail services. These changes also generally allow more flexibility for rate changes and for new product introduction, and they enhance our ability to respond to competition. Despite these regulatory changes, a substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which could expose us to unanticipated price declines. For instance, in 2011 the state utility commission in Arizona may consider a price cap plan that will govern the rates that we charge in that state. The FCC is also considering changing the rates that carriers can charge each other for originating, carrying and terminating traffic and for local access facilities. Also under review by the FCC and state commissions are the intercarrier compensation issues arising from the delivery of traffic destined for entities that offer conference and chat line services for free (known in the industry as “access stimulation,” or “traffic pumping”), and of traffic bound for Internet service providers that cross local exchange boundaries (known as “VNXX traffic”). The FCC and state commissions are also considering changes to funds they have established to subsidize service to high-cost areas. Changes to how those funds are distributed could

result in us receiving less in universal service funding, and changes to how the funds are collected could make some of our services less competitive. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.

All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our business, financial condition and operating results.

Risks Affecting Our Liquidity

Our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as other adverse developments.

We continue to carry significant debt. As of December 31, 2010, our consolidated debt was approximately $11.9 billion. Approximately $3.5 billion of our debt obligations comes due over the next three years. While we currently believe we will have the financial resources to meet our obligations when they come due, we cannot fully anticipate the future condition of our company, the credit markets or the economy generally. We may have unexpected costs and liabilities, and we may have limited access to financing. In addition, it is the current expectation of our Board of Directors that we will continue to pay a quarterly cash dividend. Cash used by us to pay dividends will not be available for other purposes, including the repayment of debt.

We may periodically need to obtain financing in order to meet our debt obligations as they come due. Due to the unstable economy and the current credit market environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets), if revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase, if we are required to contribute a material amount of cash to our pension plan, if we are required to begin to pay other post-retirement benefits significantly earlier than is anticipated, or if we become subject to significant judgments or settlements in one or more of the matters discussed in “Legal Proceedings” in Item 3 of this report, but we would need to do so in a manner consistent with the terms of our merger agreement with CenturyLink. We can give no assurance that this additional financing will be available on terms that are acceptable to us or at all. Also, we may be impacted by factors relating to or affecting our liquidity and capital resources due to perception in the market, impacts on our credit ratings or provisions in our financing agreements that may restrict our flexibility under certain conditions.

Our $1.035 billion revolving credit facility (referred to as our Credit Facility), which is currently undrawn, has a cross payment default provision, and the Credit Facility and certain of our other debt issues have cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Any such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. In addition, the Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the legal matters discussed in “Legal Proceedings” in Item 3 of this report. See “Liquidity and Capital Resources—Near-Term View” in Item 7 of this report for additional information about the Credit Facility.

Our high debt levels could adversely impact our credit ratings. Additionally, the degree to which we are leveraged may have other important limiting consequences, including the following:

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placing us at a competitive disadvantage as compared with our less leveraged competitors;

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making us more vulnerable to downturns in general economic conditions or in any of our businesses;

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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

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impairing our ability to obtain additional financing in the future for working capital, capital expenditures or general corporate purposes.

We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operate our business, which may in turn affect our operating results.

The industry in which we operate is capital intensive, and we anticipate that our capital requirements will continue to be significant in the coming years. Although we have reduced our operating expenses over the past few years, we may be unable to further significantly reduce these costs, even if revenue in some areas of our business is decreasing. While we believe that our planned level of capital expenditures will meet both our maintenance and our core growth requirements going forward, this may not be the case if circumstances underlying our expectations change.

Adverse changes in the value of assets or obligations associated with our qualified pension plan could negatively impact our liquidity.

The funded status of our qualified pension plan is the difference between the value of plan assets and the benefit obligation. The accounting unfunded status of our pension plan was $585 million at December 31, 2010. Adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant increase in our benefit obligation or a significant decrease in the value of plan assets. These adverse changes could require us to contribute a material amount of cash to our pension plan or could accelerate the timing of required cash payments. Based on current funding laws and regulations, we will not be required to make a cash contribution in 2011. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, we currently expect that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations. Any future material cash contributions in 2011 and beyond could have a negative impact on our liquidity by reducing our cash flows.

Our debt agreements allow us to incur significantly more debt, which could exacerbate the other risks described in this report.

The terms of our debt instruments permit us to incur additional indebtedness. Additional debt may be necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons alone. Incremental borrowings or borrowings at maturity on terms that impose additional financial risks to our various efforts to improve our operating results and financial condition could exacerbate the other risks described in this report.

If we pursue and are involved in any strategic transactions, our financial condition could be adversely affected.

On a regular and ongoing basis, we review and evaluate opportunities for acquisitions, dispositions and other strategic transactions that could be beneficial. As a result, we may be involved in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our financial condition (including short-term or long-term liquidity) or short-term or long-term operating results.

Should we make an error in judgment when identifying strategic transaction partners or fail to successfully execute any strategic transaction, we will likely fail to realize the benefits we intended to derive from the strategic transaction and may suffer other adverse consequences. Strategic transactions may involve a number of other risks, including:

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incurrence of substantial transaction costs;

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diversion of management’s attention from operating our existing business;

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failure to successfully integrate any acquired operations;

•

charges to earnings in the event of any write-down or write-off of goodwill recorded in connection with strategic transactions;

•

depletion of our cash resources or incurrence of additional indebtedness to fund strategic transactions;

•

an adverse impact on our tax position;

•

assumption of liabilities of any acquired business (including unforeseen liabilities); and

•

imposition of additional regulatory obligations by federal or state regulators.

We can give no assurance that we would be able to successfully complete any strategic transactions.

Other Risks Relating to Qwest

If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial statements and related disclosures could be affected.

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in Item 7 of this report, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered “critical” because they require judgments, assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events or assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

Taxing authorities may determine we owe additional taxes relating to various matters, which could adversely affect our financial results.

As a significant taxpayer, we are subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.

Tax sharing agreements have been executed between us and previous affiliates, and we believe the liabilities, if any, arising from adjustments to previously filed returns would be borne by the affiliated group member determined to have a deficiency under the terms and conditions of such agreements and applicable tax law. We have not generally provided for liabilities attributable to former affiliated companies or for claims they have asserted or may assert against us.

We believe that we have adequately provided for tax contingencies. However, our tax audits and examinations may result in tax liabilities that differ materially from those that we have recorded in our consolidated financial statements. Because the ultimate outcomes of all of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results or our net operating loss carryforwards.

If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.

We are a party to collective bargaining agreements with our labor unions, which represent a significant number of our employees. Our current four-year agreements with the Communications Workers of America, or CWA, and the International Brotherhood of Electrical Workers, or IBEW, expire on October 6, 2012. Although we believe that our relations with our employees and unions are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire from time to time. The impact of future negotiations, including changes in wages and benefit levels, could have a material impact on our financial results. Also, if we fail to extend or renegotiate our collective bargaining agreements, if significant disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business.

The trading price of our securities has been and could continue to be volatile.

The capital markets often experience extreme price and volume fluctuations. The overall market and the trading price of our securities may fluctuate greatly. The trading price of our securities may be significantly affected by various factors, including:

•

our pending merger with CenturyLink;

•

quarterly fluctuations in our operating results;

•

changes in investors’ and analysts’ perception of the business risks and conditions of our business;

•

broader market fluctuations;

•

general economic or political conditions;

•

acquisitions and financings including the issuance of substantial number of shares of our common stock as consideration in acquisitions;

•

the high concentration of shares owned by a few investors;

•

sale of a substantial number of shares held by the existing shareholders in the public market, including shares issued upon exercise of outstanding options; and

•

general conditions in the telecommunications industry, including regulatory developments.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal properties do not lend themselves to simple description by character and location. The components of our gross investment in property, plant and equipment consisted of the following as of December 31, 2010 and 2009:


	December 31,
	2010			2009
Components of gross investment in property, plant and equipment:
Land and buildings		7	%		7	%
Communications equipment		43	%		43	%
Other network equipment		46	%		46	%
General-purpose computers and other		4	%		4	%

Total		100	%		100	%

Our property, plant and equipment is used in our business markets, mass markets and wholesale markets segments. We evaluate depreciation, amortization and impairment charges on a total company basis because we do not allocate assets to our segments. As a result, these charges are not generally assigned to any segment.

Land and buildings consists of land, land improvements, central office and certain administrative office buildings. Communications equipment consists primarily of switches, routers and transmission electronics. Other network equipment includes primarily conduit and cable. General-purpose computers and other consists principally of computers, office equipment, vehicles and other general support equipment. We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities and equipment under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets. Due to favorable economics, we have increasingly turned to financing our assets through capital leases. Total gross investment in property, plant and equipment was approximately $47.3 billion and $46.6 billion as of December 31, 2010 and 2009, respectively, before deducting accumulated depreciation.

We own and lease administrative offices in major metropolitan locations both in the United States and internationally. Substantially all of our communications equipment and other network equipment is located in buildings that we own or on land within our local service area. Outside of our local service area, our assets are generally located on real property pursuant to an agreement with the property owner or another person with rights to the property. It is possible that we may lose our rights under one or more of these agreements, due to their termination or their expiration.

Several putative class actions have been filed against us disputing our use of certain rights-of-way as described in “Legal Proceedings—Other Matters” in Item 3 of this report. If we lose any of these rights-of-way or are unable to renew them, we may find it necessary to move or replace the affected portions of our network. However, we do not expect any material adverse impacts as a result of the loss of any of these rights.

For additional information, see Note 6—Property, Plant and Equipment to our consolidated financial statements in Item 8 of this report.

ITEM 3. LEGAL PROCEEDINGS

In this section, when we refer to a class action as “putative” it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.

To the extent appropriate, we have accrued liabilities for the matters described below.

The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate us to indemnify our former directors, officers or employees with respect to certain of the matters described below, and we have been advancing legal fees and costs to certain former directors, officers or employees in connection with certain matters described below.

KPNQwest Litigation/Investigation

On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which we were a major shareholder) filed a lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. We and Koninklijke KPN N.V. (“KPN”) are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest, some of whom were formerly affiliated with us. Plaintiffs allege, among other things, that defendants’ actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately $5.6 billion based on the exchange rate on December 31, 2010), plus statutory interest.

On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands, against us, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were formerly affiliated with us. The lawsuit alleges that defendants misrepresented KPNQwest’s financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $290 million based on the exchange rate on December 31, 2010).

On August 23, 2005, the Dutch Shareholders Association (Vereniging van Effectenbezitters, or VEB) filed a petition for inquiry with the Enterprise Chamber of the Amsterdam Court of Appeals, the Netherlands, with regard to KPNQwest. VEB sought an inquiry into the policies and course of business at KPNQwest that are alleged to have caused the bankruptcy of KPNQwest in May 2002, and an investigation into alleged mismanagement of KPNQwest by its executive management, supervisory board members, joint venture entities (us and KPN), and KPNQwest’s outside auditors and accountants. On December 28, 2006, the Enterprise Chamber ordered an inquiry into the management and conduct of affairs of KPNQwest for the period January 1 through May 23, 2002. On December 5, 2008, the Enterprise Chamber appointed investigators to conduct the inquiry. VEB claims that certain individuals have assigned to it their claims for losses totaling approximately €40 million (or approximately $55 million based on the exchange rate on December 31, 2010), which those individuals allegedly incurred on investments in KPNQwest securities. VEB has not yet filed any adjudicative action to assert those claims.

On June 7, 2010, a number of parties, including us and KPN, reached a settlement with VEB for €19 million (or approximately $25 million based on the exchange rate on December 31, 2010), conditioned in part on the termination of the investigation by the Enterprise Chamber. Pursuant to the terms of the settlement, VEB formally requested that the Enterprise Chamber terminate the investigation. The Enterprise Chamber denied that request and directed the investigation to proceed. On an appeal of that decision, the Dutch Supreme Court reversed the Enterprise Chamber’s decision and, among other things, referred the case back to the Enterprise Chamber to terminate the investigation.

We will continue to defend against the pending KPNQwest litigation matters vigorously.

Stockholder Litigation

In the weeks following the April 22, 2010 announcement of our pending merger with CenturyLink, purported Qwest stockholders filed 17 lawsuits against us, our directors, certain of our officers, CenturyLink and SB44 Acquisition Company. The purported stockholder plaintiffs commenced these actions in three jurisdictions: the District Court for the City and County of Denver, the United States District Court for the District of Colorado, and the Delaware Court of Chancery. The plaintiffs generally allege that our directors breached their fiduciary duties in approving the merger and seek to enjoin the merger and, in some cases, damages if the merger is completed. Many of the lawsuits also challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus relating to the merger, which was filed with the SEC on June 4, 2010.

We, and our directors, believe that all of these actions are without merit. The defendants nevertheless negotiated with the purported stockholder plaintiffs regarding a settlement of the claims asserted in all of these actions, including the claims that challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus. On July 16, 2010, the parties entered into a memorandum of understanding reflecting the terms of their agreement-in-principle for a settlement of all of the claims asserted in these actions. Pursuant to this agreement, defendants included additional disclosures in the final joint proxy statement-prospectus filed with the SEC on July 19, 2010. On December 17, 2010, the United States District Court for the District of Colorado preliminarily approved the settlement, and notice was subsequently provided to stockholders of the proposed final resolution. A final fairness hearing is scheduled for February 25, 2011. If the settlement is approved at the final hearing, all of these actions will be dismissed, with prejudice. The defendants intend to defend their positions in these matters vigorously to the extent they are not fully resolved by the settlement.

Other Matters

Several putative class actions relating to the installation of fiber-optic cable in certain rights-of-way were filed against us on behalf of landowners on various dates and in various courts in Arizona, California, Colorado, Georgia, Illinois, Indiana, Kansas, Massachusetts, Mississippi, Missouri, Nevada, New Mexico, Oregon, South Carolina, Tennessee, Texas and Utah. For the most part, the complaints challenge our right to install our fiber-optic cable in railroad rights-of-way. The complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit us to install our fiber-optic cable in the right-of-way without the plaintiffs’ consent. Most of the actions purport to be brought on behalf of state-wide classes in the named plaintiffs’ respective states, although two of the currently pending actions purport to be brought on behalf of multi-state classes. Specifically, the Illinois state court action purports to be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin, and the Indiana state court action purports to be on behalf of a national class of landowners. In general, the complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. On July 18, 2008, a federal district court in Massachusetts entered an order preliminarily approving a settlement of all of the actions described above, except the action pending in Tennessee. On September 10, 2009, the court denied final approval of the settlement on grounds that it lacked subject matter jurisdiction. On December 9, 2009, the court issued a revised ruling that, among other things, denied a motion for approval as moot and dismissed the matter for lack of subject matter jurisdiction.

Qwest Communications Company, LLC, or QCC, is a defendant in litigation filed by several billing agents for the owners of payphones seeking compensation for coinless calls made from payphones. The matter is pending in the United States District Court for the District of Columbia. Generally, the payphone owners claim that QCC underpaid the amount of compensation due to them under FCC regulations for coinless calls placed from their phones onto QCC’s network. The claim seeks compensation for calls, as well as interest and attorneys’ fees. QCC will vigorously defend against this action.

A putative class action filed on behalf of certain of our retirees was brought against us, the Qwest Group Life Insurance Plan and other related entities in federal district court in Colorado in connection with our decision to reduce the life insurance benefit for these retirees to a $10,000 benefit. The action was filed on March 30, 2007. The plaintiffs allege, among other things, that we and other defendants were obligated to continue their life insurance benefit at the levels in place before we decided to reduce them. Plaintiffs seek restoration of the life insurance benefit to previous levels and certain equitable relief. The district court ruled in our favor on the central issue of whether we properly reserved our right to reduce the life insurance benefit under applicable law and plan documents. The plaintiffs subsequently amended their complaint to assert additional claims. In 2009, the court dismissed or granted summary judgment to us on all of the plaintiffs’ claims. The plaintiffs have appealed the court’s decision to the Tenth Circuit Court of Appeals.

We continue to evaluate the method we use to assess the amount of USF payments that must be made on certain products, and during the year ended December 31, 2010 we recorded an adjustment to our liability of $15 million related to previous years’ USF payments. This ongoing evaluation may result in further adjustments to previous years’ USF payments and charges to customers.

ITEM 4. RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Qwest Common Stock

Our common stock is listed on the New York Stock Exchange under the trading symbol “Q.” On February 8, 2011, we had approximately 232,000 stockholders of record, although there are significantly more beneficial holders of our common stock. The following table sets forth the high and low sales prices per share of our common stock for the periods indicated.


	Market Price
	High		Low
2010
Fourth quarter	$	7.73	$	6.24
Third quarter		6.37		5.16
Second quarter		5.53		4.87
First quarter		5.38		4.11

2009
Fourth quarter	$	4.43	$	3.42
Third quarter		4.17		3.30
Second quarter		4.87		3.36
First quarter		4.04		2.86

Our Board of Directors declared the following cash dividends payable in 2010 and 2009:


Date Declared	Record Date	Dividend Per Share		Total Amount		Payment Date
				(in millions)
October 20, 2010	December 3, 2010	$	0.08	$	139	December 17, 2010
August 18, 2010	September 10, 2010	$	0.08	$	139	September 24, 2010
April 14, 2010	May 21, 2010	$	0.08	$	139	June 11, 2010
December 16, 2009	February 19, 2010	$	0.08	$	138	March 12, 2010
October 14, 2009	November 20, 2009	$	0.08	$	138	December 11, 2009
July 27, 2009	August 21, 2009	$	0.08	$	138	September 11, 2009
April 15, 2009	May 22, 2009	$	0.08	$	138	June 12, 2009
December 10, 2008	February 13, 2009	$	0.08	$	136	March 6, 2009

On January 24, 2011, our Board of Directors declared a quarterly dividend for the first quarter of 2011 of $0.08 per share totaling approximately $141 million. The dividend is payable on February 25, 2011 to stockholders of record as of February 18, 2011.

It is the current expectation of our Board of Directors that we will continue to pay a quarterly cash dividend. Some of our debt instruments contain restrictions on the amount of dividends we can pay. See Note 8—Borrowings to our consolidated financial statements in Item 8 of this report for additional information about our restrictions. The most restrictive covenant is under our Credit Facility, which is currently undrawn. The Credit Facility currently allows us to pay cash dividends and repurchase shares up to $1.7 billion, plus any cumulative net income and net proceeds from the issuance of common stock, less any dividends paid or shares repurchased. In addition, like other companies that are incorporated in Delaware, we are also limited by Delaware law in the amount of dividends we can pay. Our merger agreement with CenturyLink requires that CenturyLink and we coordinate with each other to designate the record dates and payment dates for the two companies respective quarterly dividends. Thus, the timing of our future dividends may deviate from historical dates due to this requirement.

Issuer Purchases of Equity Securities

The following table contains information about repurchases of our common stock or shares surrendered to satisfy tax obligations during the fourth quarter of 2010:


	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs ⁽²⁾
Period
October 2010		4,353	$	6.34		—	$	193,126,784
November 2010		9,201	$	6.87		—	$	193,126,784
December 2010 ⁽³⁾		16,519,323	$	7.71		—	$	193,126,784

Total		16,532,877				—

(1)	Amounts represent shares of common stock delivered to us as payment of withholding taxes due on the vesting and payout of restricted stock and performance shares issued under our Equity Incentive Plan.

(2)

In October 2006, our Board of Directors approved a stock repurchase program for up to $2 billion of our common stock. The repurchases were originally scheduled to be completed in 2008; however, our Board of Directors extended the timeframe to complete these repurchases for an undetermined period. As of December 31, 2010, we had repurchased a total of $1.807 billion of common stock under this program. Our merger agreement with CenturyLink prohibits us from repurchasing additional shares under this program without CenturyLink’s consent.

(3)

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, the consolidated financial statements and notes thereto in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report. The comparability of the following selected financial data is significantly impacted by various changes in accounting principles including:

•

the adoption of Financial Accounting Standards Board, or FASB, Interpretation No., or FIN, 48, “Accounting for Uncertainty in Income Taxes” (Accounting Standards Codification, or ASC, 740), which was effective for us on January 1, 2007; and

•

the adoption of Statement of Financial Accounting Standards, or SFAS, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (ASC 715), which was effective for us on December 31, 2006.


	Years Ended December 31,
	2010			2009		2008		2007		2006
	(Dollars in millions, shares in thousands except per share amounts)
Operating revenue	$	11,730		$	12,311	$	13,475	$	13,778	$	13,923
Operating expenses		9,729			10,336		11,378		12,022		12,368
Income before income taxes		450			903		1,051		620		517
Net (loss) income ⁽¹⁾		(55	)		662		652		2,890		553

(Loss) earnings per common share:
Basic	$	(0.03	)	$	0.38	$	0.38	$	1.57	$	0.29
Diluted	$	(0.03	)	$	0.38	$	0.37	$	1.50	$	0.28

Weighted average common shares outstanding:
Basic		1,726,085			1,709,346		1,728,731		1,829,244		1,889,857
Diluted		1,726,085			1,713,498		1,730,206		1,915,167		1,965,751

Dividends declared per common share	$	0.24		$	0.32	$	0.32	$	0.08	$	—

Other data:
Cash provided by operating activities	$	3,367		$	3,307	$	2,931	$	3,026	$	2,789
Cash used for investing activities		1,488			1,406		1,693		1,601		1,700
Cash used for financing activities		3,913			60		1,575		1,764		694
Expenditures for property, plant and equipment and capitalized software		1,488			1,409		1,777		1,669		1,632


	December 31,
	2010			2009			2008			2007			2006
	(Dollars in millions)
Balance sheet data:
Cash and cash equivalents	$	372		$	2,406		$	565		$	902		$	1,241
Total assets		17,220			20,380			20,141			22,471			21,234
Total borrowings—net ⁽²⁾		11,947			14,200			13,555			14,098			14,695
Total borrowings—net to total capital ratio ⁽³⁾		116	%		109	%		111	%		96	%		109	%

(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in Item 7 of this report for a discussion of unusual items affecting the results for 2010, 2009 and 2008. Results for 2007 and 2006 were affected by the changes in accounting principles described above the table.

(2)

(3)

The total borrowings—net to total capital ratio is a measure of the percentage of total borrowings—net in our capital structure. The ratio is calculated by dividing total borrowings—net by total capital. Total borrowings—net is the sum of current portion of long-term borrowings and long-term borrowings—net on our consolidated balance sheets. Total capital is the sum of total borrowings—net and total stockholders’ equity or deficit.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this report constitute forward-looking statements. See “Business—Special Note Regarding Forward-Looking Statements” in Item 1 of this report for additional factors relating to these statements, and see “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

Business Overview and Presentation

We offer data, Internet, video and voice services nationwide and globally. We generate the majority of our revenue from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

Our operating revenue is primarily generated from our business markets, mass markets and wholesale markets segments. We group our products and services among major categories of products and services as described below:

•

Strategic services , which include primarily private line, broadband, Qwest iQ Networking ^® , hosting, video (including DIRECTV), Verizon Wireless services and voice over Internet Protocol, or VoIP;

•

Legacy services, which include primarily local, long-distance, access, traditional wide area network, or WAN and integrated services digital network, or ISDN, services;

•

Qwest-branded wireless services were wireless services that we provided through our mass markets segment under an arrangement with a wireless provider. We stopped providing these services on October 31, 2009; and

•

Data integration is telecommunications equipment we sell that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers.

Segment results presented in this Item 7 and in Note 16—Segment Information to our consolidated financial statements in Item 8 of this report are not indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this report.

CenturyLink Merger

On April 21, 2010, we entered into a merger agreement whereby CenturyLink will acquire us in a tax-free, stock-for-stock transaction. Under the terms of the agreement, our stockholders will receive 0.1664 shares of CenturyLink common stock for each share of our common stock they own at closing. Based on our and CenturyLink’s number of outstanding shares as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and our stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, we received notification from the Department of Justice and the Federal Trade Commission that we received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. We have received most of the necessary approvals from state public service or public utility commissions, but we

still need approvals from the FCC and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, we currently expect to receive all required approvals in the first quarter and are planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, we may be obligated to pay CenturyLink a termination fee of $350 million.

As of December 31, 2010, we had recognized $39 million of expenses associated with our activities surrounding the pending CenturyLink merger. We have not recognized certain other expenses that are contingent on completion of the merger. These expenses include financial advisory fees and compensation expense comprised of retention bonuses, severance and stock-based compensation for stock-based awards that will vest in connection with the merger. These contingent expenses will be recognized in our consolidated financial statements commencing in the period in which the merger occurs. The final amount of compensation expense to be recognized is partially dependent upon personnel decisions that will be made as part of the integration planning. These amounts may be material.

Upon completion of the merger, our assets and liabilities will be revalued and recorded at fair value. The assignment of fair value will require a significant amount of judgment. The use of fair value measures will affect the comparability of our post-merger financial information and may make it more difficult to predict earnings in future periods. For example, we have certain deferred costs and deferred revenues on our balance sheet associated with installation activities and capacity leases whereby we incurred costs and received payments up front but are recognizing the related expenses and revenues over the estimated life of the customer or life of the contract. Based on the accounting guidance for business combinations, these existing deferred costs and deferred revenues are expected to be assigned little or no value in the purchase price allocation process and will thus be eliminated.

In 2010, we also recognized a $475 million loss due to the embedded option in our convertible debt being settled during the year. The embedded option was disqualified for equity treatment due to a requirement in the merger agreement to redeem this debt, including the option component, with cash. See Note 3—Fair Value of Financial Instruments to our consolidated financial statements in Item 8 of this report for additional information regarding the change in accounting for our previously outstanding convertible debt.

For unaudited pro forma financial information relating to the merger, see the joint proxy statement /prospectus filed with the SEC by CenturyLink on July 19, 2010.

Reclassifications

During the first quarter of 2010, we changed the definitions we use to classify expenses as cost of sales, selling expenses or general, administrative and other operating expenses and, as a result, certain expenses in our consolidated statements of operations for the prior year have been reclassified to conform to the current year presentation. Our new definitions of these expenses are as follows:

•

Cost of sales (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: facilities expenses (which are third-party telecommunications expenses we incur for using other carriers’ networks to provide services to our customers); employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages and certain benefits); equipment sales expenses (such as data integration and modem expenses); rents and utilities expenses incurred by our network operations and data centers; fleet expenses; and other expenses directly related to our network operations (such as professional fees and outsourced services).

•

Selling expenses are expenses incurred in selling products and services to our customers. These expenses include: employee-related expenses directly attributable to selling products or services (such as salaries, wages, internal commissions and certain benefits); marketing and advertising; external commissions; bad debt expense; and other selling expenses (such as professional fees and outsourced services).

•

General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and USF charges); rents and utilities expenses incurred by our administrative offices; and other general, administrative and other operating expenses (such as professional fees). These expenses also include our combined net periodic pension and post-retirement benefits expenses for all eligible employees and retirees.

These definitions reflect changes primarily to reclassify expenses for: rent and utilities incurred by our network operations and data centers; fleet; network and supply chain management; and insurance and risk management from general, administrative and other operating expenses to cost of sales, where these expenses are more aligned with how we now manage our segments. We believe these changes allow users of our financial statements to better understand our expense structure. These expense classifications may not be comparable to those of other companies. These changes had no impact on total operating expenses or net income for any period. These changes resulted in the reclassification of $370 million and $371 million from the general, administrative and other operating expenses and selling expenses categories to cost of sales for the years ended December 31, 2009 and 2008, respectively.

We anticipate that we will change our definitions again once the merger with CenturyLink is complete in order to conform our definitions to those used by CenturyLink.

In 2010, certain previously unallocated expenses were included in the information our Chief Operating Decision Maker, or CODM, uses to evaluate the performance of each segment and certain revenue and expenses were realigned based on changes in how we manage our business. The majority of our cost of sales and selling expenses are incurred directly by or allocated to our segments based on an activity based costing methodology. We have reclassified and reallocated certain prior year amounts in our Annual Report on Form 10-K for the year ended December 31, 2009 to conform to the current year presentation.

During the first quarter of 2010 we updated our methodology for counting our subscribers and access lines where we provide the services. We now count broadband subscribers and access lines when we earn revenue associated with them. 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 and residential lines that are used solely to provide broadband services. Our new broadband methodology also excludes business and wholesale markets customers from our broadband subscribers.

During the first quarter of 2010 we also updated our methodology for counting our partnership based video and wireless subscribers. We now count these subscribers when we earn revenue associated with them, regardless of whether we actually bill the subscribers for the services. Our new methodology also excludes business and wholesale markets customers from our wireless subscribers. Beginning in mid-2009 we began to earn an ongoing commission associated with video customers that we no longer bill so long as they remain active customers of DIRECTV. Because of the change in this commission we have begun to include them in our subscriber counts. We use this same methodology for our wireless subscribers. This methodology change has increased our video subscribers by approximately 68,000 for the year ended December 31, 2010. We believe the methodology updates described above align our subscribers and access lines with our revenue and better reflect our ongoing operations.

We have restated our subscribers and access lines reported as of December 31, 2009 to conform to the current year presentation. The table below quantifies these changes by segment:


	December 31, 2009
	Business Markets			Mass Markets			Wholesale Markets		Total
	(in thousands)
Previously reported access lines		2,396			6,840			1,030		10,266
Affiliates and us		(403	)		—			—		(403	)
Alignment to billed units		10			25			27		62

Currently reported access lines		2,003			6,865			1,057		9,925

Previously reported broadband subscribers		—			2,974			—		2,974
Excluding business and wholesale customers		—			(143	)		—		(143	)
Alignment to billed units		—			(19	)		—		(19	)

Currently reported broadband subscribers		—			2,812			—		2,812

Previously reported video subscribers		—			880			—		880
Alignment to billed units		—			60			—		60

Currently reported video subscribers		—			940			—		940

Previously reported wireless subscribers		—			850			—		850
Excluding business and wholesale customers		—			(1	)		—		(1	)
Alignment to billed units		—			(11	)		—		(11	)

Currently reported wireless subscribers		—			838			—		838

We have restated our subscribers and access lines reported as of December 31, 2008 to conform to the current year presentation. The table below quantifies these changes by segment:


	December 31, 2008
	Business Markets			Mass Markets			Wholesale Markets		Total
	(in thousands)
Previously reported access lines		2,636			7,796			1,133		11,565
Affiliates and us		(484	)		—			—		(484	)
Alignment to billed units		(6	)		11			41		46

Currently reported access lines		2,146			7,807			1,174		11,127

Previously reported broadband subscribers		—			2,847			—		2,847
Excluding business and wholesale customers		—			(151	)		—		(151	)
Alignment to billed units		—			(44	)		—		(44	)

Currently reported broadband subscribers		—			2,652			—		2,652

Previously reported video subscribers		—			798			—		798
Alignment to billed units		—			16			—		16

Currently reported video subscribers		—			814			—		814

Previously reported wireless subscribers		—			717			—		717
Excluding business and wholesale customers		—			(1	)		—		(1	)
Alignment to billed units		—			(58	)		—		(58	)

Currently reported wireless subscribers		—			658			—		658

Business Trends

Our financial results were impacted by several significant trends, which are listed below. We expect that these trends will continue to affect our results of operations, cash flows or financial position. Most of these trends also impact our segment results, and therefore we provide a detailed discussion of these trends under the heading “Segment Results” below. Because we do not allocate capital expenditures or our combined net periodic pension and post-retirement benefit expenses to our segments, the related trends do not impact any of our segments. Instead, we provide a discussion of these expenses under the headings “Operating Expenses—General, Administrative and Other Operating Expenses,” “Liquidity and Capital Resources—Long-Term View” and “Liquidity and Capital Resources—Historical View—Investing Activities” below.

•

Growth in strategic services

•

Product bundling and promotions

•

Greater operating efficiencies

•

Continuing loss of access lines

•

Elimination of Qwest-branded wireless revenue and expenses

•

Pension funding and pension expense

•

Disciplined capital expenditures

While these trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in “Risk Factors” in Item 1A of this report may also materially impact our business operations and financial results.

Results of Operations

Overview

Each of our segments use our network to generate revenue by providing data, Internet and voice services to its customers, as described further below. Through our strategic partnerships with DIRECTV and Verizon Wireless, we also offer satellite digital television and wireless services to customers in our local service area. Depending on the products or services purchased, a customer may pay a service activation fee, a monthly service fee, a usage charge or a combination of these.

•

Business markets. This segment provides data, Internet and voice services to our enterprise and government customers. Our business markets products and services include:

•

Strategic services, which include primarily private line, Qwest iQ Networking ^® , hosting, broadband and VoIP services;

•

Legacy services, which include primarily local, long-distance, traditional WAN, and ISDN services; and

•

Data integration, which is telecommunications equipment we sell that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers.

•

Mass markets. This segment provides data, Internet, voice and resold video and wireless services to consumers and small business customers. Our mass markets products and services include:

•

Strategic services, which include primarily broadband, video (including DIRECTV) and Verizon Wireless services;

•

Legacy services, which include primarily local and long-distance services; and

•

Qwest-branded wireless services (until October 31, 2009).

•

Wholesale markets . This segment provides data, Internet and voice services primarily to other telecommunications providers. Our wholesale markets products and services include:

•

Strategic services, which are predominately private line services provided to other carriers; and

•

Legacy services, which include primarily local, long-distance, access and traditional WAN services.

We also generate other revenue from USF surcharges and the leasing and subleasing of space in our office buildings, warehouses and other properties. We centrally manage this revenue, and consequently it is not assigned to any of our segments.

Expenses for each of our segments include direct expenses incurred by the segment and other expenses assigned to the segment. Direct expenses incurred by the segment include segment specific employee-related costs (excluding any severance expenses and combined net periodic pension and post-retirement benefits expenses), bad debt, equipment sales costs and other non-employee related costs such as customer support, collections, marketing and advertising. Other expenses assigned to the segments include network expenses, facility costs and other costs such as fleet, product management and real estate costs related to hosting and retail centers. Assigned expenses are determined by applying an activity-based costing methodology. We periodically review the methodology used to assign expenses to our segments. Changes to the methodology are reflected in prior period segment data for comparative purposes.

We centrally manage expenses for administrative services (such as finance, computer systems development and support, real estate, legal and human resources), severance costs, restructuring charges and combined net periodic pension and post-retirement benefits expenses for all employees and retirees; consequently, these expenses are not assigned to our segments. We evaluate depreciation, amortization, information technology impairment charges and interest expense on a total company basis because we do not allocate assets or debt to specific segments. As a result, these items, along with other non-operating income or expenses, are not assigned to any segment. Therefore, the segment results presented below are not indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

The following table summarizes our results of operations for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,							Increase/(Decrease)						% Change
	2010			2009		2008		2010 v 2009			2009 v 2008			2010 v 2009			2009 v 2008
	(Dollars in millions, except per share amounts)
Operating revenue by category:
Strategic and legacy services:
Strategic services	$	4,489		$	4,217	$	3,985	$	272		$	232			6	%		6	%
Legacy services		6,257			7,075		8,103		(818	)		(1,028	)		(12	)%		(13	)%

Total strategic and legacy services		10,746			11,292		12,088		(546	)		(796	)		(5	)%		(7	)%
Qwest-branded wireless services		—			112		460		(112	)		(348	)		nm			(76	)%
Data integration		604			557		570		47			(13	)		8	%		(2	)%

Total segment revenue		11,350			11,961		13,118		(611	)		(1,157	)		(5	)%		(9	)%
Other revenue (primarily USF surcharges)		380			350		357		30			(7	)		9	%		(2	)%

Total operating revenue		11,730			12,311		13,475		(581	)		(1,164	)		(5	)%		(9	)%
Operating expenses		9,729			10,336		11,378		(607	)		(1,042	)		(6	)%		(9	)%
Other expense—net		1,551			1,072		1,046		479			26			45	%		2	%

Income before income taxes		450			903		1,051		(453	)		(148	)		(50	)%		(14	)%
Income tax expense		505			241		399		264			(158	)		110	%		(40	)%

Net (loss) income	$	(55	)	$	662	$	652	$	(717	)	$	10			(108	)%		2	%

(Loss) earnings per common share:
Basic	$	(0.03	)	$	0.38	$	0.38	$	(0.41	)	$	—			(108	)%		—	%
Diluted	$	(0.03	)	$	0.38	$	0.37	$	(0.41	)	$	0.01			(108	)%		3	%

nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

The following table summarizes our results of operations as a percentage of total operating revenue for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009			2008
	(in percentages of total operating revenue)
Operating revenue by category:
Strategic and legacy services:
Strategic services		38	%		34	%		30	%
Legacy services		54	%		58	%		60	%

Total strategic and legacy services		92	%		92	%		90	%
Qwest-branded wireless services		—	%		—	%		3	%
Data integration		5	%		5	%		4	%

Total segment revenue		97	%		97	%		97	%
Other revenue (primarily USF surcharges)		3	%		3	%		3	%

Total operating revenue		100	%		100	%		100	%
Operating expenses		83	%		84	%		84	%
Other expense—net		13	%		9	%		8	%

Income before income taxes		4	%		7	%		8	%
Income tax expense		4	%		2	%		3	%

Net (loss) income		—	%		5	%		5	%

The following table summarizes some of our key operational measures for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,						Increase/(Decrease)						% Change
	2010		2009		2008		2010 v 2009			2009 v 2008			2010 v 2009			2009 v 2008
	(in thousands except employees)
Employees		28,343		30,138		32,937		(1,795	)		(2,799	)		(6	)%		(8	)%
Total broadband subscribers		2,914		2,812		2,652		102			160			4	%		6	%
Total video subscribers		1,003		940		814		63			126			7	%		15	%
Total wireless subscribers		1,086		838		658		248			180			30	%		27	%
Total access lines		8,855		9,925		11,127		(1,070	)		(1,202	)		(11	)%		(11	)%

2010 COMPARED TO 2009

Operating Revenue

Although strategic services revenue increased, a decrease in legacy services and Qwest-branded wireless services revenue resulted in lower total operating revenue. Strategic services revenue increased primarily due to increased volumes in Qwest iQ Networking ^® , as well as higher broadband revenue resulting from an increase in subscribers and an improving mix of higher priced, higher speed services as well as increased volumes in our private line services.

Legacy services revenue decreased as a result of lower local services revenue due to access line losses resulting from competitive pressures, along with product substitution. Lower demand for our long-distance services, traditional WAN services and access services, due to customer migration, product substitution and increased competition also contributed to the decrease in our legacy services revenue.

We stopped selling Qwest-branded wireless services in October 2009 due to our transition to selling Verizon Wireless services. We recognize revenue from Verizon Wireless services on a net basis and categorize this revenue as strategic services revenue, whereas we recognized revenue from Qwest-branded wireless services on a gross basis and categorized this revenue as a separate category of revenue. Due to this transition, we recognized no revenue from Qwest-branded wireless services in the year ended December 31, 2010 and will not recognize any revenue from these services in future periods. This transition has resulted in lower wireless services revenue, but has favorably impacted our overall profitability.

Revenue from data integration increased primarily due to professional services for installation of customer premise equipment.

Other revenue, primarily USF surcharges, which we account for on a gross basis, increased for the year ended December 31, 2010 primarily due to an increase in the USF contribution factor. We passed along this increase to our customers to align our USF revenue with our USF expenses. This increase was partially offset by decreased revenue associated with our services subject to USF contributions.

Operating Expenses

The following table provides further detail regarding our total operating expenses for the years ended December 31, 2010 and 2009:


	Years Ended December 31,				Increase/ (Decrease)			% Change
	2010		2009		2010 v 2009			2010 v 2009
	(Dollars in millions)
Cost of sales (exclusive of depreciation and amortization)	$	3,804	$	4,088	$	(284	)		(7	)%
Selling		1,702		1,944		(242	)		(12	)%
General, administrative and other operating		2,023		1,993		30			2	%
Depreciation and amortization		2,200		2,311		(111	)		(5	)%

Total operating expenses	$	9,729	$	10,336	$	(607	)		(6	)%

Cost of Sales (exclusive of depreciation and amortization)

Cost of sales decreased primarily due to decreased facilities expenses as a result of both lower rates and lower volumes for long-distance service, the migration of our wireless customers from our Qwest-branded wireless services as well as cost optimization. Cost of sales also decreased due to lower salaries and wages related to employee reductions in our network operations as we continue to manage our workforce to our workload. These decreases were partially offset by an increase in equipment sales expense related to data integration and an increase in professional fees.

Selling Expenses

Selling expenses decreased due to decreased employee-related expenses for salaries, wages and severance related to prior period employee reductions and decreased internal commissions driven by lower sales headcount. Selling expenses also decreased due to lower bad debt expense resulting from our transition to selling Verizon Wireless services and our reduction in revenue. The migration to internal sales call centers from using third-party sales call centers also decreased selling expenses. In addition, lower professional fees and external commissions also reduced selling expenses. These decreases in expenses were partially offset by a legal settlement during 2010 and increased expenses associated with the acceleration of stock-based compensation.

General, Administrative and Other Operating Expenses

General, administrative and other operating expenses increased due to increased employee-related expenses for salaries and wages associated with the acceleration of stock-based compensation. On December 21, 2010, we accelerated the vesting of certain restricted stock and performance share awards issued under our Equity Incentive Plan in order to preserve certain economic benefits to our stockholders of approximately $120 million that otherwise would have been lost in connection with our pending merger with CenturyLink. General, administrative and other operating expenses also increased primarily due to expenses associated with the pending CenturyLink merger and increased taxes and fees primarily related to USF charges as a result of an increase in the USF contribution factor mandated by the FCC and an adjustment resulting from prior period assessments. These increases were partially offset by decreases in pension and post-retirement benefits expenses during 2010 and a legal settlement in the third quarter of 2009.

We recorded combined pension and post-retirement benefits expenses of $124 million in 2010 as compared to $196 million for 2009. The decrease in combined net periodic benefits expense in 2010 is primarily due to our decision to no longer provide pension benefit accruals for active management employees under our qualified and non-qualified pension plans, the elimination of the qualified and non-qualified pension plan death benefits for

eligible beneficiaries of certain retirees and reduced interest cost, partially offset by an increase in actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred. Pension and post-retirement benefits expenses are based on several assumptions, including discount rates and expected rates of return on plan assets that are set at December 31 of each year. We expect to record combined net periodic expense of approximately $106 million in 2011. The expected decrease in combined net periodic expense in 2011 is primarily due to decreased interest cost partially offset by a decrease in the expected return on assets. For additional information on our pension and post-retirement benefit plans, see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Depreciation and Amortization

The following table breaks out depreciation and amortization expense for the years ended December 31, 2010 and 2009:


	Years Ended December 31,				Increase/ (Decrease)			% Change
	2010		2009		2010 v 2009			2010 v 2009
	(Dollars in millions)
Depreciation and amortization:
Depreciation	$	1,949	$	2,071	$	(122	)		(6	)%
Amortization		251		240		11			5	%

Total depreciation and amortization	$	2,200	$	2,311	$	(111	)		(5	)%

Although our capital expenditures fluctuate from year to year, we continue to see decreased depreciation expense due to significantly lower capital expenditures and the changing mix of our investment in property, plant and equipment since 2002. If we do not significantly shorten our estimates of the useful lives of our assets, we expect that our depreciation expense will continue to decrease for the foreseeable future. Amortization expense was higher for the year ended December 31, 2010 due to increases in internally developed capitalized software.

Effective January 1, 2010, we changed our estimates of the economic lives of certain telecommunications equipment assets. These changes resulted in additional depreciation expense of approximately $50 million for the year ended December 31, 2010 when compared to the year ended December 31, 2009.

Other Consolidated Results

The following table provides detail regarding other expense (income)—net and income tax expense for the years ended December 31, 2010 and 2009:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2010			2009			2010 v 2009			2010 v 2009
	(Dollars in millions)
Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net	$	1,039		$	1,089		$	(50	)		(5	)%
Loss on embedded option in convertible debt		475			—			475			nm
Loss on early retirement of debt		45			—			45			nm
Other—net		(8	)		(17	)		(9	)		(53	)%

Total other expense (income)—net	$	1,551		$	1,072		$	479			45	%

Income tax expense	$	505		$	241		$	264			110	%

nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

Other Expense (Income)—Net

Interest expense on long-term borrowings and capital leases—net decreased primarily due to debt maturities and early retirement of debt, partially offset by interest on new debt.

The loss on the embedded option in our convertible debt resulted from stock appreciation well above any that was implied through historical volatility. For additional information, see Note 3—Fair Value of Financial Instruments to our consolidated financial statements in Item 8 of this report.

In November and December 2010, we redeemed all of the then-outstanding $1.118 billion aggregate principal amount of our 3.50% Convertible Senior Notes due 2025 (referred to as our 3.50% Convertible Senior Notes) and the remaining embedded option for $616 million. This resulted in no gain or loss on the notes and a total loss of $475 million on the embedded conversion option for the year ended December 31, 2010.

In February 2010, we redeemed $525 million aggregate principal amount of our Senior Notes due 2011, resulting in an immaterial loss. In the first and third quarters of 2010, we completed cash tender offers for the purchase of certain of our outstanding debt securities. We received and accepted tenders of approximately $1.107 billion aggregate principal amount of notes for $1.169 billion, resulting in an aggregate loss of $43 million.

Other—net includes, among other things, interest income, income tax penalties, other interest expense (such as interest on income taxes), and equity method investment losses. The change in other—net in 2010 compared to 2009 is due to an equity method investment loss in 2009, offset by lower tax interest credits and lower interest income.

Income Tax Expense

Income tax expense for the year ended December 31, 2010 increased by $264 million as a result of the tax treatment of the premium paid on our convertible debt, the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, the tax treatment of the expenses incurred when we accelerated the vesting of certain stock-based compensation and the tax treatment of certain expenses associated with the pending CenturyLink merger, as well our recognition in 2009 of previously unrecognized tax benefits on uncertain tax positions and favorable income tax settlements related to prior years.

As described above, we recorded $475 million of expenses associated with extinguishing our convertible notes with cash. These expenses are not deductible for income tax purposes and, as such, they increased our effective tax rate for the year ended December 31, 2010 by 40.8 percentage points.

Among other things, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted, which increased our effective tax rate for the year ended December 31, 2010 by 25.5 percentage points.

On December 21, 2010, we accelerated the vesting of certain restricted stock and performance share awards issued under our Equity Incentive Plan in order to preserve certain economic benefits to our stockholders of $120 million that otherwise would have been lost in connection with our pending merger with CenturyLink. However, certain of the expenses we recorded for this acceleration are not deductible for income tax purposes, and as such they increased our effective tax rate for the year ended December 31, 2010 by 4.8 percentage points.

During the year ended December 31, 2010 we incurred approximately $39 million of expenses associated with the pending CenturyLink merger. Certain of these expenses are not deductible for income tax purposes and, as such, they increased our effective tax rate for the year ended December 31, 2010 by 1.9 percentage points.

During the year ended December 31, 2009, we recognized previously unrecognized tax benefits on uncertain tax positions and favorable income tax settlements related to prior years, which decreased our effective tax rate for the year ended December 31, 2009 by 11.1 percentage points.

We had previously estimated and reported that our expected on-going income tax rate would be approximately 39%, but due largely to the loss of the Medicare subsidy permanent item we now estimate that our on-going expected effective income tax rate will be in the range of approximately 39% to 41%. However, in the near-term, our effective tax rate may continue to be impacted by expenses associated with activities surrounding the pending CenturyLink merger, which may cause our effective tax rate to be higher than our expected on-going effective income tax rate range of approximately 39% to 41%.

For additional information on income taxes, see Note 12—Income Taxes to our consolidated financial statements in Item 8 of this report.

Segment Results

The following table summarizes our segment results for the years ended December 31, 2010 and 2009:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2010			2009			2010 v 2009			2010 v 2009
	(Dollars in millions)
Total segment revenue	$	11,350		$	11,961		$	(611	)		(5	)%
Total segment expenses		5,463			5,974			(511	)		(9	)%

Total segment income	$	5,887		$	5,987		$	(100	)		(2	)%

Total segment margin percentage		52	%		50	%		2	%
Business markets:
Revenue	$	4,037		$	4,028		$	9			—	%
Expenses		2,416			2,459			(43	)		(2	)%

Income	$	1,621		$	1,569		$	52			3	%

Margin percentage		40	%		39	%		1	%
Mass markets:
Revenue	$	4,659		$	5,020		$	(361	)		(7	)%
Expenses		2,186			2,415			(229	)		(9	)%

Income	$	2,473		$	2,605		$	(132	)		(5	)%

Margin percentage		53	%		52	%		1	%
Wholesale markets:
Revenue	$	2,654		$	2,913		$	(259	)		(9	)%
Expenses		861			1,100			(239	)		(22	)%

Income	$	1,793		$	1,813		$	(20	)		(1	)%

Margin percentage		68	%		62	%		6	%

As discussed above, we categorize our overall and segment revenue among major categories depending on the types of services from which the revenue is generated. These categories include strategic services, legacy services, data integration and until October 2009 Qwest-branded wireless services, each of which is described in more detail above. In addition, at the segment level we categorize our expenses among major categories depending on how the expenses are incurred. These categories include:

•

Data integration expenses, which are our costs to provide customer premise equipment that our business markets segment sells to its customers and represent a substantial portion, but not all of the total expenses our business markets segment incurs to generate our data integration revenue, and are included in both selling expenses and in cost of sales;

•

Customer service expenses, which are expenses incurred in managing interactions with our customers including care centers, operator services, technical support operations, programming and fulfillment expenses, billing and collection services, and bad debt, and are included primarily in selling expenses;

•

Facilities expenses, which are expenses incurred from using other carriers’ networks for providing telecommunications services, including our previously offered Qwest-branded wireless services, and the related regulatory, tax and other fees, and are included in cost of sales;

•

Segment overhead expenses, which are expenses incurred for segment administration, back office support operations, rent and utilities incurred by our retail sales centers and data centers, segment executive management, and product and pricing management, and are included in both selling expenses and in cost of sales;

•

Network, engineering and other operating expenses, which are expenses incurred for network maintenance and repair, network construction and engineering, network administrative and operations support, network rent and utilities, fleet, insurance and risk management, and supply chain management, and are included primarily in cost of sales; and

•

Customer acquisition and provisioning expenses, which are expenses incurred for the sales and related technical support, marketing and advertising of products and services, installation expenses, and service related equipment, and are included in both selling expenses and in cost of sales.

The following table reconciles segment revenue to total operating revenue and segment expenses to total operating expenses for the years ended December 31, 2010 and 2009.


	Year Ended December 31, 2010								Year Ended December 31, 2009
	Business Markets		Mass Markets		Wholesale Markets		Total Segment		Business Markets		Mass Markets		Wholesale Markets		Total Segment
	(Dollars in millions, access lines in thousands)
Segment revenue:
Strategic services	$	1,709	$	1,495	$	1,285	$	4,489	$	1,584	$	1,398	$	1,235	$	4,217
Legacy services		1,724		3,164		1,369		6,257		1,887		3,510		1,678		7,075

Total strategic and legacy services		3,433		4,659		2,654		10,746		3,471		4,908		2,913		11,292
Data integration		604		—		—		604		557		—		—		557
Qwest-branded wireless services		—		—		—		—		—		112		—		112

Total segment revenue	$	4,037	$	4,659	$	2,654		11,350	$	4,028	$	5,020	$	2,913		11,961

Other revenue (primarily USF surcharges)								380								350

Total operating revenue							$	11,730							$	12,311

Segment expenses:
Data integration	$	426	$	—	$	—	$	426	$	390	$	—	$	—	$	390
Customer service		102		302		53		457		113		372		88		573
Facilities		772		133		484		1,389		793		181		643		1,617
Segment overhead		125		62		43		230		124		69		48		241
Network, engineering and other operating		383		1,012		203		1,598		393		1,050		227		1,670
Customer acquisition and provisioning		608		677		78		1,363		646		743		94		1,483

Total segment expenses	$	2,416	$	2,186	$	861		5,463	$	2,459	$	2,415	$	1,100		5,974

Unassigned expenses (primarily general and administrative)								2,066								2,051
Depreciation and amortization								2,200								2,311

Total operating expenses							$	9,729							$	10,336

Total access lines ⁽¹⁾								8,855								9,925

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

Business Markets

The following table summarizes some of the key financial measures for our business markets segment for the years ended December 31, 2010 and 2009:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2010			2009			2010 v 2009			2010 v 2009
	(Dollars in millions)
Revenue:
Strategic services	$	1,709		$	1,584		$	125			8	%
Legacy services		1,724			1,887			(163	)		(9	)%

Total strategic and legacy services		3,433			3,471			(38	)		(1	)%
Data integration		604			557			47			8	%

Total revenue		4,037			4,028			9			—	%

Expenses:
Data integration		426			390			36			9	%
Customer service		102			113			(11	)		(10	)%
Facilities		772			793			(21	)		(3	)%
Segment overhead		125			124			1			1	%
Network, engineering and other operating		383			393			(10	)		(3	)%
Customer acquisition and provisioning		608			646			(38	)		(6	)%

Total expenses		2,416			2,459			(43	)		(2	)%

Income	$	1,621		$	1,569		$	52			3	%

Margin percentage		40	%		39	%		1	%

The following table summarizes the access lines for our business markets segment as of December 31, 2010 and 2009:


	December 31,
	2010		2009		Increase/ (Decrease)			% Change
	(in thousands)
Access lines ⁽¹⁾		1,872		2,003		(131	)		(7	)%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

The financial results for our business markets segment continue to be impacted by several significant trends, which are described below.

•

Strategic services. Our mix of total revenue continues to migrate from legacy services to strategic services as our customers increasingly demand customized and integrated data, Internet and voice services. We offer diverse combinations of emerging technology products and services such as Qwest iQ Networking ^® , private line, hosting, and VoIP services. These services afford our customers more flexibility in managing their communications needs and enable us to partner with them to improve the effectiveness and efficiency of their operations. Although we are experiencing price compression on our strategic services, we expect overall revenue from these services to continue to grow.

•

Legacy services. We face intense competition and price compression with respect to our legacy services and continue to see customers migrating away from these services and into strategic services. In addition, our legacy services revenue has been and we expect it will continue to be adversely affected by access line losses.

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our productivity improvements. Through planned reductions and normal employee attrition, we have reduced our workforce while achieving operational efficiencies and improving our processes through automation.

Revenue

Strategic services revenue was 42% and 39% of our total business markets revenue for the year ended December 30, 2010 and 2009, respectively. Revenue from strategic services increased due to increased volumes in Qwest iQ Networking ^® .

Legacy services revenue was 43% and 47% of our total business markets revenue for the year ended December 31, 2010 and 2009, respectively. Revenue from legacy services declined as a result of lower demand for our traditional WAN services as some customers migrated to our strategic services, including Qwest iQ Networking ^® . Lower local services revenue due to access line losses also resulted in decreased legacy services revenue.

Revenue from data integration increased primarily due to increased equipment sales and professional services, including network management, security and integration of customer premise equipment.

Expenses

Data integration expenses increased primarily due to increased sales.

Customer service expenses decreased due to lower bad debt as a result of improved collections experience.

Facilities expenses decreased due to decreased volumes in traditional WAN services, continued cost optimization and better domestic rates for long-distance services, partially offset by increased volumes in Qwest iQ Networking ^® .

Network, engineering and other operating expenses decreased due to reduced headcount in maintenance and operations support and lower third-party support expenses as we continue to adjust our workforce as we improve our productivity.

Customer acquisition and provisioning expenses decreased as we increased productivity attributable to lower sales headcount, partially offset by increased expenses associated with short-term sales incentives.

Income

We continued to reduce maintenance, operations and sales headcount and optimized facilities expenses in an effort to improve our overall cost efficiency. Despite a 2010 legal settlement, intense competition and continued unstable general economic conditions, we were able to grow our margin percentage one percentage point to 40% for the year ended December 31, 2010 compared to the same period in 2009 as a result of our continued focus on strategic services and managing costs.

Mass Markets

The following table summarizes some of the key financial measures for our mass markets segment for the years ended December 31, 2010 and 2009:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2010			2009			2010 v 2009			2010 v 2009
	(Dollars in millions)
Revenue:
Strategic services	$	1,495		$	1,398		$	97			7	%
Legacy services		3,164			3,510			(346	)		(10	)%

Total strategic and legacy services		4,659			4,908			(249	)		(5	)%
Qwest-branded wireless services		—			112			(112	)		nm

Total revenue		4,659			5,020			(361	)		(7	)%

Expenses:
Customer service		302			372			(70	)		(19	)%
Facilities		133			181			(48	)		(27	)%
Segment overhead		62			69			(7	)		(10	)%
Network, engineering and other operating		1,012			1,050			(38	)		(4	)%
Customer acquisition and provisioning		677			743			(66	)		(9	)%

Total expenses		2,186			2,415			(229	)		(9	)%

Income	$	2,473		$	2,605		$	(132	)		(5	)%

Margin percentage		53	%		52	%		1	%

nm—Comparisons to/from zero values are considered not meaningful.

The following table summarizes some of the key operational measures for our mass markets segment as of December 31, 2010 and 2009:


	December 31,
	2010		2009		Increase/ (Decrease)			% Change
	(in thousands)
Broadband subscribers ⁽¹⁾		2,914		2,812		102			4	%
Video subscribers ⁽¹⁾		1,003		940		63			7	%
Access lines ⁽¹⁾		6,038		6,865		(827	)		(12	)%
Wireless subscribers ⁽¹⁾		1,086		838		248			30	%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

The financial results for our mass markets segment continue to be impacted by several significant trends, which are described below.

•

Strategic services. We continue to focus on increasing subscribers of our broadband services in our mass markets segment. We reached approximately 2.9 million broadband subscribers at December 31, 2010 compared to approximately 2.8 million at December 31, 2009. Due to price compression, we believe the ability to continually increase connection speeds is competitively important. As a result, we continue to invest in our fiber to the node, or FTTN, deployment, which we launched to meet customer demand for higher broadband speeds. In addition to the FTTN deployment, we continue to expand our product offerings and enhance our marketing efforts as we compete in a

competitive and maturing market in which a significant portion of consumers already have broadband services. We expect these efforts will improve our ability to compete and grow our broadband subscribers.

•

Access lines. Our revenue has been, and we expect it will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless for traditional voice telecommunications services. This has increased the number and type of competitors within our industry and has decreased our market share. We expect that these factors will continue to impact our business. Product bundling and other product promotions, as described below, continue to be some of our responses to offset the loss of revenue as a result of access line losses.

•

Product bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These customers can bundle local services with other services such as broadband, video, long-distance and wireless. While video and wireless subscribers are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenue. We believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. In addition to our bundle discounts, we also offer limited time promotions on our broadband service for qualifying customers who have our broadband product in their bundle, which we believe will positively affect our acquisition volume and drive customers to purchase more expanded offerings. While bundle price discounts have resulted in lower average revenue for our individual products, we believe product bundles continue to positively impact our customer retention.

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our workload, productivity improvements, changes in the telecommunications industry and governmental regulations. Through planned reductions and normal employee attrition, we have reduced our workforce and employee-related expenses while achieving operational efficiencies and improving processes through automation and other innovative ways of operating our business.

•

Wireless revenue and expenses. In April 2008, we signed a five-year agreement with Verizon Wireless to market and sell its wireless services under its brand name. We began selling these services in the third quarter of 2008. Until October 31, 2009, we also provided Qwest-branded wireless services under an arrangement with a different wireless services provider. We recognize revenue from Verizon Wireless services on a net basis, whereas we recognized revenue from Qwest-branded wireless services on a gross basis. This difference in the treatment of revenue results in lower revenue and lower expenses (such as lower equipment sales expense, lower bad debt expense and elimination of customer care and facilities expenses) with respect to Verizon Wireless services when compared to Qwest-branded wireless services. We categorize revenue from Verizon Wireless services as strategic services revenue and revenue from Qwest-branded wireless services as a separate category of revenue.

Revenue

Strategic services revenue represented 32% of total revenue for the year ended December 31, 2010 as compared to 28% for the year ended December 31, 2009. Strategic services revenue increased primarily due to an increase in broadband subscribers and an improving mix of higher priced, higher speed services.

Legacy services revenue decreased primarily due to declines in local services volumes. Legacy services revenue also decreased due to lower long-distance volumes, partially offset by higher long-distance rates. These declines were driven by access line losses resulting from the competitive pressures and product substitution described above.

Qwest-branded wireless services revenue decreased as we stopped selling Qwest-branded wireless services in October 2009 and completed our transition to selling Verizon Wireless services.

Expenses

Customer service expenses decreased due to lower bad debt expense resulting from our transition to selling Verizon Wireless services and our reduction in revenue. We also reduced customer service expenses as our reduction in customers led to the closure of a billing and collections center and an operator agent center.

Facilities expenses decreased as we stopped selling Qwest-branded wireless services in October 2009 and completed our transition to selling Verizon Wireless services.

Network, engineering and other operating expenses decreased due to employee reductions in our network operations as we continue to adjust our workforce to reflect our workload.

Customer acquisition and provisioning expenses decreased as sales volumes declined and as we have tried to make our sales process more efficient through sales headcount reductions. Migration to using internal sales call centers from using third-party sales call centers and reduced spending associated with direct mail and media have further improved our sales and marketing expenses.

Income

Expense reductions due to reduced network workforce expenses, customer acquisition and provisioning, customer service expenses, and our transition to selling Verizon Wireless services improved our margin percentage by approximately one percentage point to 53% for the year ended December 31, 2010 when compared to 52% for the year ended December 31, 2009. We continue to experience income pressure as a result of access line losses, driven by intense competition and product substitution.

Wholesale Markets

The following table summarizes some of the key financial measures for our wholesale markets segment for the years ended December 31, 2010 and 2009:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2010			2009			2010 v 2009			2010 v 2009
	(Dollars in millions)
Revenue:
Strategic services	$	1,285		$	1,235		$	50			4	%
Legacy services		1,369			1,678			(309	)		(18	)%

Total revenue		2,654			2,913			(259	)		(9	)%

Expenses:
Customer service		53			88			(35	)		(40	)%
Facilities		484			643			(159	)		(25	)%
Segment overhead		43			48			(5	)		(10	)%
Network, engineering and other operating		203			227			(24	)		(11	)%
Customer acquisition and provisioning		78			94			(16	)		(17	)%

Total expenses		861			1,100			(239	)		(22	)%

Income	$	1,793		$	1,813		$	(20	)		(1	)%

Margin percentage		68	%		62	%		6	%

The following table summarizes the access lines for our wholesale markets segment as of December 31, 2010 and 2009:


	December 31,
	2010		2009		Increase/ (Decrease)			% Change
	(in thousands)
Access lines ⁽¹⁾		945		1,057		(112	)		(11	)%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

The financial results for our wholesale markets segment continue to be impacted by several significant trends, which are described below.

•

Private line services. Demand for our private line services continues to increase, despite our customers’ optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impact our wholesale markets segment, we ultimately believe the growth in fiber based private line will offset our decline in copper based private line, although the timing of this technological migration is uncertain.

•

Access and local services revenue. Our access and local services revenue has been, and we expect it will continue to be, adversely affected by technological migration and industry consolidation. For example, consumers are substituting cable, wireless and VoIP services for traditional voice telecommunications services, resulting in continued access revenue loss. We expect these factors will continue to impact our wholesale markets segment.

•

Long-distance services revenue . We continue to take a disciplined approach to long-distance profitability; however, revenue continues to decline as a result of customer migration to more technologically advanced services, declining demand for traditional voice services and industry consolidation.

Revenue

Our total revenue was negatively impacted by industry consolidation, price compression, and our customers’ optimization of their networks. Strategic services revenue was 48% and 42% of our total wholesale markets revenue for the year ended December 31, 2010 and 2009, respectively. Strategic services revenue primarily increased due to increased volumes in our private line services.

Legacy services revenue declined due to decreases in long-distance services revenue driven by: customer migration to more technologically advanced services; decreasing demand for traditional voice services; and industry consolidation. In addition, access and local services revenue declined due to access line losses, continued intense competition and declining demand for UNEs. Traditional WAN services also declined due to industry consolidation and customer migration to more advanced technology services.

Expenses

Customer service expenses decreased primarily due to: lower bad debt expense as a result of dispute settlements and corresponding allowance reductions; lower external commissions expenses in operator services due to decreased volumes; and increased productivity attributable to reduced headcount.

Network, engineering and other operating expenses decreased as a result of employee reductions in our network operations as we continue to adjust our workforce to reflect our workload and lower repair expenses as we experienced a lower volume of repairs.

Customer acquisition and provisioning expenses decreased as we increased productivity through lower sales headcount.

Income

Our margin percentage increased approximately six percentage points to 68% for the year ended December 31, 2010 when compared to 62% for the year ended December 31, 2009, due to a change in the mix of products and services and cost efficiencies. We continue to experience income pressure as a result of decreased access and local services and the impact of customer network optimization in strategic services.

2009 COMPARED TO 2008

Operating Revenue

Although strategic services revenue increased primarily due to increased volumes in Qwest iQ Networking ^® , a decrease in legacy services and Qwest-branded wireless services revenue resulted in lower total operating revenue. Strategic services revenue also increased due to higher broadband revenue resulting from an increase in subscribers, partially offset by rate discounts. Verizon Wireless services revenue also increased as we completed our transition to selling Verizon Wireless services from Qwest-branded wireless services. The increase in strategic services revenue was also a result of an increase in private line services revenue due to higher volumes, partially offset by lower rates.

Legacy services revenue decreased as a result of lower local services revenue due to access line losses resulting from competitive pressures, along with product substitution. Legacy services revenue also decreased due to a decline in long-distance services revenue primarily driven by our focus on improving the profitability of this service. Lower demand for our traditional WAN services, due to customer migration, also contributed to the decrease in our legacy services revenue.

Revenue from Qwest-branded wireless services was also lower primarily due to our transition to selling Verizon Wireless services. We recognize revenue from Verizon Wireless services on a net basis and categorize this revenue as strategic services revenue, whereas we recognized revenue from Qwest-branded wireless services on a gross basis and categorized this revenue as a separate category of revenue. The transition to selling Verizon Wireless services resulted in lower wireless services revenue, but favorably impacted our overall profitability.

Revenue from data integration decreased due to lower volumes of equipment and installation sales as a result of economic pressures, partially offset by increased professional services.

In addition to the specific items discussed below, we believe declining general economic conditions negatively impacted our revenue in 2009.

Operating Expenses

The following table provides further detail regarding our operating expenses for the years ended December 31, 2009 and 2008:


	Years Ended December 31,				Increase/ (Decrease)			% Change
	2009		2008		2009 v 2008			2009 v 2008
	(Dollars in millions)
Cost of sales (exclusive of depreciation and amortization)	$	4,088	$	4,956	$	(868	)		(18	)%
Selling		1,944		2,188		(244	)		(11	)%
General, administrative and other operating		1,993		1,880		113			6	%
Depreciation and amortization		2,311		2,354		(43	)		(2	)%

Total operating expenses	$	10,336	$	11,378	$	(1,042	)		(9	)%

Cost of Sales (exclusive of depreciation and amortization)

Selling Expenses

Selling expenses decreased due to reduced spending associated with direct mail and media, reduced bad debt expense, decreased employee-related expenses for salaries and wages related to prior period employee reductions and decreased internal commissions driven by lower sales headcount. The migration to internal sales call centers from using third-party sales call centers also decreased selling expenses. In addition, lower professional fees and external commissions also reduced selling expenses. These decreases were partially offset by increases in severance expenses.

General, Administrative and Other Operating Expenses

General, administrative and other operating expenses increased primarily due to an increase in pension and post-retirement benefits expenses of $210 million. In 2008 we recognized combined net periodic benefits income, as pension income exceeded post-retirement benefit expense for the year. However, during 2008 we experienced significant losses on our pension and post-retirement benefit plan assets, which significantly impacted the pension and post-retirement benefits expenses we recorded in 2009. We recorded approximately $196 million in combined net periodic benefits expense for 2009 as compared to combined net periodic benefits income of $14 million for 2008. The 2009 expense is net of a $13 million gain we recognized as a result of our decision to no longer provide pension benefit accruals for active management employees under our qualified and non-qualified pension plans on or after January 1, 2010. The shift from recording combined net periodic income to recording combined net periodic expense was primarily due to a decrease in expected return on plan assets as a result of lower plan asset values and an increase in net actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred. For additional information on our pension and post-retirement benefit plans, see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

General, administrative and other operating expenses also increased due to an increase in taxes and fees as a result of a $40 million favorable property tax settlement and other favorable adjustments recorded in 2008 as

well as by the 2008 reversal of a reserve resulting from a favorable lease termination. These increases were partially offset by lower USF charges, real estate and occupancy expenses, lower severance expenses as a result of workforce reductions in 2008 as we continue to manage our workforce to our workload, lower litigation charges and settlements, as well as reductions in professional fees, materials, supplies and marketing expenses.

Depreciation and Amortization

The following table provides detail regarding depreciation and amortization expense for the years ended December 31, 2009 and 2008:


	Years Ended December 31,				Increase/ (Decrease)			% Change
	2009		2008		2009 v 2008			2009 v 2008
	(Dollars in millions)
Depreciation and amortization:
Depreciation	$	2,071	$	2,120	$	(49	)		(2	)%
Amortization		240		234		6			3	%

Total depreciation and amortization	$	2,311	$	2,354	$	(43	)		(2	)%

Amortization expense was higher for the year ended December 31, 2009 due to increases in internally developed capitalized software used to support our operations.

Effective January 1, 2009, we changed our estimates of the economic lives of certain copper cable and telecommunications equipment assets. These changes resulted in additional depreciation expense of approximately $38 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Although our capital expenditures fluctuate from year to year, we continue to see decreased depreciation expense due to significantly lower capital expenditures and the changing mix of our investment in property, plant and equipment since 2002.

We made a decision in June 2008 to discontinue certain product and service offerings and as a result we changed our estimates of the economic lives of certain assets used in providing those products and services, which resulted in the acceleration of depreciation of those assets beginning in the third quarter of 2008. As a result, we recorded $19 million of additional depreciation for the year ended December 31, 2009 as compared to the year ended December 31, 2008. These assets were fully depreciated as of December 31, 2009.

The additional depreciation for both of the changes described above, net of deferred taxes, reduced net income by approximately $35 million, or approximately $0.02 per basic and diluted common share for the year ended December 31, 2009.

Other Consolidated Results

The following table provides detail regarding other expense (income)—net and income tax expense for the years ended December 31, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2009			2008			2009 v 2008			2009 v 2008
	(Dollars in millions)
Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net	$	1,089		$	1,069		$	20			2	%
Other—net		(17	)		(23	)		(6	)		(26	)%

Total other expense (income)—net	$	1,072		$	1,046		$	26			2	%

Income tax expense	$	241		$	399		$	(158	)		(40	)%

Other Expense (Income)—Net

Interest expense on long-term borrowings and capital leases—net increased due to the issuance of $811 million of new debt in the second quarter of 2009 and $550 million of new debt in the third quarter of 2009, partially offset by decreased interest expense due to debt maturities, decreased capitalized interest expense due to lower capital expenditures and decreasing interest rates on floating rate debt.

Other—net includes, among other things, interest income, income tax penalties, other interest expense (such as interest on income taxes), gains or losses related to certain fair value interest rate hedges and underlying debt and gains or losses on investments. The change in other—net was primarily due to lower interest income resulting from lower interest rates in 2009, partially offset by a higher average cash balance in 2009.

Income Tax Expense

Income tax expense for the year ended December 31, 2009 decreased primarily because of our recognition in 2009 of previously unrecognized tax benefits on uncertain tax positions and favorable income tax settlements related to prior years. Income tax expense also decreased due to the decrease in current income before income taxes. The previously unrecognized tax benefits and favorable settlements decreased our effective income tax rate to 26.7% for the year ended December 31, 2009 from 38.0% for the year ended December 31, 2008. As of December 31, 2009, we had $58 million of unrecognized tax benefits that could affect our effective tax rate in the future. We will continue to defer recognition of these tax benefits until we settle the issues with the taxing authorities or the tax law is clarified in a way that makes it more likely than not that we will receive the benefits. Absent the recognition of these or other discrete items that we may record, we expect our future effective income tax rate will approximate 39%.

For additional information on income taxes, see Note 12—Income Taxes to our consolidated financial statements in Item 8 of this report.

Segment Results

The following table summarizes our segment results for the years ended December 31, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2009			2008			2009 v 2008			2009 v 2008
	(Dollars in millions)
Total segment revenue	$	11,961		$	13,118		$	(1,157	)		(9	)%
Total segment expenses		5,974			7,078			(1,104	)		(16	)%

Total segment income	$	5,987		$	6,040		$	(53	)		(1	)%

Total segment margin percentage		50	%		46	%		4	%
Business markets:
Revenue	$	4,028		$	4,029		$	(1	)		—	%
Expenses		2,459			2,556			(97	)		(4	)%

Income	$	1,569		$	1,473		$	96			7	%

Margin percentage		39	%		37	%		2	%
Mass markets:
Revenue	$	5,020		$	5,746		$	(726	)		(13	)%
Expenses		2,415			3,035			(620	)		(20	)%

Income	$	2,605		$	2,711		$	(106	)		(4	)%

Margin percentage		52	%		47	%		5	%
Wholesale markets:
Revenue	$	2,913		$	3,343		$	(430	)		(13	)%
Expenses		1,100			1,487			(387	)		(26	)%

Income	$	1,813		$	1,856		$	(43	)		(2	)%

Margin percentage		62	%		56	%		6	%

The following table reconciles segment revenue to total operating revenue and segment expenses to total operating expenses for the years ended December 31, 2009 and 2008.


	Year Ended December 31, 2009								Year Ended December 31, 2008
	Business Markets		Mass Markets		Wholesale Markets		Total Segment		Business Markets		Mass Markets		Wholesale Markets		Total Segment
	(Dollars in millions, access lines in thousands)
Segment revenue:
Strategic services	$	1,584	$	1,398	$	1,235	$	4,217	$	1,401	$	1,333	$	1,251	$	3,985
Legacy services		1,887		3,510		1,678		7,075		2,058		3,953		2,092		8,103

Total strategic and legacy services		3,471		4,908		2,913		11,292		3,459		5,286		3,343		12,088
Data integration		557		—		—		557		570		—		—		570
Qwest-branded wireless services		—		112		—		112		—		460		—		460

Total segment revenue	$	4,028	$	5,020	$	2,913		11,961	$	4,029	$	5,746	$	3,343		13,118

Other revenue (primarily USF surcharges)								350								357

Total operating revenue							$	12,311							$	13,475

Segment expenses:
Data integration	$	390	$	—	$	—	$	390	$	392	$	—	$	—	$	392
Customer service		113		372		88		573		121		461		113		695
Facilities		793		181		643		1,617		798		434		947		2,179
Segment overhead		124		69		48		241		123		79		49		251
Network, engineering and other operating		393		1,050		227		1,670		415		1,132		274		1,821
Customer acquisition and provisioning		646		743		94		1,483		707		929		104		1,740

Total segment expenses	$	2,459	$	2,415	$	1,100		5,974	$	2,556	$	3,035	$	1,487		7,078

Unassigned expenses (primarily general and administrative)								2,051								1,946
Depreciation and amortization								2,311								2,354

Total operating expenses							$	10,336							$	11,378

Total access lines ⁽¹⁾								9,925								11,127

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

Business Markets

The following table summarizes some of the key financial measures for our business markets segment for the years ended December 31, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2009			2008			2009 v 2008			2009 v 2008
	(Dollars in millions)
Revenue:
Strategic services	$	1,584		$	1,401		$	183			13	%
Legacy services		1,887			2,058			(171	)		(8	)%

Total strategic and legacy services		3,471			3,459			12			—	%
Data integration		557			570			(13	)		(2	)%

Total revenue		4,028			4,029			(1	)		—	%

Expenses:
Data integration		390			392			(2	)		(1	)%
Customer service		113			121			(8	)		(7	)%
Facilities		793			798			(5	)		(1	)%
Segment overhead		124			123			1			1	%
Network, engineering and other operating		393			415			(22	)		(5	)%
Customer acquisition and provisioning		646			707			(61	)		(9	)%

Total expenses		2,459			2,556			(97	)		(4	)%

Income	$	1,569		$	1,473		$	96			7	%

Margin percentage		39	%		37	%		2	%

The following table summarizes the access lines for our business markets segment as of December 31, 2009 and 2008:


	December 31,
	2009		2008		Increase/ (Decrease)			% Change
	(in thousands)
Access lines ⁽¹⁾		2,003		2,146		(143	)		(7	)%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

Revenue

Strategic services revenue was 39% and 35% of our total business markets revenue for the years ended December 31, 2009 and 2008, respectively. Revenue from strategic services increased primarily due to increased volumes in Qwest iQ Networking ^® . Private line services revenue also increased due to higher volumes, partially offset by lower rates.

Legacy services revenue was 47% and 51% of our total business markets revenue for the years ended December 31, 2009 and 2008, respectively. Revenue from legacy services declined as a result of lower demand for our traditional WAN services as some customers migrated to our strategic services, including Qwest iQ Networking ^® and access line losses.

Revenue from data integration decreased due to lower volumes of equipment and installation sales as a result of economic pressures, partially offset by increased professional services.

Expenses

Network, engineering and other operating expenses decreased due to reduced headcount in maintenance and operations support and lower third-party support expenses as we continued to adjust our workforce as we improve our productivity.

Customer acquisition and provisioning expenses decreased primarily due to lower commission payouts as well as increased productivity attributable to lower sales headcount.

Income

Continued execution on operating initiatives that improved our overall cost efficiency drove our margin percentage to 39% from 37% for the years ended December 31, 2009 and 2008, respectively. We continue to be subject to intense competition, customer migration to strategic services and unstable general economic conditions; however, as a result of our continued focus on strategic services and managing costs, we were able to grow income and expand our margin percentage by approximately two percentage points for the year ended December 31, 2009 compared to the same period in 2008.

Mass Markets

The following table summarizes some of the key financial measures for our mass markets segment for the years ended December 31, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2009			2008			2009 v 2008			2009 v 2008
	(Dollars in millions)
Revenue:
Strategic services	$	1,398		$	1,333		$	65			5	%
Legacy services		3,510			3,953			(443	)		(11	)%

Total strategic and legacy services		4,908			5,286			(378	)		(7	)%
Qwest-branded wireless services		112			460			(348	)		(76	)%

Total revenue		5,020			5,746			(726	)		(13	)%

Expenses:
Customer service		372			461			(89	)		(19	)%
Facilities		181			434			(253	)		(58	)%
Segment overhead		69			79			(10	)		(13	)%
Network, engineering and other operating		1,050			1,132			(82	)		(7	)%
Customer acquisition and provisioning		743			929			(186	)		(20	)%

Total expenses		2,415			3,035			(620	)		(20	)%

Income	$	2,605		$	2,711		$	(106	)		(4	)%

Margin percentage		52	%		47	%		5	%

The following table summarizes some of the key operational measures for our mass markets segment as of December 31, 2009 and 2008:


	December 31,
	2009		2008		Increase/ (Decrease)			% Change
	(in thousands)
Broadband subscribers ⁽¹⁾		2,812		2,652		160			6	%
Video subscribers ⁽¹⁾		940		814		126			15	%
Wireless subscribers ⁽¹⁾		838		658		180			27	%
Access lines ⁽¹⁾		6,865		7,807		(942	)		(12	)%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

Revenue

Strategic services revenue represented 28% of total revenue for the year ended December 31, 2009 as compared to 23% for the year ended December 31, 2008, and continued to grow, but at a slower rate as compared to 2008. Strategic services revenue increased primarily due to an increase in broadband subscribers, partially offset by rate discounts. The increase in strategic services revenue was also a result of an increase in Verizon Wireless services revenue as we completed our transition to selling Verizon Wireless services from selling Qwest-branded wireless services. These increases were partially offset by a slight decrease in overall video services revenue as a result of our transition to selling satellite digital television from traditional cable-based digital television. The increase in satellite digital television subscribers was more than offset by the decrease in cable-based digital television subscribers.

Legacy services revenue decreased primarily due to declines in local services and long-distance volumes and rates. These declines were driven by access line losses resulting from competitive pressures and product substitution.

Qwest-branded wireless services revenue decreased as we completed our transition to selling Verizon Wireless services, the revenue from which we record in strategic services on a net basis.

Expenses

Customer service expenses decreased due to lower bad debt expense resulting from our transition to selling Verizon Wireless services and our reduction in revenue.

Facilities expenses decreased as we stopped selling Qwest-branded wireless services in October 2009 and completed our transition to selling Verizon Wireless services.

Network, engineering and other operating expenses decreased due to employee reductions in our network operations as we continued to adjust our workforce to reflect our workload.

Customer acquisition and provisioning expenses decreased as sales volumes declined as we have tried to make our sales process more efficient through sales headcount reductions as well as reduced marketing expenses and professional fees.

Income

Expense reductions due to a reduced workforce, network cost efficiencies and our transition to selling Verizon Wireless services improved our margin percentage by approximately five percentage points to 52% for

the year ended December 31, 2009 when compared to 47% for the year ended December 31, 2008. We continue to experience income pressure as a result of access line losses, driven by intense competition and product substitution.

Wholesale Markets

The following table summarizes some of the key financial measures for our wholesale markets segment for the years ended December 31, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)			% Change
	2009			2008			2009 v 2008			2009 v 2008
	(Dollars in millions)
Revenue:
Strategic services	$	1,235		$	1,251		$	(16	)		(1	)%
Legacy services		1,678			2,092			(414	)		(20	)%

Total revenue		2,913			3,343			(430	)		(13	)%

Expenses:
Customer service		88			113			(25	)		(22	)%
Facilities		643			947			(304	)		(32	)%
Segment overhead		48			49			(1	)		(2	)%
Network, engineering and other operating		227			274			(47	)		(17	)%
Customer acquisition and provisioning		94			104			(10	)		(10	)%

Total expenses		1,100			1,487			(387	)		(26	)%

Income	$	1,813		$	1,856		$	(43	)		(2	)%

Margin percentage		62	%		56	%		6	%

The following table summarizes the access lines for our wholesale markets segment as of December 31, 2009 and 2008:


	December 31,
	2009		2008		Increase/ (Decrease)			% Change
	(in thousands)
Access lines ⁽¹⁾		1,057		1,174		(117	)		(10	)%

(1)	We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” above.

Revenue

Our revenue was negatively impacted by industry consolidation, price compression, and our customers’ optimization of their cost structures. Strategic services revenue was 42% and 37% of our total wholesale markets revenue for the years ended December 31, 2009 and 2008, respectively. Strategic services revenue declined slightly due to decreased rates for our private line service, partially offset by increased volumes.

Legacy services revenue declined due to decreases in long-distance services revenue primarily driven by our focus on improving the profitability of this service and industry consolidation. In addition, access and local services revenue declined due to access line losses and a declining demand for UNEs for the year ended December 31, 2009 compared to the same period in 2008. Traditional WAN services also declined due to industry consolidation and customer migration to more advanced technology services.

Expenses

Customer service expenses decreased primarily due to: lower bad debt expense as a result of dispute settlements and corresponding allowance reductions; lower external commission expenses in operator services due to decreased volumes; lower access expense due to volume declines and increased productivity attributable to reduced headcount and elimination of an outsourcing contract.

Facilities expenses decreased due to a decline in our long-distance services volumes and rates, as a result of declining demand for traditional voice services and the effects of industry consolidation. Fixed facilities expenses decrease is driven by network optimization efforts to drive down costs.

Customer acquisition and provisioning expenses decreased as we saw a decrease in installation and maintenance volume for network provisioning, while increasing productivity through declines in sales headcount throughout the year.

Income

Our margin percentage increased approximately six percentage points and we held our income to a 2% reduction for the year ended December 31, 2009 as compared to the same period in 2008 due to profitability improvements primarily relating to our long-distance services. We continue to experience income pressure as a result of decreased access and local services and the impact of customer network optimization in strategic services.

Liquidity and Capital Resources

Near-Term View

We expect that our cash on hand and expected net cash generated by operating activities will exceed our cash needs over the next 12 months. At December 31, 2010, we held cash and cash equivalents of $372 million and had $1.035 billion available under our currently undrawn revolving credit facility (referred to as our Credit Facility). During the year ended December 31, 2010, we:

•

redeemed or repurchased $3.379 billion of long-term borrowings including current maturities and settled our embedded option in convertible debt for $640 million; and

•

issued $800 million of debt for net proceeds of $775 million.

You can find additional information on these financing activities in Note 8—Borrowings to our consolidated financial statements in Item 8 of this report.

During the year ended December 31, 2010, our net cash generated by operating activities totaled $3.367 billion. For the coming 12 months, our expected financing and investing cash needs include:

•

$1.004 billion of maturing debt;

•

capital expenditures of approximately $1.6 billion; and

•

quarterly dividends on our common stock of approximately $140 million per quarter.

We have significant discretion in how we use our cash to pay for capital expenditures and for other costs of our business, as only a minority of our capital expenditures is dedicated to preservation activities or government mandates. We evaluate capital expenditure projects based on expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. If we are

not successful in maintaining or increasing our net cash generated by operating activities in the near term, we may use this discretion to decrease our capital expenditures, which may impact future years’ operating results and cash flows. Also, we lease certain facilities and equipment under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets. For the year ended December 31, 2010, we entered into capital leases for approximately $202 million of assets, which allowed us to reduce our initial cash outlays. We may continue to use lease financing for some portion of our capital spending.

At December 31, 2010, our current liabilities exceeded our current assets by $1.649 billion compared to $483 million as of December 31, 2009. Our working capital deficit increased $1.166 billion primarily due to early retirements of long-term borrowings, the reclassification of non-current borrowings to current, capital expenditures and dividends declared on our common stock, partially offset by net income before depreciation, amortization and income taxes and net proceeds from our long-term debt issuances.

We continue to look for opportunities to improve our capital structure by reducing debt and interest expense. Any time we deem conditions favorable, we may attempt to improve our liquidity position by accessing debt or other markets in a manner designed to create positive economic value. Although we were able to access the credit markets in April 2009, September 2009 and January 2010, the unstable economy may impair our ability to refinance maturing debt at terms that are as favorable as those from which we previously benefited or at terms that are acceptable to us.

As of December 31, 2010, we had $193 million in stock repurchases remaining under the $2 billion stock repurchase program that our Board of Directors authorized in October 2006. The repurchases were originally scheduled to be completed in 2008; however, our Board of Directors extended the timeframe to complete these repurchases for an undetermined period. We did not repurchase any stock under this program in 2010 or 2009, and our merger agreement with CenturyLink prohibits us from repurchasing additional shares under this program without CenturyLink’s consent.

We have yet to accrue or pay for certain cash outlays that are contingent on completion of the CenturyLink merger. These cash outlays include financial advisory fees and compensation costs comprised of retention bonuses and severance. These contingent cash outlays will be recognized in our consolidated financial statements commencing in the period in which the merger occurs. The final amount and timing of the compensation costs to be paid is partially dependent upon personnel decisions that will be made as part of the integration planning. The total amount of cash outlays that are contingent on the completion of the merger may be material.

The Credit Facility, which is described below under the heading “Long-Term View,” will be terminated at the time of the closing of our merger with CenturyLink. Upon the closing of the merger, we will become a wholly owned subsidiary of CenturyLink, and as such we anticipate that CenturyLink would meet any post-merger liquidity needs not met through our operating cash flow.

Long-Term View

We believe that the cash provided by our operations and our currently undrawn Credit Facility, combined with our current cash position and the likelihood that we will continue to have access to capital markets to refinance our debt as it matures, should allow us to meet our cash requirements for the foreseeable future. Our general expectation is to refinance the debt maturities of our QC subsidiary and not to refinance other debt maturities.

Debt

We have a significant amount of debt maturing in the next several years, including $1.004 billion maturing in 2011, $1.500 billion maturing in 2012, $750 million maturing in 2013 and $1.900 billion maturing in 2014. We believe that we will continue to have access to capital markets to refinance our debt as discussed above in the “Near-Term View.”

The Credit Facility, which makes available to us $1.035 billion of additional credit subject to certain restrictions as described below, is currently undrawn and expires in September 2013. The Credit Facility has 13 lenders, with commitments ranging from $25 million to $100 million. Our merger agreement with CenturyLink allows us to draw on the facility with the intent to repay the borrowings within 90 days. This facility has a cross payment default provision, and this facility and certain other debt issues also have cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments could occur if:

•

we fail to pay any indebtedness when due in an aggregate principal amount greater than $100 million;

•

any indebtedness is accelerated in an aggregate principal amount greater than $100 million; or

•

judicial proceedings are commenced to foreclose on any of our assets that secure indebtedness in an aggregate principal amount greater than $100 million.

Upon a cross default, the creditors of a material amount of our debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due to those creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if, in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated.

The Credit Facility also contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the legal matters discussed in “Legal Proceedings” in Item 3 of this report. In addition, to the extent that our earnings before interest, taxes, depreciation and amortization, or EBITDA (as defined in our debt covenants), is reduced by cash settlements or judgments relating to the matters discussed in that note, our debt to consolidated EBITDA ratios under certain debt agreements will be adversely affected. This could reduce our liquidity and flexibility due to potential restrictions on drawing on our Credit Facility and potential restrictions on incurring additional debt under certain provisions of our debt agreements.

We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets), but would need to do so in a manner consistent with the terms of our merger agreement with CenturyLink, if:

•

revenue and cash provided by operations significantly decline;

•

unstable economic conditions continue to persist;

•

competitive pressures increase;

•

we are required to contribute a material amount of cash to our pension plan; or

•

we become subject to significant judgments or settlements in one or more of the matters discussed in “Legal Proceedings” in Item 3 of this report.

Pension Plan

Benefits paid by our pension plan are paid through a trust. This pension plan is measured annually at December 31. The accounting unfunded status of our pension plan was $585 million at December 31, 2010. Cash funding requirements can be significantly impacted by earnings on investments, the discount rate, changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, we will not be required to make a cash contribution in 2011. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, we currently expect that contributions in

2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations. See additional information about our pension benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Post-Retirement Benefits

Certain of our post-retirement health care and life insurance benefits plans are unfunded. As of December 31, 2010, the unfunded status of all of our post-retirement benefit plans was $2.522 billion. A trust holds assets that are used to help cover the health care costs of retirees who are former occupational (also referred to as union) employees. As of December 31, 2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. We did not make any cash contributions to this trust in 2010 and do not expect to make any significant cash contributions to this trust in the future. We believe that, as of December 31, 2010, the more liquid assets in the trust would be adequate to provide continuing reimbursements for our occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for our eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. Our estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. See additional information about our post-retirement benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Income Tax Payments

We currently make some payments for income taxes; however, in most jurisdictions where we are subject to income tax, those taxes are largely offset through the utilization of our significant net operating loss carryforwards, or NOLs. As of December 31, 2010, we had NOLs of $5.6 billion and we expect to fully use substantially all of these NOLs as an offset against future taxable income. We do not expect to pay a significant amount of income taxes until all of these NOLs have been used; however, the timing of that use will depend upon future earnings and upon our future tax circumstances. We currently expect to be able to use the NOLs to reduce tax payments for several years.

Once our NOLs are fully utilized, we expect to make income tax payments commensurate with our taxable income. The amounts of those payments will also depend upon future earnings and upon our future tax circumstances and cannot be accurately estimated at this time.

Historical View

The following table summarizes cash flow activities for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,						Increase/ (Decrease)					% Change
	2010		2009		2008		2010 v 2009		2009 v 2008			2010 v 2009			2009 v 2008
	(Dollars in millions)
Cash flows:
Provided by operating activities	$	3,367	$	3,307	$	2,931	$	60	$	376			2	%		13	%
Used for investing activities		1,488		1,406		1,693		82		(287	)		6	%		(17	)%
Used for financing activities		3,913		60		1,575		3,853		(1,515	)		nm			(96	)%

nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

Operating Activities

Cash provided by operating activities increased in 2010 as compared to 2009 despite a decline in cash received from customers as a result of decreased revenue. This increase was due primarily to lower payments for:

•

facilities expenses as a result of both lower rates and lower volumes for long-distance service, the migration of our wireless customers from our Qwest-branded wireless services as well as cost optimization;

•

employee-related expenses resulting from reduced headcount and one less pay period being paid in the year ended December 31, 2010 as compared to the same period in 2009; and

•

professional fees due to lower contracted labor and programming services, partially offset by payments for merger-related costs.

Cash provided by operating activities increased in 2009 as compared to 2008 as the decline in cash received from customers as a result of the decline in customers was more than offset by a decrease in payments for securities-related legal matters; a decrease in payments for facility costs resulting from the transition to Verizon Wireless services from selling Qwest-branded wireless services, declining minutes of use, network optimization and reduced rates; and lower payments for employee-related costs due to lower headcount.

Investing Activities

Cash used for investing activities increased in 2010 as compared to 2009 primarily due to increased capital expenditures and purchases of U.S. Treasury and U.S. government agency securities which were offset by the maturity of these securities. The increase in capital spending was due to a cautious investment climate in late 2008 and early 2009, increased spending on our strategic initiatives and timing of cash payments. Our capital expenditures continue to be focused on our strategic services such as broadband. In 2011, we anticipate that our fiber investment, which includes fiber to the cell site, or FTTCS, will increase. This upward trend in spending for our strategic initiatives is the largest contributor to our projected capital expenditures for 2011 increasing to approximately $1.6 billion. In addition, we may continue to use lease financing in 2011 for some portion of our capital spending.

Cash used for investing activities decreased in 2009 as compared to 2008 primarily due to lower capital expenditures. Lower capital spending was the result of initiatives related to decreasing per unit capital costs, a slowdown in new housing construction, which was down 40% as compared to 2008, and other lower customer-driven capital requirements. We also took advantage of favorable interest rates and increased our capital leasing activity, which further reduced our cash payments for capital equipment.

Financing Activities

For the year ended December 31, 2010, we repaid $3.379 billion of long-term borrowings including current maturities, settled the embedded option in our convertible debt for $640 million, paid $555 million in dividends and purchased treasury stock valued at $136 million in conjunction with the accelerated vesting of certain stock-based awards. These uses of cash were partially offset by the issuance of $800 million of new debt resulting in aggregate net proceeds of $775 million.

For the year ended December 31, 2009, we issued $1.361 billion of new debt resulting in aggregate net proceeds of $1.270 billion, repaid $827 million of long-term borrowings including current maturities and paid $551 million in dividends.

For the year ended December 31, 2008, we repaid $631 million of long-term borrowings including current maturities, paid $556 million in dividends and purchased $432 million of our common stock under our stock repurchase program.

We were in compliance with all provisions and covenants of our borrowings as of December 31, 2010.

Letters of Credit

We maintain letter of credit arrangements with various financial institutions for up to $85 million. We had outstanding letters of credit of approximately $72 million as of December 31, 2010. On January 18, 2011 we entered into $7 million of additional letters of credit.

Credit Ratings

Due to our general expectation that we will refinance the debt maturities of our QC subsidiary, our credit ratings can have significant impact on our liquidity and capital resources. Debt ratings by the various rating agencies reflect each agency’s opinion of the ability of the issuers to repay debt obligations as they come due. In general, lower ratings result in higher borrowing costs and impaired ability to borrow under acceptable terms. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.

The table below summarizes our long-term debt ratings as of December 31, 2010:

December 31, 2010

Moody’s

S&P

Fitch

Corporate rating/Sr. Implied rating

Ba1

Qwest Corporation

Baa3

BBB-

Qwest Capital Funding, Inc.

Ba3

B+

Qwest Communications International Inc.

Ba2

B+

BB+

NR—Not Rated

Since our announcement of our pending merger with CenturyLink:

•

on August 13, 2010, Moody’s Investors Service upgraded the ratings of QC from Ba1 to Baa3 (investment grade), QCF from B1 to Ba3 and QCII from Ba3 to Ba2, upgraded Qwest’s corporate rating from Ba2 to Ba1 and noted that these ratings remain on review for further upgrade;

•

Standard & Poor’s placed Qwest’s corporate rating and the ratings of QCII and QCF on “CreditWatch” with positive implications, meaning that S&P could affirm or upgrade the ratings after it completes its review, and placed QC’s rating on “CreditWatch” with developing implications, meaning that S&P could raise, maintain or lower the rating; and

•

Fitch Ratings affirmed its previous rating of BBB- with a stable outlook for QC and placed the ratings of QCII and QCF on “Rating Watch Positive,” meaning that there is a heightened probability of a potential upgrade.

With respect to Moody’s, a rating of Baa indicates that the security is subject to moderate credit risk, is considered medium grade and as such may possess certain speculative characteristics. A rating of Ba is judged to have speculative elements and is subject to substantial credit risk, meaning that the future of the issuer cannot be considered to be well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times. A rating of B is considered speculative and is subject to high credit risk. The “1, 2, 3” modifiers show relative standing within the major categories, 1 being the highest, or best, modifier in terms of credit quality.

With respect to S&P, any rating below BBB indicates that the security is speculative in nature. A rating of BBB indicates that there are currently expectations of adequate protection. A rating of BB indicates that the

issuer currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation. The plus and minus symbols show relative standing within the major categories.

With respect to Fitch, any rating below BBB indicates that the security is speculative in nature. A rating of BBB indicates that there are currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category. A rating of BB indicates that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. The plus and minus symbols show relative standing within major categories.

While we have been able to obtain financing historically and our ratings have improved since the pending merger with CenturyLink was announced, given our current credit ratings our ability to raise additional capital under acceptable terms and conditions may be impaired.

Risk Management

We are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We have used derivative financial instruments to manage our interest rate risk exposure on our debt and we may employ them in the future.

Near-Term Maturities

As of December 31, 2010, we had $1.004 billion of long-term notes maturing in the subsequent 12 months. We would be exposed to changes in interest rates at any time that we choose to refinance any of this debt. A hypothetical increase of 100 basis points in the interest rate on a refinancing of the entire current portion of long-term notes would decrease annual pre-tax earnings by approximately $10 million.

Floating-Rate Debt

As of December 31, 2010, we had $750 million of floating interest rate debt outstanding, all of which was exposed to changes in interest rates. The exposure for these instruments is linked to the London Interbank Offered Rate, or LIBOR. A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease annual pre-tax earnings by approximately $8 million.

Investments

As of December 31, 2010, we had $335 million invested in highly liquid cash-equivalent instruments and $92 million invested in currently non-liquid auction rate securities. As interest rates change, so will the interest income derived from these instruments. Assuming that these investment balances were to remain constant, a hypothetical decrease of 100 basis points in interest rates would decrease annual pre-tax earnings by approximately $3 million.

Combined Impacts

The table below provides a sensitivity analysis of certain expense and income items, as well as net income, assuming 100-basis-point upward and downward shifts in market interest rates over the entire year. This

sensitivity analysis reflects only the impact for the year ended December 31, 2010 from the borrowings and investments that were outstanding as of December 31, 2010. It does not reflect the impact of long-term notes maturing in the subsequent 12 months because they would not have been affected by changes in market interest rates during the periods presented.


	As reported			Assuming +100 basis point shift			Assuming -100 basis point shift
	(Dollars in millions)
2010:
Interest expense on long-term borrowings and capital leases—net	$	1,039		$	1,047		$	1,031
Other income—net		(8	)		(12	)		(4	)
Net loss		(55	)		(57	)		(53	)

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as of December 31, 2010:


	Payments Due by Period
	2011		2012		2013		2014		2015		2016 and Thereafter		Total
	(Dollars in millions)
Future contractual obligations ⁽¹⁾ :
Debt and lease payments:
Long-term debt	$	1,004	$	1,500	$	750	$	1,900	$	950	$	5,674	$	11,778
Capital lease and other obligations		96		89		74		59		34		16		368
Interest on long-term borrowings and capital leases ⁽²⁾		885		742		655		589		476		3,921		7,268
Operating leases		208		177		152		134		110		671		1,452

Total debt and lease payments		2,193		2,508		1,631		2,682		1,570		10,282		20,866

Other long-term liabilities		6		3		6		3		4		160		182

Purchase commitments:
Telecommunications and information technology		2		2		2		1		1		1		9
IRU* operating and maintenance obligations		19		19		19		19		19		121		216
Advertising, promotion and other services ⁽³⁾		64		41		31		27		24		44		231

Total purchase commitments		85		62		52		47		44		166		456

Non-qualified pension obligation		4		3		3		3		3		29		45
Post-retirement benefit obligation		74		74		74		73		71		1,322		1,688

Total future contractual obligations	$	2,362	$	2,650	$	1,766	$	2,808	$	1,692	$	11,959	$	23,237

*	Indefeasible rights of use

(1)	The table does not include:

•

costs that are contingent upon completion of the pending CenturyLink merger;

•

our open purchase orders as of December 31, 2010. These purchase orders are generally at fair value, are generally cancelable without penalty and are part of normal operations;

•

other long-term liabilities, such as accruals for legal matters and income taxes, that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;

•

cash funding requirements for pension benefits payable to certain eligible current and future retirees. The accounting unfunded status of our pension plan was $585 million at December 31, 2010. Benefits paid by our qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as we are not able to reliably estimate required contributions to the trust. Cash funding requirements can be significantly impacted by earnings on investments, the discount rate, changes in the plan and funding laws and regulations. As a result it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, we will not be required to make a cash contribution in 2011. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, we currently expect that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations;

•

certain post-retirement benefits payable to certain eligible current and future retirees. Although we had a $2.522 billion liability recorded on our balance sheet as of December 31, 2010 representing the net benefit obligation for all post-retirement health care and life insurance benefits, not all of this amount is a contractual obligation and only the portion that we believe is a contractual obligation is reported in the table. Certain of these plans are unfunded and net payments made by us totaled $135 million in 2010, including payments for benefits that are not contractual obligations. Total undiscounted future payments estimated to be made by us for benefits that are both contractual obligations and non-contractual obligations are approximately $4.8 billion over approximately 80 years. However, this estimate is impacted by various actuarial and market assumptions, and ultimate payments will differ from this estimate. In 1989, a trust was created and funded to help cover the health care costs of retirees who are former occupational employees. We did not make any cash contributions to this trust in 2010 and do not expect to make any significant cash contributions to this trust in the future. We anticipate that the majority of the costs that have historically been paid out of this trust will need to be paid by us at some point in the future. As of December 31, 2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. In 2009 we estimated that the trust would be adequate to provide continuing reimbursements for our occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, we still believe that the more liquid assets in the trust will be adequate to provide continuing reimbursements for our occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for our eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. Our estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. The benefits reimbursed from plan assets were $186 million in 2010. See additional information on our benefits plans in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report;

•

Assuming we exited these contracts in 2011, the contract termination fees would be approximately $697 million. Under the same assumption, termination fees for these contracts to purchase goods and services would be $31 million. In the normal course of business, we believe the payment of these fees is remote; and

•

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

(2)	Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective as of December 31, 2010.

(3)

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.

Off-Balance Sheet Arrangements

We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we do not engage in leasing, hedging, research and development services, or other relationships that expose us to any significant liabilities that are not reflected on the face of the consolidated financial statements or in the Future Contractual Obligations table above.

Critical Accounting Policies and Estimates

We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. For additional information on the application of these and other significant accounting policies, see Note 2—Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of this report. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require significant judgments, assumptions or estimates. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We believe that the estimates, judgments and assumptions made when accounting for the items described below are reasonable, based on information available at the time they are made. However, there can be no assurance that actual results will not differ from those estimates.

Loss Contingencies and Litigation Reserves

We are involved in several material legal proceedings, as described in more detail in “Legal Proceedings” in Item 3 of this report. We assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted. If a loss is considered reasonably possible, we disclose the item and any determinable estimate of the loss if material but we do not recognize any expense for the potential loss.

For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the

body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. The overall tax liability recorded for uncertain tax positions as of December 31, 2010 and 2009 considers the anticipated utilization of any applicable tax credits and NOLs.

To the extent we have recorded tax liabilities that are more or less than the actual liability that ultimately results from the resolution of an uncertain tax position, our earnings will be increased or decreased accordingly. Also, as we become aware of new interpretations of relevant tax laws and as we discuss our interpretations with taxing authorities, we may in the future change our assessments of the sustainability of an uncertain tax position or of the amounts that may be sustained upon audit. We believe that the estimates, judgments and assumptions made in accounting for these matters are reasonable, based on information currently available. However, as our assessments change and as uncertain tax positions are resolved, the impact to our consolidated financial statements could be material.

Deferred Taxes

Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax NOLs, tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken, and the resulting tax basis, are more likely than not to be sustained if they are audited by taxing authorities. Also, assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. These matters, and others, involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

Tax Valuation Allowance

We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, we rely on our recent history of pre-tax earnings, estimated timing of future deductions and benefits represented by the deferred tax assets, and our forecasts of future earnings, the latter two of which involve the exercise of significant judgment. As of December 31, 2010, we concluded that it was more likely than not that we would realize the majority of our deferred tax assets; therefore, our valuation allowance did not require material adjustments. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations.

Pension and Post-Retirement Benefits

We sponsor a noncontributory defined benefit pension plan (referred to as our pension plan) for substantially all management and occupational employees. In addition to this tax qualified pension plan, we also maintain a non-qualified pension plan for certain eligible highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees.

Pension and post-retirement health care and life insurance benefits attributed to eligible employees’ service during the year, as well as interest on benefit obligations, are accrued currently. Prior service costs and actuarial gains and losses are generally recognized as a component of net periodic expense over one of the following periods: (i) the average remaining service period of the employees expected to receive benefits of approximately nine years; (ii) the average remaining life of the employees expected to receive benefits of approximately 18 years; or (iii) the term of the collective bargaining agreements, as applicable. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits as determined using the projected unit credit method.

In computing the pension and post-retirement health care and life insurance benefits expenses and obligations, the most significant assumptions we make include discount rate, expected rate of return on plan assets, health care trend rates and our evaluation of the legal basis for plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees’ unions can also significantly impact the amount of expense, benefit obligations and pension assets that we record.

The discount rate is the rate at which we believe we could effectively settle the benefit obligations as of the end of the year. We set our discount rates each year based upon the yields of high-quality fixed-income investments available at December 31 based on our future expected cash flows of the pension and post-retirement benefit plans. In making the determination of discount rates, we used the average yields of various bond matching sources and the Citigroup Pension Discount Curve.

The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans’ assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.

To compute the expected return on pension and post-retirement benefit plan assets, we apply an expected rate of return to the market-related value of the pension plan assets and to the fair value of the post-retirement benefit plan assets adjusted for projected benefit payments to be made from the plan assets. With respect to equity assets held by our pension plan, we have elected to recognize actual returns on these equity assets ratably over a five year period when computing our market-related value; the unrecognized portion of actual returns on these equity assets is included in accumulated other comprehensive income. This method has the effect of reducing the impact on expenses of market volatility that may be experienced from year to year. With respect to bonds and other assets held by our pension plan and with respect to the assets held by our post-retirement benefit plans, we did not elect to recognize actual returns on these assets using this five-year ratable method. Therefore, the full impact of annual market volatility for these assets is reflected in the subsequent year’s net periodic combined benefits expense.

Changes in any of the above factors could impact general, administrative and other operating expenses in the consolidated statements of operations as well as the value of the liability and accumulated other comprehensive income of stockholders’ deficit on our consolidated balance sheets. If our assumed expected rates of return for 2010 were 100 basis points lower, our qualified pension and post-retirement benefit expenses would have increased by $77 million. If our assumed discount rates for 2010 were 100 basis points lower, our qualified pension and post-retirement benefit expenses would have increased by $56 million and our projected benefit obligation would have increased by approximately $1 billion. An increase of 100 basis points in the initial healthcare cost trend rate would have increased our post-retirement benefit expense by $3 million and increased our projected post-retirement benefit obligation by $65 million.

value as of December 31. See additional information on our trust investments in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

Revenue Recognition and Related Reserves

We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If the elements are deemed separable and separate earnings processes exist, total consideration is allocated to each element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If these criteria are not satisfied, the total advance payment is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period.

We believe that the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are “critical accounting estimates” because: (i) they require management to make assumptions about how long we will retain customers; (ii) the assessment of whether bundled elements are separable is subjective; (iii) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (iv) the assessment of whether bundled elements are separable may result in revenue being reported in different periods than significant portions of the related costs.

As the telecommunications market experiences greater competition and customers shift from traditional land-based telecommunications services to wireless and Internet-based services, our estimated customer relationship period could decrease and we will accelerate the recognition of deferred revenue and related costs over a shorter estimated customer relationship period.

Restructuring, Realignment and Severance Charges

Periodically, we commit to exit certain business activities, eliminate administrative and network locations or reduce our number of employees. The amount we record as restructuring, realignment or severance charges for these changes depends upon various assumptions, including severance costs, sublease income and costs, disposal costs, length of time on market for abandoned rented facilities and contractual termination costs. These estimates are inherently judgmental and may change materially based upon actual experience. The estimate of future losses of sublease income and disposal activity generally involves the most significant judgment. Due to the estimates and judgments involved in the application of each of these accounting policies and changes in our plans, these estimates and market conditions could materially impact our financial condition or results of operations.

Economic Lives of Assets to be Depreciated or Amortized

We perform annual internal studies or reviews to determine depreciable lives for our property, plant and equipment. These studies utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution, and, in certain instances, actuarially determined probabilities to calculate the remaining life of our asset base.

Due to rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications plant, equipment and software requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates. The effect of a one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $280 million or increased

depreciation by approximately $390 million, respectively. The effect of a one half year increase or decrease in the estimated remaining useful lives of our capitalized software would have decreased amortization by approximately $30 million or increased amortization by approximately $40 million, respectively.

Recoverability of Long-Lived Assets

We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions. We believe our estimates are reasonable, based on information available at the time they were made. However, if our estimates of our future cash flows had been different, we may have concluded that some of our long-lived assets were not recoverable, which would likely have caused us to record a material impairment charge. Also, if our future cash flows are significantly lower than our projections we may determine at some future date that some of our long-lived assets are not recoverable.

Derivative Financial Instruments

As of December 31, 2010, we did not have any derivative financial instruments. However, we sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of the variability in the borrower’s overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in the fair value of the borrower’s overall debt portfolio due to changes in interest rates.

We recognize all derivatives on our consolidated balance sheets at fair value. We generally designate the derivative as either a cash flow hedge or a fair value hedge on the date on which we enter into the derivative instrument. Cash flows from derivative instruments that are cash flow hedges or fair value hedges are classified in cash flows from operations.

For a derivative that is designated as and meets all of the required criteria for a cash flow hedge, we record in accumulated other comprehensive loss on our consolidated balance sheets any changes in the fair value of the derivative. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, we record those amounts immediately in other expense (income)—net in our consolidated statements of operations. For a derivative that is designated as and meets all of the required criteria for a fair value hedge, we record in other expense (income)—net in our consolidated statements of operations the changes in fair value of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)—net.

assumption of no ineffectiveness is no longer valid, then we discontinue hedge accounting with respect to that derivative prospectively. We record immediately in earnings changes in the fair value of derivatives that are not designated as hedges.

For additional information on our derivative financial instruments, see Note 9—Derivative Financial Instruments to our consolidated financial statements in Item 8 of this report.

Investment Impairment Analysis

As part of our cash management strategy, we have a variety of investments for which we are required to determine the fair value. Many of these investments are valued using published prices; other investments require judgment to determine the assumptions and factors that we should use to determine their fair value. For instance, there are reasonably possible alternative inputs for the factors we use to value our auction rate securities, primarily related to the probability that the securities will be redeemed early, the probability that a default will occur and the severity of that default. Using the least favorable inputs for these valuation factors that we believe are reasonably possible alternatives would result in an additional $14 million decrease in the fair market value estimate for the securities.

We recognize changes in the fair value of certain investments in our consolidated statements of operations. However, changes in the fair value of other investments, specifically securities that are classified as “available-for-sale,” are treated differently. Changes in the fair value of available-for-sale investments are recognized in other comprehensive income on our consolidated balance sheets unless the change in value is considered to be an other-than-temporary impairment. If the issuers cease making required interest payments, we would recognize the portion of the other-than-temporary decline in fair value that is due to credit loss in other expense (income)—net in our consolidated statements of operations. If we believe that it is more likely than not that we will be required to sell these securities before their values recover, we would recognize the entire other-than-temporary decline in fair value in other expense (income)—net in our consolidated statements of operations.

An available-for-sale investment is considered to be impaired if it loses value. When an available-for-sale investment is impaired, we are required to perform an analysis to determine whether the impairment is temporary or other-than-temporary. The determination of the type of impairment requires judgment. We evaluate the extent of the impairment, the credit rating of the securities and the issuer, whether the issuer continues to make the contractual cash payments, whether we believe the issuer will be able to continue to make the payments until the value recovers or the securities mature and our ability and intent to hold the investment until its value recovers or the securities mature. We may determine that the decline in fair value of an investment is other-than-temporary if our analysis of these factors indicates that we do not believe we will recover our investment in the securities.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update, or ASU, Number 2009-13, “Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force.” This ASU establishes a new selling price hierarchy to use when allocating the sales price of a multiple element arrangement between delivered and undelivered elements. This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011. The adoption of this ASU will not have a material effect on our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” in Item 7 of this report is incorporated herein by reference.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Qwest Communications International Inc.:

We have audited the accompanying consolidated balance sheets of Qwest Communications International Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ (deficit) equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qwest Communications International Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Qwest Communications International Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 15, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

Denver, Colorado

February 15, 2011

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions except per share amounts, shares in thousands)
Operating revenue	$	11,730		$	12,311		$	13,475
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		3,804			4,088			4,956
Selling		1,702			1,944			2,188
General, administrative and other operating		2,023			1,993			1,880
Depreciation and amortization		2,200			2,311			2,354

Total operating expenses		9,729			10,336			11,378

Operating income		2,001			1,975			2,097

Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net		1,039			1,089			1,069
Loss on embedded option in convertible debt		475			—			—
Loss on early retirement of debt		45			—			—
Other—net		(8	)		(17	)		(23	)

Total other expense (income)—net		1,551			1,072			1,046

Income before income taxes		450			903			1,051
Income tax expense		505			241			399

Net (loss) income	$	(55	)	$	662		$	652

(Loss) earnings per common share:
Basic	$	(0.03	)	$	0.38		$	0.38
Diluted	$	(0.03	)	$	0.38		$	0.37

Weighted average common shares outstanding:
Basic		1,726,085			1,709,346			1,728,731
Diluted		1,726,085			1,713,498			1,730,206

The accompanying notes are an integral part of these consolidated financial statements.

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
	2010			2009
	(Dollars in millions, shares in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	372		$	2,406
Accounts receivable—net of allowance of $83 and $100, respectively		1,264			1,302
Deferred income taxes—net		234			538
Prepaid expenses and other		352			368

Total current assets		2,222			4,614

Property, plant and equipment—net		11,794			12,299
Capitalized software—net		947			911
Deferred income taxes—net		1,686			1,971
Other		571			585

Total assets	$	17,220		$	20,380

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term borrowings	$	1,089		$	2,196
Accounts payable		801			765
Accrued expenses and other		1,430			1,580
Deferred revenue and advance billings		551			556

Total current liabilities		3,871			5,097

Long-term borrowings—net of unamortized debt discount and other of $199 and $266, respectively		10,858			12,004
Post-retirement and other post-employment benefits obligations—net		2,476			2,479
Pension obligations—net		612			817
Deferred revenue		459			486
Other		599			675

Total liabilities		18,875			21,558

Commitments and contingencies (Note 18)

Stockholders’ deficit:
Preferred stock—$1.00 par value, 200 million shares authorized; none issued or outstanding		—			—
Common stock—$0.01 par value, 5 billion shares authorized; 1,792,145 and 1,738,330 shares issued, respectively		18			17
Additional paid-in capital		42,285			42,269
Treasury stock—27,841 and 9,084 shares, respectively (including 22 shares and 44 shares, respectively, held in rabbi trust)		(157	)		(22	)
Accumulated deficit		(43,425	)		(42,953	)
Accumulated other comprehensive loss		(376	)		(489	)

Total stockholders’ deficit		(1,655	)		(1,178	)

Total liabilities and stockholders’ deficit	$	17,220		$	20,380

The accompanying notes are an integral part of these consolidated financial statements.

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions)
Operating activities:
Net (loss) income	$	(55	)	$	662		$	652
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		2,200			2,311			2,354
Deferred income taxes		508			229			450
Provision for bad debt—net		86			130			162
Loss on embedded option in convertible debt		475			—			—
Loss on early retirement of debt		45			—			—
Stock-based compensation		93			40			47
Other non-cash charges—net		94			96			126
Changes in operating assets and liabilities:
Accounts receivable		(35	)		35			(65	)
Prepaid expenses and other current assets		58			(5	)		42
Accounts payable, accrued expenses and other current liabilities		(23	)		(157	)		(530	)
Deferred revenue and advance billings		(32	)		(58	)		(48	)
Other non-current assets and liabilities		(47	)		24			(259	)

Cash provided by operating activities		3,367			3,307			2,931

Investing activities:
Expenditures for property, plant and equipment and capitalized software		(1,488	)		(1,409	)		(1,777	)
Proceeds from sales or maturities of investment securities		943			18			65
Purchases of investment securities		(944	)		—			—
Other		1			(15	)		19

Cash used for investing activities		(1,488	)		(1,406	)		(1,693	)

Financing activities:
Proceeds from long-term borrowings		775			1,270			—
Repayments of long-term borrowings, including current maturities		(3,379	)		(827	)		(631	)
Proceeds from issuances of common stock		67			57			42
Dividends paid		(555	)		(551	)		(556	)
Settlement of embedded option in convertible debt		(640	)		—			—
Purchase of treasury stock		(136	)		(3	)		(2	)
Repurchases of common stock		—			—			(432	)
Early retirement of debt		(41	)		—			—
Other		(4	)		(6	)		4

Cash used for financing activities		(3,913	)		(60	)		(1,575	)

Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents		(2,034	)		1,841			(337	)
Beginning balance		2,406			565			902

Ending balance	$	372		$	2,406		$	565

The accompanying notes are an integral part of these consolidated financial statements.

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

AND COMPREHENSIVE (LOSS) INCOME


	Shares of Common Stock			Common Stock and Additional Paid-in Capital			Treasury Stock at cost			Accum- ulated Deficit			AOCI(L) ⁽¹⁾			Total			Compre- hensive (Loss) Income
	(Shares in thousands)			(Dollars in millions)
Balance as of December 31, 2007		1,787,287		$	42,526		$	(18	)	$	(43,156	)	$	1,303		$	655
Net income		—			—			—			652			—			652		$	652
Other comprehensive loss—net of taxes:
Pension—net of deferred taxes of $950		—			—			—			—			(1,501	)		(1,501	)		(1,501	)
Other post-retirement benefit obligations, net of deferred taxes of $142		—			—			—			—			(267	)		(267	)		(267	)
Unrealized loss on derivative instruments, net of deferred taxes of $3		—			—			—			—			(6	)		(6	)		(6	)
Unrealized loss on auction rate securities and other, net of deferred taxes of $10		—			—			—			—			(16	)		(16	)		(16	)

Total comprehensive loss—net																			$	(1,138	)

Dividends declared		—			—			—			(550	)		—			(550	)
Common stock repurchases		(95,386	)		(430	)		—			—			—			(430	)
Common stock issuances:
Stock options exercised		703			3			—			—			—			3
Employee stock purchase plan		3,409			12			—			—			—			12
401(k) plan trustee discretionary purchases		7,527			27			—			—			—			27
Other		3,213			46			(2	)		(9	)		—			35

Balance as of December 31, 2008		1,706,753			42,184			(20	)		(43,063	)		(487	)		(1,386	)
Net income		—			—			—			662			—			662		$	662
Other comprehensive income—net of taxes:
Pension—net of deferred taxes of $23		—			—			—			—			36			36			36
Other post-retirement benefit obligations, net of deferred taxes of $33		—			—			—			—			(47	)		(47	)		(47	)
Unrealized gain on derivative instruments, net of deferred taxes of $4		—			—			—			—			7			7			7
Unrealized gain on auction rate securities and other, net of deferred taxes of $1		—			—			—			—			2			2			2

Total comprehensive income—net																			$	660

Dividends declared		—			—			—			(552	)		—			(552	)
Common stock issuances:
Stock options exercised		1,043			4			—			—			—			4
Employee stock purchase plan		3,490			11			—			—			—			11
401(k) plan trustee discretionary purchases		11,607			42			—			—			—			42
Other		6,353			45			(2	)		—			—			43

Balance as of December 31, 2009		1,729,246			42,286			(22	)		(42,953	)		(489	)		(1,178	)
Net loss		—			—			—			(55	)		—			(55	)	$	(55	)
Other comprehensive income—net of taxes:
Pension—net of deferred taxes of $100		—			—			—			—			155			155			155
Other post-retirement benefit obligations, net of deferred taxes of $21		—			—			—			—			(40	)		(40	)		(40	)
Unrealized loss on derivative instruments, net of deferred taxes of $1		—			—			—			—			(1	)		(1	)		(1	)
Unrealized loss on auction rate securities and other, net of deferred taxes of $1		—			—			—			—			(1	)		(1	)		(1	)

Total comprehensive income—net																			$	58

Dividends declared		—			—			—			(417	)		—			(417	)
Common stock issuances:
Stock options exercised		10,498			50			—			—			—			50
Purchase of treasury stock		(18,359	)		—			(136	)		—			—			(136	)
Employee stock purchase plan		2,324			11			—			—			—			11
401(k) plan trustee discretionary purchases		1,554			8			—			—			—			8
Stock-based compensation		39,439			115			—			—			—			115
Embedded option in convertible debt		—			(165	)		—			—			—			(165	)
Other		(398	)		(2	)		1			—			—			(1	)

Balance as of December 31, 2010		1,764,304		$	42,303		$	(157	)	$	(43,425	)	$	(376	)	$	(1,655	)

(1)	Accumulated Other Comprehensive Income (Loss)

The accompanying notes are an integral part of these consolidated financial statements.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2010, 2009 and 2008

Unless the context requires otherwise, references in this report to “Qwest,” “we,” “us,” the “Company” and “our” refer to Qwest Communications International Inc. and its consolidated subsidiaries, and references to “QCII” refer to Qwest Communications International Inc. on an unconsolidated, stand-alone basis.

Note 1: Business and Background

We offer data, Internet, video and voice services nationwide and globally. We generate the majority of our revenue from services provided within the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

CenturyLink Merger

On April 21, 2010, we entered into a merger agreement whereby CenturyLink, Inc. (“CenturyLink”) will acquire us in a tax-free, stock-for-stock transaction. Under the terms of the agreement, our stockholders will receive 0.1664 shares of CenturyLink common stock for each share of our common stock they own at closing. Based on our and CenturyLink’s number of outstanding shares as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and our stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, we received notification from the Department of Justice and the Federal Trade Commission that we received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. We have received most of the necessary approvals from state public service or public utility commissions, but we still need approvals from the Federal Communications Commission (“FCC”) and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, we currently expect to receive all required approvals in the first quarter and are planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, we may be obligated to pay CenturyLink a termination fee of $350 million.

In 2010, we also recognized a $475 million loss due to the embedded option in our convertible debt being settled during the year. The embedded option was disqualified for equity treatment due to a requirement in the merger agreement to redeem this debt, including the option component, with cash. See Note 3—Fair Value of Financial Instruments for additional information regarding the change in accounting for our previously outstanding convertible debt.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.

Reclassifications

•

General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and universal service funds (“USF”) charges); rents and utilities expenses incurred by our administrative offices; and other general, administrative and other operating expenses (such as professional fees). These expenses also include our combined net periodic pension and post-retirement benefits expenses for all eligible employees and retirees.

We have also reclassified certain other prior year amounts in our Annual Report on Form 10-K for the year ended December 31, 2009 to conform to the current year presentation.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

Use of Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we made when accounting for items and matters such as, but not limited to, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies are reasonable, based on information available at the time they were made. These estimates, judgments and assumptions can affect the reported amounts of assets, liabilities and components of stockholders’ deficit as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our consolidated statements of operations and our consolidated statements of cash flows. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 18—Commitments and Contingencies for additional information.

•

For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.

•

For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.

For all of these and other matters, actual results could differ from our estimates.

Revenue Recognition

We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include activation fees and installation charges, which we recognize as revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We also defer costs for customer acquisitions. The deferral of customer acquisition costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.

Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If the elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based on the relative fair values of the separate elements. The revenue associated with each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as revenue the amount attributable to the equipment sale as long as all the conditions for

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

revenue recognition have been satisfied. Any portion of the advance payment in excess of the relative fair value of the equipment is recognized ratably over the longer of the contractual period or the expected customer relationship period.

We have periodically transferred optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets, and on all of the other elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.

We offer some products and services that are provided by third-party vendors. We review the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. For example, the revenue from DIRECTV and Verizon Wireless services that we offer through sales agency relationships is reported on a net basis, while the revenue from resold conferencing services is reported on a gross basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership, and act as an agent or broker.

Allocation of Bundle Discounts

We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offerings. The allocation is based on the relative fair value of services included in each bundle combination.

USF, Gross Receipts Taxes and Other Surcharges

In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to governmental authorities, including USF charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the taxes on a gross basis and include them in our revenue and general, administrative and other operating expenses. In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenue and general, administrative and other operating expenses.

Our revenue and general, administrative and other operating expenses included taxes and surcharges accounted for on a gross basis of $385 million, $357 million and $391 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Advertising Costs

Costs related to advertising are expensed as incurred. Advertising expense was $296 million, $338 million and $411 million for the years ended December 31, 2010, 2009 and 2008, respectively, and is included in selling expenses and general, administrative and other operating expenses in our consolidated statements of operations.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

Legal Costs

In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.

Restructuring Charges

Periodically, we commit to exit certain business activities, eliminate administrative and network locations or significantly reduce our number of employees. At the time a restructuring plan is approved, we record a charge to our consolidated statements of operations for our estimated costs associated with the plan. We also record a charge when we permanently cease use of a leased location. Charges associated with these exits or restructuring plans incorporate various estimates, including severance costs, sublease income and costs, disposal costs, length of time on market for abandoned rented facilities and contractual termination costs. Estimates of charges associated with abandoned operating leases, some of which entail long-term lease obligations, are based on existing market conditions and the net amounts that we estimate we will pay in the future.

Income Taxes and Tax Valuation Allowance

The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net operating loss carryforwards (“NOLs”), tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

We use the deferral method of accounting for federal investment tax credits earned prior to the repeal of such credits in 1986. We also defer certain transitional investment tax credits earned after the repeal, as well as investment tax credits earned in certain states. We amortize these credits ratably over the estimated service lives of the related assets as a credit to our income tax expense in our consolidated statements of operations.

We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. A significant portion of our net deferred tax assets relate to tax benefits attributable to NOLs. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. As of December 31, 2010, we concluded that it was more likely than not that we would realize the majority of our deferred tax assets; therefore, our valuation allowance did not require material adjustments. See Note 12—Income Taxes for additional information.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original maturities of three months or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.

Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. These bank accounts allow us to delay funding of issued checks until the checks are presented for payment. A delay in funding results in a temporary source of financing. The activity related to book overdrafts is included in “other” in financing activities in our consolidated statements of cash flows. Book overdrafts are included in accounts payable on our consolidated balance sheets. As of December 31, 2010 and 2009, the book overdraft balance was $40 million and $44 million, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer’s credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value.

Property, Plant and Equipment

Property, plant and equipment are carried at cost, plus the estimated value of any associated legally or contractually required retirement obligations. Property, plant and equipment are depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are categorized in the year acquired on the basis of equal life groups for purposes of depreciation and tracking. Generally, under the straight-line group method, when an asset is sold or retired, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is abnormal or unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.

We perform annual internal studies or reviews to determine depreciable lives for our property, plant and equipment. Our studies utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to calculate the remaining life of our asset base.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and equipment assets from leased properties, and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually incurred.

Capitalized Software

Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its estimated useful life. We capitalize certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with internally developed software to be used internally are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. We review the economic lives of our capitalized software annually.

Impairment of Long-Lived Assets

We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is measured by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.

Goodwill and Other Intangible Assets

Intangible assets arising from business combinations, such as goodwill, customer lists, trademarks and trade names, are initially recorded at fair value. Other intangible assets not arising from business combinations are initially recorded at cost. Intangible assets with finite lives are amortized on a straight-line basis over those lives. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite lived and such intangible assets are not amortized.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill and other long-lived intangible assets with indefinite lives, such as trademarks and trade names are reviewed for impairment annually or whenever an event occurs or circumstances change that would indicate an impairment may have occurred. These assets are carried at historical cost if their estimated fair value is greater than their carrying amounts. However, if their estimated fair value is less than the carrying amount, goodwill and

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

other indefinite-lived intangible assets are reduced to their estimated fair value through an impairment charge to our consolidated statements of operations. In July 2010, we completed our annual review and determined that the fair value of our indefinite-lived intangible assets exceeds their carrying amount, which totaled $50 million as of December 31, 2010. Accordingly, no impairment charge was recorded in 2010.

Derivative Financial Instruments

As of December 31, 2010 we did not have any derivative financial instruments. However, we sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of the variability in the borrower’s overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in the fair value of the borrower’s overall debt portfolio due to changes in interest rates.

For a derivative that is designated as and meets all of the required criteria for a cash flow hedge, we record in accumulated other comprehensive loss on our consolidated balance sheets, any changes in the fair value of the derivative. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, we record those amounts immediately in other expense (income)—net in our consolidated statements of operations. For a derivative that is designated as and meets all of the required criteria for a fair value hedge, we record in other expense (income)—net in our consolidated statements of operations the changes in fair value of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)—net.

We assess quarterly whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item or whether our initial assumption of no ineffectiveness is still valid. If we determine that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or our assumption of no ineffectiveness is no longer valid, then we discontinue hedge accounting with respect to that derivative prospectively. We record immediately in earnings changes in the fair value of derivatives that are not designated as hedges. See Note 9—Derivative Financial Instruments for additional information.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable, interest rate hedges and long-term notes including the current portion. The carrying values of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable and interest rate hedges approximate their fair values. The carrying value of our long-term notes, including the current portion, reflects original cost net of unamortized discounts and other. See Note 3—Fair Value of Financial Instruments for a more detailed discussion of the fair value of our other financial instruments.

Pension and Post-Retirement Benefits

The discount rate is the rate at which we believe we could effectively settle the benefit obligations as of the end of the year. We set our discount rates each year based upon the yields of high-quality fixed-income investments available at December 31 with maturities matching our future expected cash flows of the pension and post-retirement benefit plans. In making the determination of discount rates, we average the yields of various bond matching sources and the Citigroup Pension Discount Curve.

The expected rate of return on plan assets is the long-term rate of return we expect to earn on plan assets. The rate of return is determined by the strategic allocation of the plan assets and the long-term risk and return forecast for each asset class. The forecast for each asset class is generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

held by our pension plan, we have elected to recognize actual returns on these equity assets ratably over a five year period when computing our market-related value of pension plan assets; the unrecognized portion of actual returns on these equity assets is included in accumulated other comprehensive income. This method has the effect of reducing the impact on expenses of equity market volatility that may be experienced from year to year. With respect to bonds and other assets held by our pension plan and with respect to the assets held by our post-retirement benefit plans, we did not elect to recognize actual returns on these assets using this five-year ratable method. Therefore, the full impact of annual market volatility for these assets is reflected in the subsequent year’s net periodic combined benefits expense.

The trusts for the pension and post-retirement benefits plans hold investments in equities, fixed income, real estate and other assets such as private equity assets. The assets held by these trusts are reflected at estimated fair value as of December 31. The fair value of certain assets held by the trusts is determined through use of observable inputs, such as quoted market prices for identical instruments in active markets or quoted prices for similar assets in active markets. For instance, the fair value of individual exchange traded equity securities is based on the last published price reported on the major market in which that individual security is traded and the fair value of certain individual fixed income securities is based on a spread to other more active fixed income securities last reported price on the major market in which that more active security is traded. Interests in commingled funds and limited partnerships are valued using the net asset value of each fund. The fair value of a significant amount of assets held by our trusts are not available by reference to a quoted market price or other significant observable inputs as of December 31. As a consequence, we believe there is a risk in reporting the fair value of these assets because the actual values of these assets could be significantly different from our estimates. The methods we use to value investments in the absence of observable market prices are described below.

Investments in partnerships (private equity, private debt and real estate) do not have observable market prices and are generally reported at fair value as determined by the partnership. Each partnership uses valuation methodologies that give consideration to a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. These valuation methodologies involve a significant degree of judgment. For some of these partnership investments, the fair value provided by the partnership is as of a date prior to our measurement date. In these situations, we adjust the fair value based on subsequent cash flows and review of the latest information provided by the partnership, including the impact of any significant events and changes in market conditions that have occurred since the last valuation date.

The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are monitored and evaluated for reasonableness. See additional information about the valuation inputs used to value the assets in Note 11 – Employee Benefits.

Investment Impairment Analysis

Investments in available-for-sale debt and equity securities are impaired if the fair value of the security is less than our amortized cost basis. Investments are reviewed quarterly for impairment and any impaired security is evaluated to determine whether the impairment is temporary or other than temporary. This evaluation requires significant judgment and is based upon many factors including our intent and ability to hold the security until it recovers, the severity and length of time the security has been impaired, the issuer’s financial standing, including its current and expected future ability to make payments in accordance with the terms of securities, credit ratings of both the issuer and the securities and compliance with the terms of the securities. If we intend to sell the

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 2: Summary of Significant Accounting Policies—(Continued)

securities or determine that it is more likely than not that we will be required to sell the securities, the impairment is classified as other than temporary and the total impairment is recognized in other expense (income)—net in our consolidated statements of operations. In addition, for investments in debt securities, if we determine that it is not probable that we will collect all payments due under the terms of the security, the impairment would be considered other than temporary; however, only the portion of the impairment attributable to credit loss would be recognized in other expense (income)—net in our consolidated statements of operations and the remainder would be recognized in other comprehensive income (loss), net of deferred income taxes. The recognition of an other-than-temporary impairment in our consolidated statements of operations establishes a new amortized cost basis in the investment. An impairment determined to be temporary is recognized in other comprehensive income (loss), net of deferred income taxes and does not result in a new amortized cost basis in the investment.

Recently Issued Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) Number 2009-13, “Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force.” This ASU establishes a new selling price hierarchy to use when allocating the sales price of a multiple element arrangement between delivered and undelivered elements. This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules. We are required to adopt this ASU prospectively for new or materially modified agreements entered into on or after January 1, 2011. The adoption of this ASU will not have a material effect on our financial position or results of operations.

Note 3: Fair Value of Financial Instruments

Our financial instruments consisted of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable, interest rate hedges, the embedded option in our previously outstanding convertible debt and long-term notes including the current portion. The carrying values of the following items approximate their fair values: cash and cash equivalents, auction rate securities, accounts receivable, accounts payable and interest rate hedges. The carrying value of our long-term notes, including the current portion, reflects original cost net of unamortized discounts and other and was $11.583 billion as of December 31, 2010. For additional information, see Note 8—Borrowings.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 3: Fair Value of Financial Instruments—(Continued)

The table below presents the fair values for auction rate securities, interest rate hedges and long-term notes including the current portion, as well as the input levels used to determine these fair values as of December 31, 2010 and 2009:


	Level		Fair value as of December 31,
	Level		2010		2009
			(Dollars in millions)
Assets:
Auction rate securities		3	$	92	$	95
Fair value hedges		3		—		2

Total assets			$	92	$	97

Liabilities:
Long-term notes, including the current portion		1 & 2	$	12,480	$	14,245
Cash flow hedges		3		—		3

Total liabilities			$	12,480	$	14,248

The three levels of the fair value hierarchy as defined by the FASB are as follows:


Input Level		Description of Input
Level 1		Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2		Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

We determined the fair value of our auction rate securities using a probability-weighted discounted cash flow model that takes into consideration the weighted average of the following factors:

•

coupon rate of 5.44%;

•

probability that we will be able to sell the securities in an auction or that the securities will be redeemed early of 75.23%;

•

probability that a default will occur of 20.98% with a related recovery rate of 55.00%; and

•

discount rate of 7.81%.

We determined the fair value of our interest rate hedges using projected future cash flows, discounted at the mid-market implied forward London Interbank Offered Rate (“LIBOR”). For additional information on our derivative financial instruments, see Note 9—Derivative Financial Instruments.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 3: Fair Value of Financial Instruments—(Continued)

We determined the fair values of our long-term notes, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.

The table below presents a rollforward of the instruments valued using Level 3 inputs for the years ended December 31, 2010 and 2009:


	Auction rate securities			Investment fund			Fair value hedges			Cash flow hedges			Embedded option in convertible debt
	(Dollars in millions)
Balance at December 31, 2008	$	90		$	20		$	—		$	(8	)	$	—
Transfers into (out of) Level 3		—			—			—			—			—
Additions		2			—			—			—			—
Dispositions and settlements		—			(21	)		—			—			—
Realized and unrealized gains:
Included in long-term borrowings—net		—			—			2			—			—
Included in other income (expense)—net		—			1			—			—			—
Included in other comprehensive income		3			—			—			5			—

Balance at December 31, 2009		95			—			2			(3	)		—

Transfers into (out of) Level 3		—			—			—			—			—
Additions		—			—			—			—			—
Reclassification from equity		—			—			—			—			(165	)
Dispositions and settlements		—			—			(7	)		—			640
Realized and unrealized gains:
Included in long-term borrowings—net		—			—			5			—			—
Included in other (expense) income—net		—			—			—			—			(475	)
Included in other comprehensive (loss) income		(3	)		—			—			3			—

Balance at December 31, 2010	$	92		$	—		$	—		$	—		$	—

Our 3.50% Convertible Senior Notes had previously been accounted for as two components: a debt component, and an equity component representing a written option on our stock. Our obligation under the CenturyLink merger agreement to redeem these notes for cash triggered a change in accounting to reclassify the equity component from equity to a liability. We therefore computed the fair value of the equity component to be $165 million as of April 21, 2010 (the date the merger agreement was signed) and reclassified this amount from additional paid-in capital to a current liability. We determined the stock price volatility considering the historical volatility of both our common stock and CenturyLink’s common stock for a historical period equivalent to the expected remaining option term. Under the terms of these notes, the conversion price of the debt was adjusted based on dividend payments. The embedded option therefore effectively participated in dividends and the fair value of the embedded option was computed based upon the conversion price in effect on the valuation date and an assumed dividend yield of zero.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 3: Fair Value of Financial Instruments—(Continued)

We determined the fair value of the embedded option in our convertible debt using a Black-Scholes option valuation model. The value was computed using the following assumptions as of April 21, 2010 (the date of the merger agreement).

•

Stock price of $5.24;

•

Stock price volatility of 28.7%;

•

Exercise price of $4.92;

•

Option term of approximately eight months; and

•

Risk free rate of 0.29%.

See Note 8—Borrowings and Note 9—Derivative Financial Instruments for additional information.

By December 31, 2010 we had settled the outstanding liability for our embedded option for $640 million resulting in a loss of $475 million.

Note 4: Investments

As of December 31, 2010 and 2009, our investments included auction rate securities of $92 million and $95 million, respectively, which are classified as non-current, available-for-sale investments and are included in other non-current assets at their estimated fair value on our consolidated balance sheets. Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism generally allows existing investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. Prior to August 2007, we invested in these securities for short periods of time as part of our cash management program. However, the uncertainties in the credit markets have prevented us and other investors from liquidating holdings of these securities in auctions since the third quarter of 2007. Because we are uncertain as to when the liquidity issues relating to these investments will improve, we continued to classify these securities as non-current as of December 31, 2010. These securities:

•

are structured obligations of special purpose reinsurance entities associated with life insurance companies and are referred to as “Triple X” securities;

•

currently pay interest every 28 days at one-month LIBOR plus 200 basis points;

•

are rated A;

•

are insured against loss of principal and interest by two bond insurers, one of which had a credit rating of B and the other of which was not rated and in the fourth quarter of 2009 was prohibited by its regulator from making any claim payments;

•

are collateralized by the issuers; and

•

mature between 2033 and 2036.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 4: Investments—(Continued)

The following table summarizes the fair value of these auction rate securities, the cumulative net unrealized loss, net of deferred income taxes, and the cost basis of these securities as of December 31, 2010 and 2009:


	December 31,
	2010		2009
	(Dollars in millions)
Auction rate securities—fair value	$	92	$	95
Classification		Non-current, available-for- sale investments
Balance sheet location (reported at estimated fair value)		Other non-current assets
Cumulative net unrealized loss, net of deferred income taxes	$	16	$	15
Auction rate securities—cost basis	$	120	$	120

The following table summarizes the unrealized gains and losses, net of deferred income taxes included in comprehensive (loss) income, on our auction rate securities for the years ended December 31, 2010 and 2009:


	December 31,
	2010			2009
	(Dollars in millions)
Unrealized (loss) gain, net of deferred income taxes	$	(1	)	$	2

These unrealized losses were recorded in accumulated other comprehensive loss on our consolidated balance sheets. We consider the decline in fair value to be a temporary impairment because we believe it is more likely than not that we will ultimately recover the entire $120 million cost basis, in part because the securities are rated investment grade, the securities are collateralized and the issuers continue to make required interest payments. At some point in the future, we may determine that the decline in fair value is other than temporary if, among other factors:

•

the issuers cease making required interest payments;

•

we believe it is more likely than not that we will be required to sell these securities before their values recover; or

•

we change our intent to hold the securities due to events such as a change in the terms of the securities.

Note 5: Accounts Receivable

The following table presents details of our accounts receivable balances as of December 31, 2010 and 2009:


	December 31,
	2010			2009
	(Dollars in millions)
Accounts receivable—net:
Trade receivables	$	920		$	989
Earned and unbilled receivables		271			285
Purchased and other receivables		156			128

Total accounts receivable		1,347			1,402
Less: allowance for doubtful accounts		(83	)		(100	)

Accounts receivable—net	$	1,264		$	1,302

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 5: Accounts Receivable—(Continued)

We are exposed to concentrations of credit risk from consumer and business customers within our local service area, business customers outside of our local service area and from other telecommunications service providers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.

The following table presents details of our allowance for doubtful accounts for the years ended December 31, 2010, 2009 and 2008:


	Balance at beginning of period		Charged to expense-net		Deductions		Balance at end of period
	(Dollars in millions)
Allowance for doubtful accounts:
2010	$	100	$	86	$	103	$	83
2009		129		130		159		100
2008		145		162		178		129

Note 6: Property, Plant and Equipment

The components of our property, plant and equipment as of December 31, 2010 and 2009 are as follows:


	Depreciable Lives		December 31,
	Depreciable Lives		2010			2009
			(Dollars in millions)
Property, plant and equipment:
Land		N/A	$	105		$	106
Buildings		15-30 years		3,363			3,382
Communications equipment		2.5-10 years		20,230			19,954
Other network equipment		8-45 years		21,590			21,267
General purpose computers and other		5-11 years		1,823			1,773
Construction in progress		N/A		181			118

Total property, plant and equipment				47,292			46,600
Less: accumulated depreciation				(35,498	)		(34,301	)

Property, plant and equipment—net			$	11,794		$	12,299

We recorded depreciation expense of $1.949 billion, $2.071 billion and $2.120 billion for the years ended December 31, 2010, 2009 and 2008, respectively.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 6: Property, Plant and Equipment—(Continued)

During 2008, we recognized expenses of approximately $6 million, which reduced net income by approximately $4 million, or less than $0.01 per basic and diluted common share, for impairment of network assets associated with our transition to selling Verizon Wireless services from selling Qwest-branded wireless services.

Asset Retirement Obligations

As of December 31, 2010, our asset retirement obligations balance was primarily related to estimated future costs of removing circuit equipment from leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets. The following table provides asset retirement obligation activity for the years ended December 31, 2010, 2009 and 2008:


	December 31,
	2010			2009			2008
	(Dollars in millions)
Asset retirement obligations:
Balance as of January 1	$	64		$	65		$	58
Accretion expense		7			7			6
Liabilities incurred		—			—			—
Liabilities settled and other		(7	)		—			—
Change in estimate		(1	)		(8	)		1

Balance as of December 31	$	63		$	64		$	65

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 7: Capitalized Software

Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its estimated useful life. As of December 31, 2010 and 2009, our capitalized software had carrying costs of $2.740 billion and $2.550 billion, respectively, and accumulated amortization was $1.793 billion and $1.639 billion, respectively. We recorded amortization expense of $251 million, $240 million and $234 million for the years ended December 31, 2010, 2009 and 2008, respectively, for capitalized software based on a life range of four to seven years.

During 2008, we recognized expenses of approximately $16 million, which reduced net income by approximately $10 million, or less than $0.01 per basic and diluted common share, for impairment of capitalized software associated with our transition to selling Verizon Wireless services from selling Qwest-branded wireless services.

In 2008, as a result of decisions to discontinue certain product offerings and exiting our expiring wireless services arrangement, we changed our estimates of the remaining economic lives of certain capitalized software, which accelerated the amortization of those assets. This change resulted in additional amortization expense of $20 million for the year ended December 31, 2008. The additional amortization, net of deferred taxes, reduced net income by approximately $12 million, or less than $0.01 per basic and diluted common share, for the year ended December 31, 2008.

The weighted average remaining life of our capitalized software was 3.4 years as of December 31, 2010.

The estimated future amortization expense for capitalized software is as follows:


	Estimated
	Amortization
	(Dollars in millions)
Estimated future amortization expense:
2011	$	226
2012		200
2013		173
2014		145
2015		103
2016 and thereafter		100

Total estimated future amortization expense	$	947

Note 8: Borrowings

Current Portion of Long-Term Borrowings

As of December 31, 2010 and 2009, the current portion of our long-term borrowings consisted of:


	December 31,
	2010		2009
	(Dollars in millions)
Current portion of long-term borrowings:
Long-term notes	$	1,004	$	2,168
Long-term capital lease and other obligations		85		28

Total current portion of long-term borrowings	$	1,089	$	2,196

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

Long-Term Borrowings

As of December 31, 2010 and 2009, our long-term borrowings consisted of the following (for all notes with unamortized discount or premium, the face amount of the notes and the unamortized discount or premium are presented separately):


	December 31,
	2010			2009
	(Dollars in millions)
Long-term borrowings:
Qwest Communications International Inc. (“QCII”):
Senior notes with various rates ranging from 7.125% to 8.0% and maturities from 2014 to 2018	$	2,650		$	3,640
Unamortized discount		(52	)		(102	)
Less: current portion		—			(1,265	)

Total QCII		2,598			2,273

Qwest Capital Funding (“QCF”):
Notes with various rates ranging from 6.50% to 7.75% and maturities from 2011 to 2031		1,160			2,185
Unamortized discount		(3	)		(2	)
Less: current portion		(179	)		(403	)

Total QCF		978			1,780

Qwest Corporation (“QC”):
Notes with various rates ranging from 3.552% to 8.875% including LIBOR plus 3.25% and maturities from 2011 to 2043		7,968			8,468
Unamortized discount		(154	)		(165	)
Fair value hedge adjustment		14			10
Capital lease and other obligations		184			73
Less: current portion		(871	)		(515	)

Total QC		7,141			7,871

Qwest Communications Company, LLC (“QCC”):
Capital lease and other obligations		184			100
Unamortized discount		(4	)		(7	)
Less: current portion		(39	)		(13	)

Total QCC		141			80

Total long-term borrowings	$	10,858		$	12,004

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

Our long-term notes and bonds had the following interest rates and contractual maturities as of December 31, 2010:


	Contractual Maturities
	2011		2012		2013		2014		2015		2016 and Thereafter		Total
	(Dollars in millions)
Interest rates:
Up to 5%	$	—	$	—	$	750	$	—	$	—	$	—	$	750
Above 5% to 6%		—		—		—		—		—		—		—
Above 6% to 7%		—		—		—		—		—		2,026		2,026
Above 7% to 8%		1,004		—		—		1,900		950		2,837		6,691
Above 8% to 9%		—		1,500		—		—		—		811		2,311

Total notes and bonds	$	1,004	$	1,500	$	750	$	1,900	$	950	$	5,674		11,778

Capital lease and other obligations														368
Less: unamortized discount														(213	)
Add: fair value hedge adjustment														14
Less: current portion of long-term borrowings														(1,089	)

Total long-term borrowings													$	10,858

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

Our long-term notes and bonds contractual maturities by entity as of December 31, 2010:


	Maturities
	2011		2012		2013		2014		2015		2016 and Thereafter		Total
	(Dollars in millions)
QCII notes:
QCII 7.125% Senior Notes	$	—	$	—	$	—	$	—	$	—	$	800	$	800
QCII 7.50% Senior Notes (Series B)		—		—		—		800		—		—		800
QCII 7.50% Senior Notes		—		—		—		500		—		—		500
QCII 8.00% Senior Notes		—		—		—		—		550		—		550

Total QCII notes		—		—		—		1,300		550		800		2,650

QCF notes:
QCF 7.25% Notes		179		—		—		—		—		—		179
QCF 6.5% Notes		—		—		—		—		—		174		174
QCF 6.875% Notes		—		—		—		—		—		352		352
QCF 7.625% Notes		—		—		—		—		—		97		97
QCF 7.75% Notes		—		—		—		—		—		358		358

Total QCF notes		179		—		—		—		—		981		1,160

QC notes and bonds:
QC Floating Rate Notes		—		—		750		—		—		—		750
QC 7.875% Notes		825		—		—		—		—		—		825
QC 8.875% Notes		—		1,500		—		—		—		—		1,500
QC 6.5% Notes		—		—		—		—		—		500		500
QC 6.875% Debentures		—		—		—		—		—		1,000		1,000
QC 7.125% Debentures		—		—		—		—		—		250		250
QC 7.2% Debentures		—		—		—		—		—		250		250
QC 7.25% Debentures		—		—		—		—		—		500		500
QC 7.375% Debentures		—		—		—		—		—		55		55
QC 7.5% Notes		—		—		—		600		—		—		600
QC 7.5% Debentures		—		—		—		—		—		484		484
QC 7.625% Notes		—		—		—		—		400		—		400
QC 7.75% Debentures		—		—		—		—		—		43		43
QC 8.375% Notes		—		—		—		—		—		811		811

Total QC notes and bonds		825		1,500		750		600		400		3,893		7,968

Total notes and bonds	$	1,004	$	1,500	$	750	$	1,900	$	950	$	5,674	$	11,778

We have a revolving credit facility (“the Credit Facility”) that is currently undrawn and expires in September 2013. The amount currently available to us under the Credit Facility is $1.035 billion.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

QCII Notes

Covenants

As of December 31, 2010, QCII had outstanding a total of $2.650 billion aggregate principal amount of senior notes. The $2.650 billion in notes is guaranteed on a senior unsecured basis by our wholly owned subsidiary, Qwest Services Corporation (“QSC”) and QCF. The indenture governing these notes limits QCII’s and its subsidiaries’ ability to:

•

incur or guarantee additional debt or issue preferred stock;

•

pay dividends or distributions on or redeem or repurchase capital stock;

•

make investments and other restricted payments;

•

issue or sell capital stock of restricted subsidiaries;

•

grant liens;

•

transfer or sell assets;

•

consolidate or merge or transfer all or substantially all of our assets; and

•

enter into transactions with affiliates.

If the notes receive investment grade ratings, most of the covenants with respect to the notes will be subject to suspension or termination. Under the indenture governing these notes, we must repurchase the notes upon certain changes of control. However, the pending merger with CenturyLink does not constitute a change of control under the indenture governing these notes. This indenture also contains provisions for cross acceleration relating to any of our other debt obligations and the debt obligations of our restricted subsidiaries in an aggregate amount in excess of $100 million. We were in compliance with all of the covenants as of December 31, 2010.

Tender Offer

In August 2010, we completed a cash tender offer for the purchase of any and all of the $1.265 billion aggregate principal amount of QCII’s 3.50% Convertible Senior Notes. We received and accepted tenders of approximately $147 million aggregate principal amount of these notes, or 12% of the outstanding notes. This tender resulted in the settlement of approximately 12% of the embedded conversion option for $24 million, which approximated the fair value of the option on the settlement date.

Repayments

In November and December 2010, we redeemed all of the then-outstanding $1.118 billion aggregate principal amount of our 3.50% Convertible Senior Notes and the remaining embedded option for $616 million. This resulted in no gain or loss on the notes and a total loss of $475 million on the embedded conversion option for the year ended December 31, 2010.

In February 2010, we redeemed $525 million aggregate principal amount of QCII’s Senior Notes due 2011, resulting in an immaterial loss.

In January 2009, we redeemed $230 million aggregate principal amount of QCII’s Floating Rate Senior Notes due 2009.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

New Issuance

In January 2010, we issued $800 million of 7.125% Senior Notes due 2018. We are using or used net proceeds of $775 million for general corporate purposes, including repayment of indebtedness and funding and refinancing investments in our telecommunications assets.

In September 2009, we issued $550 million of 8.00% Senior Notes due 2015. We are using or used the net proceeds of $532 million for general corporate purposes, including repayment of indebtedness and funding and refinancing investments in our telecommunication assets.

QCII Credit Facility

The Credit Facility, which makes available to us $1.035 billion of additional credit subject to certain restrictions, is currently undrawn and expires in September 2013; however, the Credit Facility will be terminated at the time of the closing of the merger with CenturyLink. The Credit Facility has 13 lenders, with commitments ranging from $25 million to $100 million. Any amounts drawn on the Credit Facility are guaranteed by our wholly owned subsidiary QSC and are secured by a senior lien on the stock of QC. The Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to legal matters, discussed in Note 18—Commitments and Contingencies.

If drawn, the Credit Facility would, at our election, bear interest at a rate of adjusted LIBOR or a base rate defined in the Credit Facility, in each case plus an applicable margin. Such margin varies based upon the credit ratings of the facility and is currently 3.25% for LIBOR based borrowings and 2.25% for base rate borrowings.

The Credit Facility contains certain other covenants including, but not limited to, limitations on:

•

incurrence of indebtedness (suspended while the Credit Facility remains undrawn);

•

restricted payments;

•

using any proceeds to pay settlements or judgments relating to legal matters discussed in Note 18—Commitments and Contingencies;

•

dividend and other payments;

•

mergers, consolidations and asset sales;

•

investments; and

•

liens (suspended while the Credit Facility remains undrawn).

At the time of the closing of our pending merger with CenturyLink, the Credit Facility will be terminated and any outstanding amounts will be immediately due and payable.

The Credit Facility contains financial covenants that (i) require Qwest and its consolidated subsidiaries to maintain a debt-to-consolidated EBITDA ratio of not more than 5 to 1 and (ii) require QC and its consolidated subsidiaries to maintain a debt-to-consolidated EBITDA ratio of not more than 2.5 to 1. Consolidated EBITDA as defined in the Credit Facility means our net income (loss) adjusted for taxes, interest, depreciation, amortization and certain non-cash, non-recurring items. Compliance with these financial covenants is not required while the Credit Facility remains undrawn; however, we were in compliance with these financial covenants as of December 31, 2010.

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

The Credit Facility has a cross payment default provision, and this facility and certain other debt issues also have cross acceleration provisions. When present, such provisions could have a greater impact on our liquidity than might otherwise arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments could occur if:

•

we fail to pay any indebtedness when due in an aggregate principal amount greater than $100 million;

•

any indebtedness is accelerated in an aggregate principal amount greater than $100 million; or

•

judicial proceedings are commenced to foreclose on any of our assets that secure indebtedness in an aggregate principal amount greater than $100 million.

Upon such a cross default, the creditors of a material amount of our debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due such creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated.

QCF Notes

Covenants

The QCF notes are guaranteed by QCII on a senior unsecured basis. The indentures governing the QCF notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on the assets of QCF; and (ii) a limitation on mergers or sales of all, or substantially all, of the assets of QCF or us, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. We were in compliance with all of the provisions and covenants of the QCF notes as of December 31, 2010.

Tender Offer

In March 2010, QCF completed a cash tender offer for the purchase of any and all of the $1.204 billion aggregate principal amount of certain of its notes, consisting of $403 million of its 7.90% Notes due 2010 and $801 million of its 7.25% Notes due 2011. With respect to QCF’s 7.90% Notes due 2010, QCF received and accepted tenders of approximately $338 million aggregate principal amount of these notes, or 84%, for $347 million, resulting in a loss of $10 million. With respect to QCF’s 7.25% Notes due 2011, QCF received and accepted tenders of approximately $622 million aggregate principal amount of these notes, or 78%, for $650 million, resulting in a loss of $30 million. The combined loss on this tender offer, net of deferred taxes, reduced net income by approximately $25 million, or approximately $0.01 per basic and diluted common share, for the year ended December 31, 2010.

Repayment

In August 2010, QCF paid at maturity the remaining $65 million aggregate principal amount of its 7.90% Notes due 2010.

In August 2009, QCF paid at maturity $562 million aggregate principal amount of its 7.0% Notes due 2009.

100

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

QC Notes

Covenants

The indentures governing the QC notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on the assets of QC; and (ii) a limitation on mergers or sales of all, or substantially all, of the assets of QC, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. We were in compliance with all of the provisions and covenants of the QC notes as of December 31, 2010.

New Issues

In April 2009, QC issued approximately $811 million aggregate principal amount of its 8.375% Senior Notes due 2016. QC is using or used the net proceeds of $738 million for general corporate purposes, including repayment of indebtedness and funding or refinancing investments in its telecommunication assets.

The notes are unsecured obligations of QC and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of QC. The covenant and default terms are substantially the same as those associated with QC’s other long-term borrowings.

Repayments

In June 2010, QC paid at maturity the $500 million aggregate principal amount of its 6.95% Term Loan due 2010.

Registered Exchange Offer

In November 2009, QC commenced a registered exchange offer for its 8.375% Notes due 2016 pursuant to the registration rights agreement that it entered into in connection with the issuance of these notes. QC completed the registered exchange offer in December 2009.

Interest Rate Hedges

During 2009 and 2008, QC entered into interest rate hedges as discussed in Note 9—Derivative Financial Instruments.

101

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 8: Borrowings—(Continued)

Interest Expense

Interest expense includes interest on long-term borrowings and capital lease obligations. Other interest expense, such as interest on income taxes, is included in other—net in our consolidated statements of operations. The following table presents the amount of gross interest expense, capitalized interest and cash paid for interest during the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions)
Interest expense on long-term borrowings and capital leases—net:
Gross interest expense	$	1,057		$	1,103		$	1,090
Capitalized interest		(18	)		(14	)		(21	)

Total interest expense on long-term borrowings and capital leases—net	$	1,039		$	1,089		$	1,069

Cash paid for interest—net:
Cash interest paid on long-term borrowings, capital leases and interest rate swaps	$	1,026		$	1,005		$	1,042
Cash received from counterparties on interest rate swaps		(37	)		(24	)		(46	)

Cash paid for interest—net	$	989		$	981		$	996

Note 9: Derivative Financial Instruments

Interest Rate Hedges

During 2009 and 2008, we entered into the interest rate hedges described below as part of our short-term and long-term debt strategies.

In August 2009, QC entered into interest rate hedges on $400 million of the outstanding $1.500 billion aggregate principal amount of its 8.875% Notes due in 2012. QC designated these interest rate hedges as fair value hedges. We terminated these interest rate hedges in the third quarter of 2010. Upon termination, we received $10 million in cash for the fair value of the hedges and accrued interest. The accumulated $7 million increase in the carrying value of the notes is being amortized to interest expense using the effective interest method over the remaining term of the notes.

In March 2008, QC entered into interest rate hedges on $500 million of the outstanding $750 million aggregate principal amount of its Floating Rate Notes due 2013. QC designated these interest rate hedges as cash flow hedges. These hedges expired in March 2010. We did not recognize any gain or loss in earnings for hedge ineffectiveness during the lives of the hedges.

As of December 31, 2010, we had no outstanding interest rate hedge contracts. The interest rate hedges that were previously outstanding had immaterial effects on our consolidated statements of operations and balance sheets in all periods presented.

102

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 9: Derivative Financial Instruments—(Continued)

Embedded Option

In 2005, we issued our 3.50% Convertible Senior Notes to diversify our capital structure and minimize cash interest cost. These notes had previously been accounted for as two components: a debt component, and an equity component representing a written option on our stock. We believe that our obligation under the CenturyLink merger agreement to redeem these notes for cash triggered a change in accounting to reclassify the equity component from equity to a liability. We therefore computed the fair value of the equity component to be $165 million as of April 21, 2010 (the date the merger agreement was signed) and reclassified this amount from additional paid-in capital to a current liability.

In August 2010, we completed a cash tender offer for the purchase of any and all of the $1.265 billion aggregate principal amount of our 3.50% Convertible Senior Notes. We received and accepted tenders of approximately $147 million aggregate principal amount of these notes, or 12% of the outstanding notes. This tender resulted in the settlement of approximately 12% of the embedded conversion option for $24 million, which approximated the fair value of the option on the settlement date.

For additional information on our accounting policies for derivative financial instruments, see Note 2—Summary of Significant Accounting Policies.

Note 10: Severance and Restructuring

Severance

For the years ended December 31, 2010, 2009 and 2008, we recorded severance expenses of $67 million, $113 million and $129 million, respectively. A portion of our severance expenses is included in each of cost of sales, selling expenses and general, administrative and other operating expenses in our consolidated statements of operations. We have not included any severance expenses in our segment expenses. As of December 31, 2010 and 2009, our severance liability was $29 million and $77 million, respectively, and is included in accrued expenses and other in our consolidated balance sheets.

Restructuring

During 2004 and previous years, as part of our ongoing efforts to evaluate our operating costs, we established restructuring programs, which included workforce reductions, consolidation of excess facilities, and restructuring of certain business functions. As of December 31, 2010, the remaining restructuring reserve for these programs related to leases for real estate that we ceased using in prior periods and consisted of our estimates of amounts to be paid for these leases in excess of our estimates of any sublease revenue we may collect. We expect this reserve will be used over the remaining lease terms, which range from 0.8 to 15 years, with a weighted average of 11.9 years.

During 2008, we reversed approximately $33 million of restructuring reserve due to favorable early termination of a lease for which we previously reserved. The restructuring reversal is included in general, administrative and other operating expenses in our consolidated statements of operations.

103

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 10: Severance and Restructuring—(Continued)

As of December 31, 2010 and 2009, the restructuring reserve included in current liabilities was $17 million and $18 million, respectively, and the non-current portion was $159 million and $188 million, as of those dates. The remaining reserve balances are included on our consolidated balance sheets in accrued expenses and other current liabilities for the current portion and other long-term liabilities for the long-term portion. The provisions, reversals, and adjustments are included in general, administrative and other expenses in our consolidated statements of operations. We have not included any restructuring expenses in our segment expenses.

The following table presents the details of our real estate restructuring reserves for the years ended December 31, 2010, 2009 and 2008:


	Real Estate Restructuring
	(Dollars in millions)
Balance December 31, 2007	$	312
Provisions		—
Utilization		(50	)
Reversals and adjustments		(36	)

Balance December 31, 2008		226
Provisions		—
Utilization		(20	)
Reversals and adjustments		—

Balance December 31, 2009		206
Provisions		—
Utilization		(22	)
Reversals and adjustments		(8	)

Balance December 31, 2010	$	176

Note 11: Employee Benefits

Pension, Post-Retirement and Other Post-Employment Benefits

We sponsor a noncontributory qualified defined benefit pension plan (referred to as our pension plan) for substantially all management and occupational employees. In addition to this tax qualified pension plan, we also maintain a non-qualified pension plan for certain eligible highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for eligible former employees.

Pension

The pension plan provides benefits to participants under five separate formulas which are 1) the pension band or pension factor formula for occupational employees, 2) the account balance formula (“ABF”) for occupational employees, 3) the Old Management Formula (“OMF”) for management employees, 4) the Defined Lump Sum (“DLS”) formula for management employees and 5) the ABF for management employees. Vested participants, upon retirement or termination, may elect any form of annuity option available, a lump sum distribution or a combination annuity/lump sum.

104

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

For occupational employees hired or rehired prior to January 1, 2009, pension benefits are based on either the pension band or pension factor formula. The pension band formula uses a flat dollar amount per year of service in which each job title has been assigned a dollar amount (“pension band”). The pension factor formula, which covers occupational sales employees, uses a factor based on final average compensation times years of service. All occupational employees hired or rehired on or after January 1, 2009, upon meeting certain requirements, earn a pension under the ABF, which provides a compensation credit equal to 3% of eligible compensation plus an annual interest credit.

For management employees, the OMF is based on final average compensation and years of service, the DLS formula is based on final average compensation and age-related service credits and the ABF is based on a compensation credit equal to 3% of eligible compensation plus an annual interest credit. Participants who earned their pension under the OMF and DLS formula were management participants who had completed 20 years of service by December 31, 2000 or who were service pension eligible by December 31, 2003. Employees who did not meet these requirements accrued a pension under the OMF and DLS formula until December 31, 2000, or earlier based on the plan’s provisions, and then commenced accruing a pension under the ABF beginning on January 1, 2001. The ABF covers management participants hired after December 31, 2000 and management employees who did not have 20 years of service by December 31, 2000 or who did not become service pension eligible by December 31, 2003. In November 2009, we amended the pension plan to no longer provide pension benefit accruals for active management employees after December 31, 2009. In addition, management employees hired after January 1, 2009 are not eligible to participate in the plan. This amendment froze final average compensation calculations under the OMF and DLS formulas. In addition, the plan no longer includes service after December 31, 2009 in the calculation under the OMF, percentage credits under the DSL formula, nor compensation credits under the ABF. Active management employees who participate in the plan retain their accrued pension benefit earned as of December 31, 2009 and employees under the ABF will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Qwest.

In addition to the benefits described above, the pension plan provides survivor and disability benefits to certain participants. The plan also provided a death benefit for eligible beneficiaries of certain retirees; however, we have eliminated this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010. We previously eliminated the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.

Current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for the pension plan is to make contributions with the objective of accumulating sufficient assets to pay all qualified pension benefits when due under the terms of the plan. Based on current funding laws and regulations, we will not be required to make a cash contribution in 2011. The accounting unfunded status of our pension plan was $585 million at December 31, 2010. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, we currently expect that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations.

105

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Non-Qualified Pension

We maintain a non-qualified pension plan for certain eligible highly compensated employees. In November 2009, we amended the non-qualified pension plan to no longer provide benefit accruals after December 31, 2009. In addition, management employees hired after January 1, 2009 are not eligible to participate in the plan. Employees who participate in the plan retain their accrued pension benefit earned as of December 31, 2009 and employees under the ABF will continue to earn interest credits on their vested benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Qwest. In addition, this plan provides survivor and disability benefits to certain participants. The plan also provided a death benefit for eligible beneficiaries of certain retirees; however, we have eliminated this benefit for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010. We previously eliminated the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.

Post-Retirement Benefits

The benefit obligation for our occupational health care and life insurance post-retirement plans is estimated based on the terms of our written benefit plans. In calculating this obligation, we consider numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. In 2008, we negotiated our current four-year collective bargaining agreements, which covered approximately 14,200 of our unionized employees as of December 31, 2010. The plan was amended to reflect changes affecting eligible post-1990 retirees who are former occupational employees, including: (i) a Letter of Agreement that states such post-1990 retirees will begin contributing to the cost of health care benefits in excess of specified limits on the company-funded portion of retiree health care costs (also referred to as “caps”) beginning January 1, 2009 and (ii) a provision that such post-1990 retirees will pay increased out of pocket costs through plan design changes starting January 1, 2009, including the elimination of Medicare Part B premium reimbursements for post-1990 retirees who are former occupational employees. These changes have been considered in calculating the benefit obligation under the occupational health care plan.

No contributions were made to the post-retirement occupational health care trust in 2010 or 2009, and we do not expect to make a contribution in 2011.

The terms of the post-retirement health care and life insurance plans between us and our eligible management employees and our eligible post-1990 management retirees are established by us and are subject to change at our discretion. We have a practice of sharing some of the cost of providing health care benefits with our management employees and post-1990 management retirees. The benefit obligation for the management post-retirement health care benefits is based on the terms of the current written plan documents and is adjusted for anticipated continued cost sharing with management employees and post-1990 management retirees. However, our contribution under our post-1990 management retirees’ health care plan is capped at a specific dollar amount. Effective January 1, 2009, the Company amended its post-1990 management retiree plan to, among other things, (i) require retirees to pay increased out-of-pocket costs and (ii) eliminate the reimbursement of Medicare Part B premiums.

A putative class action purportedly filed on behalf of certain of our retirees was brought against us and certain other defendants in Federal District Court in Colorado in connection with our decision to reduce life insurance benefits for these retirees during 2006 and 2007. See Note 18—Commitments and Contingencies—Other Matters for additional information.

106

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2010:


	100 Basis Points Change
	Increase		Decrease
	(Dollars in millions)
Effect on the aggregate of the service and interest cost components of net periodic post-retirement benefit expense (statement of operations)	$	3	$	(3	)
Effect on benefit obligation (balance sheet)	$	65	$	(59	)

We expect our health care cost trend rate to decrease by 0.5% per year from 7.5% in 2011 to an ultimate rate of 5.0% in 2016. Our post-retirement health care expense for eligible post-1990 retirees who are former management employees and for eligible retirees who are former occupational employees is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.

Expected Cash Flows

The pension, non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium payments are paid by us or distributed from plan assets. The estimated benefit payments provided below are based on actuarial assumptions on the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.


	Pension Plan		Non-Qualified Pension Plan		Post-Retirement Benefit Plans		Medicare Part D Subsidy Receipts
	(Dollars in millions)
Estimated future benefit payments:
2011	$	756	$	4	$	354	$	(21	)
2012		723		3		349		(24	)
2013		705		3		342		(26	)
2014		686		3		333		(29	)
2015		667		3		323		(31	)
2016—2020		3,027		12		1,418		(152	)

107

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Net Periodic Benefit Expense

The measurement date used to determine pension, non-qualified pension and post-retirement health care and life insurance benefits is December 31. The actuarial assumptions used to compute the net periodic benefit expense for our pension, non-qualified pension and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.


	Pension Plan									Non-Qualified Pension Plan									Post-Retirement Benefit Plans
	2010			2009			2008			2010			2009			2008			2010			2009			2008
Actuarial assumptions at beginning of year:
Discount rate		5.80	%		6.70	%		6.30	%		5.50	%		6.70	%		6.10	%		5.70	%		6.70	%		6.30	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%		N/A			N/A			N/A
Expected long-term rate of return on plan assets		8.00	%		8.00	%		8.00	%		N/A			N/A			N/A			8.00	%		8.50	%		8.50	%
Initial health care cost trend rate		N/A			N/A			N/A			N/A			N/A			N/A			8.00	%		9.00	%		9.00	%
Ultimate health care cost trend rate		N/A			N/A			N/A			N/A			N/A			N/A			5.00	%		5.00	%		5.00	%
Year ultimate trend rate is reached		N/A			N/A			N/A			N/A			N/A			N/A			2016			2013			2012

N/A—Not applicable

The components of net periodic benefit expense for our pension, non-qualified pension and post-retirement benefit plans for the years ended December 31, 2010, 2009 and 2008 are detailed below:


	Years Ended December 31,
	Pension Plan									Non-Qualified Pension Plan						Post-Retirement Benefit Plans
	2010			2009			2008			2010		2009		2008		2010			2009			2008
	(Dollars in millions)
Net periodic benefit expense (income):
Service cost	$	53		$	103		$	116		$	—	$	1	$	1	$	7		$	8		$	9
Interest cost		447			505			496			2		2		2		183			215			226
Expected return on plan assets		(556	)		(565	)		(647	)		—		—		—		(61	)		(68	)		(124	)
Recognized prior service cost		(22	)		—			(5	)		—		—		—		(99	)		(99	)		(104	)
Recognized net actuarial loss		130			75			2			—		—		—		40			30			11
Curtailment and settlements		—			(13	)		—			—		2		3		—			—			—

Total net periodic benefit expense (income)	$	52		$	105		$	(38	)	$	2	$	5	$	6	$	70		$	86		$	18

The net periodic benefit expense for our pension, non-qualified pension and post-retirement benefit is included in general, administrative and other operating expenses in our consolidated statements of operations. Beginning on January 1, 2010, we no longer provide pension benefit accruals for active management employees under our qualified and non-qualified pension plans. As a result, we recognized a gain of $13 million relating to the qualified pension plan for the year ended December 31, 2009. We also recognized $2 million and $3 million in non-qualified pension plan settlements for the years ended December 31, 2009 and 2008, respectively.

108

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Benefit Obligations

The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2010 and 2009 and are as follows:


	December 31,
	Pension Plan						Non-Qualified Pension Plan						Post-Retirement Benefit Plans
	2010			2009			2010			2009			2010			2009
Actuarial assumptions at end of year:
Discount rate		5.30	%		5.80	%		4.90	%		5.50	%		5.20	%		5.70	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%		N/A			N/A
Initial health care cost trend rate		N/A			N/A			N/A			N/A			7.50	%		8.00	%
Ultimate health care cost trend rate		N/A			N/A			N/A			N/A			5.00	%		5.00	%
Year ultimate trend rate is reached		N/A			N/A			N/A			N/A			2016			2016

N/A—Not applicable

The following table summarizes the change in the benefit obligations for the pension, non-qualified pension and post-retirement benefit plans for the years ended December 31, 2010 and 2009:


	Pension Plan						Non-Qualified Pension Plan						Post-Retirement Benefit Plans
	2010			2009			2010			2009			2010			2009
	(Dollars in millions)
Benefit obligations accrued at beginning of year:	$	8,116		$	7,962		$	31		$	33		$	3,388		$	3,424
Service cost		53			103			2			1			7			8
Interest cost		447			505			—			2			183			215
Actuarial loss		389			562			2			8			66			83
Plan amendments		—			(220	)		—			—			—			—
Plan curtailments		—			(112	)		—			(3	)		—			—
Participant contributions		—			—			—			—			59			51
Benefits paid from plan assets		(760	)		(684	)		—			—			(186	)		(193	)
Benefits paid by company		—			—			(4	)		(10	)		(214	)		(220	)
Medicare Part D reimbursements		—			—			—			—			20			20

Benefit obligations accrued at end of year	$	8,245		$	8,116		$	31		$	31		$	3,323		$	3,388

Accumulated benefit obligations	$	8,245		$	8,116		$	31		$	31		$	3,323		$	3,388

In the table above, the 2009 pension plan amendment represents the elimination of death benefits for eligible beneficiaries of certain retirees. The 2009 pension plan and non-qualified pension plan curtailments represent the elimination of future pension benefit accruals for active management employees.

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For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Plan Assets

We maintain plan assets for our pension plan and certain post-retirement benefit plans. The pension plan assets are used for the payment of pension benefits and certain eligible plan expenses. The post-retirement benefit plan assets are used to pay health care benefits and premiums on behalf of eligible retirees who are former occupational plan participants and to pay certain eligible plan expenses. The following table summarizes the change in the fair value of plan assets for the pension and post-retirement benefit plans as of and for the years ended December 31, 2010 and 2009:


	Pension Plan						Post-Retirement Benefit Plans
	2010			2009			2010			2009
	(Dollars in millions)
Fair value of plan assets at beginning of year	$	7,326		$	7,217		$	863		$	915
Actual gain on plan assets		1,094			793			124			141
Benefits paid from plan assets		(760	)		(684	)		(186	)		(193	)

Fair value of plan assets at end of year	$	7,660		$	7,326		$	801		$	863

Pension Plan : Our investment objective for the pension plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective by broadly diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan has approximately 50% of the assets allocated to interest rate sensitive investments and 50% allocated to investments designed to provide higher expected returns than the interest rate sensitive investments. Interest rate sensitive investments include 30% of plan assets targeted primarily to long-duration investment grade bonds, 7.5% to high yield and emerging market bonds, 5% to convertible bonds, and 7.5% targeted to diversified strategies, which primarily have exposures to global government, corporate and inflation-linked bonds, as well as some exposures to global stocks and commodities. Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with approximately 15% targeted to U.S. stocks, 12.5% to developed market non-U.S. stocks, 2.5% to emerging market stocks, and 5% to private equity investments. Approximately 10% is allocated to other investments including funds primarily invested in private debt and hedge funds. Real estate investments are targeted at 5% of plan assets. At the beginning of 2011, our expected annual long-term rate of return on pension assets is assumed to be 7.5%.

Post-Retirement Benefit Plan : Our investment objective for the post-retirement benefit plan assets is to achieve an attractive risk-adjusted return and minimize the risk of large losses over the expected life of the assets. We believe that plan assets will be adequate to provide reimbursements for our occupational post-retirement health care costs for approximately five years. Investment risk is managed by broadly diversifying assets across numerous strategies with differing expected returns, volatilities and correlations. Our investment strategy is designed to be consistent with the investment objective, with particular focus on providing liquidity for the reimbursement of our occupational post-retirement health care costs. The post-retirement benefit plan assets have target allocations of 35% to equities and 65% to non-equity investments. Specific target allocations within these broad categories are allowed to vary to provide liquidity in order to meet reimbursement requirements. Equity investments are broadly diversified with exposure to publicly traded U.S., non-U.S. and emerging market stocks and private equity. While no new private equity investments have been made in recent years, the percent allocation to existing private equity investments is expected to increase in the near term as liquid, publicly traded stocks are drawn down for the reimbursement of health care costs. The 65% non-equity allocation includes

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For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

investment grade bonds, high yield bonds, convertible bonds, emerging market debt, hedge funds, private debt, and diversified strategies. At the beginning of 2011, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 7.5%.

Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more than 10% of their assets in securities issued by the sponsor company. As of December 31, 2010 and 2009, the pension and post-retirement benefit plans did not directly own any shares of our common stock or any of our debt.

Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension and post-retirement benefit plans use exchange traded futures to gain exposure to equity and Treasury markets consistent with target asset allocations. Interest rate swaps are used in the pension plan to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign exchange forward contracts and total return swaps are used primarily to manage currency exposures. Some derivative instruments subject the plans to counterparty risk. We closely monitor counterparty exposure and mitigate this risk by diversifying the exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling contracts.

The gross notional exposure of the derivative instruments directly held by the plans at December 31, 2010 and 2009 is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment.


	Gross notional exposure
	Pension Plan				Post-Retirement Benefit Plans
	2010		2009		2010		2009
	(Dollars in millions)
Derivative instrument:
Exchange-traded U.S. equity futures	$	382	$	346	$	13	$	9
Exchange-traded non-U.S. equity futures		36		29		12		1
Exchange-traded Treasury futures		1,333		886		48		30
Interest rate swaps		432		574		—		—
Total return swaps		110		110		20		20
Foreign exchange forwards		399		409		45		64

Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 3—Fair Value of Financial Instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values as of December 31, 2010. It is important to note that the asset allocations do not include market exposures that are gained with derivatives.


	Fair value of pension plan assets as of December 31, 2010
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investment grade bonds ^(a)	$	453	$	804		$	—	$	1,257
High yield bonds ^(b)		—		520			114		634
Emerging market bonds ^(c)		—		191			—		191
Convertible bonds ^(d)		—		355			—		355
Diversified strategies ^(e)		—		444			—		444
U.S. stocks ^(f)		400		44			—		444
Non-U.S. stocks ^(g)		701		120			—		821
Emerging market stocks ^(h)		78		161			—		239
Private equity ⁽ⁱ⁾		—		—			831		831
Private debt ^(j)		—		—			530		530
Market neutral hedge funds ^(k)		—		635			102		737
Directional hedge funds ^(k)		—		230			29		259
Real estate ^(l)		—		35			288		323
Derivatives ^(m)		8		(2	)		—		6
Cash equivalents and short-term investments ⁽ⁿ⁾		57		452			—		509
Securities lending collateral ^(o)		—		241			—		241

Total investments		1,697		4,230			1,894		7,821
Securities lending obligation ^(o)		—		(241	)		—		(241	)

Total investments, net of securities lending obligation	$	1,697	$	3,989		$	1,894		7,580

Dividends and interest receivable									20
Pending trades receivable									83
Accrued expenses									(10	)
Pending trades payable									(13	)

Total pension plan assets								$	7,660

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)


	Fair value of post-retirement plan assets as of December 31, 2010
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investment grade bonds ^(a)	$	10	$	153		$	—	$	163
High yield bonds ^(b)		—		123			—		123
Emerging market bonds ^(c)		—		38			—		38
Convertible bonds ^(d)		—		33			—		33
Diversified strategies ^(e)		—		6			—		6
U.S. stocks ^(f)		77		—			—		77
Non-U.S. stocks ^(g)		40		30			—		70
Emerging market stocks ^(h)		—		30			—		30
Private equity ⁽ⁱ⁾		—		—			77		77
Private debt ^(j)		—		—			11		11
Market neutral hedge funds ^(k)		—		70			—		70
Directional hedge funds ^(k)		—		20			—		20
Real estate ^(l)		—		18			25		43
Derivatives ^(m)		—		1			—		1
Cash equivalents and short-term investments ⁽ⁿ⁾		2		19			—		21
Securities lending collateral ^(o)		—		31			—		31

Total investments		129		572			113		814
Securities lending obligation ^(o)		—		(31	)		—		(31	)

Total investments, net of securities lending obligation	$	129	$	541		$	113		783

Dividends and interest receivable									2
Pending trades receivable									17
Accrued expenses									(1	)
Pending trades payable									—

Total post-retirement plan assets								$	801

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values as of December 31, 2009. It is important to note that the asset allocations do not include market exposures that are gained with derivatives.


	Fair value of pension plan assets as of December 31, 2009
	Level 1			Level 2			Level 3		Total
	(Dollars in millions)
Investment grade bonds ^(a)	$	440		$	844		$	—	$	1,284
High yield bonds ^(b)		—			468			126		594
Emerging market bonds ^(c)		—			205			—		205
Convertible bonds ^(d)		—			426			—		426
Diversified strategies ^(e)		—			439			—		439
U.S. stocks ^(f)		445			89			—		534
Non-U.S. stocks ^(g)		668			105			—		773
Emerging market stocks ^(h)		74			138			—		212
Private equity ⁽ⁱ⁾		—			—			741		741
Private debt ^(j)		—			—			524		524
Market neutral hedge funds ^(k)		—			839			58		897
Directional hedge funds ^(k)		—			161			4		165
Real estate ^(l)		—			—			294		294
Derivatives ^(m)		(7	)		(36	)		—		(43	)
Cash equivalents and short-term investments ⁽ⁿ⁾		96			173			—		269
Securities lending collateral ^(o)		—			289			—		289

Total investments		1,716			4,140			1,747		7,603
Securities lending obligation ^(o)		—			(289	)		—		(289	)

Total investments, net of securities lending obligation	$	1,716		$	3,851		$	1,747		7,314

Dividends and interest receivable										22
Pending trades receivable										27
Accrued expenses										(12	)
Pending trades payable										(25	)

Total pension plan assets									$	7,326

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)


	Fair value of post-retirement plan assets as of December 31, 2009
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investment grade bonds ^(a)	$	12	$	190		$	—	$	202
High yield bonds ^(b)		—		143			—		143
Emerging market bonds ^(c)		—		33			—		33
Convertible bonds ^(d)		—		28			—		28
Diversified strategies ^(e)		—		5			—		5
U.S. stocks ^(f)		91		—			—		91
Non-U.S. stocks ^(g)		49		28			—		77
Emerging market stocks ^(h)		—		28			—		28
Private equity ⁽ⁱ⁾		—		—			85		85
Private debt ^(j)		—		—			12		12
Market neutral hedge funds ^(k)		—		93			—		93
Directional hedge funds ^(k)		—		18			—		18
Real estate ^(l)		—		—			44		44
Cash equivalents and short-term investments ⁽ⁿ⁾		2		14			—		16
Securities lending collateral ^(o)		—		29			—		29

Total investments		154		609			141		904
Securities lending obligation ^(o)		—		(29	)		—		(29	)

Total investments, net of securities lending obligation	$	154	$	580		$	141		875

Dividends and interest receivable									3
Pending trades receivable									17
Accrued expenses									(19	)
Pending trades payable									(13	)

Total post-retirement plan assets								$	863

The plans’ assets are invested in various asset categories utilizing multiple strategies and investment managers. For several of the investments in the tables above and discussed below, the plans own units in commingled funds and limited partnerships that invest in various types of assets. Interests in commingled funds are valued using the net asset value (NAV) per unit of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. All commingled funds held by the plans that can be redeemed at NAV within a year of the financial statement date are classified as Level 2, otherwise the fund is classified as Level 3. Investments in limited partnerships represent long-term commitments with a fixed maturity date, typically ten years. Valuation inputs for these limited partnership interests are generally based on assumptions and other information not observable in the market and are classified as Level 3 investments. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers, and partnerships are monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies, and valuation inputs used to value the assets in the preceding tables:

(a) Investment grade bonds represent stand-alone investments in U.S. Treasury securities as well as portfolios and commingled funds with characteristics similar to the Barclays Capital U.S. Aggregate Bond Index (the index). The index is comprised of U.S. Treasuries, agencies, corporate bonds, mortgage-backed

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

securities, asset-backed securities, and commercial mortgage-backed securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. Valuations of other investment grade bonds are based on a spread to U.S. Treasuries and consider yields available on comparable securities of issuers with similar credit ratings and are classified as Level 2. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(b) High yield bonds represent investments in fixed income securities below investment grade and bank loans. Investments are made in stand-alone portfolios and commingled funds. Valuations of publicly traded high yield bonds are based on a spread to U.S. Treasuries and consider yields available on comparable securities of issuers with similar credit ratings and are classified as Level 2. The commingled funds that can be redeemed at NAV within a year of the financial statement date are classified as Level 2. For the pension plan, all other high yield funds that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(c) Emerging market bonds represent debt instruments issued by governments and other entities located in developing countries. Emerging market bonds are priced based on dealer quotes or a spread relative to the local government bonds and are classified as Level 2.

(d) Convertible bonds primarily represent investments in corporate debt securities that have features that allow the debt to be converted into equity securities under certain circumstances. Valuations of individual convertible bonds are based on a combination of a spread to U.S. Treasuries and the value and volatility of the underlying equity security. Convertible bonds are classified as Level 2.

(e) Diversified strategies represent investments in commingled funds that primarily have exposures to global government, corporate and inflation-linked bonds, but that also have exposures to global stocks and commodities. The funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(f) U.S. stocks represent investments in securities that are held in stand-alone portfolios and commingled funds that track the broad U.S. stock markets. Individual U.S. stocks are valued at the last published price reported on the major market on which the individual securities are traded and are classified as Level 1. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(g) Non-U.S. stocks represent investments in securities, which are held in stand-alone portfolios, a registered mutual fund and commingled funds that track developed non-U.S. stock markets. Foreign currency exposure is hedged approximately 50% to the U.S. dollar. Individual non-U.S. stock securities and mutual funds are valued at the last published price reported on the major market on which the individual securities or mutual fund are traded and are classified as Level 1. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(h) Emerging market stocks represent investments in registered mutual funds and commingled funds for the pension plan and commingled funds for the post-retirement plan and are comprised of stocks of companies located in developing markets. Registered mutual funds are valued at the last published price reported on the major market on which the mutual funds are traded and are classified as Level 1. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(i) Private equity represents investments in nonpublicly traded domestic and foreign buy-out and venture capital funds. Private equity funds are structured as limited partnerships and are valued according to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The partnerships use valuation methodologies that give consideration to a range of factors, including but not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments. These valuation methodologies involve a significant degree of judgment. For some investments, the fair value provided by the partnership is as of a date prior to our measurement date. In these situations, we adjust the value for subsequent cash flows and review the fair value based on the latest information provided by the partnership, including the impact of any significant events and changes in market conditions that have occurred since the last valuation date. Private equity investments are classified as Level 3.

(j) Private debt represents investments in nonpublicly traded funds that primarily invest in either distressed or mezzanine debt instruments. Mezzanine debt instruments are debt instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of underlying fund investments are based on factors including the issuer’s current and projected credit worthiness, the security’s terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a significant degree of judgment. For some investments, the fair value provided by the partnership is as of a date prior to our measurement date. In these situations, we adjust the value for subsequent cash flows and review the fair value based on the latest information provided by the partnership, including the impact of any significant events and changes in market conditions that have occurred since the last valuation date. Private debt investments are classified as Level 3.

(k) Hedge funds. Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. For the pension plan, these investments are typically combined with futures to achieve uncorrelated excess returns over various markets. Directional hedge funds represent investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds. All hedge funds are valued at NAV. Hedge funds that can be redeemed at NAV within a year of the financial statement date are classified as Level 2. All other hedge fund investments that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(l) Real estate represents investments in nonpublicly traded commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties. Real estate investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of specific properties is generally based on third-party appraisals that use comparable sales or a projection of future cash flows to determine fair value. Real estate investments that can be redeemed at NAV within a year of the financial statement date are classified as level 2. Real estate investments that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(m) Derivatives include the market value of exchange-traded futures contracts which are classified as Level 1, as well as privately negotiated over-the-counter forwards and swaps that are valued based on changes in interest rates, currencies or a specific market index and classified as Level 2. The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

(n) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes. U.S. Treasury Bills are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. Valuations of other securities are based on a spread to U.S. Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers with similar credit ratings and are classified as Level 2.

(o) Securities lending obligation and collateral represent securities lending transactions whereby the plans’ lending agent lends stock and bond investments of the plan to other third-party investment firms in exchange for collateral. The stock and bond securities are generally loaned for a period of less than one month and can be recalled on a day’s notice. Under the terms of its securities lending agreement, the plan typically requires collateral of a value in excess of the fair value of the loaned investments. Collateral received is then invested in certain collective investment vehicles maintained by the lending agent. Upon the maturity of the agreement, the borrower must return the same, or substantially the same, investments that were borrowed and the plan returns the collateral. The value of the obligation is a fixed amount based on the collateral received and is classified as Level 2. The collateral received is invested in collective investment vehicles that are comprised of short-term investment grade bonds and cash equivalents, the valuations of which are described above, and is classified as Level 2.

Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency, and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities, and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

The table below presents a rollforward of the pension plan assets valued using Level 3 inputs for the years ended December 31, 2010 and 2009:


	Pension Plan Assets Valued Using Level 3 Inputs
	High yield bonds			Private equity			Private debt			Market neutral hedge fund			Directional hedge funds			Real estate			Total
	(Dollars in millions)
Balance at December 31, 2008	$	89		$	686		$	490		$	70		$	36		$	421		$	1,792
Net (dispositions) acquisitions		(44	)		21			6			(22	)		(30	)		14			(55	)
Actual return on plan assets:
Gains (losses) relating to assets sold during the year		34			103			—			2			(5	)		(7	)		127
Gains (losses) relating to assets still held at year-end		47			(69	)		28			8			3			(134	)		(117	)

Balance at December 31, 2009		126			741			524			58			4			294			1,747
Net transfers		—			—			—			—			—			(32	)		(32	)
Net (dispositions) acquisitions		(24	)		(40	)		(35	)		41			25			6			(27	)
Actual return on plan assets:
(Losses) gains relating to assets sold during the year		(3	)		146			25			—			—			23			191
Gains (losses) relating to assets still held at year-end		15			(16	)		16			3			—			(3	)		15

Balance at December 31, 2010	$	114		$	831		$	530		$	102		$	29		$	288		$	1,894

The table below presents a rollforward of the post-retirement benefits plan assets valued using Level 3 inputs for the years ended December 31, 2010 and 2009:


	Post-Retirement Benefit Plan Assets Valued Using Level 3 Inputs
	Private equity			Private debt			Real estate			Total
	(Dollars in millions)
Balance at December 31, 2008	$	85		$	14		$	72		$	171
Net dispositions		(4	)		(1	)		(2	)		(7	)
Actual return on plan assets:
Gains (losses) relating to assets sold during the year		13			(1	)		(6	)		6
Losses relating to assets still held at year-end		(9	)		—			(20	)		(29	)

Balance at December 31, 2009		85			12			44			141
Net transfers		—			—			(17	)		(17	)
Net dispositions		(15	)		(1	)		(5	)		(21	)
Actual return on plan assets:
Gains relating to assets sold during the year		21			—			1			22
(Losses) gains relating to assets still held at year-end		(14	)		—			2			(12	)

Balance at December 31, 2010	$	77		$	11		$	25		$	113

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.

For the year ended December 31, 2010, the investment program produced actual gains on pension and post-retirement plan assets of $1.218 billion as compared to the expected returns of $617 million for a difference of $601 million. For the year ended December 31, 2009, the investment program produced actual gains on pension and post-retirement plan assets of $934 million as compared to the expected returns of $633 million for a difference of $301 million. The short-term annual returns on plan assets will almost always be different from the expected long-term returns, and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.

Unfunded Status

The following table presents the unfunded status of the pension, non-qualified pension and post-retirement benefit plans as of December 31, 2010 and 2009:


	Pension Plan						Non-Qualified Pension Plan						Post-Retirement Benefit Plans
	2010			2009			2010			2009			2010			2009
	(Dollars in millions)
Benefit obligation	$	(8,245	)	$	(8,116	)	$	(31	)	$	(31	)	$	(3,323	)	$	(3,388	)
Fair value of plan assets		7,660			7,326			—			—			801			863

Unfunded status	$	(585	)	$	(790	)	$	(31	)	$	(31	)	$	(2,522	)	$	(2,525	)

Current portion of unfunded status	$	—		$	—		$	(4	)	$	(4	)	$	(155	)	$	(155	)
Non-current portion of unfunded status	$	(585	)	$	(790	)	$	(27	)	$	(27	)	$	(2,367	)	$	(2,370	)

The current portion of our non-qualified pension and post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities. The non-current portion of our pension and non-qualified pension obligations is recorded on our consolidated balance sheets in pension obligations-net. The non-current portion of our post-retirement benefit obligation is recorded on our consolidated balance sheets in post-retirement and other post-employment benefit obligations-net. Also included in accrued expenses and other current liabilities are obligations for the current portion of post-employment perquisites, post-employment disability insurance and workers compensation benefit obligations. These amounts totaled $15 million and $14 million as of December 31, 2010 and 2009, respectively. Also included in post-retirement and other post-employment benefit obligations-net are obligations for the non-current portion of our executive life insurance plans, post-employment perquisites, post-employment disability insurance and workers compensation benefit obligations. These amounts totaled $109 million as of December 31, 2010 and 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Accumulated Other Comprehensive (Loss) Income—Recognition and Deferrals

The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2009, items recognized during 2010 as a component of net periodic benefits expense, additional items deferred during 2010 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2010. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss as of December 31, 2010 and 2009:


	As of and for the Years Ended December 31,
	2009			Recognition of Net Periodic Benefits Expense			Deferrals			Net Change in AOCI			2010
	(Dollars in millions)
Accumulated other comprehensive (loss) income:
Pension plan:
Net actuarial (loss) gain	$	(1,973	)	$	130		$	148		$	278		$	(1,695	)
Prior service benefit (cost)		185			(22	)		—			(22	)		163
Deferred income tax benefit (expense)		777			(42	)		(59	)		(101	)		676

Total pension plan		(1,011	)		66			89			155			(856	)

Non-qualified pension plan:
Net actuarial (loss) gain		(7	)		(3	)		2			(1	)		(8	)
Prior service benefit		1			—			—			—			1
Deferred income tax (expense) benefit		(1	)		1			—			1			—

Total non-qualified pension plan		(7	)		(2	)		2			—			(7	)

Post-retirement benefit plans:
Net actuarial (loss) gain		(583	)		40			(1	)		39			(544	)
Prior service benefit (cost)		989			(99	)		—			(99	)		890
Deferred income tax benefit (expense)		138			21			(1	)		20			158

Total post-retirement benefit plans		544			(38	)		(2	)		(40	)		504

Total accumulated other comprehensive (loss) income	$	(474	)	$	26		$	89		$	115		$	(359	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

The following table presents estimated items to be recognized in 2011 as a component of net periodic benefit expense of the pension, non-qualified pension and post-retirement benefit plans:


	Pension Plan			Non-Qualified Pension Plan		Post- Retirement Benefit Plans
	(Dollars in millions)
Estimated recognition of net periodic benefit expense in 2011:
Net actuarial loss	$	124		$	—	$	42
Prior service benefit		(22	)		—		(99	)
Deferred income tax (expense) benefit		(39	)		—		22

Estimated net periodic benefit expense to be recorded in 2011 as a component of other comprehensive income (loss)	$	63		$	—	$	(35	)

Medicare Prescription Drug, Improvement and Modernization Act of 2003

We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.

Other Benefit Plans

Health Care and Life Insurance

We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our active health care benefit expenses were $238 million, $248 million and $290 million for the years ended December 31, 2010, 2009 and 2008, respectively. Occupational employee benefits are based on negotiated collective bargaining agreements. Management employees and occupational employees are required to partially fund the health care benefits provided by us, in addition to paying their own out-of-pocket costs. Participating management employees contributed $40 million, $38 million and $42 million in 2010, 2009 and 2008, respectively. Participating occupational employees contributed $11 million, $10 million and $4 million in 2010, 2009 and 2008, respectively. The basic group life insurance plan is fully insured and the premiums are paid by us.

401(k) Plan

We sponsor a qualified defined contribution benefit plan covering substantially all management and occupational employees. Under this plan, employees may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue Service (“IRS”). Currently, we match a percentage of employee contributions in cash. As of December 31, 2010 and 2009, the assets of the plan included approximately 42 million and 44 million shares of our common stock, respectively, as a result of the combination of our employer match and participant directed contributions. We recognized $56 million, $59 million and $64 million in expense related to this plan for the years ended December 31, 2010, 2009 and 2008, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 11: Employee Benefits—(Continued)

Deferred Compensation Plans

We sponsor non-qualified unfunded deferred compensation plans for various groups that include certain of our current and former highly compensated employees. One of these plans is open to new participants. Participants in these plans may, at their discretion, invest their deferred compensation in various investment choices including our common stock. Shares of our common stock owned by rabbi trusts, such as those established for our deferred compensation plans, are treated as treasury stock and are included at cost on our consolidated balance sheets. The values of assets and liabilities related to these plans are not significant.

Note 12: Income Taxes

Income Tax Expense

The components of the income tax expense from continuing operations are as follows:


	Years Ended December 31,
	2010			2009		2008
	(Dollars in millions)
Income tax expense:
Current tax provision (benefit):
Federal	$	(14	)	$	10	$	(56	)
State and local		11			2		5

Total current tax (benefit) provision		(3	)		12		(51	)

Deferred tax provision:
Federal		470			187		389
State and local		38			42		61

Total deferred tax expense		508			229		450

Income tax expense	$	505		$	241	$	399

For the year ended December 31, 2010, we increased the total valuation allowance by $7 million. For the years ended December 31, 2009 and 2008, we decreased the total valuation allowance by $2 million and $5 million, respectively. These amounts are included in the deferred tax provision. Immaterial amounts relate to a change in the beginning of year valuation allowance for all three years ended December 31, 2010, 2009 and 2008, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 12: Income Taxes—(Continued)

The effective income tax rate for continuing operations differs from the statutory tax rate as follows:


	Years Ended December 31,
	2010			2009			2008
	(in percent)
Effective income tax rate:
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes—net of federal effect and tax expense (benefit) of income (loss) not recognized		9.0			3.3			4.8
Medicare subsidy, including effect of 2010 Health Care Legislation		22.8			(1.6	)		(1.3	)
Loss on embedded option in convertible debt		37.0			—			—
Excess compensation		4.3			0.2			0.1
Merger-related costs		1.7			—			—
Uncertain tax position changes		—			(10.0	)		(2.1	)
Other		1.7			0.4			0.1
Adjustments related to prior periods		(0.6	)		(0.4	)		1.8
Changes in valuation allowance		1.3			(0.2	)		(0.4	)

Effective income tax rate		112.2	%		26.7	%		38.0	%

Deferred Tax Assets and Liabilities

The components of the deferred tax assets and liabilities are as follows:


	December 31,
	2010			2009
	(Dollars in millions)
Deferred tax assets and liabilities:
Deferred tax assets:
Net operating loss carryforwards	$	2,029		$	2,118
Post-retirement benefits		1,030			1,180
Deferred loss subject to amortization		282			298
Restructuring charge		68			80
Pension		226			305
Other employee benefits		91			99
Other		364			390

Gross deferred tax assets		4,090			4,470
Valuation allowance on deferred tax assets		(139	)		(132	)

Net deferred tax assets		3,951			4,338

Deferred tax liabilities:
Property, plant and equipment and intangible assets		(1,943	)		(1,750	)
Other		(88	)		(79	)

Total deferred tax liabilities		(2,031	)		(1,829	)

Net deferred tax assets	$	1,920		$	2,509

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QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 12: Income Taxes—(Continued)

Tax Audits and Uncertain Tax Positions

The IRS examines all of our federal income tax returns because we are included in its coordinated industry case program. As of December 31, 2010, our federal income tax returns for tax years 2006-2007 and prior have been examined by the IRS. As a result of the examinations and the resulting settlements, our total unrecognized tax benefits decreased by $74 million. In 2010, we filed amended federal income tax returns for 2006-2007 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit.

In 2009, we filed amended federal income tax returns for 2002-2005 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit. Additionally, our federal income tax returns filed for tax years after 2008 are still subject to adjustment in an IRS audit.

We file combined income tax returns in many states, and these combined returns remain open for adjustments to our federal income tax returns. In addition, certain combined state income tax returns we have filed since 1996 are still open for state specific adjustments.

A reconciliation of the unrecognized tax benefits for the years ended December 31, 2010 and 2009 follows:


	Unrecognized Tax Benefits
	2010			2009
	(Dollars in millions)
Balance as of January 1	$	282		$	434
Additions for current year tax positions		10			12
Additions for prior year tax positions		—			185
Reductions for prior year tax positions		(15	)		(129	)
Settlements		(74	)		(220	)
Reductions related to expirations of statute of limitations		—			—

Balance as of December 31	$	203		$	282

As of December 31, 2010, approximately $58 million of the unrecognized tax benefits could affect our income tax provision and effective income tax rate.

In accordance with our accounting policy, interest expense and penalties related to income taxes are included in the other—net line of our consolidated statements of operations. For the year ended December 31, 2010, we recognized $4 million of interest benefit related to uncertain tax positions. For the years ended December 31, 2009 and 2008, we recognized $2 million and $11 million, respectively, for interest expense related to uncertain tax positions. As of December 31, 2010 and 2009, we had recorded liabilities for interest related to uncertain tax positions in the amounts of $5 million and $10 million, respectively. We made no accrual for penalties related to income tax positions.

Other Income Tax Information

As of December 31, 2010, we had NOLs of $5.6 billion, including approximately $384 million related to stock compensation, the benefit of which, if realized, will be recognized in equity. If unused, the NOLs will expire between 2015 and 2025; however, no significant amounts expire until 2020. We had unamortized

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 12: Income Taxes—(Continued)

investment tax credits of $40 million and $44 million as of December 31, 2010 and 2009, respectively, which are included in other long-term liabilities on our consolidated balance sheets. These investment tax credits are amortized over the lives of the related assets. As of December 31, 2010 and 2009, we also have $73 million and $72 million ($47 million and $47 million net of federal income tax) of state investment tax credit carryforwards that will expire between 2011 and 2023, if not utilized.

Income tax expense in 2010 compared to 2009 increased by $113 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted.

In 2010, we increased our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $4 million state deferred tax benefit, net of federal effect.

In 2009, we reduced our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $9 million state deferred tax expense, net of federal effect.

Due to our NOLs, we do not generally pay income taxes and we do not expect to pay a significant amount of income taxes until our NOLs have been used, although we do expect to pay immaterial amounts of federal alternative minimum tax and state income tax in 2011. In 2010, we paid $25 million for income taxes. In 2009, we paid $48 million for income taxes, of which $10 million was for interest. In 2008, we paid $120 million related to income taxes, of which $79 million was for interest.

Valuation Allowance

From 2001 through 2005, we reported a significant cumulative loss and generated substantial NOLs for income tax purposes, and we maintained a valuation allowance against the majority of our net deferred tax assets at that time because we could not sustain a conclusion that it was more likely than not that we would realize the NOLs and other deferred tax assets.

As of December 31, 2010 and 2009, certain deferred tax assets totaling $139 million and $132 million, respectively, required future income of special character to realize the tax benefits. Because we are not currently forecasting income of an appropriate character for these benefits to be realized, we continue to maintain a valuation allowance equal to the amount we do not believe is more likely than not to be realized.

Note 13: Stockholders’ Deficit

Common Stock ($0.01 par value)

We are authorized to issue up to 5.0 billion shares of common stock with $0.01 par value per share. We had 1.792 billion and 1.738 billion shares issued and 1.764 billion and 1.729 billion shares outstanding as of December 31, 2010 and 2009, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 13: Stockholders’ Deficit—(Continued)

On October 4, 2006, our Board of Directors approved a stock repurchase program for up to $2 billion of our common stock. For the years ended December 31, 2010 and 2009, we did not repurchase shares of our common stock under this program. As of December 31, 2010, we had repurchased a total of $1.807 billion of common stock under this program. Our merger agreement with CenturyLink prohibits us from repurchasing additional shares under this program without CenturyLink’s consent.

Preferred Stock ($1.00 par value)

Under our charter, our Board of Directors has the authority, without stockholder approval, to (i) create one or more classes or series within a class of preferred stock, (ii) issue shares of preferred stock in such class or series up to the maximum number of shares of the relevant class or series of preferred stock authorized and (iii) determine the preferences, rights, privileges and restrictions of any such class or series, including dividend rights, voting rights, the rights and terms of redemption, the rights and terms of conversion, liquidation preferences, the number of shares constituting any such class or series and the designation of such class or series. One of the effects of authorized but unissued and unreserved shares of capital stock may be to render more difficult or discourage an attempt by a potential acquirer to obtain control of us by means of a merger, tender offer, proxy contest or otherwise and thereby protect the continuity of our management. The issuance of such shares of capital stock may have the effect of delaying, deferring or preventing a change in control of us without any further action by our stockholders. We have no present intention to adopt a stockholder rights plan, but could do so without stockholder approval at any future time.

As of December 31, 2010 and 2009, there were 200 million shares of preferred stock authorized but no shares issued or outstanding.

Treasury Stock

Deferred Compensation—Rabbi Trusts

Rabbi trusts were established for two of our deferred compensation plans. As of December 31, 2010 and 2009, the rabbi trusts held approximately 22,000 and 44,000 shares, respectively, of our common stock with a cost of approximately $1 million and $2 million for December 31, 2010 and 2009, respectively. Shares of our common stock held by the rabbi trusts are accounted for as treasury stock, but are considered outstanding for legal purposes.

Forfeitures of Vested Restricted Stock and Performance Shares

Under our Equity Incentive Plan and equity award agreements, we automatically withhold a portion of vesting restricted stock and common stock underlying vesting performance shares to cover the withholding taxes due upon vesting. As a result of these withholdings, we acquired approximately 18,779,000, 2,329,000 and 1,546,000 shares of treasury stock during 2010, 2009 and 2008, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 13: Stockholders’ Deficit—(Continued)

Dividends

Our Board of Directors declared the following cash dividends payable in 2010 and 2009:


Date Declared	Record Date	Dividend Per Share		Total Amount		Payment Date
				(in millions)
October 20, 2010	December 3, 2010	$	0.08	$	139	December 17, 2010
August 18, 2010	September 10, 2010	$	0.08	$	139	September 24, 2010
April 14, 2010	May 21, 2010	$	0.08	$	139	June 11, 2010
December 16, 2009	February 19, 2010	$	0.08	$	138	March 12, 2010
October 14, 2009	November 20, 2009	$	0.08	$	138	December 11, 2009
July 27, 2009	August 21, 2009	$	0.08	$	138	September 11, 2009
April 15, 2009	May 22, 2009	$	0.08	$	138	June 12, 2009
December 10, 2008	February 13, 2009	$	0.08	$	136	March 6, 2009

Note 14: (Loss) Earnings per Common Share

Basic (loss) earnings per common share excludes dilution and is computed by dividing net (loss) income allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted (loss) earnings per common share reflects the potential dilution that could occur if certain outstanding stock options are exercised and certain performance share awards require the issuance of common stock.

The following is a reconciliation of the number of shares used in the basic and diluted (loss) earnings per common share computations for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009		2008
	(Dollars in millions except per
	share amounts, shares in thousands)
Net (loss) income allocated to common shareholders	$	(58	)	$	657	$	649

Basic weighted average common shares outstanding		1,726,085			1,709,346		1,728,731
Dilutive effect of options with strike prices equal to or less than the average price of our common stock, calculated using the treasury stock method		—			511		1,139
Dilutive effect of performance shares		—			3,641		336

Diluted weighted average common shares outstanding		1,726,085			1,713,498		1,730,206

(Loss) earnings per common share:
Basic	$	(0.03	)	$	0.38	$	0.38
Diluted	$	(0.03	)	$	0.38	$	0.37

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 14: (Loss) Earnings per Common Share—(Continued)

We had weighted average unvested restricted stock grants outstanding of approximately 12 million, 12 million, and 7 million shares during the years ended December 31, 2010, 2009 and 2008, respectively. These shares were excluded from the (loss) earnings per common share calculation, and these shareholders have their own earnings per share calculation whereby they were allocated net income of approximately $3 million, $5 million and $3 million for the years ended December 31, 2010, 2009 and 2008 for purposes of calculating basic and diluted earnings per share.

The following is a summary of the securities that could potentially dilute basic (loss) earnings per common share, but have been excluded from the computations of diluted (loss) earnings per common share for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010		2009		2008
	(Shares in thousands)
Outstanding options to purchase common stock excluded because the strike prices of the options exceeded the average price of common stock during the period		8,136		48,300		57,489
Outstanding options to purchase common stock excluded because the market-based vesting conditions have not been met		2,083		2,083		2,083
Performance shares excluded because the impact would have been antidilutive		20,578		—		—
Other outstanding instruments excluded because the impact would have been antidilutive		36,320		2,243		2,177

Note 15: Stock-Based Compensation

Equity Incentive Plan

We adopted an Equity Incentive Plan (“EIP”) on June 23, 1997. The EIP was most recently amended and restated on May 23, 2007. The EIP permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock units and other stock grants to selected eligible employees, consultants and non-employee members of our Board of Directors. The Compensation and Human Resources Committee of our Board of Directors, or its delegate, approves the granting and terms of all awards under the EIP (including the exercise prices for stock options). The maximum number of shares of our common stock that may be issued under the EIP at any time pursuant to awards is equal to 10% of the aggregate number of our common shares issued and outstanding reduced by the aggregate number of options and other awards then outstanding under the EIP or otherwise. Issued and outstanding shares are determined as of the close of trading on the New York Stock Exchange on the preceding trading day. As of December 31, 2010, approximately 176 million shares of our common stock were authorized for grant under the EIP and approximately 122 million shares were available for future issuance under the EIP.

In general, the awards that we grant under our EIP include either service-based vesting terms (generally with ratable vesting over three to five years) or market- or performance-based vesting terms. Unless otherwise provided by the Compensation and Human Resources Committee of our Board of Directors, the EIP provides that, upon a “change in control,” all awards granted under the EIP will vest immediately. From September 2002 to October 2008, awards granted to our employees at the vice president level and above typically provide for accelerated vesting and an extended exercise period upon a change in control, and awards granted to all other employees typically provide for accelerated vesting if the optionee is terminated without cause following a change in control. Since October 2008, awards granted to our employees at the executive vice president level and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

above typically provide for accelerated vesting and an extended exercise period if the optionee is terminated without cause following a change in control, awards granted to our employees at the vice president level provide for accelerated vesting and an extended exercise period upon a change in control, and awards granted to all other employees typically provide for accelerated vesting if the optionee is terminated without cause following a change in control.

On December 21, 2010, we accelerated the vesting of certain restricted stock and performance share awards issued under our EIP in order to preserve certain economic benefits to our stockholders that otherwise would have been lost in connection with our pending merger with CenturyLink. As a result, we recorded an increase to stock-based compensation expense of $63 million. There was no incremental compensation cost for this modification. This modification affected approximately 80 employees.

Awards without Market-Based Conditions

Stock Options

Options generally have an exercise price that is at least equal to the fair market value of the common stock on the date of grant, subject to certain restrictions. Options have ten-year terms.

Our stock option activity for the three-year period ended December 31, 2010 is summarized below:


	Number of Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2007		69,253		$	17.20
Granted		15,138			4.92	$	1.44
Exercised		(703	)		4.08
Canceled or forfeited		(2,446	)		6.28
Expired		(10,854	)		22.77

Outstanding as of December 31, 2008		70,388		$	14.21
Granted		346			3.45	$	0.67
Exercised		(1,043	)		3.37
Canceled or forfeited		(2,019	)		5.26
Expired		(13,044	)		28.90

Outstanding as of December 31, 2009		54,628		$	11.17
Granted		11,630			4.66	$	1.15
Exercised		(10,498	)		4.73
Canceled or forfeited		(1,514	)		4.56
Expired		(9,790	)		35.55

Outstanding as of December 31, 2010		44,456		$	5.84

The aggregate intrinsic values of the options exercised during the years ended December 31, 2010, 2009 and 2008, totaled approximately $16 million, $1 million and $1 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

The outstanding options as of December 31, 2010 have the following characteristics:


	Outstanding Options						Exercisable Options
Range of Exercise Price	Number Outstanding (in thousands)		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number Exercisable (in thousands)		Weighted Average Exercise Price
$0.01—$4.00		6,389		4.24	$	3.63		5,690	$	3.63
$4.01—$4.50		5,173		3.62	$	4.17		5,076	$	4.17
$4.51—$5.00		13,453		7.93	$	4.67		2,733	$	4.70
$5.01—$6.00		11,511		5.02	$	5.26		8,656	$	5.24
$6.01—$7.50		2,203		4.74	$	6.20		2,196	$	6.20
$7.51—$50.00		5,727		4.23	$	13.62		5,726	$	13.62

Total		44,456		5.51	$	5.84		30,077	$	6.37

The aggregate intrinsic value for outstanding options that were in-the-money was approximately $113 million as of December 31, 2010. The exercisable options as of December 31, 2010 had remaining contractual terms with a weighted average of 3.99 years. Options that were both exercisable and in-the-money on December 31, 2010 had an aggregate intrinsic value of approximately $72 million on that date.

We use the Black-Scholes model to estimate the fair value of new stock option grants and establish that fair value at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Additionally, all option valuation models require the input of highly subjective assumptions including the expected life of the options and the expected stock price volatility. Because our stock options have characteristics significantly different from traded options, and changes in the input assumptions can materially affect the fair value estimate, estimates of the fair value of our stock options are subjective.

Following are the weighted-average assumptions used with the Black-Scholes option-pricing model to determine the fair value estimates of options granted in the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009			2008
Black-Scholes assumptions:
Risk-free interest rate		2.3	%		1.8	%		2.7	%
Expected dividend yield		6.6	%		8.9	%		6.4	%
Expected option life (years)		4.8			4.8			4.9
Expected stock price volatility		48	%		47	%		38	%

We believe the two most significant assumptions used in our estimates of fair value are the expected option life and the expected stock price volatility, both of which we estimate based on historical information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

Restricted Stock

Restricted stock activity as of and for the three-year period ended December 31, 2010 is summarized below:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock:
Unvested balance as of December 31, 2007		4,526		$	7.43
Granted		4,759			4.99
Vested		(1,505	)		7.44
Forfeited		(960	)		6.32

Unvested balance as of December 31, 2008		6,820		$	5.88
Granted		8,669			3.19
Vested		(2,792	)		6.16
Forfeited		(1,437	)		4.27

Unvested balance as of December 31, 2009		11,260		$	3.95
Granted		9,020			5.78
Vested		(16,472	)		4.19
Forfeited		(420	)		3.89

Unvested balance as of December 31, 2010		3,388		$	7.65

Based on our stock price on the vesting dates, the fair value of restricted stock that vested during the years ended December 31, 2010, 2009 and 2008 totaled $112 million, $10 million and $8 million, respectively. We use the closing price of our common stock on the date of grant as the fair value of our restricted stock awards for expense recognition purposes.

Awards with Market-Based Conditions

In 2007, we granted certain non-qualified options and restricted stock with vesting conditions tied in part to the market value of our common stock. Only one of these option awards and one of these restricted stock awards remain outstanding, and the option has a ten-year term.

In 2008, we began granting what we call “performance share awards.” For performance share awards that were granted in 2008, all of which have either vested or been forfeited, a grantee could elect to receive payout in cash. All other performance share awards payout in shares of our common stock, and the number of shares that a grantee ultimately receives is based on a formula that utilizes our total shareholder return as compared to the total shareholder return of a basket of our peers. We value these awards using Monte-Carlo simulations because our standard valuation models do not accurately estimate their fair value. We believe the most significant assumption used in our estimate of fair value is the expected volatility, which we estimated based on historical information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

Stock Options

Stock options with market-based conditions activity as of and for the three-year period ended December 31, 2010 is summarized below:


	Number of Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Stock options with market-based conditions:
Outstanding as of December 31, 2007		2,340		$	8.39	$	4.17
Canceled or forfeited		(257	)		8.52		4.49

Outstanding as of December 31, 2008		2,083		$	8.37	$	4.13
Canceled or forfeited		—			—		—

Outstanding as of December 31, 2009		2,083		$	8.37	$	4.13
Canceled or forfeited		—			—		—

Outstanding as of December 31, 2010		2,083		$	8.37	$	4.13

Restricted Stock

Restricted stock with market-based conditions activity as of and for the three-year period ended December 31, 2010 is summarized below:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock with market-based conditions:
Unvested balance as of December 31, 2007		1,011		$	5.73
Forfeited		(115	)		6.32

Unvested balance as of December 31, 2008		896		$	5.65
Forfeited		—			—

Unvested balance as of December 31, 2009		896		$	5.65
Forfeited		—			—

Unvested balance as of December 31, 2010		896		$	5.65

Performance Share Awards

The payout under performance share awards can range from 0% to 200% of the award and is based on our total shareholder return as compared to the total shareholder return of a basket of our peers over the service period of three years. As such, these awards are considered to have market-based conditions.

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For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

Performance share awards activity as of and for the three-year period ended December 31, 2010 is summarized below:


	Number of Original Awards (in thousands)			Performance Adjustment (in thousands)			Total Number of Awards (in thousands)			Weighted Average Grant Date Fair Value
Performance share awards:
Ending balance as of December 31, 2007		—									—
Granted		1,713								$	4.90
Vested		—									—
Forfeited		(192	)								4.90

Ending balance as of December 31, 2008		1,521									4.90
Granted		11,090									2.64
Vested		—									—
Forfeited		(1,278	)								2.88

Ending balance as of December 31, 2009		11,333			9,920			21,253			2.85
Granted		6,943			5,912			12,855			3.89
Vested		(15,900	)		(15,832	)		(31,732	) ⁽¹⁾		3.29
Forfeited		(566	)		—			(566	)		2.94

Ending balance as of December 31, 2010		1,810			—			1,810		$	3.28

(1)	Of the 31,732,000 shares, 1,312,000 shares vested to employees who selected a cash payout option. No actual shares of our common stock were issued for these performance share awards.

Based on our stock price on the vesting dates, the fair value of the performance share awards that vested during the year ended December 31, 2010 totaled $244 million. We settled $21 million of share-based liabilities for $11 million of stock and $10 million of cash during the year ended December 31, 2010.

If the service period had ended on December 31, 2010, we would have paid out 3,620,000 shares of our common stock for the unvested performance share awards. Our compensation expense relating to the unvested awards was approximately $1 million for the year ended December 31, 2010 and $1 million for the year ended December 31, 2009.

The weighted-average assumptions used to estimate the grant date fair values of the market-based condition awards granted during the years ended December 31, 2010, 2009 and 2008 are summarized below.


	For the Years Ended December 31,
	2010			2009			2008
Monte-Carlo simulation assumptions:
Risk-free interest rate		1.43	%		1.31	%		2.10	%
Expected dividend yield		6.9	%		10.1	%		6.8	%
Expected stock price volatility		57	%		53	%		32	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (“ESPP”) under which we are authorized to issue 50 million shares of our common stock to eligible employees. Under the terms of our ESPP, eligible employees may authorize payroll deductions of up to 15% of their base compensation, as defined, to purchase our common stock at a price of 85% of the fair market value of our common stock on the last trading day of the month in which our common stock is purchased. For the years ended December 31, 2010, 2009 and 2008, approximately 2.3 million, 3.5 million and 3.4 million shares, respectively, were purchased under this plan at weighted-average purchase prices of $4.76, $3.15 and $3.50 per share, respectively.

Stock-Based Compensation Expense

Stock-based compensation expense is included in cost of sales, selling expenses and general, administrative and other operating expenses in our consolidated statements of operations. We recognize compensation expense relating to our service-based and certain of our market-based awards under our EIP using the straight-line method over the applicable vesting periods. Some of our market-based performance share awards were accounted for as liability awards because the employees can choose to receive the award payout in stock or cash. We estimate the fair value of these liability awards throughout their vesting period and record an expense representing the cumulative portion of the award earned through that period. We recognize compensation expense related to employee purchases under our ESPP for the difference between the employees’ purchase prices and the fair market values of the stock. While we have recorded deferred income tax benefits relative to our stock compensation expense, we have not realized any income tax benefits resulting from deductions on our tax returns for the year ended December 31, 2010 due to our NOL carryforwards.

As of December 31, 2010, there was $39 million of total unrecognized compensation expense related to unvested stock options, restricted stock and performance shares under our EIP. We expect to recognize this amount over the remaining weighted average service period of 1.8 years. There is no unrecognized compensation expense related to the ESPP. Included in the stock-based compensation below, there was an immaterial amount of stock compensation awarded as a severance benefit to certain employees whose employment was terminated during the year.

Stock-based compensation capitalized during the year was not material.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

The following table presents details of our stock-based compensation for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions, except per share amounts)
Stock-based compensation expense:
EIP awards (excluding market-based conditions):
Stock options	$	9		$	12		$	24
Restricted stock		51			22			18
EIP awards with market-based conditions:
Stock options		2			3			2
Restricted stock		1			1			2
Performance share awards		58			9			—
ESPP		2			2			2

Total stock-based compensation expense	$	123		$	49		$	48

Impact on (loss) earnings per common share:
Basic	$	(0.07	)	$	(0.02	)	$	(0.02	)
Diluted	$	(0.07	)	$	(0.02	)	$	(0.02	)

We recognized an income tax benefit of $31 million, $19 million and $17 million associated with our stock compensation expense during the years ended December 31, 2010, 2009 and 2008, respectively.

Proceeds from EIP and Employee Stock Purchase Plan

We issue new shares of our common stock upon: the exercise of stock options; grants of restricted stock; vesting and payout of performance share awards; and employee purchases of our stock under our ESPP. The cash received upon exercise of stock options and from employee purchases under our ESPP was $61 million, $15 million and $15 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Deferred Compensation Plan for Non-Employee Directors

We sponsor a deferred compensation plan for current and former non-employee members of our Board of Directors. Under this plan, participants may, at their discretion, elect to defer all or any portion of the directors’ fees for the upcoming year for services they perform. Participants in the plan are fully vested in their plan accounts. Subject to the terms of the plan, participants can suspend or change their election to defer fees in future calendar years.

Quarterly, we credit each participant’s account with a number of “phantom units” having a value equal to his or her deferred directors’ fees. Each phantom unit has a value equal to one share of our common stock and is subject to adjustment for cash dividends payable to our stockholders as well as stock dividends and splits, consolidations and the like that affect shares of our common stock outstanding. Non-employee directors participating in the plan held approximately 860,000 and 937,000 phantom units as of December 31, 2010 and 2009, respectively. Subject to the terms of the plan, each participant’s account will be distributed as a lump sum as soon as practicable following the end of his or her services as a director. Amounts deferred before 2005 and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 15: Stock-Based Compensation—(Continued)

earnings on those amounts are subject to the distribution options elected in advance by the participant and may be in the form of: (i) a lump-sum payment; (ii) annual cash installments over periods up to 10 years; or (iii) some other form selected by our chief human resources officer (or his or her designee). A change in our stock price of one dollar would not result in a significant expense impact to our consolidated financial statements.

Investment earnings, administrative expenses and increases or decreases in the deferred compensation liability resulting from changes in the value of our common stock are recorded in our consolidated statements of operations. The deferred compensation liability is recorded in other long-term liabilities. The expense associated with this plan did not have a significant impact on our consolidated financial statements for the periods presented. However, depending on the extent of appreciation in the value of our common stock, expenses incurred under this plan could become significant in subsequent years.

Note 16: Segment Information

Our operating revenue is generated from our business markets, mass markets and wholesale markets segments. Our Chief Operating Decision Maker (“CODM”) regularly reviews information for each of our segments to evaluate performance and to allocate resources. The accounting principles used to determine segment results are the same as those used in our consolidated financial statements. We have reclassified certain prior year segment revenue and expense amounts presented in our Annual Report on Form 10-K for the years ended December 31, 2009 and 2008 to conform to the current year presentation.

Each of our segments uses our network to generate revenue by providing data, Internet and voice services to its customers, as described further below. Through our strategic partnerships with DIRECTV and Verizon Wireless, certain of our segments also offer satellite digital television and wireless services to customers in our local services area. Depending on the products or services purchased, a customer may pay a service activation fee, a monthly service fee, a usage charge or a combination of these.

•

Business markets. This segment provides data, Internet and voice services to our enterprise and government customers. Our business markets products and services include:

•

Strategic services, which include primarily private line, Qwest iQ Networking ^® , hosting, broadband and Voice over Internet Protocol (“VoIP”) services;

•

Legacy services, which include primarily local, long-distance, traditional wide area network (“WAN”) and Integrated Services Digital Network (“ISDN”) services; and

•

Data integration, which is telecommunications equipment we sell located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers.

•

Mass markets. This segment provides data, Internet, voice and resold video and wireless services to consumers and small business customers. Our mass markets products and services include:

•

Strategic services, which include primarily broadband, video (including DIRECTV) and Verizon Wireless services;

•

Legacy services, which include primarily local and long-distance services; and

•

Qwest-branded wireless services (until October 31, 2009).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 16: Segment Information—(Continued)

•

Wholesale markets . This segment provides data, Internet and voice services primarily to other telecommunications providers. Our wholesale markets products and services include:

•

Strategic services, which include primarily private line services provided to other carriers: and

•

Legacy services, which include primarily long-distance, access, local and traditional WAN services.

Expenses for each of our segments include direct expenses incurred by the segment and other expenses assigned to the segment. Direct expenses incurred by the segment include segment specific employee-related costs (except for any severance expenses and combined net periodic pension and post-retirement benefits expenses), bad debt, equipment sales costs and other non-employee related costs such as customer support, collections, marketing and advertising. Other expenses assigned to the segments include network expenses, facility costs and other costs such as fleet, product management and real estate costs related to hosting and retail centers. Assigned expenses are determined by applying an activity-based costing methodology. We periodically review the methodology used to assign expenses to our segments. Future changes to the methodology will be reflected in the prior period segment data for comparative purposes.

We centrally manage expenses for administrative services (such as finance, computer systems development and support, real estate related to office buildings, legal and human resources), severance costs, restructuring charges and pension and post-retirement benefits expenses for all employees and retirees; consequently, these expenses are not assigned to our segments. We evaluate depreciation, amortization, information technology impairment charges and interest expense on a total company basis because we do not allocate assets or debt to specific segments. As a result, these items, along with other non-operating income or expenses, are not assigned to any segment. Therefore, the segment results presented below are not indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 16: Segment Information—(Continued)

For each segment, segment income equals its revenue minus its expenses and other expenses allocated to it based on its operations. Segment information for the years ended December 31, 2010, 2009 and 2008 is summarized in the following table:


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions)
Total segment revenue	$	11,350		$	11,961		$	13,118
Total segment expenses		5,463			5,974			7,078

Total segment income	$	5,887		$	5,987		$	6,040

Total margin percentage		52	%		50	%		46	%

Business markets:
Revenue	$	4,037		$	4,028		$	4,029
Expenses		2,416			2,459			2,556

Income	$	1,621		$	1,569		$	1,473

Margin percentage		40	%		39	%		37	%

Mass markets:
Revenue	$	4,659		$	5,020		$	5,746
Expenses		2,186			2,415			3,035

Income	$	2,473		$	2,605		$	2,711

Margin percentage		53	%		52	%		47	%

Wholesale markets:
Revenue	$	2,654		$	2,913		$	3,343
Expenses		861			1,100			1,487

Income	$	1,793		$	1,813		$	1,856

Margin percentage		68	%		62	%		56	%

The following table reconciles segment income to net (loss) income for the three years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010			2009			2008
	(Dollars in millions)
Total segment income	$	5,887		$	5,987		$	6,040
Other revenue (primarily USF surcharges)		380			350			357
Unassigned expenses (primarily general and administrative)		(2,066	)		(2,051	)		(1,946	)
Depreciation and amortization		(2,200	)		(2,311	)		(2,354	)
Total other expense—net		(1,551	)		(1,072	)		(1,046	)
Income tax expense		(505	)		(241	)		(399	)

Net (loss) income	$	(55	)	$	662		$	652

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 16: Segment Information—(Continued)

Revenue from our products and services for the years ended December 31, 2010, 2009 and 2008 is summarized in the following table:


	Years Ended December 31,
	2010		2009		2008
	(Dollars in millions)
Operating revenue by category:
Strategic and legacy services:
Strategic services ⁽¹⁾	$	4,489	$	4,217	$	3,985
Legacy services ⁽²⁾		6,257		7,075		8,103

Total strategic and legacy services		10,746		11,292		12,088
Qwest-branded wireless services ⁽³⁾		—		112		460
Data integration ⁽⁴⁾		604		557		570

Total segment revenue		11,350		11,961		13,118
Other revenue (primarily USF surcharges)		380		350		357

Total operating revenue	$	11,730	$	12,311	$	13,475

(1)	Our strategic services include primarily private line, broadband, Qwest iQ Networking ^® , hosting, video (including DIRECTV), Verizon Wireless services and Voice over Internet Protocol (“VoIP”).

(2)	Our legacy services include primarily local, long-distance, access, traditional wide area network (“WAN”) and integrated services digital network (“ISDN”) services.

(3)	Our Qwest-branded wireless services were wireless services that we provided through our mass markets segment under an arrangement with a wireless services provider. This arrangement ended on October 31, 2009.

(4)

Data integration is telecommunications equipment we sell that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers.

We do not have any single customer that provides more than 10% of our total operating revenue. Substantially all of our revenue comes from customers located in the United States.

Note 17: Related Party Transactions

In October 1999, we agreed to purchase certain telecommunications-related assets and all of the stock of Precision Systems, Inc., a telecommunications solutions provider, from Anschutz Digital Media, Inc., a subsidiary of Anschutz Company (which beneficially owned more than 5% of our common stock until November 2009), in exchange for a promissory note in the amount of $34 million. The note bore interest at 6% annually with semi-annual interest payments and annual principal payments due through 2008. In 2008, we paid the remaining note principal of $8 million, plus accrued interest of less than $1 million.

In 2010 and 2009, we paid approximately $24 million and $27 million, respectively, in administrative fees in the ordinary course of business to United Healthcare Services, Inc., which provides health benefit plans to most of our employees and is a subsidiary of UnitedHealth Group. Our director, Anthony Welters, serves as Executive Vice President of UnitedHealth Group and as President of its Public and Senior Markets Group.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies

Commitments

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as of December 31, 2010:


	Payments Due by Period
	2011		2012		2013		2014		2015		2016 and Thereafter		Total
	(Dollars in millions)
Future contractual obligations ⁽¹⁾ :
Debt and lease payments:
Long-term debt	$	1,004	$	1,500	$	750	$	1,900	$	950	$	5,674	$	11,778
Capital lease and other obligations		96		89		74		59		34		16		368
Interest on long-term borrowings and capital leases ⁽²⁾		885		742		655		589		476		3,921		7,268
Operating leases		208		177		152		134		110		671		1,452

Total debt and lease payments		2,193		2,508		1,631		2,682		1,570		10,282		20,866

Other long-term liabilities		6		3		6		3		4		160		182

Purchase commitments:
Telecommunications and information technology		2		2		2		1		1		1		9
IRU* operating and maintenance obligations		19		19		19		19		19		121		216
Advertising, promotion and other services ⁽³⁾		64		41		31		27		24		44		231

Total purchase commitments		85		62		52		47		44		166		456

Non-qualified pension obligation		4		3		3		3		3		29		45
Post-retirement benefit obligation		74		74		74		73		71		1,322		1,688

Total future contractual obligations	$	2,362	$	2,650	$	1,766	$	2,808	$	1,692	$	11,959	$	23,237

*	Indefeasible rights of use

(1)	The table does not include:

•

costs that are contingent upon completion of the pending CenturyLink merger;

•

our open purchase orders as of December 31, 2010. These purchase orders are generally at fair value, are generally cancelable without penalty and are part of normal operations;

•

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies—(Continued)

changes in the plan and funding laws and regulations. As a result it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, we will not be required to make a cash contribution in 2011. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, we currently expect that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations;

•

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to use the network facilities of other carriers and to purchase other goods and services. Our contracts to use other carriers’ network facilities generally have no minimum volume requirements and are based on an interrelationship of volumes and discounted rates. Assuming we exited these contracts in 2011, the contract termination fees would be approximately $697 million. Under the same assumption, termination fees for these contracts to purchase goods and services would be $31 million. In the normal course of business, we believe the payment of these fees is remote; and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies—(Continued)

•

(2)	Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective as of December 31, 2010.

(3)

Capital Leases

We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense. Payments on capital leases are included in repayments of long-term borrowings, including current maturities in the consolidated statements of cash flows.

The table below summarizes our capital lease activity as of and for the years ended December 31, 2010, 2009 and 2008:


	Years Ended December 31,
	2010		2009		2008
	(Dollars in millions)
Capital leases:
Assets acquired through capital leases	$	202	$	107	$	15
Assets included in property, plant and equipment		474		276		240
Accumulated depreciation		131		83		120
Depreciation expense		51		29		30
Cash payments towards capital leases		45		32		37

The future minimum payments under capital leases as of December 31, 2010 are included in our consolidated balance sheet as follows:


	Future Minimum Payments
	(Dollars in millions)
Capital lease obligations:
Total minimum payments	$	387
Less: amount representing interest and executory costs		(75	)

Present value of minimum payments		312
Less: current portion		(62	)

Long-term portion	$	250

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies—(Continued)

Operating Leases

Certain office facilities, real estate and equipment are subject to operating leases. We also have easement (or right-of-way) agreements with railroads and public transportation authorities that are accounted for as operating leases. For the years ended December 31, 2010, 2009 and 2008, rent expense under these operating leases was $322 million, $331 million and $301 million, respectively, and sublease rental income over the same periods was $25 million, $28 million and $30 million, respectively. Operating leases as reported in the table in “Future Contractual Obligations” above have not been reduced by minimum sublease rental income of $141 million, which we expect to realize under non-cancelable subleases.

Letters of Credit and Guarantees

We maintain letter of credit arrangements with various financial institutions for up to $85 million. We had outstanding letters of credit of approximately $72 million as of December 31, 2010. On January 18, 2011, we entered into $7 million of additional letters of credit.

As described further in Note 22—Financial Statements of Guarantors, certain Qwest entities have guaranteed the payment of debt, leases or letter of credit obligations of other Qwest entities.

Contingencies

To the extent appropriate, we have accrued liabilities for the matters described below.

KPNQwest Litigation/Investigation

144

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies—(Continued)

the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $290 million based on the exchange rate on December 31, 2010).

We will continue to defend against the pending KPNQwest litigation matters vigorously.

Stockholder Litigation

145

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18: Commitments and Contingencies—(Continued)

final resolution. A final fairness hearing is scheduled for February 25, 2011. If the settlement is approved at the final hearing, all of these actions will be dismissed, with prejudice. The defendants intend to defend their positions in these matters vigorously to the extent they are not fully resolved by the settlement.

Other Matters

Qwest Communications Company, LLC (“QCC”) is a defendant in litigation filed by several billing agents for the owners of payphones seeking compensation for coinless calls made from payphones. The matter is pending in the United States District Court for the District of Columbia. Generally, the payphone owners claim that QCC underpaid the amount of compensation due to them under Federal Communications Commission regulations for coinless calls placed from their phones onto QCC’s network. The claim seeks compensation for calls, as well as interest and attorneys’ fees. QCC will vigorously defend against this action.

146

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 19: Quarterly Financial Data (Unaudited)


	Quarterly Financial Data
	First Quarter		Second Quarter		Third Quarter			Fourth Quarter			Total
	(Dollars in millions, except per share amounts)
2010
Operating revenue	$	2,966	$	2,930	$	2,935		$	2,899		$	11,730
Operating income		568		509		497			427			2,001
Income tax expense		209		108		108			80			505
Net income (loss)		38		158		(90	)		(161	)		(55	)
Basic earnings (loss) per common share	$	0.02	$	0.09	$	(0.05	)	$	(0.09	)	$	(0.03	)
Diluted earnings (loss) per common share	$	0.02	$	0.09	$	(0.05	)	$	(0.09	)	$	(0.03	)

2009
Operating revenue	$	3,173	$	3,090	$	3,054		$	2,994		$	12,311
Operating income		549		491		485			450			1,975
Income tax expense		92		5		75			69			241
Net income		206		212		136			108			662
Basic earnings per common share	$	0.12	$	0.12	$	0.08		$	0.06		$	0.38
Diluted earnings per common share	$	0.12	$	0.12	$	0.08		$	0.06		$	0.38

Fourth Quarter 2010

Net loss for the fourth quarter of 2010 was affected by a $267 million loss on our embedded option in our convertible debt as well as an increase in stock-based compensation expense of $63 million due to the accelerated vesting of certain restricted stock and performance share awards issued under our Equity Incentive Plan in order to preserve certain economic benefits to our stockholders that otherwise would have been lost in connection with our pending merger with CenturyLink.

Income tax expense for the fourth quarter of 2010 was affected by the tax treatment of the premium paid on our convertible debt and the tax treatment of the expenses incurred when we accelerated the vesting of certain stock-based compensation.

Third Quarter 2010

Net loss for the third quarter of 2010 was affected by a $229 million loss on our embedded option in our convertible debt.

First Quarter 2010

Income tax expense for the first quarter of 2010 increased by $113 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws disallow, beginning in 2013, federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program.

Second Quarter 2009

Income tax expense for the second quarter of 2009 includes our recognition of previously unrecognized tax benefits on uncertain tax positions and favorable income tax settlements related to prior years.

147

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 20: Other Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of December 31, 2010 and 2009 consisted of the following:


	December 31,
	2010		2009
	(Dollars in millions)
Prepaid expenses and other current assets:
Prepaid expenses	$	205	$	223
Deferred activation and installation charges		100		112
Other		47		33

Total prepaid expenses and other current assets	$	352	$	368

Other Non-Current Assets

Other non-current assets as of December 31, 2010 and 2009 consisted of the following:


	December 31,
	2010		2009
	(Dollars in millions)
Other non-current assets:
Non-current investments as described in Note 4—Investments	$	93	$	96
Deferred activation and installation charges		100		110
Debt issuance costs		95		112
Other		283		267

Total other non-current assets	$	571	$	585

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of December 31, 2010 and 2009 consisted of the following:


	December 31,
	2010		2009
	(Dollars in millions)
Accrued expenses and other current liabilities:
Accrued interest	$	219	$	273
Employee compensation		394		365
Accrued property and other taxes		255		244
Current portion of post-retirement and other post-employment benefit obligations and non-qualified pension obligations		174		173
DIRECTV payable		147		128
Dividends payable		—		138
Other		241		259

Total accrued expenses and other current liabilities	$	1,430	$	1,580

148

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 20: Other Financial Information—(Continued)

Other Non-Current Liabilities

Other non-current liabilities as of December 31, 2010 and 2009 consisted of the following:


	December 31,
	2010		2009
	(Dollars in millions)
Other non-current liabilities:
Reserves for contingencies and litigation as described in Note 18—Commitments and Contingencies	$	77	$	75
Restructuring and realignment reserves as described in Note 10—Restructuring and Severance		195		223
Other		327		377

Total other non-current liabilities	$	599	$	675

Note 21: Labor Union Contracts

We are a party to collective bargaining agreements with our labor unions, the Communications Workers of America and the International Brotherhood of Electrical Workers. Our current four-year collective bargaining agreements expire on October 6, 2012. As of December 31, 2010, employees covered under these collective bargaining agreements totaled approximately 14,200, or 50% of all our employees.

Note 22: Financial Statements of Guarantors

QCII and two of its subsidiaries, QCF and QSC, guarantee the payment of certain of each other’s registered debt securities. As of December 31, 2010, QCII’s total outstanding debt included $2.7 billion aggregate principal amount of senior notes that were issued in February 2004, June 2005, September 2009 and January 2010 and that are guaranteed by QCF and QSC (the “QCII Guaranteed Notes”). These notes are guaranteed through their respective maturity dates, the latest of which is in April 2018. In addition, each series of QCF’s outstanding notes totaling approximately $1.2 billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCII (the “QCF Guaranteed Notes”). These notes are guaranteed through their respective maturity dates, the latest of which is in February 2031. The guarantees described above are full and unconditional and joint and several. All of the QCF Guaranteed Notes and $1.3 billion of the QCII Guaranteed Notes are registered debt securities. A significant amount of QCII’s and QSC’s income and cash flow are generated by their subsidiaries. As a result, the funds necessary to meet their debt service or guarantee obligations are provided in large part by distributions or advances from their subsidiaries.

The following information sets forth our consolidating statements of operations for the years ended December 31, 2010, 2009 and 2008, our consolidating balance sheets as of December 31, 2010 and 2009, and our consolidating statements of cash flows for the years ended December 31, 2010, 2009 and 2008. The information for QCII is presented on a stand-alone basis, information for QSC and QCF is presented on a combined basis and information for all of our other subsidiaries is presented on a combined basis. Each entity’s investments in its subsidiaries, if any, are presented under the equity method. The consolidating statements of operations and balance sheets include the effects of consolidating adjustments to our subsidiaries’ tax provisions and the related income tax assets and liabilities in the QSC and QCII results. Both QSC and QCF are 100% owned by QCII, and QCF is a finance subsidiary of QCII. Other than as already described in this note, the accounting principles used to determine the amounts reported in this note are the same as those used in our consolidated financial statements.

149

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 22: Financial Statements of Guarantors—(Continued)

We periodically restructure the internal capital structure of our subsidiaries based on the needs of our business.

Allocations among Affiliates

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

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

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

150

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue:
Operating revenue	$	—		$	—		$	11,730		$	—		$	11,730
Operating revenue—affiliates		—			(1	)		24			(23	)		—

Total operating revenue		—			(1	)		11,754			(23	)		11,730

Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			—			3,804			—			3,804
Selling		—			—			1,702			—			1,702
General, administrative and other operating		75			(2	)		1,950			—			2,023
Operating expenses—affiliates		—			—			23			(23	)		—
Depreciation and amortization		—			—			2,200			—			2,200

Total operating expenses		75			(2	)		9,679			(23	)		9,729

Operating (loss) income		(75	)		1			2,075			—			2,001
Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net		318			101			620			—			1,039
Interest expense—affiliates		1			292			—			(293	)		—
Interest income—affiliates		—			(293	)		—			293			—
Loss on embedded option in convertible debt		475			—			—			—			475
Loss on early retirement of debt		5			40			—			—			45
Other—net		—			(8	)		—			—			(8	)
(Income) loss from equity investments in subsidiaries		(755	)		(602	)		—			1,357			—

Total other expense (income)—net		44			(470	)		620			1,357			1,551

(Loss) income before income taxes		(119	)		471			1,455			(1,357	)		450
Income tax benefit (expense)		64			284			(853	)		—			(505	)

Net (loss) income	$	(55	)	$	755		$	602		$	(1,357	)	$	(55	)

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

151

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2009


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue:
Operating revenue	$	—		$	—		$	12,311		$	—		$	12,311
Operating revenue—affiliates		—			(3	)		17			(14	)		—

Total operating revenue		—			(3	)		12,328			(14	)		12,311

Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			—			4,088			—			4,088
Selling		—			—			1,944			—			1,944
General, administrative and other operating		43			(3	)		1,953			—			1,993
Operating expenses—affiliates		—			—			14			(14	)		—
Depreciation and amortization		—			—			2,311			—			2,311

Total operating expenses		43			(3	)		10,310			(14	)		10,336

Operating (loss) income		(43	)		—			2,018			—			1,975
Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net		269			185			635			—			1,089
Interest expense—affiliates		14			363			296			(673	)		—
Interest income—affiliates		—			(672	)		(1	)		673			—
Other (income) expense—net		(3	)		(15	)		1			—			(17	)
(Income) loss from equity investments in subsidiaries		(910	)		(327	)		—			1,237			—

Total other (income) expense—net		(630	)		(466	)		931			1,237			1,072

Income (loss) before income taxes		587			466			1,087			(1,237	)		903
Income tax benefit (expense)		75			454			(770	)		—			(241	)

Net income (loss)	$	662		$	920		$	317		$	(1,237	)	$	662

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

152

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2008


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue:
Operating revenue	$	—		$	—		$	13,475		$	—		$	13,475
Operating revenue—affiliates		—			—			42			(42	)		—

Total operating revenue		—			—			13,517			(42	)		13,475

Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			—			4,956			—			4,956
Selling		—			—			2,188			—			2,188
General, administrative and other operating		71			—			1,809			—			1,880
Operating expenses—affiliates		—			—			42			(42	)		—
Depreciation and amortization		—			—			2,354			—			2,354

Total operating expenses		71			—			11,349			(42	)		11,378

Operating (loss) income		(71	)		—			2,168			—			2,097
Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net		272			207			590			—			1,069
Interest expense—affiliates		10			272			823			(1,105	)		—
Interest income—affiliates		—			(1,103	)		(2	)		1,105			—
Other expense (income)—net		1			(30	)		6			—			(23	)
(Income) loss from equity investments in subsidiaries		(867	)		(192	)		—			1,059			—

Total other (income) expense—net		(584	)		(846	)		1,417			1,059			1,046

Income (loss) before income taxes		513			846			751			(1,059	)		1,051
Income tax benefit (expense)		139			11			(549	)		—			(399	)

Net income (loss)	$	652		$	857		$	202		$	(1,059	)	$	652

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

153

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2010


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾		Subsidiary Non- Guarantors		Eliminations			QCII Consolidated
	(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	148	$	224	$	—		$	372
Accounts receivable—net		16			22		1,226		—			1,264
Accounts receivable—affiliates		296			277		154		(727	)		—
Notes receivable—affiliates		—			1,568		110		(1,678	)		—
Deferred income taxes—net		—			36		208		(10	)		234
Prepaid expenses and other		9			26		345		(28	)		352

Total current assets		321			2,077		2,267		(2,443	)		2,222
Property, plant and equipment—net		—			—		11,794		—			11,794
Capitalized software—net		—			—		947		—			947
Investments in subsidiaries		1,355			429		—		(1,784	)		—
Deferred income taxes—net		840			2,045		139		(1,338	)		1,686
Prepaid pension, post-retirement and other post-employment benefits—net—affiliate		2,848			71		914		(3,833	)		—
Other		125			45		401		—			571

Total assets	$	5,489		$	4,667	$	16,462	$	(9,398	)	$	17,220

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term borrowings	$	—		$	179	$	910	$	—		$	1,089
Current borrowings—affiliates		118			1,560		—		(1,678	)		—
Accounts payable		4			1		796		—			801
Accounts payable—affiliates		26			20		186		(232	)		—
Accrued expenses and other		300			61		1,076		(7	)		1,430
Accrued expenses and other—affiliates		—			175		320		(495	)		—
Deferred income taxes—net		10			—		—		(10	)		—
Deferred revenue and advance billings		—			—		572		(21	)		551

Total current liabilities		458			1,996		3,860		(2,443	)		3,871
Long-term borrowings—net		2,598			978		7,282		—			10,858
Pension, post-retirement and other post-employment benefits obligations—net		3,088			—		—		—			3,088
Pension, post-retirement and other post-employment benefits obligations and other—affiliate		985			356		2,492		(3,833	)		—
Deferred income taxes—net		—			11		1,327		(1,338	)		—
Deferred revenue		—			—		459		—			459
Other		15			2		582		—			599

Total liabilities		7,144			3,343		16,002		(7,614	)		18,875
Stockholders’ (deficit) equity		(1,655	)		1,324		460		(1,784	)		(1,655	)

Total liabilities and stockholders’ (deficit) equity	$	5,489		$	4,667	$	16,462	$	(9,398	)	$	17,220

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

154

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2009


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾		Subsidiary Non- Guarantors		Eliminations			QCII Consolidated
	(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents	$	194		$	987	$	1,225	$	—		$	2,406
Accounts receivable—net		17			4		1,281		—			1,302
Accounts receivable—affiliates		693			234		18		(945	)		—
Notes receivable—affiliates ⁽⁴⁾		—			4,822		113		(4,935	)		—
Deferred income taxes—net		—			330		216		(8	)		538
Prepaid expenses and other		—			32		388		(52	)		368

Total current assets		904			6,409		3,241		(5,940	)		4,614
Property, plant and equipment—net		—			—		12,299		—			12,299
Capitalized software—net		—			—		911		—			911
Investments in subsidiaries ⁽⁴⁾		2,413			1,831		—		(4,244	)		—
Deferred income taxes—net		907			1,999		192		(1,127	)		1,971
Prepaid pension, post-retirement and other post-employment benefits—net—affiliate		2,914			74		964		(3,952	)		—
Other		142			52		391		—			585

Total assets	$	7,280		$	10,365	$	17,998	$	(15,263	)	$	20,380

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term borrowings	$	1,265		$	403	$	528	$	—		$	2,196
Current borrowings—affiliates ⁽⁴⁾		113			4,822		—		(4,935	)		—
Accounts payable		2			1		762		—			765
Accounts payable—affiliates		17			3		112		(132	)		—
Accrued expenses and other		432			70		1,114		(36	)		1,580
Accrued expenses and other—affiliates		—			533		280		(813	)		—
Deferred income taxes—net		8			—		—		(8	)		—
Deferred revenue and advance billings		—			—		572		(16	)		556

Total current liabilities		1,837			5,832		3,368		(5,940	)		5,097
Long-term borrowings—net		2,273			1,780		7,951		—			12,004
Pension, post-retirement and other post-employment benefits obligations—net		3,296			—		—		—			3,296
Pension, post-retirement and other post-employment benefits obligations and other—affiliate		1,037			355		2,560		(3,952	)		—
Deferred income taxes—net		—			—		1,127		(1,127	)		—
Deferred revenue		—			—		486		—			486
Other		15			15		645		—			675

Total liabilities		8,458			7,982		16,137		(11,019	)		21,558
Stockholders’ (deficit) equity		(1,178	)		2,383		1,861		(4,244	)		(1,178	)

Total liabilities and stockholders’ (deficit) equity	$	7,280		$	10,365	$	17,998	$	(15,263	)	$	20,380

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

(4)

In May 2009, QSC invested $10.2 billion in a subsidiary non-guarantor by making a cash contribution to capital in the amount of approximately $300 million and assuming $9.9 billion of the subsidiary’s current borrowings-affiliate from QCF. In connection with this transaction, QSC and QCF offset $4.4 billion of their respective current borrowings-affiliate and notes receivable-affiliate.

155

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2010


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Cash (used for) provided by operating activities	$	(358	)	$	514		$	3,106		$	105		$	3,367

Investing activities:
Expenditures for property, plant and equipment and capitalized software		—			—			(1,488	)		—			(1,488	)
Proceeds from sales or maturities of investment securities		—			943			—			—			943
Purchases of investment securities		—			(944	)		—			—			(944	)
Changes in interest in investments managed by QSC		10			7			(17	)		—			—
Cash infusion to subsidiaries		—			(577	)		—			577			—
Net decrease (increase) in short-term affiliate loans		—			3,254			3			(3,257	)		—
Dividends received from subsidiaries		2,320			2,611			—			(4,931	)		—
Other		—			—			1			—			1

Cash provided by (used for) investing activities		2,330			5,294			(1,501	)		(7,611	)		(1,488	)

Financing activities:
Proceeds from long-term borrowings		775			—			—			—			775
Repayments of long-term borrowings, including current maturities		(1,790	)		(1,025	)		(564	)		—			(3,379	)
Net proceeds from (repayments of) short-term affiliate borrowings		5			(3,262	)		—			3,257			—
Proceeds from issuances of common stock		67			—			—			—			67
Purchase of treasury stock		(136	)		—			—			—			(136	)
Dividends paid		(555	)		—			—			—			(555	)
Cash infusion from parent		—			—			577			(577	)		—
Dividends paid to parent		—			(2,320	)		(2,611	)		4,931			—
Settlement of embedded option in convertible debt		(640	)		—			—			—			(640	)
Early retirement of debt		(1	)		(40	)		—			—			(41	)
Other		109			—			(8	)		(105	)		(4	)

Cash (used for) provided by financing activities		(2,166	)		(6,647	)		(2,606	)		7,506			(3,913	)

Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents		(194	)		(839	)		(1,001	)		—			(2,034	)
Beginning balance		194			987			1,225			—			2,406

Ending balance	$	—		$	148		$	224		$	—		$	372

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

156

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2009


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Cash (used for) provided by operating activities	$	(242	)	$	1,024		$	2,479		$	46		$	3,307

Investing Activities:
Expenditures for property, plant and equipment and capitalized software		—			—			(1,409	)		—			(1,409	)
Proceeds from sale of investment securities		—			18			—			—			18
Purchases of investment securities		—			—			—			—			—
Changes in interest in investments managed by QSC		(10	)		1			9			—			—
Cash infusion to subsidiaries		—			(1,076	)		—			1,076			—
Net decrease (increase) in short-term affiliate loans		—			101			4			(105	)		—
Dividends received from subsidiaries		640			2,000			—			(2,640	)		—
Other		—			—			(15	)		—			(15	)

Cash provided by (used for) investing activities		630			1,044			(1,411	)		(1,669	)		(1,406	)

Financing activities:
Proceeds from long-term borrowings		532			—			738			—			1,270
Repayments of long-term borrowings, including current maturities		(230	)		(562	)		(35	)		—			(827	)
Net (repayments of) proceeds from short-term affiliate borrowings		(32	)		(185	)		112			105			—
Proceeds from issuances of common stock		57			—			—			—			57
Purchase of treasury stock		(3	)		—			—			—			(3	)
Dividends paid		(551	)		—			—			—			(551	)
Equity infusion from parent		—			—			1,076			(1,076	)		—
Dividends paid to parent		—			(640	)		(2,000	)		2,640			—
Other		33			(1	)		8			(46	)		(6	)

Cash (used for) provided by financing activities		(194	)		(1,388	)		(101	)		1,623			(60	)

Cash and cash equivalents:
Increase in cash and cash equivalents		194			680			967			—			1,841
Beginning balance		—			307			258			—			565

Ending balance	$	194		$	987		$	1,225		$	—		$	2,406

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

157

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2008


	QCII ⁽¹⁾			QSC ⁽²⁾ & QCF ⁽³⁾			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Cash (used for) provided by operating activities	$	(445	)	$	1,171		$	2,158		$	47		$	2,931

Investing Activities:
Expenditures for property, plant and equipment and capitalized software		—			—			(1,777	)		—			(1,777	)
Proceeds from sale of investment securities		—			65			—			—			65
Purchases of investment securities		—			—			—			—			—
Changes in interest in investments managed by QSC		23			(10	)		(13	)		—			—
Cash infusion to subsidiaries		—			(1,521	)		—			1,521			—
Net (increase) decrease in short-term affiliate loans		—			(2,274	)		(13	)		2,287			—
Dividends received from subsidiaries		1,290			2,100			—			(3,390	)		—
Other		—			4			15			—			19

Cash provided by (used for) investing activities		1,313			(1,636	)		(1,788	)		418			(1,693	)

Financing activities:
Proceeds from long-term borrowings		—			—			—			—			—
Repayments of long-term borrowings, including current maturities		(98	)		(171	)		(362	)		—			(631	)
Net proceeds from (repayments of) short-term affiliate borrowings		41			1,753			493			(2,287	)		—
Proceeds from issuances of common stock		42			—			—			—			42
Purchase of treasury stock		(2	)		—			—			—			(2	)
Repurchases of common stock		(432	)		—			—			—			(432	)
Dividends paid		(556	)		—			—			—			(556	)
Equity infusion from parent		—			—			1,521			(1,521	)		—
Dividends paid to parent		—			(1,290	)		(2,100	)		3,390			—
Other		47			(1	)		5			(47	)		4

Cash (used for) provided by financing activities		(958	)		291			(443	)		(465	)		(1,575	)

Cash and cash equivalents:
Decrease in cash and cash equivalents		(90	)		(174	)		(73	)		—			(337	)
Beginning balance		90			481			331			—			902

Ending balance	$	—		$	307		$	258		$	—		$	565

(1)	QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)	QSC is a guarantor of the QCII Guaranteed Notes.

(3)	QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

158

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Qwest Communications International Inc.:

We have audited Qwest Communications International Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Qwest Communications International Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Qwest Communications International Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Qwest Communications International Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ (deficit) equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 15, 2011 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Denver, Colorado

February 15, 2011

159

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our, or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”) as of December 31, 2010. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred in the fourth quarter of 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

ITEM 9B. OTHER INFORMATION

None.

160

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 of this Annual Report on Form 10-K is incorporated by reference to a definitive proxy statement or amendment to this Form 10-K to be filed with the SEC within 120 days of December 31, 2010.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of this Annual Report on Form 10-K is incorporated by reference to a definitive proxy statement or amendment to this Form 10-K to be filed with the SEC within 120 days of December 31, 2010.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of this Annual Report on Form 10-K is incorporated by reference to a definitive proxy statement or amendment to this Form 10-K to be filed with the SEC within 120 days of December 31, 2010.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of this Annual Report on Form 10-K is incorporated by reference to a definitive proxy statement or amendment to this Form 10-K to be filed with the SEC within 120 days of December 31, 2010.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Pre-Approval Policies and Procedures

The Audit Committee of our Board of Directors is responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. Under the Audit Committee’s charter, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. The approval may be given as part of the Audit Committee’s approval of the scope of the engagement of our independent registered public accounting firm or on an individual basis. The pre-approval of non-audit services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to the full Audit Committee. Our independent registered public accounting firm may not be retained to perform the non-audit services specified in Section 10A(g) of the Exchange Act.

161

Fees Paid to the Independent Registered Public Accounting Firm

We first engaged KPMG LLP to be our independent registered public accounting firm in May 2002. The aggregate fees billed to us for each of the years ended December 31, 2010 and 2009, for professional accounting services, including KPMG’s audit of our annual consolidated financial statements, are set forth in the table below.


	2010		2009
	(Dollars in thousands)
Audit fees	$	3,614	$	3,987
Audit-related fees		1,189		877
Tax fees		59		42

Total fees	$	4,862	$	4,906

For purposes of the preceding table, the professional fees are classified as follows:

•

Audit fees—These are fees billed for the year shown for professional services performed for the audit of the consolidated financial statements included in our Form 10-K filing for that year, the review of condensed consolidated financial statements included in our Form 10-Q filings made during that year, comfort letters, consents and assistance with and review of documents filed with the SEC. Audit fees for each year shown include amounts that have been billed to us through the date of this filing and any additional amounts that are expected to be billed to us thereafter.

•

Audit-related fees—These are fees billed for assurance and related services that were performed in the year shown and that are traditionally performed by our independent registered public accounting firm. More specifically, these services include: international statutory audits; regulatory filings; the audit of certain of our subsidiaries’ annual financial statements; employee benefit plan audits (including audits of employee benefit plans and trust funds where the fees are paid by the plan or trust fund instead of by us); due diligence services related to mergers, acquisitions and dispositions; internal control reviews; attestation services that are not required by statute or regulation (including attestation services relating to employee benefit trust funds where the fees are paid by the trust instead of by us); and audits of the financial statements of certain of our subsidiaries required in connection with acquisitions or dispositions of those subsidiaries. Audit-related fees for each year shown include amounts that have been billed to us through the date of this filing.

•

Tax fees—These are fees billed for all professional services performed in the year shown by professional staff of our independent registered public accounting firm’s tax division except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice. Tax compliance involves preparation of original and amended tax returns, refund claims and tax payment services. Tax planning and tax advice encompass a diverse range of subjects, including assistance with tax audits and appeals, tax advice related to mergers, acquisitions and dispositions, and requests for rulings or technical advice from taxing authorities. Tax fees for each year shown include amounts that have been billed to us through the date of this filing.

The Audit Committee approved in advance all of the services performed by KPMG described above.

162

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	Documents filed as part of this report:


		Page
(1)	Report of Independent Registered Public Accounting Firm		72
	Financial Statements covered by the Report of Independent Registered Public Accounting Firm:
	Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008		73
	Consolidated Balance Sheets as of December 31, 2010 and 2009		74
	Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		75
	Consolidated Statements of Stockholders’ Deficit and Comprehensive (Loss) Income for the years ended December 31, 2010, 2009 and 2008		76
	Notes to the Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008		77

(a) (3) and (b) Exhibits required by Item 601 of Regulation S-K:

Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.


Exhibit Number		Description

(2.1)		Agreement and Plan of Merger, dated April 21, 2010, by and among Qwest Communications International Inc., CenturyTel, Inc. and SB44 Acquisition Company (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on April 22, 2010, File No. 001-15577).

(3.1)		Restated Certificate of Incorporation of Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Registration Statement on Form S-4/A, filed September 17, 1999, File No. 333-81149).

(3.2)		Certificate of Amendment of Restated Certificate of Incorporation of Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No. 001-15577).

(3.3)		Amended and Restated Bylaws of Qwest Communications International Inc., adopted as of July 1, 2002 and amended as of May 25, 2004 and December 14, 2006 (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on December 18, 2006, File No. 001-15577).

(4.1)		Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by reference to Qwest Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).

(4.2)		First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to Qwest Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).

(4.3)		Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.’s Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).

163


Exhibit Number		Description

(4.4)		Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.’s Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).

(4.5)		Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., and The First National Bank of Chicago (now known as Bank One Trust Company, N. A.), as trustee (incorporated by reference to U S WEST’s Current Report on Form 8-K, dated November 18, 1998, File No. 001-14087).

(4.6)		Indenture, dated as of October 15, 1999, by and between Qwest Corporation and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest Corporation’s Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001 -3040).

(4.7)		First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest Communications International Inc., and Bank One Trust Company, as trustee (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 001-15577).

(4.8)		Officer’s Certificate of Qwest Corporation, dated March 12, 2002 (including forms of 8 ⁷ / ₈ % notes due March 15, 2012) (incorporated by reference to Qwest Corporation’s Form S-4, File No. 333-115119).

(4.9)		Indenture, dated as of December 26, 2002, between Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on January 10, 2003, File No. 001-15577).

(4.10)		First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).

(4.11)		First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).

(4.12)		Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).

(4.13)		Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest’s Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001- 15577).

164


Exhibit Number		Description

(4.14)		Indenture, dated as of February 5, 2004, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and J.P. Morgan Trust Company (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).

(4.15)		First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).

(4.16)		Second Supplemental Indenture, dated November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’s Current Report on Form 8-K filed on November 23, 2004, File No. 001-03040).

(4.17)		First Supplemental Indenture, dated June 17, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).

(4.18)		Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).

(4.19)		Second Supplemental Indenture, dated June 23, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).

(4.20)		Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 14, 2005, File No. 001-15577).

(4.21)		First Supplemental Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 14, 2005, File No. 001-15577).

(4.22)		First Supplemental Indenture, dated as of November 16, 2005, by and among Qwest Services Corporation, Qwest Communications International Inc., Qwest Capital Funding, Inc. and J.P. Morgan Trust Company, N.A. as successor to Bank One Trust Company, N.A. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 21, 2005, File No. 001-15577).

(4.23)		Fourth Supplemental Indenture, dated August 8, 2006, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on August 8, 2006, File No. 001-15577).

(4.24)		Fifth Supplemental Indenture, dated May 16, 2007, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on May 18, 2007, File No. 001-15577).

(4.25)		Sixth Supplemental Indenture, dated April 13, 2009, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on April 13, 2009, File No. 001-15577).

165


Exhibit Number		Description

(4.26)		Third Supplemental Indenture, dated September 17, 2009, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on September 21, 2009, File No. 001-15577).

(4.27)		Fourth Supplemental Indenture, dated January 12, 2010, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on January 13, 2010, File No. 001-15577).

(10.1)		Equity Incentive Plan, as amended and restated (incorporated by reference to Qwest Communications International Inc.’s Proxy Statement for the 2007 Annual Meeting of Stockholders, File No. 001-15577).*

10.2		Forms of restricted stock, performance share and option agreements used under Equity Incentive Plan, as amended and restated (also incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on October 24, 2005, Annual Report on Form 10-K for the year ended December 31, 2005, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, Annual Report on Form 10-K for the year ended December 31, 2006, Current Report on Form 8-K filed on September 12, 2008, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, File No. 001-15577).*

(10.3)		Deferred Compensation Plan, as amended (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007, and Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-15577).*

(10.4)		Equity Compensation Plan for Non-Employee Directors (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).*

(10.5)		Deferred Compensation Plan for Nonemployee Directors, as amended and restated, and Amendment to Deferred Compensation Plan for Nonemployee Directors (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on December 16, 2005 and Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File No. 001-15577) .*

(10.6)		2010 Qwest Management Annual Incentive Plan Summary (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on February 22, 2010, File No. 001-15577).*

(10.7)		Description of Executive Level Officer Access Only Health Care (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File No. 001-15577).*

(10.8)		Executive Relocation Policy (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15577).*

(10.9)		Qwest Nonqualified Pension Plan (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15577).*

(10.10)		Registration Rights Agreement, dated April 13, 2009, among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on April 13, 2009, File No. 001-15577).

166


Exhibit Number		Description

(10.11)		Registration Rights Agreement, dated September 17, 2009, among Qwest Communications International Inc. and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on September 21, 2009, File No. 001-15577).

(10.12)		Registration Rights Agreement, dated January 12, 2010, among Qwest Communications International Inc. and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on January 13, 2010, File No. 001-15577).

(10.13)		Amended and Restated Employment Agreement, dated August 20, 2009, by and between Edward A. Mueller and Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on August 21, 2009, File No. 001-15577).*

(10.14)		Equity Agreement, dated August 10, 2007, by and between Edward A. Mueller and Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on August 13, 2007, File No. 001-15577).*

(10.15)		Aircraft Time Sharing Agreement, dated December 1, 2008, by and between Qwest Corporation and Edward A. Mueller (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-15577).

(10.16)		First Amendment to Aircraft Time Sharing Agreement, dated July 29, 2010, by and between Qwest Corporation and Edward A. Mueller (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 001-15577).

(10.17)		Form of Severance Agreement, effective as of December 10, 2008, by and between Qwest Communications International Inc. and each of Richard N. Baer, Teresa A. Taylor, C. Daniel Yost and Thomas E. Richards (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on December 15, 2008, File No. 001-15577).*

(10.18)		Letter, dated August 19, 2008, from Qwest to Richard N. Baer (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on August 20, 2008, File No. 001-15577).*

(10.19)		Severance Agreement, dated September 12, 2008, by and between Qwest Communications International Inc. and Joseph J. Euteneuer (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on September 12, 2008, File No. 001-15577).*

(10.20)		Letter, dated September 12, 2008, from Qwest to Joseph J. Euteneuer (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on September 12, 2008, File No. 001-15577).*

(10.21)		Letter, dated August 19, 2009, from Qwest to Joseph J. Euteneuer (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on August 21, 2009, File No. 001-15577).*

(10.22)		Letter, dated August 19, 2008, from Qwest to Teresa A. Taylor (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File No. 001-15577).*

(10.23)		Letter, dated September 4, 2009, from Qwest to Teresa A. Taylor (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on September 8, 2009, File No. 001-15577).*

167


Exhibit Number		Description

(10.24)		Letter, dated August 19, 2008, from Qwest to C. Daniel Yost (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File No. 001-15577).*

(10.25)		Severance Agreement, dated August 26, 2009, by and between Qwest Communications International Inc. and Christopher K. Ancell (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-15577).*

(10.26)		Letter, dated September 4, 2009, from Qwest to Christopher K. Ancell (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-15577).*

(10.27)		Severance Agreement, dated July 28, 2003, by and between Bill Johnston and Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 001-15577).*

(10.28)		Amendment to Severance Agreement, dated as of April 24, 2006, by and between Bill Johnston and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 001-15577).*

10.29		Form of Amendment Agreement, dated as of December 20, 2010, by and between Qwest Communications International Inc. and each of Edward A. Mueller, Richard N. Baer, Joseph J. Euteneuer, Teresa A. Taylor, C. Daniel Yost, Christopher K. Ancell and R. William Johnston.*

12		Calculation of Ratio of Earnings to Fixed Charges.

21		Subsidiaries of Qwest Communications International Inc.

23		Consent of Independent Registered Public Accounting Firm.

24		Power of Attorney

31.1		Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Quarterly Segment Income.

99.2		Quarterly Statements of Operations.

101		Financial statements from the Annual Report on Form 10-K of Qwest Communications International Inc. for the year ended December 31, 2010, formatted in XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholders’ (Deficit) Equity and Comprehensive Income (Loss) and (v) the Notes to the Consolidated Financial Statements.

( )	Previously filed.

*	Executive Compensation Plans and Arrangements.

In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.

168

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Denver, State of Colorado, on February 15, 2011.


QWEST COMMUNICATIONS INTERNATIONAL INC., A DELAWARE CORPORATION

By:		/s/ R. W ILLIAM J OHNSTON
		R. William Johnston Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer and Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 15 ^th day of February 2011.


Signature		Title

/ S / E DWARD A. M UELLER Edward A. Mueller		Director, Chairman and Chief Executive Officer (Principal Executive Officer)

/ S / J OSEPH J. E UTENEUER Joseph J. Euteneuer		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

* Charles L. Biggs		Director

* K. Dane Brooksher		Director

* Peter S. Hellman		Director

* R. David Hoover		Director

* Caroline Matthews		Director

* Patrick J. Martin		Director

* Wayne W. Murdy		Director

* Jan L. Murley		Director

* Michael J. Roberts		Director

169


Signature		Title

* James A. Unruh		Director

* Anthony Welters		Director


*By:		/s/ J OSEPH J. E UTENEUER
		Joseph J. Euteneuer

170

Exhibit 10.2

RESTRICTED STOCK AGREEMENT

(Non-Employee Directors)

This Restricted Stock Agreement (“Agreement”) is made between Qwest Communications International Inc., a Delaware corporation (the “Company”), and (the “Grantee”).

WHEREAS, pursuant to the Qwest Communications International Inc. Equity Incentive Plan (the “Plan”), the Company desires to grant shares of Common Stock, par value $0.01 per share, of the Company (“Common Stock”) to the Grantee subject to the restrictions and on the terms and conditions specified below.

NOW THEREFORE, in connection with the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows, intending to be legally bound:

1.	DEFINITIONS; CONFLICTS.

Capitalized terms used and not otherwise defined herein shall have the meanings given thereto in the Plan. The terms and provisions of the Plan are incorporated herein by reference. In the event of a conflict or inconsistency between the terms and provisions of the Plan and the terms and provisions of this Agreement, the terms and provisions of the Plan shall govern and control. In the event of a conflict or inconsistency between the terms and conditions of this Agreement and any agreement between Grantee and U S WEST, Inc. and/or its subsidiaries, the terms and conditions of this Agreement shall govern and control.

2.	GRANT OF RESTRICTED STOCK.

The Company hereby grants to the Grantee 13,000 shares (the “Shares”) of Common Stock (the “Restricted Stock”), effective as of January 3, 2011 (the “Transfer Date”). After the Grantee becomes the holder of record with respect to the Restricted Stock, the Grantee shall be treated as the beneficial owner of the Restricted Stock and shall have the right to receive all amounts, including cash and property of any kind, distributed with respect to the Restricted Stock.

3.	RESTRICTIONS.

The Grantee shall not sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any of the Shares for the period commencing on the Transfer Date and ending on the Expiration Date (as defined in Section 4 below), except as otherwise provided in Section 4 or Section 6 or as otherwise permitted by this Agreement or the terms of the Plan.

If any transfer of Shares is made or attempted to be made contrary to the terms of this Agreement, the Company shall have the right to acquire for its own account, without the payment of any consideration therefor, such Shares from the owner thereof or his or her transferee, at any time before or after such prohibited transfer. In addition to any other legal or equitable remedies it may have, the Company may enforce its rights to specific performance to the extent permitted by law and may exercise such other equitable remedies then available to it. The Company may refuse for any purpose to recognize any transferee who receives Shares contrary to the provisions of this Agreement as a stockholder of the Company and may retain and/or recover all dividends on such Shares that were paid or payable subsequent to the date on which the prohibited transfer was made or attempted.

4.	VESTING; LAPSE OF RESTRICTIONS.

Except as otherwise provided in this Agreement, the Shares of Restricted Stock shall vest one hundred percent (100%) on January 3, 2012 (the “Expiration Date”), provided that the Grantee has remained in continuous service as a member of the Board of Directors of the Company (the “Directorship”) from the Transfer Date until the Expiration Date.

The Restricted Stock shall be fully vested and this Agreement shall terminate on the Expiration Date. Shares that have become vested and as to which the restrictions have lapsed shall be referred to as Vested Shares. Shares that have not become vested and as to which the restrictions have not lapsed shall be referred to as Unvested Shares.

Notwithstanding the vesting schedule set forth above, the Unvested Shares will become Vested Shares in the event of the Grantee’s death or Disability or under the circumstances described in Section 6 below.

The Grantee may, at Grantee’s discretion and subject to the policies of the Company, sell, assign, transfer by gift or otherwise, hypothecate, or otherwise dispose of, by operation of law or otherwise, any of the Vested Shares not withheld by the Company for tax withholding purposes pursuant to Section 9.

5.	TERMINATION OF DIRECTORSHIP; FORFEITURE OF UNVESTED SHARES.

In the event the Grantee’s Directorship is terminated for any reason other than due to death or Disability or under the circumstances described in Section 6 below, all Unvested Shares shall be forfeited and the Grantee shall immediately transfer and assign to the Company, without the requirement of consideration, all Unvested Shares, which shall promptly be tendered to the Company by the delivery of certificates, if any, for such Unvested Shares, duly endorsed in blank by the Grantee or the Grantee’s representative or with stock powers attached thereto duly endorsed, at the Company’s principal offices, all in form suitable for the transfer of such Shares to the Company without the payment of any consideration therefor by the Company. After the time at which any such Shares are required to be delivered to the Company for transfer to the Company, the Company shall not pay any dividend to the Grantee on account of such Shares or permit the Grantee to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Shares.

6.	CHANGE IN CONTROL

All restrictions imposed under this Agreement shall lapse and all Unvested Shares shall become Vested Shares:

(a)

if a Change in Control occurs as a result of the completion of the Company’s pending merger with CenturyLink, Inc. and the Grantee is not appointed as a member of the Board of Directors of CenturyLink, Inc. effective as of the effective time of the merger; or

(b)

if a Change in Control occurs for any reason other than the completion of the Company’s pending merger with CenturyLink, Inc.

7.	ADJUSTMENT OF THE SHARES.

Upon the occurrence of an event described in Article IV of the Plan, the Shares shall be adjusted in accordance with Article IV.

8 .	ENFORCEMENT OF RESTRICTIONS.

If a certificate or certificates representing Shares is issued, it shall bear the following legend:

“The Shares of stock represented by this Certificate are subject to all of the terms of a Restricted Stock Agreement between Qwest Communications International Inc. and the registered owner of this Certificate (the “Agreement”) and to the terms of the Qwest Communications International Inc. Equity Incentive Plan. Copies of the Agreement and the Plan are on file at the office of the Company. The Agreement, among other things, limits the right of the Owner to transfer the Shares represented hereby and provide in certain circumstances that all or a portion of the Shares must be returned to the Company.”

The Company may, in its sole discretion, require the Grantee to keep the certificate, if any, representing the Unvested Shares, duly endorsed, in the custody of the Company while the Unvested Shares are subject to the restrictions contained in Section 3. The Company may, in its sole discretion, require that the certificate, if any, representing the Unvested Shares, duly endorsed, be held in the custody of a third party while the Unvested Shares are subject to the restrictions contained in Section 3.

The Company’s Insider Trading Policy 100.110 requires that all Insiders must pre-clear with the Law Department all proposed transactions in Qwest Securities prior to the transaction.

9.	TAX WITHHOLDING.

Notwithstanding any Plan provision to the contrary, upon the vesting of any portion of the Shares, the Company shall withhold from the Vested Shares a number of Shares having a value equal to the minimum amount that would be required to be withheld under applicable federal income tax laws (the, “Withholding Tax”) if Grantee was regarded, solely for purposes of such Withholding Tax, as an employee of the Company. In such case, the value of the Shares to be withheld shall be based on the closing price of the Company’s common stock as reported on the New York Stock Exchange on the date the amount of the Withholding Tax is determined (the “Tax Date”).

10.

BINDING EFFECT.

This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto.

11.

WAIVER OF RIGHT TO JURY TRIAL.

By signing this Agreement, Grantee voluntarily, knowingly and intelligently waives any right he or she may have to a jury trial for all claims relating to this Agreement and any other claim relating to Grantee’s Directorship. The Company also hereby voluntarily, knowingly, and intelligently waives any right it might otherwise have to a jury trial for all claims relating to this Agreement and any other claim relating to Grantee’s Directorship.

12.

GOVERNING LAW.

This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions of any state. Any action to enforce this Agreement shall be brought in Colorado state or federal district court and the parties waive any objection to the jurisdiction or venue of such courts.

13.

HEADINGS.

Headings are for the convenience of the parties and are not deemed to be part of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates set forth opposite their signatures to be effective as of the Transfer Date.


	QWEST COMMUNICATIONS INTERNATIONAL INC.

Date:	By:
		Richard N. Baer
		Executive Vice President, General Counsel and Chief Administrative Officer

	GRANTEE


Date:	[Name]

RESTRICTED STOCK AGREEMENT

This Restricted Stock Agreement (“Agreement”) is made and entered into between Qwest Communications International Inc., a Delaware corporation (the “Company”), and (the “Grantee”).

WHEREAS, pursuant to the Qwest Communications International Inc. Equity Incentive Plan (the “Plan”), the Company desires to grant shares of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”) to the Grantee subject to the restrictions and other terms and conditions herein.

1.	DEFINITIONS; CONFLICTS.

Capitalized terms used and not otherwise defined herein will have the meanings given to them in the Plan. The terms and provisions of the Plan are incorporated herein by reference. In the event of a conflict or inconsistency between the terms and provisions of the Plan and the terms and provisions of this Agreement, the terms and provisions of the Plan will govern and control. Unless the context requires otherwise, references in this Agreement to the “Company” include Qwest Communications International Inc. and its consolidated subsidiaries.

2.	GRANT OF RESTRICTED STOCK.

The Company hereby grants to the Grantee shares (the “Shares”) of Common Stock (the “Restricted Stock”), effective as of (the “Transfer Date”). Effective as of the Transfer Date, the Grantee will be the holder of record of the Restricted Stock and will have the right to receive all amounts, including cash and property of any kind, distributed with respect to the Restricted Stock.

3.	RESTRICTIONS.

The Grantee will not sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any of the Shares for the period commencing on the Transfer Date and ending on the Expiration Date (as defined in Section 4), except as otherwise provided in Section 4 or Section 5 or as otherwise permitted by this Agreement or the Plan.

If any transfer of Shares is made or attempted to be made contrary to the terms of this Agreement or the Plan, the Company will have the right to acquire for its own account, without the payment of any consideration therefor, those Shares from the owner thereof or his transferee, at any time before or after the prohibited transfer. In addition to any other legal or equitable remedies it may have, the Company may enforce its rights to

specific performance to the extent permitted by law and may exercise any other equitable remedies then available to it. The Company may refuse for any purpose to recognize any transferee who receives Shares contrary to the provisions of this Agreement or the Plan as a stockholder of the Company and may retain and/or recover all dividends on those Shares that were paid or payable subsequent to the date on which the prohibited transfer was made or attempted.

4.	VESTING; LAPSE OF RESTRICTIONS.

On the earlier of the closing date of the Company’s pending merger with CenturyLink, Inc. or July 1, 2011, the Company will determine the number of Shares that will be “Earned Shares” for purposes of this Agreement, using the guidelines described on Appendix A . Any Shares that are not determined to be Earned Shares will be immediately forfeited.

Except as otherwise provided in this Agreement, the Earned Shares will vest and become unrestricted in one-third installments upon each of March 5, 2012, March 5, 2013, and March 5, 2014; provided that, with respect to each installment, the Grantee has remained in continuous employment with the Company from the Transfer Date until the date the installment is designated to vest.

The Earned Shares will be fully vested and unrestricted and this Agreement will terminate on the last vesting installment date described in the paragraph immediately above (the “Expiration Date”). Shares that have vested and become unrestricted are referred to as “Vested Shares.” Shares that have not vested and become unrestricted, and that have not been forfeited, are referred to as “Unvested Shares.”

Notwithstanding the vesting schedule set forth above, any Unvested Shares will immediately become Vested Shares:

(a)

in the event of the Grantee’s death or Disability, or

(b)

if, within the two-year period after a Change in Control:

(i)

the Grantee’s employment with the Company is involuntarily terminated without Cause (as defined by the severance agreement between the Company and the Grantee (the “Severance Agreement”)), or

(ii)

the Grantee terminates his or her employment with the Company for Good Reason (as defined by the Severance Agreement) and the Company fails to remedy the condition triggering Good Reason during the 30-day remedy period under the Severance Agreement; provided, however, that if:

(A)

the Change in Control occurs as a result of the closing of the Company’s pending merger with CenturyLink, Inc.,

(B)

at least 60 days before the date of the Change in Control, CenturyLink requests in writing that the Grantee continue his or her employment for a transition period of not more than 12 months after the date of the Change in Control, and

(C)

during the requested transition period, there is no reduction of either the Grantee’s base salary or target annual bonus (each as in effect immediately before the Change in Control) and no requirement that the Grantee’s primary work location be moved to a location that is greater than 35 straight line miles from the Grantee’s primary work location immediately before the Change in Control,

then any vesting that would otherwise occur under this paragraph (b)(ii) will be deferred until the last day of the requested transition period and will occur only if the Grantee remains employed with the Company for the entire requested transition period.

The Grantee may, at Grantee’s discretion and subject to the policies of the Company, sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any of the Vested Shares not withheld by the Company for tax withholding purposes pursuant to Section 8.

5.	TERMINATION OF EMPLOYMENT; FORFEITURE OF UNVESTED SHARES.

In the event the Grantee’s employment with the Company terminates for any reason (other than a termination that results in Unvested Shares becoming Vested Shares under Section 4), all Unvested Shares will be forfeited and the Grantee will immediately transfer and assign to the Company, without the requirement of consideration, all Unvested Shares, which will promptly be tendered to the Company by the delivery of certificates, if any, for the Unvested Shares, duly endorsed in blank by the Grantee or the Grantee’s representative or with stock powers attached thereto duly endorsed, at the Company’s principal offices, all in form suitable for the transfer of those Shares to the Company without the payment of any consideration therefor by the Company. After the time at which those Shares are required to be delivered to the Company for transfer to the Company, the Company will not pay any dividend to the Grantee on account of those Shares or permit the Grantee to exercise any of the privileges or rights of a stockholder with respect to those Shares, but will, in so far as permitted by law, treat the Company as the owner of those Shares.

6.	ADJUSTMENT OF THE SHARES.

Upon the occurrence of an event described in Article IV of the Plan, the Shares will be adjusted in accordance with Article IV.

7.	ENFORCEMENT OF RESTRICTIONS.

If a certificate or certificates representing Unvested Shares is issued, it will bear the following legend:

The Company may, in its sole discretion, require the Grantee to keep the certificate, if any, representing the Unvested Shares, duly endorsed, in the custody of the Company or a third party while the Unvested Shares are subject to the restrictions contained in Section 3.

The Company’s Insider Trading Policy 110 requires that all Insider Employees and Section 16 Insiders (as defined in that policy) must pre-clear with the Law Department all proposed transactions in Qwest securities prior to transaction.

8.	TAX WITHHOLDING.

Notwithstanding any Plan provision to the contrary, upon the vesting of any portion of the Shares, the Company will withhold from those Shares a number of Shares having a value equal to the minimum amount required to be withheld under applicable federal, state and local income and other tax laws (collectively, the “Withholding Taxes”). In that case, the value of the Shares to be withheld will be based on the closing market price of the Common Stock as reported on the New York Stock Exchange on the date the amount of the Withholding Taxes is determined.

9.	BINDING EFFECT.

This Agreement will be binding upon the heirs, executors, administrators and successors of the parties hereto.

10.

WAIVER OF RIGHT TO JURY.

By signing this Agreement, the Grantee voluntarily, knowingly and intelligently waives any right he or she may have to a jury trial for all claims relating to this Agreement and any other claim relating to the Grantee’s employment with Company. The Company also hereby voluntarily, knowingly, and intelligently waives any right it might otherwise have to a jury trial for all claims relating to this Agreement and any other claim relating to the Grantee’s employment with the Company.

11.

GOVERNING LAW.

This Agreement will be construed and interpreted in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions of any state. Any action to enforce this Agreement will be brought in Colorado state or federal district court and the parties waive any objection to the jurisdiction or venue of those courts.

12.

HEADINGS.

Headings are for the convenience of the parties and are not a part of this Agreement.

13.

EXECUTION.

This Agreement is voidable by the Company if the Grantee does not execute this Agreement within 30 days of execution by the Company.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates set forth opposite their signatures to be effective as of the Transfer Date.


	QWEST COMMUNICATIONS INTERNATIONAL INC.

Date:	By:
		Executive Vice President,
		General Counsel and Chief Administrative Officer

	GRANTEE:

Date:

Appendix A

Guidelines for Determining Earned Shares

•

The Shares will be divided into two amounts – a 2010 Amount, and a 2011 Amount – based on the proportionate number of full months in 2010 and 2011 between September 1, 2010, and the date on which the determination occurs

•

The 2010 Amount will be multiplied by the applicable percentage noted below based on the Company’s performance as compared to pre-established revenue and EBITDA goals for 2010:

•

100% if both goals are met

•

50% if only one goal is met

•

0% if neither goal is met

•

The 2011 Amount will be adjusted similarly based on the Company’s performance as compared to certain financial goals for 2011

•

The Company will assess the Grantee’s individual performance between September 1, 2010, and the date on which the determination occurs and assign the Grantee an individual performance percentage from 0% to 100%; the Company in its sole discretion has the right to reduce this individual performance percentage (to 0%, if necessary), and has the right to reduce any other future compensation to which the Grantee does not have a contractual entitlement, to account for any difference between (1) the payout that the Grantee received in settlement of performance share awards that were subject to accelerated vesting pursuant to an Amendment Agreement, dated December 20, 2010, between the Company and the Grantee and (2) the payout that the Grantee would have received if those performance share awards had vested in accordance with their original terms (including vesting in connection with the closing of the Company’s pending merger with CenturyLink, Inc.)

•

The “Earned Shares” will equal the sum of the 2010 Amount and the 2011 Amount (each as adjusted for corporate performance as described above), multiplied by the Grantee’s individual performance percentage and rounded to the nearest 1,000 shares

Exhibit 10.29

AMENDMENT AGREEMENT ¹

This Amendment Agreement (the “ Agreement ”) is made and entered into as of December 20, 2010 (the “ Effective Date ”), by and between QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation (the “ Company ”) and (the “ Executive ”).

WHEREAS, the Company, CenturyLink, Inc., a Louisiana corporation (f/k/a CenturyTel, Inc.) (“ CenturyLink ”), and SB44 Acquisition Company, a Delaware corporation, have entered into an Agreement and Plan of Merger, dated as of April 21, 2010 (the “ Merger Agreement ”); and

WHEREAS the Company anticipates that the transactions contemplated by the Merger Agreement will be consummated in calendar year 2011 (such consummation, the “ Closing ”); and

WHEREAS, the Company and the Executive have previously entered into restricted stock agreements (the “ Restricted Stock Agreements ”) and performance share agreements (the “ Performance Share Agreements ”) with respect to the restricted stock and performance share awards referenced on Exhibit A; and

WHEREAS, the Company and the Executive have previously entered into the severance agreement listed on Exhibit B (the “ Severance Agreement ”); and

WHEREAS, the Company and the Executive wish to amend the Restricted Stock Agreements, Performance Share Agreements and Severance Agreement (collectively, the “ Prior Agreements ”) by this Agreement;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Company have agreed and do hereby agree, to amend the Prior Agreements as follows:

1. All terms used herein but not defined shall have the meanings given them in the Prior Agreements.

2. The Restricted Stock Agreements are hereby amended to provide that all shares of Restricted Stock granted under such Agreements which are unvested (the “ Accelerating Restricted Stock ”) on the Effective Date (or such other date on or before December 31, 2010, as may be set by the Company’s Board of Directors) (the “ Acceleration Date ”) shall become vested and cease to be subject to any risk of forfeiture on the Acceleration Date. The Performance Share Agreements are hereby amended to provide that each Performance Period shall end, and all Performance Shares granted under such Agreements (the “ Accelerating

¹	Template for Mueller, Baer, Euteneuer, Taylor, Yost and Ancell.

Performance Shares ”) shall vest, on the Acceleration Date, all Accelerating Performance Shares shall be paid to the Executive based on the Company’s actual performance in accordance with the performance targets and the process for the calculation of payouts set forth in the applicable Performance Share Agreements, and the Acceleration Date shall be treated as the sole date of the Ending Measurement Period. If the Executive has chosen to have the Executive’s Performance Shares settled in shares of Common Stock, such Accelerating Performance Shares shall be settled and the shares of Common Stock shall be delivered to the Executive no later than December 31, 2010. The Accelerating Restricted Stock, together with any shares of Common Stock received in settlement of the Accelerating Performance Shares, are referred to herein as the “ Accelerating Shares .”

Notwithstanding the foregoing, if the number of Accelerating Performance Shares calculated based on the Acceleration Date being treated as the sole date of the Ending Measurement Period (the “ Issued Performance Shares ”) is less than the number of Accelerating Performance Shares that would have been settled or distributed, or cashed out as the case may be, had the date of the Closing been treated as the sole date of the Ending Measurement Period (the “ Closing Performance Shares ”), then the number of additional shares of Common Stock which represents the difference between the Issued Performance Shares and the Closing Performance Shares shall be issued to the Executive as soon as reasonably practicable following the Closing. If the Issued Performance Shares exceed the Closing Performance Shares, then Executive acknowledges that the Company shall have the right to reduce compensation that might otherwise be paid to the Executive following the Closing Date and in respect of which Executive does not have a contractual entitlement to payment in an amount that is equal to or less than the value of the difference between the Issued Performance Shares and the Closing Performance Shares.

[The Restricted Stock Agreements and Performance Share Agreements are hereby amended to provide that the Executive may not sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any Accelerating Share until: (a) if the Closing occurs and the Executive has not voluntarily resigned employment with the Company, and the Company has not terminated the Executive’s employment for “Cause” (as defined in the respective Restricted Stock Agreement or Performance Share Agreement), in either case prior to the Closing, immediately following the occurrence of the Closing; (b) if the Closing occurs and the Executive has voluntarily resigned employment with the Company, or the Company has terminated the Executive’s employment for Cause, in either case prior to the Closing, December 20, 2019; or (c) if the Closing does not occur prior to the date that an Accelerating Share would have otherwise become vested pursuant to the terms of the Restricted Stock Agreement or Performance Share Agreement pursuant to which it was granted had this Agreement not been entered into (the “ Original Vesting Date ”), the Original Vesting Date. Notwithstanding the foregoing, such restrictions shall be waived: (x) between March 1, 2011 and March 15, 2011 if the Closing has not occurred as of the date of such sale or other disposition during such period and the Executive has a tax liability for 2010 with respect to such Accelerating Shares which exceeds the amount withheld by the Company, but only to the extent required for the Executive to satisfy such incremental tax liability and only to the extent permissible under applicable law and any applicable insider trading policy (after consultation with counsel to the Executive); and (y) in any other circumstance in which such restrictions are waived in writing by (i) prior to the Closing, with respect to any individual who has a title of

Executive Vice President of the Company or higher, and/or who is an officer of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, the Compensation and Human Resources Committee of the Company’s Board of Directors, with the prior written consent of CenturyLink; (ii) prior to the Closing, with respect to any other individual, the General Counsel of the Company, with the prior written consent of CenturyLink; or (iii) on or subsequent to the Closing, with the prior written consent of the General Counsel of CenturyLink.] ²

[The Restricted Stock Agreements and Performance Share Agreements are hereby amended to provide that the Executive may not sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any Accelerating Share until: (a) if the Closing occurs and the Executive has not voluntarily resigned employment with the Company, and the Company has not terminated the Executive’s employment for “Cause” (as defined in the respective Restricted Stock Agreement or Performance Share Agreement), in either case prior to the date that the Accelerating Share would have otherwise become vested pursuant to the terms of the Restricted Stock Agreement or Performance Share Agreement pursuant to which it was granted had this Agreement not been entered into (the “ Original Vesting Date ”), the Original Vesting Date; (b) if the Closing occurs and the Executive has voluntarily resigned employment with the Company, or the Company has terminated the Executive’s employment for Cause, in either case prior to such Accelerating Share’s Original Vesting Date, December 20, 2019; or (c) if the Closing does not occur prior to such Accelerating Share’s Original Vesting Date, the Original Vesting Date. Notwithstanding the foregoing, such restrictions shall be waived: (x) between March 1, 2011 and March 15, 2011 if the Closing has not occurred as of the date of such sale or other disposition during such period and the Executive has a tax liability for 2010 with respect to such Accelerating Shares which exceeds the amount withheld by the Company, but only to the extent required for the Executive to satisfy such incremental tax liability and only to the extent permissible under applicable law and any applicable insider trading policy (after consultation with counsel to the Executive); and (y) in any other circumstance in which such restrictions are waived in writing by (i) prior to the Closing, with respect to any individual who has a title of Executive Vice President of the Company or higher, and/or who is an officer of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, the Compensation and Human Resources Committee of the Company’s Board of Directors, with the prior written consent of CenturyLink; (ii) prior to the Closing, with respect to any other individual, the General Counsel of the Company, with the prior written consent of CenturyLink; or (iii) on or subsequent to the Closing, with the prior written consent of the General Counsel of CenturyLink.] ³

[If the Executive has chosen to have the Executive’s Performance Shares settled in cash, then such cash, less any taxes required to be withheld therefrom, shall be paid to the Executive within five business days after the Acceleration Date. The Executive agrees to contribute such after-tax amount into escrow immediately upon receipt by the Executive, to be released to the Executive only on the date(s) that the Executive would have been able to sell or otherwise

²	Delete for Ancell.

³	For Ancell only.

transfer such Accelerating Share pursuant to the foregoing paragraph, had the Executive elected to receive Common Stock instead of cash in settlement of the Executive’s Performance Share award, except where such delay is waived, in whole or in part, in accordance with the provisions of the foregoing paragraph.] ⁴

[3. Within five business days after the Acceleration Date, Executive shall be paid $ , less any taxes required to be withheld from such amount (such after-tax amount, the “ Severance Amount ”). Executive agrees to contribute the Severance Amount into escrow immediately upon receipt by the Executive, to be released to Executive on the earliest to occur of (a) the date on which occurs the Closing, provided that the Executive has not terminated employment without “Good Reason” or been fired for “Cause” (each as defined in the Severance Agreement) prior to the Closing; (b) the date on which Executive has a termination of employment which gives rise to the right to receive severance payments under the Severance Agreement; or (c) December 20, 2014. In connection with the foregoing, the Severance Agreement is hereby amended effective as of the Acceleration Date to reduce the amount of cash severance benefits payable thereunder by $ . Within five business days after the Acceleration Date, as a separate payment, the Company will pay the Executive an additional amount in connection with the payment pursuant to this paragraph of the Severance Amount sufficient to cover any additional taxes and costs incurred by the Executive due to Section 409A of the Internal Revenue Code of 1986, as amended, and income taxes on such amount, such that Executive is left in the same after-tax position as if such Section 409A had not applied. ] ⁵

[4. It is the Company’s intention that this Agreement not cause the Executive to incur additional federal and state tax liability in excess of the liability recognized with respect to the acceleration of the Restricted Stock and Performance Shares [and Severance Amount] ⁶ described above (any such excess, the “ Excess Tax ”). Consistent with that intent, the Company shall indemnify the Executive for any Excess Tax imposed on the Executive due to Section 409A of the Internal Revenue Code of 1986, as amended, and for any tax advisor and legal fees incurred by the Executive in connection with the imposition of the Excess Tax and the calculation of the indemnification payment in a manner such that the Executive is left in the same after-tax position as if that section had not applied. Any such amounts shall be paid to the Executive no later than the final day of the Executive’s taxable year in which such Excess Tax or fees are paid. For the avoidance of doubt, this Agreement shall not affect the Executive’s rights under Section 4 of the Severance Agreement.

5. Notwithstanding anything in this Agreement or the Severance Agreement to the contrary, the Company shall remain obligated to make all such payments as set forth in Section 4 of the Severance Agreement. For the avoidance of doubt, however, if, in accordance with the

⁴	Delete for Ancell.

⁵	For Taylor only.

⁶	For Taylor only.

terms of the Severance Agreement as amended by this Agreement, no “Tax Reimbursement Payment” (as defined in the Severance Agreement) is to be made in connection with the Closing or the transactions contemplated in the Merger Agreement, and the applicable taxing authority later determines that an Excise Tax (as defined in the Severance Agreement) is due, then once the amount of such Excise Tax is determined the Company or its successor shall make a Tax Reimbursement Payment (as defined in Section 4(a) of the Severance Agreement) to put the Executive in the same after tax position as if Sections 280G and 4999 of the Code had not applied (plus any interest or penalties payable with respect to the amounts to which such Tax Reimbursement Payment relate) within thirty (30) days following such determination (subject to the provisions of Sections 4(d)(3) and 4(d)(4) of the Severance Agreement).

6. The Company agrees to cause to be maintained in effect for the benefit of the Executive, until the later of (a) the date that all amounts are paid or provided to the Executive pursuant to this Agreement and, to the extent applicable, Section 4 of the Severance Agreement and (b) the date on which expires the longest of any statutes of limitations applying to claims with respect to this Agreement and, to the extent applicable, Section 4 of the Severance Agreement, a letter of credit (the “ Letter of Credit ”) having a face value of not less than $1,000,000. The Executive shall be entitled to draw upon the Letter of Credit solely to pay for accounting or legal fees to enforce the terms of this Agreement and Section 4 of the Severance Agreement or to provide legal or accounting advice in connection with any Excess Tax or Tax Reimbursement Payment. The Company shall undertake all necessary steps to ensure that neither the providing of a Letter of Credit nor the maintenance of the Letter of Credit shall result in any income taxes to be imposed on the Executive by reason of providing or maintenance of such Letter of Credit. Upon the Executive’s request, the Company shall provide evidence reasonably satisfactory to the Executive that the Letter of Credit has been established and is maintained in accordance with this Agreement and Section 4 of the Severance Agreement and shall provide terms, including terms with respect to distribution of funds, reasonably satisfactory to counsel to Executive and the Company. After the amount of the Letter of Credit has been exhausted, all liability to pay all amounts, including legal fees, in accordance with the terms of this Agreement and Section 4 of the Severance Agreement shall remain in existence in accordance with their terms. ] ⁷

[7. The Severance Agreement is hereby amended to add the following Section at the end thereof:

⁷	For Baer, Taylor and Yost.

hereinafter referred to as the “ Total Payments ”) would be subject (in whole or part), to any excise tax imposed under Section 4999 of the Code (the “ Excise Tax ”), then, after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement, any cash Severance Payments that do not constitute deferred compensation within the meaning of Section 409A shall first be reduced, all other Severance Payments that do not constitute deferred compensation within the meaning of Section 409A shall be next reduced, and all other Severance Payments that do constitute deferred compensation within the meaning of Section 409A shall thereafter be reduced (beginning with those payments last to be paid), to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which Executive would be subject in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such unreduced Total Payments); provided , however , that, to the extent permitted by Section 409A, Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.

b. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which Executive shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel or other advisor (the “ 280G Advisor ”) reasonably acceptable to Executive and selected by the Company, does not constitute a “parachute payment” within the meaning of Section 280G(b)(2) of the Code (including by reason of Section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the opinion of the 280G Advisor, constitutes reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the 280G Advisor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of this calculation, (1) Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the applicable Total Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence in the calendar year in which the

applicable Total Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (2) except to the extent that Executive otherwise notifies the Company, Executive shall be deemed to be subject to the loss of itemized deductions and personal exemptions to the maximum extent provided by the Code for each dollar of incremental income.

8. [As of the Effective Date, he Executive hereby waives any right to receive the $10,764,000 severance payment to which he might otherwise be due under the Employment Agreement in connection with his termination of employment on or after the Closing.] ⁸

9. This Agreement shall be governed by the laws of the State of Delaware without regard to its conflict of law provisions.

10. This Agreement and the Severance Agreement shall be binding on the Company and any successor in interest or assign of the Company, and in the event of any corporate transaction (including the transaction contemplated by the Merger Agreement) pursuant to which any entity becomes the successor in interest or assign of the Company, such entity shall be required to specifically assume this Agreement.

11. Except as otherwise provided herein, the remaining terms of the Prior Agreements shall remain in full force and effect.

⁸	For Mueller only.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment or caused it to be executed on their behalf as of the date first above written.


QWEST COMMUNICATIONS INTERNATIONAL INC.

By:
		Name: Edward A. Mueller
		Title: Chairman and Chief Executive Officer

EXECUTIVE

By:
		Name:

EXHIBIT A

[ list awards relating to Restricted Stock Agreement and Performance Share Agreements ]

EXHIBIT B

[ list Severance Agreement and any amendments thereto ]

AMENDMENT AGREEMENT ¹

WHEREAS, the Company, CenturyLink, Inc., a Louisiana corporation (f/k/a CenturyTel, Inc.), and SB44 Acquisition Company, a Delaware corporation, have entered into an Agreement and Plan of Merger, dated as of April 21, 2010 (the “ Merger Agreement ”); and

WHEREAS the Company anticipates that the transactions contemplated by the Merger Agreement will be consummated in calendar year 2011 (such consummation, the “ Closing ”); and

WHEREAS, the Company and the Executive have previously entered into the severance agreement listed on Exhibit B (the “ Severance Agreement ”); and

1. All terms used herein but not defined shall have the meanings given them in the Prior Agreements.

¹	Template for Johnston.

treated as the sole date of the Ending Measurement Period. The Accelerating Restricted Stock, together with any shares of Common Stock received in settlement of the Accelerating Performance Shares, are referred to herein as the “ Accelerating Shares .”

The Restricted Stock Agreements and Performance Share Agreements are hereby amended to provide that the Executive may not sell, assign, transfer by gift or otherwise, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise, any Accelerating Share until: (a) if the Closing occurs and the Executive has not voluntarily resigned employment with the Company, and the Company has not terminated the Executive’s employment for “Cause” (as defined in the respective Restricted Stock Agreement or Performance Share Agreement), in either case as of the Closing, immediately following the occurrence of the Closing; (b) if the Closing occurs and the Executive has voluntarily resigned employment with the Company, or the Company has terminated the Executive’s employment for Cause, in either case as of the Closing, December 20, 2019; (c) if the Closing does not occur prior to the date that an Accelerating Share would have otherwise become vested pursuant to the terms of the Restricted Stock Agreement or Performance Share Agreement pursuant to which it was granted had this Agreement not been entered into (the “ Original Vesting Date ”), the Original Vesting Date. Notwithstanding the foregoing, such restrictions shall be waived: (x) between March 1, 2011 and March 15, 2011 if the Closing has not occurred as of the date of such sale or other disposition during such period and the Executive has a tax liability for 2010 with respect to such Accelerating Shares which exceeds the amount withheld by the Company, but only to the extent required for the Executive to satisfy such incremental tax liability; and (y) in any other circumstance in which such restrictions are waived in writing by (i) with respect to any individual who has a title of Executive Vice President of the Company or higher, and/or who is an officer of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, the Compensation and Human Resources Committee of the Company’s Board of Directors; or (ii) with respect to any other individual, the General Counsel of the Company.

3. The Severance Agreement is hereby amended to delete Section 2.b. in its entirety and restate it as follows:

b. EQUITY AWARDS. The Board of Directors may, in its discretion, periodically grant Executive additional equity awards under the Stock Plan. Notwithstanding the terms of any stock option or other equity award agreement to the contrary, upon a Change in Control, all equity awards granted to Executive after September 19, 2002 under the Stock Plan will immediately vest and all stock options will remain exercisable for the full term of the option, except that all equity awards granted to Executive between December 20, 2010 and the date on which occurs the closing of the transactions contemplated by Agreement and Plan of Merger entered into between the Company, CenturyLink, Inc., a Louisiana corporation (f/k/a CenturyTel, Inc.), and SB44 Acquisition Company, a Delaware corporation, dated as of April 21, 2010, will vest according to the terms of the applicable equity award agreement.

4. The Severance Agreement is hereby amended to add the following Section at the end thereof:

[ ]. a. Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by Executive (including any payment or benefit received or to be received in connection with a Change in Control or the termination of Executive’s employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (all such payments and benefits, including any severance payments or benefits due under this Agreement (the “ Severance Payments ”), being hereinafter referred to as the “ Total Payments ”) would be subject (in whole or part), to any excise tax imposed under Section 4999 of the Code (the “ Excise Tax ”), then, after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement, any cash Severance Payments that do not constitute deferred compensation within the meaning of Section 409A shall first be reduced, all other Severance Payments that do not constitute deferred compensation within the meaning of Section 409A shall be next reduced, and all other Severance Payments that do constitute deferred compensation within the meaning of Section 409A shall thereafter be reduced (beginning with those payments last to be paid), to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which Executive would be subject in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such unreduced Total Payments); provided , however , that, to the extent permitted by Section 409A, Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.

compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the 280G Advisor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of this calculation, (1) Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the applicable Total Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence in the calendar year in which the applicable Total Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (2) except to the extent that Executive otherwise notifies the Company, Executive shall be deemed to be subject to the loss of itemized deductions and personal exemptions to the maximum extent provided by the Code for each dollar of incremental income.

5. This Agreement shall be governed by the laws of the State of Delaware without regard to its conflict of law provisions.

6. Except as otherwise provided herein, the remaining terms of the Prior Agreements shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment or caused it to be executed on their behalf as of the date first above written.


QWEST COMMUNICATIONS INTERNATIONAL INC.

By:
	Name:	Richard N. Baer
	Title:	Executive Vice President, General Counsel and Chief Administrative Officer

EXECUTIVE

By:
	Name:

EXHIBIT A

[ list awards relating to Restricted Stock Agreement and Performance Share Agreements ]

EXHIBIT B

[ list Severance Agreement and any amendments thereto ]

Exhibit 12

QWEST COMMUNICATIONS INTERNATIONAL INC.

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES

(UNAUDITED)


	Years Ended December 31,
	2010			2009			2008			2007			2006
Income before income taxes	$	450		$	903		$	1,051		$	620		$	517
Add: estimated fixed charges		1,156			1,204			1,180			1,253			1,327
Add: estimated amortization of capitalized interest		13			14			15			12			12
Less: interest capitalized		(18	)		(14	)		(21	)		(16	)		(14	)

Total earnings available for fixed charges	$	1,601		$	2,107		$	2,225		$	1,869		$	1,842

Estimate of interest factor on rentals	$	99		$	101		$	90		$	98		$	104
Interest expense, including amortization of premiums, discounts and debt issuance costs ⁽¹⁾		1,039			1,089			1,069			1,139			1,209
Interest capitalized		18			14			21			16			14

Total fixed charges	$	1,156		$	1,204		$	1,180		$	1,253		$	1,327

Ratio of earnings to fixed charges		1.4			1.8			1.9			1.5			1.4

(1)	Interest expense includes only interest related to long-term borrowings and capital lease obligations.

Exhibit 21


Subsidiary of Qwest Communications International Inc. ⁽¹⁾		Jurisdiction of Incorporation/Formation
Qwest Communications Company, LLC		Delaware

Qwest Corporation		Colorado

Qwest Services Corporation		Colorado

(1)	The names of certain subsidiaries have been omitted in accordance with Item 601(b)(21) of Regulation S-K.

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Qwest Communications International Inc.:

We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-30123, 333-40050, 333-50061, 333-56323, 333-61725, 333-65345, 333-74622, 333-84877, 333-87246, 333-91424, 333-111923, 333-111924, 333-138364 and 333-153438) and the registration statement on Form S-3 (No. 333-156101) of Qwest Communications International Inc. (the Company) of our reports dated February 15, 2011, with respect to the consolidated balance sheets of Qwest Communications International Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ (deficit) equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010, which reports appear in the December 31, 2010 Annual Report on Form 10-K of Qwest Communications International Inc.

KPMG LLP

Denver, Colorado

February 15, 2011

Exhibit 24

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Edward A. Mueller, Joseph J. Euteneuer and Stephen E. Brilz, or any one of them, as his or her attorney-in-fact and agent, with full power of substitution, for him or her in any and all capacities, hereby giving and granting to said attorney-in-fact and agent full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by Qwest Communications International Inc., a Delaware corporation, with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an annual report on Form 10-K for the fiscal year ended December 31, 2010, including but not limited to, such full power and authority to do the following: (i) execute and file such annual report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such annual report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in his sole discretion deems appropriate.

This power of attorney has been duly executed below by the following persons as of the 15 ^th day of February, 2011.



/s/ C HARLES L. B IGGS Charles L. Biggs		/s/ K. D ANE B ROOKSHER K. Dane Brooksher

/ S / P ETER S. H ELLMAN Peter S. Hellman		/s/ R. D AVID H OOVER R. David Hoover

/s/ P ATRICK J. M ARTIN Patrick J. Martin		/s/ C AROLINE M ATTHEWS Caroline Matthews

/s/ E DWARD A. M UELLER Edward A. Mueller		/s/ W AYNE W. M URDY Wayne W. Murdy

/s/ J AN L. M URLEY Jan L. Murley		/s/ M ICHAEL J. R OBERTS Michael J. Roberts

/s/ J AMES A. U NRUH James A. Unruh		/s/ A NTHONY W ELTERS Anthony Welters

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Edward A. Mueller, certify that:

1.	I have reviewed this annual report on Form 10-K of Qwest Communications International 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;

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:

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;

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;

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

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):

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

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: February 15, 2011

/s/ E DWARD A. M UELLER

Edward A. Mueller

Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Joseph J. Euteneuer, certify that:

1.	I have reviewed this annual report on Form 10-K of Qwest Communications International 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;

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):

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: February 15, 2011

/s/ J OSEPH J. E UTENEUER

Joseph J. Euteneuer

Executive Vice President and Chief Financial Officer

Exhibit 32

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION

Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Qwest Communications International Inc. (“Qwest”), that, to his knowledge, the Annual Report of Qwest on Form 10-K for the year ended December 31, 2010, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Qwest. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-K. A signed original of this statement has been provided to Qwest and will be retained by Qwest and furnished to the Securities and Exchange Commission or its staff upon request.


Dated: February 15, 2011	By:	/s/ E DWARD A. M UELLER
		Edward A. Mueller Chairman and Chief Executive Officer

Dated: February 15, 2011	By:	/s/ J OSEPH J. E UTENEUER
		Joseph J. Euteneuer Executive Vice President and Chief Financial Officer

Exhibit 99.1

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY SEGMENT INCOME

(UNAUDITED)


	2010												2009												2008
	Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
	(Dollars in millions
Total segment revenue	$	2,814		$	2,845		$	2,824		$	2,867		$	2,905		$	2,960		$	3,001		$	3,095		$	3,218		$	3,288		$	3,292		$	3,320
Total segment expenses		1,349			1,365			1,368			1,381			1,428			1,482			1,509			1,555			1,655			1,851			1,774			1,798

Total segment income		1,465		$	1,480		$	1,456		$	1,486		$	1,477		$	1,478		$	1,492		$	1,540		$	1,563		$	1,437		$	1,518		$	1,522

Total segment margin percentage		52	%		52	%		52	%		52	%		51	%		50	%		50	%		50	%		49	%		44	%		46	%		46	%
Total access lines ⁽¹⁾		8,855			9,114			9,387			9,663			9,925			10,170			10,484			10,800			11,127			11,438			11,750			12,058
Business markets:
Revenue:
Strategic services	$	434		$	432		$	426		$	417		$	409		$	398		$	392		$	385		$	378		$	357		$	340		$	326
Legacy services		413			430			434			447			453			464			478			492			494			510			521			533

Total strategic and legacy services		847			862			860			864			862			862			870			877			872			867			861			859
Data integration		170			157			142			135			148			153			132			124			163			158			133			116

Total revenue		1,017			1,019			1,002			999			1,010			1,015			1,002			1,001			1,035			1,025			994			975

Expenses:
Data integration		112			116			101			97			99			113			95			83			105			118			89			80
Customer service		26			25			23			28			29			28			28			28			34			38			18			31
Facilities		195			190			197			190			201			193			198			201			201			199			200			198
Segment overhead		28			28			38			31			31			30			30			33			25			35			33			30
Network, engineering and other operating		98			96			95			94			97			98			97			101			101			108			104			102
Customer acquisition and provisioning		141			149			159			159			160			154			159			173			183			175			180			169

Total expenses		600			604			613			599			617			616			607			619			649			673			624			610

Income	$	417		$	415		$	389		$	400		$	393		$	399		$	395		$	382		$	386		$	352		$	370		$	365

Margin percentage		41	%		41	%		39	%		40	%		39	%		39	%		39	%		38	%		37	%		34	%		37	%		37	%
Access lines ⁽¹⁾		1,872			1,913			1,942			1,969			2,003			2,036			2,067			2,102			2,146			2,190			2,205			2,225
Mass markets:
Revenue:
Strategic services	$	382		$	380		$	368		$	365		$	355		$	347		$	347		$	349		$	340		$	334		$	333		$	326
Legacy services		766			785			795			818			841			859			889			921			948			978			996			1,031

Total strategic and legacy services		1,148			1,165			1,163			1,183			1,196			1,206			1,236			1,270			1,288			1,312			1,329			1,357
Qwest- branded wireless services ⁽²⁾		—			—			—			—			4			20			33			55			89			116			126			129

Total revenue		1,148			1,165			1,163			1,183			1,200			1,226			1,269			1,325			1,377			1,428			1,455			1,486

Expenses:
Customer service		75			72			73			82			77			85			98			112			106			117			110			128
Facilities		29			31			31			42			36			41			47			57			76			114			122			122
Segment overhead		16			14			16			16			17			16			19			17			20			22			19			18
Network, engineering and other operating		253			264			250			245			261			272			265			252			269			304			276			283
Customer acquisition and provisioning		168			167			171			171			165			186			193			199			209			232			238			250

Total expenses		541			548			541			556			556			600			622			637			680			789			765			801

Income	$	607		$	617		$	622		$	627		$	644		$	626		$	647		$	688		$	697		$	639		$	690		$	685

Margin percentage		53	%		53	%		53	%		53	%		54	%		51	%		51	%		52	%		51	%		45	%		47	%		46	%
Broadband subscribers ⁽¹⁾		2,914			2,899			2,859			2,852			2,812			2,770			2,741			2,708			2,652			2,599			2,554			2,515
Video subscribers ⁽¹⁾		1,003			963			951			951			940			900			857			839			814			756			716			697
Wireless subscribers ⁽¹⁾		1,086			1,044			982			922			838			760			738			718			658			708			811			816
Access lines ⁽¹⁾		6,038			6,238			6,457			6,673			6,865			7,058			7,310			7,558			7,807			8,039			8,286			8,519
Wholesale markets:
Revenue:
Strategic services	$	328		$	323		$	318		$	316		$	309		$	306		$	307		$	313		$	316		$	315		$	312		$	308
Legacy services		321			338			341			369			386			413			423			456			490			520			531			551

Total revenue		649			661			659			685			695			719			730			769			806			835			843			859

Expenses:
Customer service		14			13			11			15			14			19			24			31			26			28			30			29
Facilities		115			119			123			127			151			155			164			173			198			249			248			252
Segment overhead		12			11			9			11			11			13			12			12			14			11			12			12
Network, engineering and other operating		49			51			50			53			56			57			56			58			63			75			68			68
Customer acquisition and provisioning		18			19			21			20			23			22			24			25			25			26			27			26

Total expenses		208			213			214			226			255			266			280			299			326			389			385			387

Income	$	441		$	448		$	445		$	459		$	440		$	453		$	450		$	470		$	480		$	446		$	458		$	472

Margin percentage		68	%		68	%		68	%		67	%		63	%		63	%		62	%		61	%		60	%		53	%		54	%		55	%
Access lines ⁽¹⁾		945			963			988			1,021			1,057			1,076			1,107			1,140			1,174			1,209			1,259			1,314

(1)

We have updated our methodology for counting our subscribers and access lines where we provide the services. We now count broadband subscribers and access lines when we earn revenue associated with them. Our access line methodology includes only those access lines that provide services to external customers and excludes lines used solely by us and our affiliates and residential lines that we solely use to provide broadband services. Our new broadband methodology excludes business and wholesale markets customers from our broadband subscribers.

We now count these subscribers when we earn revenue associated with them, regardless of whether we actually bill the subscribers for the services. Our new methodology also excludes business and wholesale markets customers from our wireless subscribers. Beginning in mid-2009 we began to earn an ongoing commission associated with video customers that we no longer bill so long as they remain active customers of DIRECTV. Because of the change in this commission we have begun to include them in our subscriber counts. We use this same methodology for our wireless subscribers. This methodology change has increased our video subscribers by approximately 68,000 for the year ended December 31, 2010. We believe the methodology updates described above align our subscribers and access lines with our revenue and better reflect our ongoing operations.

We have restated our subscribers and access lines reported as of December 31, 2009 to conform to the current year presentation. The table below quantifies these changes by segment:


	December 31, 2009
	Business Markets			Mass Markets			Wholesale Markets		Total
	(in thousands)
Previously reported access lines		2,396			6,840			1,030		10,266
Affiliates and us		(403	)		—			—		(403	)
Alignment to billed units		10			25			27		62

Currently reported access lines		2,003			6,865			1,057		9,925

Previously reported broadband subscribers		—			2,974			—		2,974
Excluding business and wholesale customers		—			(143	)		—		(143	)
Alignment to billed units		—			(19	)		—		(19	)

Currently reported broadband subscribers		—			2,812			—		2,812

Previously reported video subscribers		—			880			—		880
Alignment to billed units		—			60			—		60

Currently reported video subscribers		—			940			—		940

Previously reported wireless subscribers		—			850			—		850
Excluding business and wholesale customers		—			(1	)		—		(1	)
Alignment to billed units		—			(11	)		—		(11	)

Currently reported wireless subscribers		—			838			—		838

We have restated our subscribers and access lines reported as of December 31, 2008 to conform to the current year presentation. The table below quantifies these changes by segment:


	December 31, 2008
	Business Markets			Mass Markets			Wholesale Markets		Total
	(in thousands)
Previously reported access lines		2,636			7,796			1,133		11,565
Affiliates and us		(484	)		—			—		(484	)
Alignment to billed units		(6	)		11			41		46

Currently reported access lines		2,146			7,807			1,174		11,127

Previously reported broadband subscribers		—			2,847			—		2,847
Excluding business and wholesale customers		—			(151	)		—		(151	)
Alignment to billed units		—			(44	)		—		(44	)

Currently reported broadband subscribers		—			2,652			—		2,652

Previously reported video subscribers		—			798			—		798
Alignment to billed units		—			16			—		16

Currently reported video subscribers		—			814			—		814

Previously reported wireless subscribers		—			717			—		717
Excluding business and wholesale customers		—			(1	)		—		(1	)
Alignment to billed units		—			(58	)		—		(58	)

Currently reported wireless subscribers		—			658			—		658

(2)

The decrease in Qwest-branded wireless services revenue in 2010 compared to 2009 is primarily due to fewer wireless subscribers as we transitioned to selling Verizon Wireless services. We recognize revenue from Verizon Wireless services on a net basis, whereas we recognized revenue from Qwest-branded wireless services on a gross basis. We categorize the revenue that we earn from our Verizon Wireless arrangement in strategic services revenue.

Exhibit 99.2

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY STATEMENTS OF OPERATIONS ⁽¹⁾

(UNAUDITED)


	2010											2009											2008
	Q4			Q3			Q2			Q1		Q4			Q3		Q2			Q1			Q4		Q3			Q2			Q1
	(Dollars in millions)
Operating revenue	$	2,899		$	2,935		$	2,930		$	2,966	$	2,994		$	3,054	$	3,090		$	3,173		$	3,315	$	3,379		$	3,382		$	3,399
Operating expenses:
Cost of sales (exclusive of depreciation and amortization) :		943			980			940			941		1,017			1,029		1,028			1,014			1,106		1,330			1,246			1,274
Selling		414			420			428			440		453			455		493			543			545		572			526			545
General, administrative and other operating		560			486			505			472		495			504		500			494			504		424			468			484
Depreciation and amortization		555			552			548			545		579			581		578			573			601		599			578			576

Total operating expenses		2,472			2,438			2,421			2,398		2,544			2,569		2,599			2,624			2,756		2,925			2,818			2,879

Operating income		427			497			509			568		450			485		491			549			559		454			564			520

Other expense (income)—net:
Interest expense on long-term borrowings and capital leases—net		240			255			265			279		279			274		276			260			264		263			270			272
Loss (gain) on embedded option in convertible debt		267			229			(21	)		—		—			—		—			—			—		—			—			—
Loss on early retirement of debt		—			3			—			42		—			—		—			—			—		—			—			—
Other—net		1			(8	)		(1	)		—		(6	)		—		(2	)		(9	)		5		(27	)		(4	)		3

Total other expense (income)—net		508			479			243			321		273			274		274			251			269		236			266			275

(Loss) income before income taxes		(81	)		18			266			247		177			211		217			298			290		218			298			245
Income tax expense		80			108			108			209		69			75		5			92			113		73			118			95

Net (loss) income	$	(161	)	$	(90	)	$	158		$	38	$	108		$	136	$	212		$	206		$	177	$	145		$	180		$	150

(1)	We have reclassified certain prior year amounts to conform to the current quarter presentation.