LEVEL 3 COMMUNICATIONS INC - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the fiscal year ended December 31, 2001

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

For the transition period from ________ to ___________

Commission file number: 0-15658

Level 3 Communications, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 47-0210602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1025 Eldorado Boulevard, Broomfield, Colorado 80021
(Address of principal executive offices) (Zip code)

(720) 888-1000
(Registrant's telephone number including area code)

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

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $.01 per share
Rights to Purchase Series A Junior Participating Preferred Stock, par value
$.01 per share

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 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.

(Cover continued on next page)

(Cover continued from prior page)

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

Title Outstanding
Common Stock, par value $.01 per share 392,676,814 as of March 8, 2002

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

Portions of the Company's Definitive Proxy Statement for the 2002
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K

(End of cover)

Cautionary Factors That May Affect Future Results (Cautionary
Statements Under the Private Securities Litigation Reform Act of 1995)

This report contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to Level 3 Communications, Inc. and its
subsidiaries ("Level 3" or the "Company"). When used in this report, the words
"anticipate", "believe", "plans", "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions.

Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this document. These forward-looking statements include,
among others, statements concerning:

o the Company's communications and information services business, its
advantages and the Company's strategy for implementing the business
plan;

o anticipated growth and recovery of the communications and information
services industry;

o plans to devote significant management time and capital resources to
the Company's business;

o expectations as to the Company's future revenues, margins, expenses
and capital requirements;

o anticipated dates on which the Company will begin providing certain
services or reach specific milestones in the development and
implementation of its business; and

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

These forward-looking statements are subject to risks and uncertainties,
including financial, regulatory, environmental, industry growth and trend
projections, that could cause actual events or results to differ materially from
those expressed or implied by the statements. The most important factors that
could prevent Level 3 from achieving its stated goals include, but are not
limited to, the Company's failure to:

o achieve and sustain profitability based on the implementation of its
advanced, international, facilities based communications network based
on optical and Internet Protocol technologies;

o overcome significant early operating losses;

o produce sufficient capital to fund its business;

o develop financial and management controls, as well as additional
controls of operating expenses as well as other costs;

o attract and retain qualified management and other personnel;

o successfully complete commercial testing of new technology and Company
information systems to support new products and services, including
voice transmission services;

o ability to meet all of the terms and conditions of the Company's debt
obligations;

o negotiate new and maintain existing peering agreements; and

o develop and implement effective business support systems for
processing customer orders and provisioning.

The Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Further disclosures that the Company makes on related subjects in its additional
filings with the Securities and Exchange Commission should be consulted. For
further information regarding the risks and uncertainties that may affect the
Company's future results, please review our Current Report on Form 8-K/A filed
with the Securities and Exchange Commission on November 9, 1999.

ITEM 1. BUSINESS

Level 3 Communications, Inc. and its subsidiaries ("Level 3" or the
"Company") engage in the communications, information services and coal mining
businesses through ownership of operating subsidiaries and substantial equity
positions in public companies. In late 1997, the Company announced the business
plan to increase substantially its information services business and to expand
the range of services it offers by building an advanced, international,
facilities based communications network based on Internet Protocol technology
(the 'Business Plan").

The Company is a facilities based provider (that is, a provider that owns
or leases a substantial portion of the plant, property and equipment necessary
to provide its services) of a broad range of integrated communications services.
The Company has created, generally by constructing its own assets, but also
through a combination of purchasing and leasing of facilities, the Level 3
Network - an advanced, international, facilities based communications network.
The Company has designed the Level 3 Network to provide communications services,
which employ and leverage rapidly improving underlying optical and Internet
Protocol technologies.

Market and Technology Opportunity. The Company believes that ongoing
technology advances in both optical and Internet Protocol technologies are
revolutionizing the communications industry and will facilitate rapid decreases
in unit costs for communications service providers that are able to most
effectively leverage these technology advances. Service providers that can
effectively leverage technology advances and rapidly reduce unit costs will be
able to offer significantly lower prices, which, the Company believes, will
drive substantial increases in the demand for communications services. The
Company believes that there are two primary factors driving this market dynamic,
which it refers to as "Silicon Economics":

o Rapidly Improving Technologies. Over the past few years, both optical
and Internet Protocol based networking technologies have undergone
extremely rapid innovation, due, in large part, to market based
development of underlying technologies. This rapid technology
innovation has resulted in both a rapid improvement in
price-performance for optical and Internet Protocol systems, as well
as rapid improvement in the functionality and applications supported
by these technologies. The Company believes that this rapid innovation
will continue well into the future.

o High Demand Elasticity. The Company believes rapid decreases in
communication services costs and prices causes the development of new
bandwidth-intensive applications, which drive even more significant
increases in bandwidth demand. In addition, communications services
are direct substitutes for other, existing modes of information
distribution such as traditional broadcast entertainment and
distribution of software, audio and video content using physical media
delivered over motor transportation systems. The Company believes that
as communications services improve more rapidly than these alternative
content distribution systems, significant demand will be generated
from these sources. The Company believes that high elasticity of
demand from both these new applications and substitution for existing
distribution systems will continue for the foreseeable future.

In connection with the Company's belief that communications services
are direct substitutes for other, existing modes of information
distribution, on March 13, 2002, the Company completed the acquisition
of CorpSoft, Inc., which conducts its business under the name
Corporate SoftwareSM. Corporate Software is a major distributor,
marketer and reseller of business software. Based in Norwood,
Massachusetts, Corporate Software is an industry leader in the field
of software marketing, procurement and license management. It is a
leading distributor of software products from Microsoft(R), IBM/Lotus
(R), Novell(R), Sun Microsystems (R), Computer Associates (R),
Symantec (R) and 200 other software publishers, and serves more than
5,000 business customers in 128 countries.

The Company believes that communications price performance will
improve more rapidly than computing and data storage price performance
and, as a result, companies will, over time, seek information
technology operating efficiency by purchasing software functionality
and data storage as commercial services procured over a broadband
networks such as the Level 3 Network.

Level 3 believes that the combination of Level 3's network
infrastructure, and Corporate Software's expertise in software
lifecycle management and marketing, as well as strong customer
relationships, will position Level 3 to benefit as companies change
the manner in which they buy and use software capability.

The Company also believes that there are several significant implications
that result from this Silicon Economics market dynamic:

o Incorporating Technology Changes. Given the rapid rate of improvement
in optical and Internet Protocol technologies, those communications
service providers that are most effective at rapidly deploying new
technologies will have an inherent cost and service advantage over
companies that are less effective at deploying these new technologies.

o Capital Intensity. The rapid improvements in these technologies and
the need to move to new technologies more quickly results in shortened
economic lives of underlying assets. To achieve the rapid unit cost
reductions and improvements in service capabilities, service providers
must deploy new generations of technology sooner, resulting in a more
capital-intensive business model. Those providers with the technical,
operational and financial ability to take advantage of the rapid
advancements in these technologies are expected to have higher
absolute capital requirements, shortened asset lives, rapidly
decreasing unit costs and prices, rapidly increasing unit demand and
higher cash flows and profits.

o Industry Structure. As a result of the rapid innovation in the
underlying technology, the communications industry is visibly shifting
from a utility model to a technology model. Just as in the computing
industry, where market-based standards and rapid price performance
improvements have existed for over 20 years, it is extremely difficult
for a single communications company to be best-of-class across a wide
variety of disciplines in a rapidly changing environment. Rather, an
opportunity exists for companies to focus on areas in which they have
significant competitive advantages and develop significant market
share in a disaggregated industry structure.

Level 3's Strategy. The Company is seeking to capitalize on the
opportunities presented by significant advancements in optical and Internet
Protocol technologies by pursuing its Business Plan. Key elements of the
Company's strategy include:

o Become the Low Cost Provider of Communications Services. Level 3's
network has been designed to provide high quality communications
services at a lower cost. For example, the Level 3 Network is
constructed using multiple conduits to allow the Company to
cost-effectively deploy future generations of optical networking
components (both fiber and transmission electronics and optronics) and
thereby expand capacity and reduce unit costs. In addition, the
Company's strategy is to maximize the use of open, non-proprietary
interfaces in the design of its network software and hardware. This
approach is intended to provide Level 3 with the ability to purchase
the most cost-effective network equipment from multiple vendors and
allow Level 3 to deploy new technology more rapidly and effectively.

o Combine Latest Generations of Fiber and Optical Technologies. In order
to achieve unit cost reductions for transmission capacity, Level 3 has
designed its network with multiple conduits to deploy successive
generations of fiber to exploit improvements in optical transmission
technology. Optimizing optical transmission systems to exploit
specific generations of fiber optic technology currently provides
transmission capacity on the new fiber more cost effectively than
deploying new optical transmission systems on previous generations of
fiber.

o Offer a Comprehensive Range of Communications Services. The Company
provides a comprehensive range of communications services over the
Level 3 Network. The Company is offering broadband transport services
under the brand name (3)LinkSM, colocation services under the brand
name (3)CenterSM Colocation, MPLS based private networks under the
brand name

(3)PacketSM MPN, Internet access services under the brand name
(3)CrossroadsSM, and Softswitch based services under the brand names
(3)ConnectSM Modem and (3)VoiceSM. The availability of these services
varies by location.

o Provide Upgradeable Metropolitan Backbone Networks. Level 3's
significant investment in metropolitan optical networks enables the
Company to connect directly to points of traffic aggregation. These
traffic aggregation facilities are typically locations where Level 3's
customers wish to interconnect with the Level 3 Network. Level 3's
metropolitan backbone networks allow Level 3 to extend its network
services to these aggregation points at low costs. The Company has
constructed metropolitan networks totaling approximately 14,200
conduit miles and approximately 777,000 fiber miles in the United
States, and approximately 3,500 conduit miles and approximately
154,000 fiber miles in Europe. The Company believes that these
metropolitan networks are a significant strategic advantage versus
other intercity communications companies that must connect to
customers using potentially high cost, low capacity, legacy facilities
provided by former local monopoly providers. This difficult situation
is sometimes referred to as the "local loop bottleneck".

o Provide Colocation Facilities. Level 3 believes that providing
colocation services on its network attracts communications intensive
customers by allowing Level 3 to offer those customers reduced
bandwidth costs, rapid provisioning of additional bandwidth,
interconnection with other third-party networks and improved network
performance. Therefore, Level 3 believes that controlling significant
colocation facilities in its Gateways provides it with a competitive
advantage.

As of December 31, 2001, Level 3 had secured approximately 5.8
million square feet of space for its Gateway and colocation
facilities and had completed the buildout of approximately 3.3
million square feet of this space.

o Target Communications Intensive Customers. The Company's distribution
strategy is to utilize a direct sales force focused on communications
intensive businesses. These businesses include both traditional and
next generation carriers, ISPs, application service providers, content
providers, systems integrators, web-hosting companies, media
distribution companies, web portals, eCommerce companies, streaming
media companies, storage providers and wireless communications
providers. Providing communications services at continually declining
bandwidth costs and prices is at the core of the Company's market
enabling strategy since bandwidth generally represents a substantial
portion of these businesses' costs.

o Utilize Optimization Technologies. In order to effectively manage its
business in a rapidly changing environment, Level 3 has assembled an
operations research team that has developed and continues to refine a
set of sophisticated non-linear, mixed integer optimization models.
The objective for these models is to maximize the net present value of
the Company's cash flows given relevant constraints. These tools are
designed to assist Level 3 in determining optimal pricing for its
services, in determining demand forecasts based on price elasticity,
in optimizing network design based on optimal topology and optronics
configuration, in optimizing network implementation based on optimal
timing of capacity installation, in optimizing the timing of
introducing new technologies and in determining long-term network
requirements. The Company believes that its optimization proficiency
and technology provides the Company a competitive advantage.

o Provide Seamless Interconnection to the Public Switched Telephone
Network (the "PSTN"). The Company offers (3)VoiceSM long distance
service, which allows the seamless interconnection of the Level 3
Network with the PSTN for long distance voice transmissions. Seamless
interconnection allows customers to use Level 3's Internet Protocol
based services without modifying existing telephone equipment or
dialing procedures (that is, without the need to dial access codes or
follow other similar special procedures). The Company's (3)ConnectSM
Modem

turnkey modem infrastructure service uses similar Softswitch
technology to seamlessly interconnect to the PSTN and to the public
Internet.

o Develop Advanced Business Support Systems. The Company has developed
and continues to develop a substantial, scalable and web-enabled
business support system infrastructure specifically designed to enable
the Company to offer services efficiently to its targeted customers.
The Company believes that this system will reduce its operating costs,
give its customers direct control over some of the services they buy
from the Company and allow the Company to grow rapidly while
minimizing redesign of its business support systems.

o Attract and Motivate High Quality Employees. The Company has developed
programs designed to attract and retain employees with the technical
skills necessary to implement the Business Plan. The programs include
the Company's Shareworks stock purchase plan and its Outperform Stock
Option program.

Competitive Advantages. The Company believes that it has the following
competitive advantages that, together with its strategy, will assist it in
implementing the Business Plan:

o Experienced Management Team. Level 3 has assembled a management team
that it believes is well suited to implement the Business Plan. Level
3's senior management has substantial experience in leading the
development and marketing of communications and information technology
products and services and in designing, constructing and managing
intercity, metropolitan and international networks.

o A More Readily Upgradeable Network Infrastructure. Level 3's network
design takes advantage of recent technological innovations,
incorporating many of the features that are not present in older
communication networks, and provides Level 3 flexibility to take
advantage of future developments and innovations. Level 3 has designed
the transmission network to optimize all aspects of fiber and
optronics simultaneously as a system to deliver the lowest unit cost
to its customers. As fiber and optical transmission technology
changes, Level 3 expects to realize new unit cost improvements by
deploying the latest fiber in available empty or spare conduits in the
multiple-conduit Level 3 Network. Each new generation of fiber enables
associated optical transmission equipment to be spaced further apart
and carry more traffic than the same equipment deployed on older
generations of fiber. The Company believes that the spare conduit
design of the Level 3 Network will enable Level 3 to lower costs and
prices while enjoying higher margins than its competitors.

o Integrated End-to-End Network Platform. Level 3's strategy is to
deploy network infrastructure in major metropolitan areas and to link
these networks with significant intercity networks in North America
and Europe. The Company believes that the integration of its
metropolitan and intercity networks with its colocation facilities
will expand the scope and reach of its on-net customer coverage,
facilitate the uniform deployment of technological innovations as the
Company manages its future upgrade paths and allow the Company to grow
or scale its service offerings rapidly. Level 3 believes that it is
the only global communications service provider with the unique
combination of large fiber-count, multi-conduit metropolitan networks,
uniformly deployed multi-conduit intercity networks and substantial
colocation facilities.

o On-Net Transport Activation Process ("ONTAPSM"). Level 3 has developed
ONTAP - an automated process to significantly shorten the time period
between receipt of a customer's order and the installation of that
order. Most industry participants install a customer's order over a
several week and often several month process. Through the use of
ONTAP, Level 3 is able to reduce that installation time interval
significantly. Level 3 is able to provision or install a customer's
capacity order in a matter of days rather than the industry standard
of weeks or even months. In general, using ONTAP, Level 3 is able to
install a customer's private line or wavelength service that is on the
Level 3 network within 10 calendar days. In addition, ONTAP

provides a customer with: immediate verification that the requested
capacity is available on the Level 3 network and a confirmed delivery
date. As a result, a customer can more closely tie its capacity
purchases to its actual demand rather than having to forecast future
demand in advance to meet a competitor's much longer installation
interval.

o Online Customer Service Center. Level 3 provides its customers with
access to a web-enabled, self service application - the Online
Customer Service Center or Online CSC. The Online CSC provides Level
3's customers with online direct access to the same internal systems
used by Level 3's staff. The Online CSC features include: ability to
request new or additional services, review order status, review and
modify the customer's profile and review the most up to date Level 3
product information. The Online CSC also provides various reports for
Level 3's (3)CrossroadsSM, (3)Connect ModemSM and (3)PacketSM Usage
reports. In addition, through the Online CSC, a customer is able to
create new repair tickets, view open repair tickets and view a 90-day
history of closed repair tickets.

o Prefunded Business Plan. Level 3 believes that it has prefunded its
Business Plan through free cash flow breakeven through approximately
$14 billion in cumulative debt and equity capital raised to date. As a
result, Level 3 believes that it has lower financial risk relative to
certain other communications service providers.

The Level 3 Network.

The Level 3 Network is an advanced, international, facilities based
communications network. Today, the Company provides its services over its own
facilities. Through 2000, the Company primarily offered its communications
services using local and intercity facilities that had been leased from third
parties. This enabled the Company to develop and offer certain of its services
during the construction of its own facilities. Today, the Company's network
encompasses:

o an intercity network covering nearly 16,000 miles in North America;

o leased or owned local networks in 57 North American markets;

o an intercity network covering approximately 3,600 miles across Europe;

o leased or owned local networks in 9 European markets;

o approximately 5.8 million square feet of Gateway and transmission
facilities in North America and Europe; and

o a 1.28 Tbps transatlantic cable system.

Intercity Networks. The Company's nearly 16,000 mile fiber optic intercity
network in North America consists of the following:

o Multiple conduits connecting approximately 200 North American cities.
In general, Level 3 has installed groups of 10 to 12 conduits in its
intercity network. The Company believes that the availability of spare
conduit will allow it to deploy future technological innovations in
optical networking components as well as providing Level 3 with the
flexibility to offer conduit to other entities.

o Initial installation of optical fiber strands designed to accommodate
dense wave division multiplexing transmission technology. In addition,
the Company believes that the installation of newer optical fibers
will allow a combination of greater wavelengths of light per strand,
higher transmission speeds and longer physical spacing between network
electronics. The Company also

believes that each new generation of optical fiber will allow
increases in the performance of these aspects network design and will
therefore enable lower unit costs.

o High speed SONET transmission equipment employing self-healing
protection switching and designed for high quality and reliable
transmission. The Company expects that over time, SONET equipped
networks will be replaced with network designs that employ a "mesh"
architecture made possible by advances in optical technologies. A mesh
architecture allows carriers to establish alternative protection
schemes that reduce the amount of capacity required to be reserved for
protection purposes.

o A design that maximizes the use of open, non-proprietary hardware and
software interfaces to allow less costly upgrades as hardware and
software technology improves.

North America. During the first quarter of 2001, the Company completed its
construction activities relating to its North American intercity network. Also
during 2001, the Company completed the migration of customer traffic from its
original leased capacity network to the Company's completed North America
intercity network. During 2000, the Company had substantially completed the
construction of this intercity network. Deployment of the North American
intercity network was accomplished through simultaneous construction efforts in
multiple locations, with different portions being completed at different times.
The Company has completed construction of 15,889 route miles of its North
American intercity network. All route miles of the North American intercity
network are operational.

Europe. In Europe, the Company has completed construction of, its
approximately 3,600 route mile fiber optic intercity network with
characteristics similar to those of the North American intercity network in a
two Ring architecture. During 2000, the Company completed the construction of
both Ring 1 and Ring 2 of its European network. Ring 1, which is approximately
1,800 miles, connects the major European cities of Paris, Frankfurt, Amsterdam,
Brussels and London and was operational at December 31, 2000. Ring 2, which is
approximately 1,600 miles, connects the major German cities of Berlin, Cologne,
Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. Ring 2 became operational
during the first quarter of 2001.

During 2001, the Company announced an expansion of its European operations
to 8 additional cities. The additional European cities include: Karlsruhe,
Cologne and Stuttgart, Germany; Milan, Italy; Zurich and Geneva, Switzerland;
Madrid, Spain; and Stockholm, Sweden. The Company anticipates that it will be
operational in these additional cities by the end of the second quarter 2002.
The Company intends to expand to these additional locations through the
acquisition of available capacity from other carriers in the region.

Level 3's European network is linked to the Level 3 North American
intercity network by the Level 3 transatlantic 1.28 Tbps cable system, which was
also completed and placed into service during 2000. The transatlantic cable
system - referred to by the Company as the Yellow system - has an initial
capacity of 320 Gbps and is upgradeable to 1.28 Tbps. The deployment of Yellow
was complete pursuant to a co-build agreement announced in February 2000,
whereby Global Crossing Ltd. participated in the construction of, and obtained a
50% ownership interest in, Yellow. Under the co-build agreement, Level 3 and
Global Crossing Ltd. each now separately own and operate two of the four fiber
pairs on Yellow. Level 3 also acquired additional capacity on Global Crossing
Ltd.'s transatlantic cable, Atlantic Crossing 1, during 2000 to serve as
redundant capacity for its fiber pairs on Yellow.

Asia. The Company established an Asia Pacific headquarters in Hong Kong in
1999, and during 2000 the Company completed and opened Gateway facilities in
Tokyo and Hong Kong. In January 2000, Level 3 announced its intention to develop
and construct a Northern Asia undersea cable system initially connecting Hong
Kong and Japan. The Hong Kong-Japan cable was intended to be the first stage of
the Company's construction of an undersea network in the region. At that time,
the Company indicated its intention to share construction and operating expenses
of the system with one or more industry partners. In December 2000, the Company
signed an agreement to collaborate with FLAG Telecom on the development of the
Northern Asia undersea cable system connecting Hong Kong, Japan, Korea and
Taiwan.

During the fourth quarter of 2001 the Company announced the disposition of
its Asian operations in a sale transaction with Reach, Ltd. Although the Company
believed that Asia represented an attractive longer-term investment opportunity,
given current volatile market and economic conditions the Company determined
that it was necessary to focus its resources, both capital and managerial on the
immediate opportunities provided by the Company's operational assets in North
America and Europe. This transaction closed on January 18, 2002. As a result of
the Reach transaction, the Company expects to reduce its future cash obligations
by approximately $300 million.

As part of the agreement, the Reach and the Company agreed that Level 3
will provide capacity and services to Reach over Level 3's North American
intercity network, and Level 3 will buy capacity and services from Reach in
Asia. This arrangement will allow Level 3 to continue to service its customer
base with capacity needs in Asia and provide Reach access to a the Level
intercity networks in North America and Europe. Additionally, the Company is
maintaining a sales group in Asia to serve its global customers and Asian-based
carriers with capacity needs in North America and Europe.

Local Market Infrastructure. The Company's local facilities include fiber
optic networks connecting Level 3's intercity network Gateway sites to ILEC and
CLEC central offices, long distance carrier points-of-presence ("POPs"),
buildings housing communication-intensive end users and Internet peering and
transit facilities. Level 3's high fiber count metropolitan networks allow the
Company to extend its services directly to its customers' locations at low
costs, because the availability of this network infrastructure does not require
extensive multiplexing equipment to reach a customer location, which is required
in ordinary fiber constrained metropolitan networks.

The Company had secured approximately 5.8 million square feet of space for
its Gateway and transmission facilities as of December 31, 2001 and had
completed the buildout of approximately 3.3 million square feet of this space.
The Company's initial Gateway facilities were designed to house local sales
staff, operational staff, the Company's transmission and Internet Protocol
routing and Softswitch facilities and technical space to accommodate (3)CenterSM
Colocation services - that is, the colocation of equipment by high-volume Level
3 customers, in an environmentally controlled, secure site with direct access to
the Level 3 Network generally through dual, fault tolerant connections. The
Company's newer facilities are typically larger than the Company's initial
facilities and were designed to include a smaller percentage of total square
feet for the Company's transmission and Internet Protocol routing/Softswitch
facilities and a larger percentage of total square feet for the provision of
(3)CenterSM Colocation services. The Company is offering its (3)LinkSM Transport
services, (3)CenterSM Colocation services, (3)CrossroadsSM services,
(3)ConnectSM Modem services and (3)VoiceSM services at its Gateway sites. The
availability of these services varies by location.

As of December 31, 2001, the Company had operational, facilities based
local metropolitan networks in 27 U.S. markets and nine European markets. Also
as of December 31, 2001, the Company had entered into interconnection agreements
with RBOCs covering 58 North American markets.

The Company has negotiated master leases with several CLECs and ILECs to
obtain leased capacity from those providers so that the Company can provide its
customers with local transmission capabilities before its own local networks are
complete and in locations not directly accessed by the Company's owned
facilities.

At March 8, 2002, the Company had a total of 66 markets in service: 57 in
the United States and nine in Europe. In the United States, the Company markets
in service include:

Albany Hartford New York Salt Lake City
Atlanta Houston Newark San Antonio
Austin Jacksonville Oakland San Diego
Baltimore Indianapolis Omaha San Francisco
Boston Jersey City Orlando San Jose
Buffalo Kansas City Orange County San Luis Obispo
Charlotte Las Vegas Philadelphia Seattle
Chicago Long Island Phoenix St. Louis
Cincinnati Los Angeles Pittsburgh Stamford
Cleveland Louisville Portland Tampa
Dallas Mancester Princeton Washington, D.C.
Denver Memphis Providence Wilmington
Detroit Miami Raleigh
El Paso Nashville Richmond
Fort Worth New Orleans Sacramento

In Europe, the markets in service include:

Amsterdam Hamburg
Berlin London
Brussels Munich
Dusseldorf Paris
Frankfurt

Products and Services

Level 3 offers a comprehensive range of communications services, including
the following:

o Transport Services. The Company's transport services are branded
"(3)LinkSM" and consist of (3)LinkSM Global Wavelengths, (3)LinkSM
Private Line services, (3)LinkSM Dark Fiber and (3)PacketSM MPN.

|_| (3)LinkSM Global Wavelength. Level 3 is offering (3)Link Global
Wavelengths - a point-to-point connection of a fixed amount of
bandwidth on a particular wavelength or color of light.
Currently,(3)Link Global Wavelength is available at 2.5GBps and
10GBps. This product is targeted to those customers that require
both significant amounts of bandwidth and desire to provide their
own traffic protection schemes. The approach enables customers to
build and manage a network by deploying their own SONET, ATM or
IP equipment at the end points where the wavelength is delivered.
(3)Link Global Wavelength services are typically offered through
short term, annual and long-term pre-paid leases.

|_| (3)LinkSM Private Line services. (3)Link Private Line services
consist of a fixed amount of dedicated bandwidth between fixed
locations for the exclusive use of the customer. These services
are offered with committed levels of quality and with network
protection schemes included. (3)Link Private Line services are
currently priced at a fixed rate depending upon the distance
between end points and the amount of bandwidth required. These
services are typically offered through short term, annual and
long-term pre-paid contracts. The Company is offering the
following types of private line services:

o (3)LinkSM Private Line - U.S. Intercity Services. Level 3
provides this transport service over its North American
intercity network. Available transmission speeds include
DS-3, OC-3, OC-12 and OC-48.

o (3)LinkSM Private Line - Metro Services. Level 3 provides
this service within a metropolitan area. This service is
provided in three categories: Metro Access Stand-alone - a
metro circuit is installed from a customer site to a
colocation cabinet in a Level 3 Gateway in that city; Metro
Point to Point - a circuit is installed between two of a
customers' sites by passing through the Level 3 Gateway in
that city; and Metro Access - a circuit is installed from
the customer's location to access backbone services that are
located within the Level 3 Gateway. Available transmission
speeds include DS-3, OC-3, OC-12 and OC-48.

o (3)LinkSM Private Line - International Services. Level 3
provides this private line service between two locations on
a point to point basis that cross an international boundary.
This service can be installed between two customer
points-of-presence where each point is located within a
Level 3 Gateway facility. The service is available between
mainland Europe and the United Kingdom and the United
States. Available transmission speeds depends upon the
country locations, but range from DS-1 to OC-48.

o (3)LinkSM Unprotected Private Line. Level 3 provides this
private line service between two locations on a point to
point basis on an unprotected basis - that is, without any
network protection scheme. As this product is offered as an
unprotected service, (3)Link Unprotected Private Line
provides a customer with cost advantages when a customer
desires to purchase private line capacity without a network
protection scheme for purposes of creating a meshed network
or for adding additional capacity or protection to the
customer's existing network. Available transmission speeds
for this product are either OC-3/STM-1 or OC-12/STM-4.

|_| (3)LinkSM Dark Fiber. Level 3 offers long-term leases of dark
fiber and conduit along its local and intercity networks on a
long-term basis. Customers can lease dark fiber and conduit in
any combination of three ways: (1) segment by segment, (2) full
ring or (3) the entire Level 3 Network. Level 3 offers colocation
space in its Gateway and intercity re-transmission facilities to
these customers for their transmission electronics.

o Colocation and Gateway Services.

|_| (3)CenterSM Colocation. The Company offers high quality, data
center grade space where customers can locate servers, content
storage devices and communications network equipment in a safe
and secure technical operating environment.

At its colocation sites, the Company offers high-speed, reliable
connectivity to the Level 3 Network and to other networks,
including both local and wide area networks, the PSTN and
Internet. Level 3 also offers customers AC/DC power, emergency
back-up generator power, HVAC, fire protection and security.
These sites are monitored and maintained 24 hours a day, seven
days a week.

As of December 31, 2001, Level 3 offered (3)Center Colocation in
74 facilities in 66 markets located in the United States and
Europe. Level 3 believes that its ability to offer both
metropolitan and intercity communications services to its
(3)Center Colocation customers provides it with an advantage over
its competitors, because(3)Center Colocation customers often
spend a substantial portion of their operating expenses on
communications services. This service is typically offered
through annual and long-term contracts.

o (3)PacketSM MPN. (3)Packet MPN or (3)Packet MPLS Private Networks is
an MPLS-based data transport service that offers Ethernet access into
Level 3's managed wide area network. The Company is currently
developing (3)Packet MPN to allow for ATM and Frame Relay access as
well.

Customers can purchase ports in any Level 3's markets in North America
or Europe to build virtual connections between ports and create a
customized network solution. (3)Packet MPN, which is a product that is
billed based on a customer's usage, is designed to allow
communications-intensive customers to deploy and manage traffic over a
virtual private network, enabling them to access capacity as usage
demand dictates. This flexibility can decrease network costs and is a
highly scaleable alternative to traditional transport services. These
services are typically offered through short-term or annual contracts.

o (3)CrossRoadsSM. (3)CrossRoads is a high quality, high speed Internet
access product offering. The service is offered in a variety of
capacities - 100BaseT, GigE, DS-1, DS-3, OC-3 and OC-12 - using a
variety of interfaces including Ethernet and SONET. A unique feature
of the service is Destination Sensitive Billing or DSB. Through DSB,
(3)CrossRoads customers pay for bandwidth based on the destination of
their traffic. DSB customers pay for either "Sent" or "Received"
bandwidth, but not both.

Level 3 believes that the combination of Destination Sensitive Billing
with metropolitan and intercity networks and significant colocation
space is a competitive advantage and that this accounts for the rapid
market acceptance of (3)CrossRoads to date. These services are
typically offered through short-term and annual contracts.

o Softswitch Services. Level 3 has pioneered and developed the
Softswitch - a distributed computer system that emulates the functions
performed by traditional circuit switches enabling Level 3 to control
and process telephone calls over an Internet Protocol network.
Currently, Level 3 is offering two Softswitch based services:
(3)ConnectSM Modem and (3)VoiceSM. These services are typically
offered through short-term, annual and long-term contracts.

|_| (3)ConnectSM Modem. The Company is offering to its (3)Connect
Modem customers an outsourced, turn-key infrastructure solution
for the management of dial up access to either the public
Internet or a corporate data network. (3)Connect Modem was the
first service offered by the Company that used Softswitch
technology to seamlessly interconnect to the PSTN. ISPs comprise
a majority of the customer base for (3)Connect Modem and are
provided a fully managed dial up network infrastructure for
access to the public Internet. Corporate customers that purchase
(3)Connect Modem services receive connectivity for remote users
to support data applications such as telecommuting, e-mail
retrieval, and client/server applications.

As part of this service, Level 3 arranges for the provision of
local network coverage, dedicated local telephone numbers (which
the (3)Connect Modem customer distributes to its customers in the
case of an ISP or to its employees in the case of a corporate
customer), racks and modems as well as dedicated connectivity
from the customer's location to the Level 3 Gateway facility.
Level 3 also provides monitoring of this infrastructure 24 hours
a day, seven days a week. By providing a turn-key infrastructure
modem solution, Level 3 believes that this product allows its
customers to save both capital and operating costs associated
with maintaining the infrastructure.

At end of the fourth quarter 2001, the Company's (3)Connect Modem
product was processing approximately 11.3 billion minutes per
month, representing an approximately 31% increase from the end of
the third quarter 2001.

|_| (3)VoiceSM Services. The Company also offers (3)Voice, an
Internet Protocol based long distance service, which uses
Softswitch technology. This long distance service is currently
available for originating long distance calls in 24 markets and
is generally targeted at carriers. The end users of the Company's
(3)Voice carrier customers place a long distance call by using
existing telephone equipment and dialing procedures. The local
service provider transfers the call to the Level 3 Softswitch
where it is converted to Internet Protocol format. The call is
then transmitted along the Level 3 Network to another Level 3
Gateway facility closest to the receiving city where it is sent
to the called party in whatever format is desired, including a
standard telephone call. Calls on the

Level 3 Softswitch network can be terminated or completed
anywhere in North America. The (3)Voice long distance service is
offered at a quality level equal to that of the traditional
telephone network.

Corporate Software. On March 13, 2002, Level 3 announced that it had
completed the previously disclosed acquisition of CorpSoft, Inc., which conducts
its business under the name Corporate SoftwareSM. Corporate Software is a major
distributor, marketer and reseller of business software. Based in Norwood,
Massachusetts, Corporate Software is an industry leader in the field of software
marketing, procurement and license management. It is a leading distributor of
software products from Microsoft(R), IBM/Lotus(R), Novell(R), Sun
Microsystems(R), Computer Associates(R), Symantec(R) and 200 other software
publishers, and serves more than 5,000 business customers in 128 countries.

Corporate Software uses a Software Asset Management ("SAM") approach to
maximize a customer's return on its software investments. Corporate Software
provides its customers with the following software management services:

o License Contract Management Services. This service includes: central
coordination of license agreements; contract management business
practices and back-office capabilities to unify and coordinate volume
purchasing and enterprise wide software agreements including Microsoft
EA and Select agreements; ability to process and manage contract to
meet cyclical increases in demand through the year; the ability to
measure, report and monitor worldwide contacts in support of
contractual obligations of clients to Microsoft; and manage commitment
levels, product pools, pricing and contract dates and renewals.

o Management Tracking & Reporting. This service includes: fundamental
reporting abilities that directly support license management and sales
activities; order management system allowing the tracking of
procurement from most general (parent company) to most specific
(ship-to-location); combined with cost-allocation data, reports can be
inputted directly into customer's data warehouse for optimal software
asset management.

o Order Management. This service includes: state-of-the-art ordering
system to minimize ordering errors and help ensure compliance; and
systems to assist a customer to order the correct right version of a
software title on the correct operating system platform.

o E-Procurement Services - CorpSoft Central. These services include:
customized, Web-commerce solution that provides Microsoft customers
immediate access to Microsoft software; features that include product
pricing and availability based on site-specific enrollment, online
ordering capability, real-time order status and tracking, customer
reports, reduced returns, tracking of existing and deployed licenses
reconciled to EA agreements, online invoices and license proofs,
special order research capability, and online help and documentation;
and visibility of license milestone for Microsoft Select agreements
and "true up" counts for Microsoft EA agreements.

Level 3 believes that, in part, the information technology industry has
been shaped by data processing and data storage price-performance improvement
rates that, until recently, have improved much more rapidly than communications
price-performance improvement rates. As a result, enterprises have generally
located computing and storage resources at the point of use. The Company
believes that, over time, significant economies of scale can be obtained by
commercial entities, which manage computing, operating system and software
application resources, and which offer access to these resources to enterprises
on a commercial basis.

The Company believes that the combination of its continuously upgradeable
network, and Corporate Software's expertise in software lifecycle management and
strong customer relationship position, over time, will permit the Company to
offer companies software functionality as a service available over the Level 3
network.

(i)Structure, Inc. Level 3 currently offers, through its subsidiary
(i)Structure, Inc. (formerly PKS Information Services, Inc.), computer
operations outsourcing and systems integration services to customers located
throughout the United States as well as abroad.

The Company's systems integration services help customers define, develop
and implement cost-effective information services. The computer outsourcing
services offered by the Company include networking and computing services
necessary for older mainframe-based systems and newer client/server-based
systems. The Company provides its outsourcing services to clients that want to
focus their resources on core businesses, rather than expend capital and incur
overhead costs to operate their own computing environments. (i)Structure
believes that it is able to utilize its expertise and experience, as well as
operating efficiencies, to provide its outsourcing customers with levels of
service equal to or better than those achievable by the customers themselves,
while at the same time reducing the customers' cost for such services. This
service is particularly useful for those customers moving from older computing
platforms to more modern client/server networks.

(i)Structure offers reengineering services that allow companies to convert
older legacy software systems to modern networked computing systems, with a
focus on reengineering software to enable older software application and data
repositories to be accessed by web browsers over the Internet or over private or
limited access Internet Protocol networks. (i)Structure also provides customers
with a combination of workbench tools and methodologies that provide a complete
strategy for converting mainframe-based application systems to client/server
architecture.

Distribution Strategy

Communications Services. Level 3's sales strategy is to utilize a direct
sales force focused on communications intensive businesses. These targeted
businesses include both traditional and next generation carriers, ISPs,
application service providers, content providers, systems integrators,
web-hosting companies, streaming media companies, storage providers and wireless
communications providers. Level 3 believes that these companies are the most
significant drivers of bandwidth demand. The past distinctions between retail
and wholesale have been blurred as these communications intensive businesses
purchase Level 3 services, add value and then market to end-users. Bandwidth
constitutes a significant portion of these companies' cost structure and their
needs for bandwidth in many cases are growing at an exponential rate. Providing
continually declining bandwidth costs to these companies is at the core of Level
3's market enabling strategy.

Beginning in 2001, Level 3 changed its customer focus to the top 300 global
users of bandwidth capacity. These top 300 global users tend to be financially
more viable than certain Internet start-ups. The Company has in place policies
and procedures to review the financial condition of potential and existing
customers and concludes that collectibility is probable prior to commencement of
services. If the financial condition of an existing customer deteriorates to a
point where payment for services is in doubt, the Company will not recognize
revenue attributable to that customer until cash is received. Based on these
policies and procedures, the Company believes its exposure to credit risk within
the communications business and effect to the financial statements is limited.
The Company is not immune from the affects of the downturn in the economy and
specifically the telecommunications industry; however, the Company believes the
concentration of credit risk with respect to receivables is mitigated due to the
dispersion of the Company's customer base among geographic areas and remedies
provided by terms of contracts and statutes. The Company estimates that
approximately 25% of its recurring revenue base as of December 31, 2001,
consists of financially weaker customers. Approximately 80% of this amount is
expected to disconnect services during the first half of 2002.

For the year ended December 31, 2001, approximately 53% of the Company's
sales were to carriers, 30% were to internet service providers or ISPs, 11% were
to content providers and 6% were to other types of customers. For the year ended
December 31, 2001, no single customer accounted for more than 10% of the
Company's consolidated total revenues.

Corporate Software. In 2001, Corporate Software had more than 5,000 active
customer accounts. Corporate Software's customer base includes corporations,
government agencies, educational institutions, non-profit organizations and
other business entities. Sales contracts with large customers for the
procurement of products generally cover a one to three year period subject to
the customers' rights to terminate the contract upon notice.

These contracts usually include provisions regarding price, availability,
payment terms and return policies. Standard payment terms with Corporate
Software's customers are generally net 30 days from the date of invoice.

(i)Structure. (i)Structure's outsourcing sales are relationship oriented
and (i)Structure has a team of ten Sales Directors within the United States.
Sales activities are focused on new sales in geographic territories, major
accounts, sales to existing customers and channel sales. To support outsourcing
sales, (i)Structure partners with companies that provide integration and
application services. The marketing activities of the company include:
collateral, web marketing, industry conferences and direct marketing programs.

(i)Structure also sells application software and related services through a
small sales force that is geographically focused. Sales activities are focused
on new sales in geographic territories, major accounts, sales to existing
customers and channel sales. To support these sales (i)Structure partners with
companies that provide integration and application services. The marketing
activities of the company include: collateral, web marketing, industry
conferences and direct marketing programs.

Business Support Systems

In order to pursue its sales and distribution strategies, the Company has
developed and is continuing to develop and implement a set of integrated
software applications designed to automate the Company's operational processes.
Through the development of a robust, scalable business support system, the
Company believes that it has the opportunity to develop a competitive advantage
relative to traditional telecommunications companies. Whereas traditional
telecommunications companies operate extensive legacy business support systems
with compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and features, Level 3 has developed a business
support system architecture intended to maximize both reliability and
scalability.

Key design aspects of the business support system development program are:

o integrated modular applications to allow the Company to upgrade
specific applications as new products are available;

o a scalable architecture that allows certain functions that would
otherwise have to be performed by Level 3 employees to be performed by
the Company's alternative distribution channel participants;

o phased completion of software releases designed to allow the Company
to test functionality on an incremental basis;

o "web-enabled" applications so that on-line access to all order entry,
network operations, billing, and customer care functions is available
to all authorized users, including Level 3's customers and resellers;

o use of a tiered, client/server architecture that is designed to
separate data and applications, and is expected to enable continued
improvement of software functionality at minimum cost; and

o use of pre-developed or "shrink wrapped" applications, where
applicable, which will interface to Level 3's internally developed
applications.

Interconnection and Peering

As a result of the Telecom Act, properly certificated companies may, as a
matter of law, interconnect with ILECs on terms designed to help ensure
economic, technical and administrative equality between the interconnected
parties. The Telecom Act provides, among other things, that ILECs must offer
competitors the services and facilities necessary to offer local switched
services. See "Regulation."

As of December 31, 2001, the Company had entered into interconnection
agreements covering 58 markets. The Company may be required to negotiate new or
renegotiate existing interconnection agreements as Level 3

expands its operations in current and additional markets in the future and as
existing agreements expire or are terminated.

Peering agreements between the Company and ISPs are necessary in order for
the Company to exchange traffic with those ISPs without having to pay transit
costs. The Company is considered a Tier 1 Internet Service Provider and has
settlement free peering arrangements with all ISPs in North America. In Europe,
the Company has settlement free peering arrangements with all ISPs except one
major Tier 1 ISP. The Company is currently negotiating settlement free peering
arrangements with this ISP. The basis on which the large national ISPs make
peering available or impose settlement charges is evolving as the provision of
Internet access and related services has expanded.

Employee Recruiting and Retention

As of December 31, 2001, Level 3 had 3,178 employees in the communications
portion of its business and (i)Structure had approximately 549 employees, for a
total of 3,727 employees. These numbers do not include the employees of
Corporate Software, since this transaction closed on March 13, 2002. Corporate
Software has approximately 800 employees worldwide. The Company believes that
its ability to implement the Business Plan will depend in large part on its
ability to attract and retain substantial numbers of additional qualified
employees.

In order to attract and retain highly qualified employees, the Company
believes that it is important to provide (i) a work environment that encourages
each individual to perform to his or her potential, (ii) a work environment that
facilitates cooperation towards shared goals and (iii) a compensation program
designed to attract the kinds of individuals the Company seeks and to align
employees' interests with the Company's. The Company believes that its policies
and practices help provide such a work environment. With respect to compensation
programs, while the Company believes financial rewards alone are not sufficient
to attract and retain qualified employees, the Company believes a properly
designed compensation program is a necessary component of employee recruitment
and retention. In this regard the Company's philosophy is to pay annual cash
compensation, which, if the Company's annual goals are met, is moderately
greater than the cash compensation paid by competitors. The Company's non-cash
benefit programs (including medical and health insurance, life insurance,
disability insurance, etc.) are designed to be comparable to those offered by
its competitors. As economic conditions dictate, the Company reviews the
structure of its compensation plans and may make adjustments to these plans as
these conditions warrant.

The Company believes that the qualified candidates it seeks place
particular emphasis on equity-based long term incentive ("LTI") programs. The
Company currently has two complementary programs: (i) the equity-based
"Shareworks" program, which helps ensure that all employees have an ownership
interest in the Company and are encouraged to invest risk capital in the
Company's stock; and (ii) an innovative Outperform Stock Option ("OSO") program
applicable to the Company's employees. The Shareworks program currently enables
employees to contribute up to 7% of their compensation toward the purchase of
restricted common stock, which purchases are matched one for one by the Company.
If an employee remains employed by the Company for three years from the date of
purchase, the shares that are contributed by the Company will vest. The shares
that are purchased by the employee are vested at the time of purchase. The
Shareworks program also provides that, subject to satisfactory Company
performance, the Company's employees will be eligible annually for grants by the
Company of its restricted common stock of up to a set percentage determined by
the Compensation Committee of the Board of Directors of the employees'
compensation, which shares will vest three years from the employee's initial
grant date. For the year ended December 31, 2001, the Company granted to its
eligible employees a 5% grant.

The Company has adopted the OSO program, which differs from LTI programs
generally adopted by the Company's competitors that make employees eligible for
conventional non-qualified stock options ("NQSOs"). While widely adopted, the
Company believes such NQSO programs reward employees when company stock price
performance is inferior to investments of similar risks, dilute public
stockholders in a manner not directly proportional to performance and fail to
provide a preferred return on stockholders' invested capital over the return to
option holders. The Company believes that the OSO program is superior to an
NQSO-based program with respect to these issues while, at the same time,
providing employees a success-based reward balancing the associated risk.

The Company's OSO program is the primary component of Level 3's long term
incentive, stock based compensation programs. The OSO program was designed by
the Company so that its stockholders receive a market related return on their
investment before OSO holders receive any return on their options. The Company
believes that the OSO program better aligns employees' and stockholders'
interests by basing stock option value on the Company's ability to outperform
the market in general, as measured by the S&P 500 Index. The value received for
options under the OSO plan is based on a formula involving a multiplier related
to how much the Company's common stock outperforms the S&P 500 Index.
Participants in the OSO program do not realize any value from options unless our
common stock price outperforms the S&P 500 Index. To the extent that the Level 3
common stock outperforms the S&P 500, the value of OSOs to an option holder may
exceed the value of NQSOs.

In July 2000, the Company adopted a convertible outperform stock option
program, ("C-OSO") as an extension of the existing OSO plan. The program is a
component of the Company's ongoing employee retention efforts and offers similar
features to those of an OSO, but provides an employee with the greater of the
value of a single share of the Company's common stock at exercise, or the
calculated OSO value of a single OSO at the time of exercise.

C-OSO awards were made to eligible employees employed on the date of the
grant. The awards were made in September 2000 and December 2000. Each award
vests over three years as follows: 1/6 of each grant at the end of the first
year, a further 2/6 at the end of the second year and the remaining 3/6 in the
third year. Each award is immediately exercisable upon vesting. Awards expire
four years from the date of the grant. In September 2001, the Company granted
Special Convertible Outperform Stock Option ("Special COSO") to certain
employees on the date of grant. Each Special COSO vests in equal quarterly
installments over three years and is immediately exercisable upon vesting.
Special COSOs expire four years from the date of grant.

Subsequent to March 31, 1998 (the effective date of the separation of the
Company's former construction business), the Company adopted the recognition
provisions of SFAS No. 123. Under SFAS No. 123, the fair value of an OSO (as
computed in accordance with accepted option valuation models) on the date of
grant is amortized over the vesting period of the OSO. The recognition
provisions of SFAS No. 123 are applied prospectively upon adoption. As a result,
they are applied to all stock awards granted in the year of adoption and are not
applied to awards granted in previous years unless those awards are modified or
settled in cash after adoption of the recognition provisions. The adoption of
SFAS No. 123 resulted in non-cash charges to operations of $314 million in 2001,
$236 million in 2000 and $125 million in 1999 and will continue to result in
non-cash charges to operations for future periods that the Company believes will
also be material. The amount of the non-cash charge will be dependent upon a
number of factors, including the number of options granted and the fair value
estimated at the time of grant.

Competition

Communications. The communications industry is highly competitive. Many of
the Company's existing and potential competitors in the communications industry
have financial, personnel, marketing and other resources significantly greater
than those of the Company, as well as other competitive advantages including
larger customer bases. Increased consolidation and strategic alliances in the
industry resulting from the Telecom Act, the opening of the U.S. market to
foreign carriers, technological advances and further deregulation could give
rise to significant new competitors to the Company.

In recent years, competition has increased in all areas of Level 3's
communications services market. The increased number of competitors and
resulting investment in telecommunications networks has created a substantial
oversupply of network capacity in the industry. While the Company believes that
this oversupply condition is temporary, the oversupply has resulted in an
intensely competitive environment forcing numerous competitors to curtail their
business plans and, in a number of cases, to file for protection under
bankruptcy or protection from creditor statutes. The Company's primary
competitors are IXCs, ILECs, CLECs, ISPs and other companies that provide
communications products and services. The following information identifies key
competitors for each of the Company's product offerings.

For transport services, Level 3's key competitors in the United States are
other facilities based communications companies including Williams
Communications, Global Crossing, Qwest Communications, and

Broadwing. In Europe, the Company's key competitors are other carriers such as
KPNQwest N.V., Telia International, Colt Telecom Group plc, WorldCom, and Global
Crossing.

The Company's key competitors for its (3)Connect Modem services are other
providers of dial up Internet access including WorldCom, Genuity, Sprint, Qwest,
ICG and AT&T. In addition, the key competitors for the Company's (3)Voice
service offering are other providers of wholesale long distance communications
services including AT&T, WorldCom, Sprint and certain RBOCs. The RBOCs are
seeking authorizations to provide certain long distance services which will
further increase competition in the long distance services market. See "-
Regulation."

Level 3's key competitors for its (3)Center Colocation services are other
facilities based communications companies, and other colocation providers such
as web hosting companies and third party colocation companies. These companies
include Cable & Wireless, Equinix, Switch & Data, Qwest Communications and
Broadwing.

For the Company's (3)Crossroads Internet access service, Level 3 competes
with companies that include WorldCom, Genuity, Sprint, AT&T, Cable & Wireless,
and Qwest.

The communications industry is subject to rapid and significant changes in
technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those which the
Company plans on providing. Accordingly, in the future the Company's most
significant competitors may be new entrants to the communications and
information services industry, which are not burdened by an installed base of
outmoded or legacy equipment.

Corporate Software. The personal computer software market is intensely
competitive. With respect to its business, Corporate Software faces competition
from a wide variety of sources, including "software-only" resellers, hardware
resellers and manufacturers and large systems integrators. Current competitors
from the software-only reseller category would include Software Spectrum, ASAP
Software and Softwarehouse International.

Competitors also include hardware resellers and manufacturers. These
companies compete in the large and mid-size organization markets with marketing
efforts to provide customers with software and hardware services. Such
competitors include Dell Computer Corporation and Compaq Computer Corporation,
hardware manufacturers that also sell software, and systems integrators such as
Compucom Systems, Inc. Many of these companies do have a global presence.

The manner in which personal computer software products are distributed and
sold is continually changing and new methods of distribution may emerge or
expand. Software publishers may intensify their efforts to sell their products
directly to end-users, including current and potential customers of Corporate
Software, without utilizing services such as those provided by Corporate
Software. In the past, direct sales from software publishers to end-users have
not been significant, although end-users have traditionally been able to
purchase upgrades directly from publishers. From time to time, some publishers
have instituted programs for the direct sale of large order quantities of
software to major corporate accounts, and Corporate Software anticipates that
these types of transactions will continue to be used by various publishers in
the future. Corporate Software could be adversely affected if major software
publishers successfully implement or expand programs for the direct sale of
software through volume purchase agreements or other arrangements intended to
exclude the resale channel. The licensing program changes recently announced by
Microsoft are not expected to reduce the role of the reseller channel in the
sale of Microsoft products. Corporate Software believes that the total range of
services it provides to its customers cannot be easily substituted by
publishers, particularly because publishers do not offer the scope of services
or product offerings required by most of Corporate Software's customers.
However, there can be no assurance that publishers will not increase their
efforts to sell substantial quantities of software directly to end-users without
engaging Corporate Software to provide value-added services. If the resale
channel's participation in volume license and maintenance agreements is reduced
or eliminated, or if other methods of distribution of software become common,
Corporate Software's business and financial results could be materially
adversely affected. Corporate Software currently delivers a limited amount of
software through electronic software distribution and intends to continue to
participate in this method of software distribution as demand for this service
by large organizations emerges and as

communications technology improvements permit electronic software distribution
to be made securely and efficiently.

(i)Structure. The information technology infrastructure outsourcing market
is highly competitive. There are few barriers to entry for new entrants with
access to capital. Companies compete on reliability of their data centers,
knowledge and competency of technical staff, quality of service and price. Large
competitors have many resources available to them including longer operating
history, name recognition, greater financial resources, large installed customer
base and established industry relationships. These competitors may also be able
to provide services outside of the data center, which can be used in pricing
negotiations. (i)Structure prices competitively, but larger companies may be
able to more effectively compete on price to obtain the potential customer's
business.

At present, (i)Structures's competitors in the information technology
infrastructure outsourcing market include:

o larger established computer outsourcing companies such as IBM Global
Services, EDS, and Computer Sciences Corporation (CSC);

o midsize companies or divisions of larger companies such as ACS,
Acxiom, and Lockheed; and

o enterprises that maintain their computer processing environments
in-house.

(i)Structure expects to offer application software services primarily in
Europe. The market for these services is highly competitive and there are few
barriers to entry. Companies are competing on the usefulness of their
intellectual property, knowledge and competency of technical staff, quality of
service and price. Large competitors have many resources available to them
including longer operating history, name recognition, greater financial
resources, large installed customer base and established industry relationships.
At present, (i)Structure's competitors in the application software services
market include European software development businesses and IT service companies
such as S1 Inc., Bottomline Technologies, Inc. and Eontec.

Regulation

The Company's communications and information services business will be
subject to varying degrees of federal, state, local and international
regulation.

Pending Legislation

On February 27, 2002, the U.S. House of Representatives approved The
Internet Freedom and Broadband Deployment Act of 2001 (H.R. 1542), also known as
the Tauzin-Dingell bill, by a count of 273-157. The legislation allows the Bell
Operating Companies to offer in-region long distance data services without
meeting the requirements of Section 271 of the Telecommunications Act of 1996.
In addition, the legislation removes requirements that the RBOCs sell certain
network elements, including line-sharing and fiber-fed local loops to
competitive carriers. The Telecommunications Act of 1996 (1996 Act) requires
RBOCs to open their networks to competitors before the incumbent carriers may
enter the long-distance voice market and provide nondiscriminatory access to
unbundled network elements. It is unclear whether the legislation will be
approved by the United States Senate. If Tauzin-Dingell becomes law, it could
materially alter how the company provides it services, to whom it sells it
services and how the company prices those services.

Federal Regulation

The FCC regulates interstate and international telecommunications services.
The FCC imposes extensive regulations on common carriers such as ILECs that have
some degree of market power. The FCC imposes less regulation on common carriers
without market power, such as the Company. The FCC permits these nondominant
carriers to provide domestic interstate services (including long distance and
access services) without prior authorization; but it requires carriers to
receive an authorization to construct and operate telecommunications facilities,
and to provide or resell telecommunications services, between the United States
and international points.

The Company has recently obtained FCC approval to land its transatlantic cable
in the U.S. The Company has obtained FCC authorization to provide international
services on a facilities and resale basis. The Company has filed tariffs for its
access and international long distance services with the FCC.

Under the Telecom Act, any entity, including cable television companies,
and electric and gas utilities, may enter any telecommunications market, subject
to reasonable state regulation of safety, quality and consumer protection.
Because implementation of the Telecom Act is subject to numerous federal and
state policy rulemaking proceedings and judicial review, there is still
uncertainty as to what impact it will have on the Company. The Telecom Act is
intended to increase competition. The Telecom Act opens the local services
market by requiring ILECs to permit interconnection to their networks and
establishing ILEC obligations with respect to:

o Reciprocal Compensation. Requires all ILECs and CLECs to complete
calls originated by competing carriers under reciprocal arrangements
at prices based on a reasonable approximation of incremental cost or
through mutual exchange of traffic without explicit payment.

o Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, ILECs are required to offer wholesale
versions of all retail services to other telecommunications carriers
for resale at discounted rates, based on the costs avoided by the ILEC
in the wholesale offering.

o Interconnection. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all ILECs
to permit interconnection at any technically feasible point within
their networks, on nondiscriminatory terms and at prices based on cost
(which may include a reasonable profit). At the option of the carrier
seeking interconnection, colocation of the requesting carrier's
equipment in an ILEC's premises must be offered, except where the ILEC
can demonstrate space limitations or other technical impediments to
colocation.

o Unbundled Access. Requires all ILECs to provide nondiscriminatory
access to specified unbundled network elements (including certain
network facilities, equipment, features, functions, and capabilities)
at any technically feasible point within their networks, on
nondiscriminatory terms and at prices based on cost (which may include
a reasonable profit).

o Number Portability. Requires all ILECs and CLECs to permit, to the
extent technically feasible, users of telecommunications services to
retain existing telephone numbers without impairment of quality,
reliability or convenience when switching from one telecommunications
carrier to another.

o Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll
service, and to provide nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with
no unreasonable dialing delays.

o Access to Rights-of-Way. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and rights-of-way
at regulated prices.

ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Even when
an agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunications regulatory
commissions.

In August 1996, the FCC released a decision (the "Interconnection Decision")
establishing rules implementing the above-listed requirements and providing
guidelines for review of interconnection agreements by state public utility
commissions. The United States Court of Appeals for the Eighth Circuit (the
"Eighth Circuit") vacated certain portions of the Interconnection Decision. On
January 25, 1999, the Supreme Court reversed the Eighth Circuit with respect to
the FCC's jurisdiction to issue regulations governing local interconnection
pricing

(including regulations governing reciprocal compensation). The Supreme Court
also found that the FCC had authority to promulgate a "pick and choose" rule and
upheld most of the FCC's rules governing access to unbundled network elements.
The Supreme Court, however, remanded to the FCC the standard by which the FCC
identified the network elements that must be made available on an unbundled
basis.

On November 5, 1999, the FCC released an order largely retaining its list
of unbundled network elements but eliminating the requirement that ILECs provide
unbundled access to local switching for customers with four or more lines in the
densest portion of the top 50 Metropolitan Statistical Areas, and the
requirement to unbundle operator services and directory assistance. In its
decision, the FCC reaffirmed that network elements should be priced using a
total element long run incremental pricing ("TELRIC") methodology. A number of
parties challenged the FCC's TELRIC finding. On Jan. 22, 2001, the U.S. Supreme
Court agreed to hear those appeals. Oral argument took place on Oct. 10, 2001.
The Supreme Court's decision could effect some pricing terms in the Company's
existing interconnection agreements and may require the renegotiation of
existing interconnection agreements. The Supreme Court's decision could also
result in new rules being promulgated by the FCC. Given the general uncertainty
surrounding the effect of these decisions and appeals, the Company may not be
able to continue to obtain or enforce interconnection terms that are acceptable
to it or that are consistent with its business plans.

The Telecom Act also codifies the ILECs' equal access and nondiscrimination
obligations and preempts inconsistent state regulation. The Telecom Act contains
special provisions that modify previous court decrees that prevented RBOCs from
providing long distance services and engaging in telecommunications equipment
manufacturing. These provisions permit a RBOC to enter the long distance market
in its traditional service area if it satisfies several procedural and
substantive requirements, including obtaining FCC approval upon a showing that
the RBOC has entered into interconnection agreements (or, under some
circumstances, has offered to enter into such agreements) in those states in
which it seeks long distance relief, the interconnection agreements satisfy a
14-point "checklist" of competitive requirements, and the FCC is satisfied that
the RBOC's entry into long distance markets is in the public interest. To date,
the FCC has approved petitions to provide long distance service by Verizon in
New York, Massachusetts, Connecticut, Pennsylvania, and Rhode Island. Verizon
has applications pending in New Jersey, and Vermont Southwestern Bell has
received approval for Texas, Oklahoma Kansas, Arkansas and Missouri.. BellSouth
has applications pending for Georgia and Louisiana. The Telecom Act permitted
the RBOCs to enter the out-of-region long distance market immediately upon its
enactment.

In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant carriers such as the Company maintain tariffs on
file with the FCC for domestic interstate services. On February 13, 1997, the
U.S. Court of Appeals for the District of Columbia stayed implementation of the
FCC order. On April 28, 2000, all litigation with respect to the FCC's order was
resolved in favor of the FCC. As a result, a deadline of August 1, 2001 was
established for non-dominant carriers, such as Level 3, to eliminate tariffs for
interstate services. In March 2001, the FCC also ordered that all nondominant
interexchange carriers detariff international interexchange services by January
28, 2002. Pursuant to these orders, the Company cancelled its tariff for
domestic interstate and international private line services effective July 31,
2001. The Company's state tariffs remain in place. While tariffs provided a
means of providing notice of prices as well as terms and conditions for the
provision of service, the Company has historically relied primarily on its sales
force and marketing activities to provide information to its customers regarding
these matters and expects to continue to do so. Further, in accordance with the
FCC's orders the Company maintains a schedule of its rates, terms and conditions
for its domestic and international private line services on its website at
www.level3.com.

In 2001, the FCC adopted its CLEC access charge order adopting a benchmark
rate for CLEC access charges. The order became effective in June 2001. The rules
establish a conclusive presumption that CLEC access rates at or below the
benchmark are just and reasonable. The FCC adopted a three-year transition
period until the rates reach the rates charged by the ILEC in the same area. In
addition, the FCC clarified that an interexchange carrier's refusal to serve
customers of a CLEC that tariffs access rates at or below the benchmark rate,
when the interexchange carrier serves ILEC end users in the same area, generally
constitutes a violation of their duty to provide service upon reasonable
request. The CLEC access charge order is subject to both petitions for
reconsideration at the FCC and appeals in the U.S. Court of Appeals. In
addition, CLEC access charges are among the intercarrier compensation issues
addressed in the FCC's Notice of Proposed Rulemaking regarding a unified
intercarrier compensation regime. The Company's long standing policy has been to
mirror the access rates charged

by the ILECs. Because the rates established by the FCC in the CLEC access charge
order are consistent with the ILEC rates, the Company is not required to change
the manner in which access charges are assessed or collected.

Beginning in June 1997, every RBOC advised CLECs that they did not consider
calls in the same local calling area from their customers to CLEC customers, who
are ISPs, to be local calls under the interconnection agreements between the
RBOCs and the CLECs. The RBOCs claim that these calls are exchange access calls
for which exchange access charges would be owed. The RBOCs claimed, however,
that the FCC exempted these calls from access charges so that no compensation is
owed to the CLECs for transporting and terminating such calls. As a result, the
RBOCs threatened to withhold, and in many cases did withhold, reciprocal
compensation for the transport and termination of such calls. To date,
thirty-six state commissions have ruled on this issue in the context of state
commission arbitration proceedings or enforcement proceedings. In thirty- three
states, to date, the state commission has determined that reciprocal
compensation is owed for such calls. Several of these cases are presently on
appeal. Reviewing courts have upheld the state commissions in eight decisions
rendered to date on appeal. Decisions in the Fourth, Fifth and Seventh U.S.
Circuit Courts of Appeal have upheld state determinations that reciprocal
compensation is owed for ISP bound traffic. A decision is pending before the
U.S. Circuit Court of Appeals for the District of Columbia. On February 25,
1999, the FCC issued a Declaratory Ruling on the issue of inter-carrier
compensation for calls bound to ISPs. The FCC ruled that the calls are largely
jurisdictionally interstate calls, not local calls. The FCC, however, determined
that this issue was not dispositive of whether inter-carrier compensation is
owed.

The FCC noted a number of factors which would allow the state commissions
to leave their decisions requiring the payment of compensation undisturbed. That
decision was appealed to the Court of Appeals for the District of Columbia
Circuit which held on appeal that the FCC had failed to adequately support its
conclusions under the requirements of the Telecommunications Act. On April 18,
2001, the FCC adopted an new order regarding intercarrier compensation for
ISP-bound traffic. In that Order, the Commission set out to address the issues
raised by the Court of Appeals and established a new intercarrier compensation
mechanism for ISP-bound traffic. In addition to establishing a new rate
structure, the Commission capped the amount of traffic that would be
"compensable" and prohibited payment for ISP-traffic to carriers entering new
markets. The April 2001 order was appealed and on Feb. 12, 2002, the Court of
Appeals for the District of Columbia Circuit heard oral argument. A decision is
expected in the summer of 2002.

Although there is a fair amount of uncertainty surrounding the regulatory
and economic treatment of ISP-bound traffic, the Company has over the past two
years entered into agreements with Verizon, formerly Bell Atlantic, that
provides for payment for ISP bound traffic in the 14-state Verizon territory,
the SBC Corporation for the 13-state operating territory that includes its
affiliates Pacific Bell, Southwestern Bell, Ameritech and Southern New England
Telephone and BellSouth in its nine-state operating territory. Given the general
uncertainty surrounding the effect of these decisions and appeals, the Company
may have to change how it treats the compensation it receives for terminating
calls bound for Internet Service Providers if the agreements under which
compensation is paid incorporate changes in FCC rules and regulations.

The FCC has to date treated ISPs as "enhanced service providers," exempt
from federal and state regulations governing common carriers, including the
obligation to pay access charges and contribute to the universal service fund.
Nevertheless, regulations governing disclosure of confidential communications,
copyright, excise tax, and other requirements may apply to the Company's
provision of Internet access services. The Company cannot predict the likelihood
that state, federal or foreign governments will impose additional regulation on
the Company's Internet business, nor can it predict the impact that future
regulation will have on the Company's operations.

In December 1996, the FCC initiated a Notice of Inquiry regarding whether
to impose regulations or surcharges upon providers of Internet access and
information services (the "Internet NOI"). The Internet NOI sought public
comment upon whether to impose or continue to forebear from regulation of
Internet and other packet-switched network service providers. The Internet NOI
specifically identifies Internet telephony as a subject for FCC consideration.
On April 10, 1998, the FCC issued a Report to Congress on its implementation of
the universal service provisions of the Telecom Act. In that Report, the FCC
stated, among other things, that the provision of transmission capacity to ISPs
constitutes the provision of telecommunications and is, therefore, subject to
common carrier regulations. The FCC indicated that it would reexamine its policy
of not requiring an ISP to contribute to the

universal service mechanisms when the ISP provides its own transmission
facilities and engages in data transport over those facilities in order to
provide an information service. Any such contribution by a facilities based ISP
would be related to the ISP's provision of the underlying telecommunications
services. In the Report, the FCC also indicated that it would examine the
question of whether certain forms of "phone-to-phone Internet Protocol
telephony" are information services or telecommunications services. It noted
that the FCC did not have an adequate record on which to make any definitive
pronouncements on that issue at this time, but that the record the FCC had
reviewed suggests that certain forms of phone-to-phone Internet Protocol
telephony appear to have similar functionality to non-Internet Protocol
telecommunications services and lack the characteristics that would render them
information services. If the FCC were to determine that certain Internet
Protocol telephony services are subject to FCC regulations as telecommunications
services, the FCC noted it may find it reasonable that the ISPs pay access
charges and make universal service contributions similar to non-Internet
Protocol based telecommunications service providers. The FCC also noted that
other forms of Internet Protocol telephony appear to be information services.
The Company cannot predict the outcome of these proceedings or other FCC
proceedings that may effect the Company's operations or impose additional
requirements, regulations or charges upon the Company's provision of Internet
access services.

The Communications Act requires that every telecommunications carrier
contribute, on an equitable and non-discriminatory basis, to federal universal
service mechanisms established by the FCC, and the FCC also requires providers
of non-common carrier telecommunications to contribute to universal service,
subject to some exclusions and limitations. At present, these contributions are
calculated based on contributors' interstate and international revenues derived
from U.S. domestic end users for telecommunications or telecommunications
services, as those terms are defined under FCC regulations. Level 3, pursuant to
federal regulations, pays these contributions. The amount of Level 3's
contributions can vary based upon the total amount of federal universal service
support being provided under the FCC's federal mechanisms and associated
administrative expenses, the methodology used by the FCC to calculate each
carrier's contributions, and, at present, the proportion of Level 3's assessable
interstate and international revenues derived from its domestic end users for
telecommunications or telecommunications services to, for all contributors, the
total amount of assessable interstate and international revenues derived from
domestic end users for telecommunications or telecommunications services. The
extent to which Level 3's services are viewed as telecommunications/
telecommunications services or as information services will also affect Level
3's contributions. The FCC has pending several proceedings that could affect the
total amount of universal service support, including proceedings related to the
types of service that receive subsidy support, the extent of subsidies for
rural, insular and high cost areas. The FCC is also considering whether to
change its methodology for assessing a carrier's contributions from a revenue
based methodology to an end-user connection based methodology. Level 3 is unable
to predict which of these proposed changes, if any, the FCC will adopt and the
cumulative effect of any such changes on Level 3's total subsidy contribution
payments.

In 1999, the FCC strengthened its existing colocation rules to encourage
competitive deployment of high-speed data services. The order, among other
things, restricted the ability of ILECs to prevent certain types of equipment
from being colocated and required ILECs to offer alternative colocation
arrangements that will be less costly. Early in 2000, the D.C. Circuit struck
down several aspects of the colocation order and remanded it back to the FCC for
further consideration. In response to the remand, the FCC released an order in
August 2001. In that order, the FCC found that multifunctional equipment could
be collocated only if the primary purpose and function of the equipment is for
the CLEC to obtain "equal in quality" interconnection or nondiscriminatory
access to UNEs. The FCC also eliminated its rules that gave CLECs the option of
picking their physical collocation space. Following this remand order, several
ILECs filed petitions for review with the D.C. Circuit. The oral argument is
scheduled for May 10, 2002.

In recent months, the FCC has initiated a number of proceedings that may
have an effect on how the FCC regulates local competition and broadband services
as well as how it assesses universal service contribution requirements. Because
these proceedings are in the early stages of the rulemaking process, the Company
is unable to assess the potential effect at this time.

Performance Measurements and Standards for UNEs and Interconnection. In
November 2001, the FCC released a Notice of Proposed Rulemaking seeking comment
on the proposal to adopt performance measurements and standards for evaluating
ILEC performance in the provision of UNEs.

Performance Measurements and Standards for Interstate Special Access
Services. In November 2001, the FCC released a Notice of Proposed Rulemaking
seeking comment on whether it should adopt specific performance measurements and
standards for evaluating the ILECs' performance in the provision of special
access services.

Triennial Review of the Commission's UNE Rules. In December 2001, the FCC
released a Notice of Proposed Rulemaking to undertake a comprehensive review of
the unbundling rules. This rulemaking address consolidates issues pending in
various other proceedings, including access to high capacity loops and dedicated
transport, local switching, and next-generation networks.

Examination of Regulatory Treatment of Incumbent Carriers' Broadband
Telecommunications Services. On December 20, 2001, the FCC released a Notice of
Proposed Rulemaking proposing to declare ILECs non-dominant in the provision of
broadband services, and thereby reduce the regulatory requirements they must
comply with, on grounds that sufficient competition from cable, satellite, and
terrestrial wireless providers exists to check ILEC market power.

Appropriate Framework for Broadband Access to the Internet over Wireline
Facilities. On February 15, 2002, the FCC released a Notice of Proposed
Rulemaking proposing to deregulate ILEC provision of broadband services by
declaring them "information services" exempt from Title II regulation under the
Communications Act. The NPRM further solicits comments on whether a
reclassification of ILEC broadband Internet services would eliminate the
unbundling and interconnection rules that currently apply to such services.
Finally, the NPRM also asks whether wireline facilities-based providers of
broadband Internet access services - including cable, wireless and satellite
providers - should contribute to the Universal Service subsidy funds.

State Regulation

The Telecom Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecom Act is subject to numerous state rulemaking proceedings on these issues,
it is currently difficult to predict how quickly full competition for local
services, including local dial tone, will be introduced.

State regulatory agencies have jurisdiction when Company facilities and
services are used to provide intrastate services. A portion of the Company's
traffic may be classified as intrastate and therefore subject to state
regulation. The Company expects that it will offer more intrastate services
(including intrastate switched services) as its business and product lines
expand. To provide intrastate services, the Company generally must obtain a
certificate of public convenience and necessity from the state regulatory agency
and comply with state requirements for telecommunications utilities, including
state tariffing requirements. The Company currently is authorized to provide
telecommunications services in all fifty states and the District of Columbia.
The Company is seeking expanded authority in the states of Alaska, California,
Georgia, Idaho, Maine, Minnesota, Missouri, North Carolina, Ohio, Oklahoma,
Oregon, Pennsylvania, South Dakota, Tennessee, Utah, West Virginia and
Wisconsin. In addition, the Company will be required to obtain interconnection
agreements with independent telephone companies in each state where it wishes to
expand its network coverage. States also often require prior approvals or
notifications for certain transfers of assets, customers or ownership of
certificated carriers and for issuances by certified carriers of equity or debt.

Local Regulation

The Company's networks will be subject to numerous local regulations such
as building codes and licensing. Such regulations vary on a city-by-city,
county- by-county and state-by-state basis. To install its own fiber optic
transmission facilities, the Company will need to obtain rights-of-way over
privately and publicly owned land. Rights-of-way that are not already secured
may not be available to the Company on economically reasonable or advantageous
terms.

Canadian Regulation

The Canadian Radio-television and Telecommunications Commission (the
"CRTC") generally regulates long distance telecommunications services in Canada.
Regulatory developments over the past several years have terminated the historic
monopolies of the regional telephone companies, bringing significant competition
to this industry for both domestic and international long distance services, but
also lessening regulation of domestic long distance companies. Resellers, which,
as well as facilities-based carriers, now have interconnection rights, but which
are not obligated to file tariffs, may not only provide transborder services to
the U.S. by reselling the services provided by the regional companies and other
entities but also may resell the services of the former monopoly international
carrier, Teleglobe Canada ("Teleglobe"), including offering international
switched services provisioned over leased lines. Although the CRTC formerly
restricted the practice of "switched hubbing" over leased lines through
intermediate countries to or from a third country, the CRTC recently lifted this
restriction. The Teleglobe monopoly on international services and undersea cable
landing rights terminated as of October 1, 1998, although the provision of
Canadian international transmission facilities-based services remains restricted
to "Canadian carriers" with majority ownership by Canadians. Ownership of
non-international transmission facilities are limited to Canadian carriers but
the Company can own international undersea cables landing in Canada. The Company
cannot, under current or foreseen law, enter the Canadian market as a provider
of transmission facilities-based domestic services. Recent CRTC rulings address
issues such as the framework for international contribution charges payable to
the local exchange carriers to offset some of the capital and operating costs of
the provision of switched local access services of the incumbent regional
telephone companies, in their capacity as ILECs, and the new entrant CLECs.

While competition is permitted in virtually all other Canadian
telecommunications market segments, the Company believes that the regional
companies continue to retain a substantial majority of the local and calling
card markets. Beginning in May 1997, the CRTC released a number of decisions
opening to competition the Canadian local telecommunications services market,
which decisions were made applicable in the territories of all of the regional
telephone companies except SaskTel (although Saskatchewan has subsequently
allowed local service competition in that province). As a result, networks
operated by CLECs may now be interconnected with the networks of the ILECs.
Transmission facilities-based CLECs are subject to the same majority Canadian
ownership "Canadian carrier" requirements as transmission facilities-based long
distance carriers. CLECs have the same status as ILECs, but they do not have
universal service or customer tariff-filing obligations. CLECs are subject to
certain consumer protection safeguards and other CRTC regulatory oversight
requirements. CLECs must file interconnection tariffs for services to
interexchange service providers and wireless service providers. Certain ILEC
services must be provided to CLECs on an unbundled basis and subject to
mandatory pricing, including central office codes, subscriber listings, and
local loops in small urban and rural areas. For a five-year period, certain
other important CLEC services must be provided on an unbundled basis at mandated
prices, notably unbundled local loops in large, urban areas. ILECs, which,
unlike CLECs, remained fully regulated, will be subject to price cap regulation
in respect of their utility services for an initial four-year period beginning
May 1, 1997, and these services must not be priced below cost. Interexchange
contribution payments are now pooled and distributed among ILECs and CLECs
according to a formula based on their respective proportions of residential
lines, with no explicit contribution payable from local business exchange or
directory revenues. CLECs must pay an annual telecommunications fee based on
their proportion of total CLEC operating revenues. All bundled and unbundled
local services (including residential lines and other bulk services) may now be
resold, but ILECs need not provide these services to resellers at wholesale
prices. Transmission facilities-based local and long distance carriers (but not
resellers) are entitled to colocate equipment in ILEC central offices pursuant
to terms and conditions of tariffs and intercarrier agreements. Certain local
competition issues are still to be resolved. The CRTC has ruled that resellers
cannot be classified as CLECs, and thus are not entitled to CLEC interconnection
terms and conditions.

The Company's Other Businesses

The Company was incorporated as Peter Kiewit Sons', Inc. in Delaware in
1941 to continue a construction business founded in Omaha, Nebraska in 1884. In
subsequent years, the Company invested a portion of the cash flow generated by
its construction activities in a variety of other businesses. The Company
entered the coal mining business in 1943, the telecommunications business
(consisting of MFS and, more recently, an investment in C-TEC Corporation and
its successors RCN Corporation, Commonwealth Telephone Enterprises, Inc. and
Cable Michigan,

Inc.) in 1988, the information services business in 1990 and the alternative
energy business, through an investment in MidAmerican, in 1991. Level 3 also has
made investments in several development-stage ventures.

In 1995, the Company distributed to the holders of Class D Stock all of its
shares of MFS. In the seven years from 1988 to 1995, the Company invested
approximately $500 million in MFS; at the time of the distribution to
stockholders in 1995, the Company's holdings in MFS had a market value of
approximately $1.75 billion. In December 1996, MFS was purchased by WorldCom in
a transaction valued at $14.3 billion. In December 1997, the Company's
stockholders ratified the decision of the Board to effect the split-off
separating the Construction Group. As a result of the split-off, which was
completed on March 31, 1998, the Company no longer owns any interest in the
Construction Group. In conjunction with the split-off, the Company changed its
name to "Level 3 Communications, Inc.," and the Construction Group changed its
name to "Peter Kiewit Sons', Inc."

In January 1998, the Company completed the sale to MidAmerican of its
energy investments, consisting primarily of a 24% equity interest in
MidAmerican. The Company received proceeds of approximately $1.16 billion from
this sale, and as a result recognized an after-tax gain of approximately $324
million in 1998. In November 1998, Avalon Cable of Michigan, Inc. acquired all
the outstanding stock of Cable Michigan. Level 3 received approximately $129
million in cash for its interest in Cable Michigan and recognized a pre-tax gain
of approximately $90 million.

The Company's other businesses include its investment in the C-TEC
Companies (as defined), coal mining, the SR91 Tollroad (as defined) and certain
other assets. In 1998, the Company completed the sale of its interests in United
Infrastructure Company, MidAmerican and Kiewit Investment Management Corp.

C-TEC Companies

On September 30, 1997, C-TEC completed a tax-free restructuring, which
divided C-TEC Corporation into three public companies (the "C-TEC Companies"):
C-TEC, which changed its name to Commonwealth Telephone Enterprises, Inc.
("Commonwealth Telephone"), RCN Corporation ("RCN") and Cable Michigan, Inc.
("Cable Michigan"). The Company's interests in the C-TEC Companies are held
through a holding company (the "C-TEC Holding Company"). The Company owns 100%
of the capital stock of the C-TEC Holding Company. Prior to February 2002, a
portion of the common stock of the C-TEC Holding Company, that is, 10%, was held
by David C. McCourt, a director of the Company who was formerly the Chairman of
C-TEC. In February 2002, Mr. McCourt sold his interest in the C-TEC Holding
Company to a subsidiary of the Company for a total of $15 million.

Commonwealth Telephone. Commonwealth Telephone is a Pennsylvania public
utility providing local telephone service to a 19-county, 5,191 square mile
service territory in Pennsylvania. Commonwealth Telephone also provides network
access and long distance services to IXCs. Commonwealth Telephone's business
customer base is diverse in size as well as industry, with very little
concentration. A subsidiary, Commonwealth Communications Inc. provides
telecommunications engineering and technical services to large corporate
clients, hospitals and universities in the northeastern United States. Another
subsidiary, Commonwealth Long Distance operates principally in Pennsylvania,
providing switched services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis. As of December
31, 2001, the C-TEC Holding Company owned approximately 45% of the outstanding
common stock of Commonwealth Telephone.

On October 23, 1998, Commonwealth Telephone completed a rights offering of
3.7 million shares of its common stock. In the offering, Level 3 exercised all
rights it received and purchased approximately 1.8 million additional shares of
Commonwealth Telephone common stock for an aggregate subscription price of $37.7
million.

On February 7, 2002, Commonwealth Telephone filed a registration statement
on Form S-3 with respect to the sale by a subsidiary of the Company in an
underwritten public offering of up to 3,162,500 shares of common stock
(including 412,500 shares of common stock subject to the underwriters'
over-allotment option) as a result of the exercise of certain demand
registration rights held by the Company. The filing of the registration
statement is consistent with the Company's public statements that the Company
would consider the possible sale of certain of its non-core assets, which
include holdings in public companies such as Commonwealth Telephone. On March 8,
2002, the Company filed an amendment to its registration statement (SEC File No.
333-82366) to increase the number of shares to be sold by the Company's
subsidiary in an underwritten public offering to up to 4,025,000

shares of common stock (including 525,000 shares of common stock subject to the
underwriters' over-allotment option).

RCN. RCN is a full service provider of local, long distance, Internet and
cable television services primarily to residential users in densely populated
areas in the Northeast. RCN operates as a competitive telecommunications service
provider in New York City and Boston. RCN also owns cable television operations
in New York, New Jersey and Pennsylvania; a 49% interest in Megacable, S.A. de
C.V., Mexico's second largest cable television operator; and has long distance
operations (other than the operations in certain areas of Pennsylvania). RCN is
developing advanced fiber optic networks to provide a wide range of
telecommunications services, including local and long distance telephone, video
programming and data services (including high speed Internet access), primarily
to residential customers in selected markets in the Boston to Washington, D.C.
and San Francisco to San Diego corridors and Chicago. As of December 31, 2001,
the C-TEC Holding Company owned approximately 27% of the outstanding common
stock of RCN.

Cable Michigan. Cable Michigan was a cable television operator in the State
of Michigan. On June 4, 1998, Cable Michigan announced that it had agreed to be
acquired by Avalon Cable. Level 3 received approximately $129 million in cash
when the transaction closed on November 6, 1998.

Coal Mining

The Company is engaged in coal mining through its subsidiary, KCP, Inc.
("KCP"). KCP has a 50% interest in two mines, which are operated by a subsidiary
of Peter Kiewit Sons', Inc. ("New PKS"). Decker Coal Company ("Decker") is a
joint venture with Western Minerals, Inc., a subsidiary of The RTZ Corporation
PLC. Black Butte Coal Company ("Black Butte") is a joint venture with Bitter
Creek Coal Company, a subsidiary of Anadarko Petroleum Corporation. The Decker
mine is located in southeastern Montana and the Black Butte mine is in
southwestern Wyoming. The coal mines use the surface mining method.

In September 2000, the Company sold its entire 50% ownership interest in
the Walnut Creek Mining Company to a subsidiary of Peter Kiewit Sons', Inc. for
cash of $37 million.

The coal produced from the KCP mines is sold primarily to electric
utilities, which burn coal in order to produce steam to generate electricity.
Approximately 89% of sales are made under long-term contracts, and the remainder
are made on the spot market. Approximately 60%, 75% and 77% of KCP's revenues in
2001, 2000 and 1999, respectively, were derived from long-term contracts with
Commonwealth Edison Company (with Decker and Black Butte) and The Detroit Edison
Company (with Decker). KCP also has other sales commitments, including those
with Sierra Pacific, Idaho Power, Solvay Minerals, Pacific Power & Light and
Minnesota Power, that provide for the delivery of approximately 8 million tons
through 2005. The level of cash flows generated in recent periods by the
Company's coal operations will not continue after the year 2000 because the
delivery requirements under the Company's current long- term contracts decline
significantly. Under a mine management agreement, KCP pays a subsidiary of New
PKS an annual fee equal to 30% of KCP's adjusted operating income. The fee for
2001 was $5 million.

The coal industry is highly competitive. KCP competes not only with other
domestic and foreign coal suppliers, some of whom are larger and have greater
capital resources than KCP, but also with alternative methods of generating
electricity and alternative energy sources. In 2000, the most recent year for
which information is available, KCP's production represented 1.3% of total U.S.
coal production. Demand for KCP's coal is affected by economic, political and
regulatory factors. For example, recent "clean air" laws may stimulate demand
for low sulfur coal. KCP's western coal reserves generally have a low sulfur
content (less than one percent) and are currently useful principally as fuel for
coal-fired, steam-electric generating units.

KCP's sales of its western coal, like sales by other western coal
producers, typically provide for delivery to customers at the mine. A
significant portion of the customer's delivered cost of coal is attributable to
transportation costs. Most of the coal sold from KCP's western mines is
currently shipped by rail to utilities outside Montana and Wyoming. The Decker
and Black Butte mines are each served by a single railroad. Many of their
western coal competitors are served by two railroads and such competitors'
customers often benefit from lower transportation costs because of competition
between railroads for coal hauling business. Other western coal producers,
particularly

those in the Powder River Basin of Wyoming, have lower stripping ratios (that
is, the amount of overburden that must be removed in proportion to the amount of
minable coal) than the Black Butte and Decker mines, often resulting in lower
comparative costs of production. As a result, KCP's production costs per ton of
coal at the Black Butte and Decker mines can be as much as four and five times
greater than production costs of certain competitors. KCP's production cost
disadvantage has contributed to its agreement to amend its long-term contract
with Commonwealth Edison Company to provide for delivery of coal from alternate
source mines rather than from Black Butte. Because of these cost disadvantages,
KCP does not expect that it will be able to enter into long-term coal purchase
contracts for Black Butte and Decker production as the current long-term
contracts expire. In addition, these cost disadvantages may adversely affect
KCP's ability to compete for spot sales in the future.

The Company is required to comply with various federal, state and local
laws and regulations concerning protection of the environment. KCP's share of
land reclamation expenses for the year ended December 31, 2001 was approximately
$4 million. KCP's share of accrued estimated reclamation costs was $96 million
at December 31, 2001. The Company did not make significant capital expenditures
for environmental compliance with respect to the coal business in 2001. The
Company believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since its competitors
in the mining industry are similarly affected by such laws. However, failure to
comply with environmental protection and land restoration laws, or actual
reclamation costs in excess of the Company's accruals, could have an adverse
effect on the Company's business, results of operations, and financial
condition.

SR91 Tollroad

The Company has invested $13.3 million for a 65% equity interest and lent
$8.8 million to California Private Transportation Company L.P. ("CPTC"), which
developed, financed, and currently operates the 91 Express Lanes, a ten mile,
four-lane tollroad in Orange County, California (the "SR91 Tollroad"). The fully
automated highway uses an electronic toll collection system and variable pricing
to adjust tolls to demand.

Capital costs at completion were $130 million, $110 million of which was
funded with debt that was not guaranteed by Level 3. Revenue collected over the
35-year franchise period is used for operating expenses, debt repayment, and
profit distributions. The SR91 Tollroad opened in December 1995 and achieved
operating break-even in 1996. Approximately 96,800 customers have registered to
use the tollroad as of December 31, 2001, and weekday volumes typically exceed
26,000 vehicles per day during December 2001.

Other

In December 1990, Continental Holdings, Inc., an indirect, wholly owned
subsidiary of the Company ("Continental"), pursuant to a Stock Purchase
Agreement (the "Agreement"), sold 100% of the issued and outstanding shares of
its wholly owned subsidiary Continental PET Technologies, Inc.("PET") to BTR
Nylex Limited ("BTR"). At the time of the sale, PET was a named defendant in
Pechiney Plastic Packaging, Inc. (as successor in interest to American National
Can Company) vs. Continental PET Technologies, Inc., a patent infringement
action, filed in the United States District Court for the District of
Connecticut. Pechiney asserts that certain bottles made by PET since 1990
infringe claims contained in Pechiney's United States Patent No. 4,554,190 and
that all multi-layer barrier bottles made by PET since November 1993 infringe
claims of its United States Patent No. 4,526,821. PET asserts a number of
defenses, including non-infringement, invalidity of the patents in suit, laches
and equitable estoppel. Pechiney is seeking to enjoin PET from further
infringement of the '190 and '821 patents, and seeks damages, including
interest, in excess of $130 million for alleged infringement through October 31,
2001. Pechiney is further seeking, under a theory of willful infringement, to
recover enhanced damages of up to three times any actual damage award. PET
asserts that Pechiney is not entitled to injunctive relief and can recover no
damages because of the invalidity of the patents, improper claims construction,
non-infringement, and that it has not willfully infringed either patent. PET
further asserts that, if damages are recoverable, they do not exceed $3 million,
exclusive of interest. Neither the Company nor PET are named defendants in the
lawsuit.

Subject to the provisions of the Agreement, Continental agreed to defend
PET with respect to the litigation and, under certain circumstances, agreed to
be responsible for damages. No trial date has been set in the matter, and the
outcome cannot be predicted with reasonable certainty at this time. Any exposure
that Continental might have pursuant to the Agreement is not determinable or
predictable at this time. If the outcome of the litigation is adverse

to PET, it is uncertain whether a claim of indemnity will be made. Continental
believes that it has substantial defenses to an indemnity claim, and intends to
contest any such claim vigorously.

Glossary of Terms

access......................................Telecommunications services that permit long distance carriers to use
local exchange facilities to originate and/or terminate long distance
service.

access charges .............................The fees paid by long distance carriers to LECs for originating and
terminating long distance calls on the LECs' local networks.

backbone ...................................A centralized high-speed network that interconnects smaller,
independent networks. It is the through-portion of a transmission
network, as opposed to spurs which branch off the through-portions.

CAP ........................................Competitive Access Provider. A company that provides its customers
with an alternative to the local exchange company for local transport
of private line and special access telecommunications services.

capacity ...................................The information carrying ability of a telecommunications facility.

Carrier ....................................A provider of communications transmission services by fiber, wire or
radio.

Central Office .............................Telephone company facility where subscribers' lines are joined to
switching equipment for connecting other subscribers to each other,
locally and long distance.

CLEC .......................................Competitive Local Exchange Carrier. A company that competes with
LECs in the local services market.

common carrier .............................A government-defined group of private companies offering
telecommunications services or facilities to the general public on a
non- discriminatory basis.

conduit ....................................A pipe, usually made of metal, ceramic or plastic, that protects
buried cables.

DS-3 .......................................A data communications circuit capable of transmitting data at 45 Mbps.

dark fiber .................................Fiber optic strands that are not connected to transmission equipment.

dedicated lines ............................Telecommunications lines reserved for use by particular customers.

dialing parity .............................The ability of a competing local or toll service provider to provide
telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code,
their telecommunications to the service provider of the customers'
designation.

equal access ...............................The basis upon which customers of interexchange carriers are able to
obtain access to their Primary Interexchange Carriers' (PIC) long
distance telephone network by dialing "1", thus eliminating the need
to dial additional digits and an authorization code to obtain such
access.

facilities based carriers ..................Carriers that own and operate their own network and equipment.

fiber optics ...............................A technology in which light is used to transport information from one
point to another. Fiber optic cables are thin filaments of glass
through which light beams are transmitted over long distances
carrying enormous amounts of data. Modulating light on thin strands
of glass produces major benefits including high bandwidth, relatively
low cost, low power consumption, small space needs and total
insensitivity to electromagnetic interference.

Gbps .......................................Gigabits per second. A transmission rate. One gigabit equals 1.024
billion bits of information.

ILEC .......................................Incumbent Local Exchange Carrier. A company historically providing
local telephone service. Often refers to one of the Regional Bell
Operating Companies (RBOCs). Often referred to as "LEC" (Local
Exchange Carrier).

Interconnection ............................Interconnection of facilities between or among local exchange
carriers, including potential physical colocation of one carrier's
equipment in the other carrier's premises to facilitate such
interconnection.

InterLATA ..................................Telecommunications services originating in a LATA and terminating
outside of that LATA.

Internet ...................................A global collection of interconnected computer networks which use a
specific communications protocol.

IntraLATA ..................................Telecommunications services originating and terminating in the same
LATA.

ISDN .......................................Integrated Services Digital Network. An information transfer
standard for transmitting digital voice and data over telephone lines
at speeds up to 128 Kbps.

ISPs .......................................Internet Service Providers. Companies formed to provide access to
the Internet to consumers and business customers via local networks.

IXC ........................................Interexchange Carrier. A telecommunications company that provides
telecommunications services between local exchanges on an interstate
or intrastate basis.

Kbps .......................................Kilobits per second. A transmission rate. One kilobit equals 1,024
bits of information.

LATA .......................................Local Access and Transport Area. A geographic area composed of
contiguous local exchanges, usually but not always within a single
state. There are approximately 200 LATAs in the United States.

leased line ................................Telecommunications line dedicated to a particular customer along
predetermined routes.

LEC ........................................Local Exchange Carrier. A telecommunications company that provides
telecommunications services in a geographic area in which calls
generally are transmitted without toll charges. LECs include both
ILECs and CLECs.

local exchange .............................A geographic area determined by the appropriate state regulatory
authority in which calls generally are transmitted without toll
charges to the calling or called party.

local loop .................................A circuit that connects an end user to the LEC central office within
a LATA. long distance carriers Long distance carriers provide
services between (interexchange carriers) local exchanges on an
interstate or intrastate basis. A long distance carrier may offer
services over its own or another carrier's facilities.

Mbps .......................................Megabits per second. A transmission rate. One megabit equals 1.024
million bits of information.

MPLS .......................................MultiProtocol Label Switching. A switching standard for the
transmission of data at increased speeds. The concept is based on
having routers at the edge of a communications network and switches
at the core of the network for the faster transmission of data
communications.

multiplexing ...............................An electronic or optical process that combines a large number of
lower speed transmission lines into one high speed line by splitting
the total available bandwidth into narrower bands (frequency
division), or by allotting a common channel to several different
transmitting devices, one at a time in sequence (time division).

NAP ........................................Network Access Point. A location at which ISPs exchange each other's
traffic.

OC-3 .......................................A data communications circuit consisting of three DS-3s capable of
transmitting data at 155 Mbps.

OC-12 ......................................A data communications circuit consisting of twelve DS-3s capable of
transmitting data at 622 Mbps.

OC-48 ......................................A data communications circuit consisting of forty-eight DS-3s capable
of transmitting data at approximately 2.45 Gbps.

peering ....................................The commercial practice under which ISPs exchange each other's
traffic without the payment of settlement charges. Peering occurs at
both public and private exchange points.

POP ........................................Point of Presence. Telecommunications facility where a
communications provider locates network equipment used to connect
customers to its network backbone.

private line ...............................A dedicated telecommunications connection between end user locations.

PSTN .......................................Public Switched Telephone Network. That portion of a local exchange
company's network available to all users generally on a shared basis
(i.e., not dedicated to a particular user). Traffic along the public
switched network is generally switched at the local exchange
company's central offices.

RBOCs ......................................Regional Bell Operating Companies. Originally, the seven local
telephone companies (formerly part of AT&T) established as a result
of the AT&T Divestiture. Currently consists of four local telephone
companies as a result of the mergers of Bell Atlantic with NYNEX and
SBC with Pacific Telesis and Ameritech.

reciprocal compensation ....................The compensation of a CLEC for termination of a local call by the
ILEC on the CLEC's network, which is the same as the compensation
that the CLEC pays the ILEC for termination of local calls on the
ILEC's network.

resale .....................................Resale by a provider of telecommunications services (such as a LEC)
of such services to other providers or carriers on a wholesale or a
retail basis.

router .....................................Equipment placed between networks that relays data to those networks
based upon a destination address contained in the data packets being
routed.

SONET ......................................Synchronous Optical Network. An electronics and network architecture
for variable bandwidth products which enables transmission of voice,
data and video (multimedia) at very high speeds. SONET ring
architecture provides for virtually instantaneous restoration of
service in the event of a fiber cut by automatically rerouting
traffic in the opposite direction around the ring.

special access services ....................The lease of private, dedicated telecommunications lines or
"circuits" along the network of a local exchange company or a CAP,
which lines or circuits run to or from the long distance carrier
POPs. Examples of special access services are telecommunications
lines running between POPs of a single long distance carrier, from
one long distance carrier POP to the POP of another long distance
carrier or from an end user to a long distance carrier POP.

switch .....................................A device that selects the paths or circuits to be used for
transmission of information and establishes a connection. Switching
is the process of interconnecting circuits to form a transmission
path between users and it also captures information for billing
purposes.

Tbps .......................................Terabits per second. A transmission rate. One terabit equals 1.024
trillion bits of information.

T-1 A data communications circuit capable of transmitting data at 1.544
Mbps.

unbundled ..................................Services, programs, software and training sold separately from the
hardware.

unbundled access ...........................Access to unbundled elements of a telecommunications services
provider's network including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within
such network.

web site ...................................A server connected to the Internet from which Internet users can
obtain information.

wireless ...................................A communications system that operates without wires. Cellular
service is an example.

world wide web or web ......................A collection of computer systems supporting a communications protocol
that permits multimedia presentation of information over the Internet.

xDSL .......................................A term referring to a variety of new Digital Subscriber Line
technologies. Some of these new varieties are asymmetric with
different data rates in the downstream and upstream directions.
Others are symmetric. Downstream speeds range from 384 Kbps (or
"SDSL") to 1.5 to 8 Mbps ("ADSL").

Directors and Executive Officers

Set forth below is information as of March 8, 2002, about each director and
each executive officer of the Company. The executive officers of the Company
have been determined in accordance with the rules of the SEC.

Name Age Position

Walter Scott, Jr. .................70 Chairman of the Board
James Q. Crowe.....................52 Chief Executive Officer and Director
Kevin J. O'Hara....................41 President, Chief Operating Officer and Director
R. Douglas Bradbury................51 Vice Chairman of the Board and Executive Vice President
Charles C. Miller, III.............49 Vice Chairman of the Board and Executive Vice President
Sureel A. Choksi...................29 Group Vice President and Chief Financial Officer
Thomas C. Stortz...................50 Group Vice President, General Counsel and Secretary
John F. Waters, Jr.................37 Group Vice President and Chief Technology Officer
Colin V.K. Williams................62 Director
Mogens C. Bay......................53 Director
William L. Grewcock................76 Director
Richard R. Jaros...................50 Director
Robert E. Julian...................62 Director
David C. McCourt...................45 Director
Kenneth E. Stinson.................59 Director
Michael B. Yanney..................68 Director

Other Management

Set forth below is information as of March 8, 2002, about the following
members of senior management of the Company.

Name Age Position

Linda J. Adams.....................45 Group Vice President
Daniel P. Caruso...................38 Group Vice President
Donald H. Gips.....................42 Group Vice President
John Neil Hobbs....................42 Group Vice President
Joseph M. Howell, III..............55 Group Vice President
Michael D. Jones...................44 Chief Executive Officer (i)Structure, Inc.
Brady Rafuse.......................38 Group Vice President
Edward Van Macatee.................47 Group Vice President
Ronald J. Vidal....................42 Group Vice President

Walter Scott, Jr. has been the Chairman of the Board of the Company since
September 1979, and a director of the Company since April 1964. Mr. Scott has
been Chairman Emeritus of Peter Kiewit Sons', Inc. ("PKS") since the split-off.
Mr. Scott is also a director of PKS, Berkshire Hathaway Inc., Burlington
Resources Inc., MidAmerican, ConAgra Foods, Inc., Commonwealth Telephone
Enterprises, Inc. ("Commonwealth Telephone"), RCN Corporation ("RCN"), Kiewit
Materials Company and Valmont Industries, Inc.

James Q. Crowe has been the Chief Executive Officer of the Company since
August 1997, and a director of the Company since June 1993. Mr. Crowe was also
President of the Company until February 2000. Mr. Crowe was President and Chief
Executive Officer of MFS Communications Company, Inc. ("MFS") from June 1993 to
June 1997. Mr. Crowe also served as Chairman of the Board of WorldCom from
January 1997 until July 1997, and as Chairman of the Board of MFS from 1992
through 1996. Mr. Crowe is presently a director of PKS, Commonwealth Telephone
and RCN.

Kevin J. O'Hara has been President of the Company since July 2000 and Chief
Operating Officer of the Company since March 1998. Mr. O'Hara was also Executive
Vice President of the Company from August 1997

until July 2000. Prior to that, Mr. O'Hara served as President and Chief
Executive Officer of MFS Global Network Services, Inc. from 1995 to 1997, and as
Senior Vice President of MFS and President of MFS Development, Inc. from October
1992 to August 1995. From 1990 to 1992, he was a Vice President of MFS Telecom,
Inc. ("MFS Telecom").

R. Douglas Bradbury has been Vice Chairman of the Board since February 2000
and Executive Vice President since August 1997. Mr. Bradbury was also Chief
Financial Officer of the Company from August 1997 until July 2000. Mr. Bradbury
has been a director of the Company since March 1998. Mr. Bradbury served as
Chief Financial Officer of MFS from 1992 to 1996, Senior Vice President of MFS
from 1992 to 1995, and Executive Vice President of MFS from 1995 to 1996. Mr.
Bradbury is also a director of LodgeNet Entertainment Corporation.

Charles C. Miller, III has been Vice Chairman of the Board and Executive
Vice President of the Company since February 15, 2001. Prior to that, Mr. Miller
was President of Bellsouth International, a subsidiary of Bellsouth Corporation
from 1995 until December 2000. Prior to that, Mr. Miller held various senior
level officer and management position at BellSouth from 1987.

Sureel A. Choksi has been Group Vice President and Chief Financial Officer
of the Company since July 2000. Prior to that, Mr. Choksi was Group Vice
President Corporate Development and Treasurer of the Company from February 2000
until August 2000. Prior to that, Mr. Choksi served as Vice President and
Treasurer of the Company from January 1999 to February 1, 2000. Prior to that,
Mr. Choksi was a Director of Finance at the Company from 1997 to 1998, an
Associate at TeleSoft Management, LLC in 1997 and an Analyst at Gleacher &
Company from 1995 to 1997.

Thomas C. Stortz has been Group Vice President, General Counsel and
Secretary of the Company since February 2000. Prior to that, Mr. Stortz served
as Senior Vice President, General Counsel and Secretary of the Company from
September 1998 to February 1, 2000. Prior to that, he served as Vice President
and General Counsel of Peter Kiewit Sons', Inc. and Kiewit Construction Group,
Inc. from April 1991 to September 1998. He has served as a director of Peter
Kiewit Sons', Inc., RCN, C-TEC, Kiewit Diversified Group Inc. and CCL
Industries, Inc.

John F. Waters, Jr. has been Group Vice President and Chief Technology
Officer of the Company since February 2000. Prior to that, Mr. Waters was Vice
President, Engineering of the Company from November 1997 until February 1, 2000.
Prior to that, Mr. Waters was an executive staff member of MCI Communications
from 1994 to November 1997.

Mogens C. Bay has been a director of the Company since November 2000. Since
January 1997, Mr. Bay has been the Chairman and Chief Executive Officer of
Valmont Industries, Inc., a company engaged in the infrastructure and irrigation
businesses. Prior to that, Mr. Bay was President and Chief Executive Officer of
Valmont Industries from August 1993 to December 1996 as well as a director of
Valmont since October 1993. Mr. Bay is also a director of PKS and ConAgra Foods,
Inc.

William L. Grewcock has been a director of the Company since January 1968.
Prior to the split-off, Mr. Grewcock was Vice Chairman of the Company for more
than five years. He is presently a director of PKS.

Richard R. Jaros has been a director of the Company since June 1993 and
served as President of the Company from 1996 to 1997. Mr. Jaros served as
Executive Vice President of the Company from 1993 to 1996 and Chief Financial
Officer of the Company from 1995 to 1996. He also served as President and Chief
Operating Officer of CalEnergy from 1992 to 1993, and is presently a director of
MidAmerican, Commonwealth Telephone, RCN and Homeservices.com, Inc.

Robert E. Julian has been a director of the Company since March 31, 1998.
Mr. Julian was also Chairman of the Board of (i)Structure from 1995 until 2000.
From 1992 to 1995 Mr. Julian served as Executive Vice President and Chief
Financial Officer of the Company. Mr. Julian is the Chairman of the Audit
Committee of the Board of Directors.

David C. McCourt has been a director of the Company since March 31, 1998.
Mr. McCourt has also served as Chairman of Commonwealth Telephone and RCN since
October 1997. In addition, Mr. McCourt has been the Chief Executive Officer of
RCN since 1997 and Chief Executive Officer of Commonwealth Telephone from
October 1997 until November 1998. From 1993 to 1997 Mr. McCourt served as
Chairman of the Board and Chief Executive Officer of C-TEC.

Kenneth E. Stinson has been a director of the Company since January 1987.
Mr. Stinson has been Chairman of the Board and Chief Executive Officer of Peter
Kiewit Sons', Inc. since the Split-Off. Prior to the Split-Off, Mr. Stinson was
Executive Vice President of the Company for more than the last five years. Mr.
Stinson is also a director of Kiewit Materials Company, ConAgra Foods, Inc. and
Valmont Industries, Inc.

Colin V.K. Williams has been a director of the Company since August 2000.
From July 1998 until December 31, 2000, Mr. Williams was Executive Vice
President of the Company and President of Level 3 International, Inc. Prior to
joining the company, Mr. Williams was Chairman of WorldCom International, Inc.,
where he was responsible for the international communications business and the
development and operation of WorldCom's fiber networks overseas. In 1993 Mr.
Williams initiated and built the international operations of MFS. Prior to
joining MFS, Mr. Williams was Corporate Director, Business Development at
British Telecom from 1988 until 1992.

Michael B. Yanney has been a director of the Company since March 31, 1998.
He has served as Chairman of the Board, President and Chief Executive Officer of
America First Companies L.L.C. for more than the last five years. Mr. Yanney is
also a director of Burlington Northern Santa Fe Corporation, RCN and Forest Oil
Corporation.

Linda J. Adams has been Group Vice President Human Resources of the Company
since February 2000. Prior to that, Ms. Adams was Vice President Human Resources
of the Company from November 1998 to February 2000. Prior to that, Ms. Adams was
initially Vice President of Human Resources Rent-A-Center, a subsidiary of Thorn
Americas, Inc., and then Senior Vice President of Human Resources for Thorn
Americas, Inc. from August 1995 until August 1998. Prior to that, Ms. Adams was
Vice President of Worldwide Compensation & Benefits for PepsiCo, Inc. from
August 1994 to August 1995.

Daniel P. Caruso has been Group Vice President since June 2001 and prior to
that was Group Vice President Transport Services of the Company from January
2001 to June 2001. Prior to that Mr. Caruso was Group Vice President Global
Customer Operations of the Company from February 2000. Prior to that, Mr. Caruso
served as Senior Vice President, Network Services of the Company from October
1997 to February 2000. Prior to that, Mr. Caruso was Senior Vice President,
Local Service Delivery of WorldCom from December 1992 to September 1997 and was
a member of the senior management of Ameritech from June 1986 to November 1992.

Donald H. Gips has been Group Vice President Corporate Strategy of the
Company since January 2001. Prior to that, Mr. Gips was Group Vice President
Sales and Marketing of the Company from February 2000. Prior to that, Mr. Gips
served as Senior Vice President, Corporate Development of the Company from
November 1998 to February 2000. Prior to that, Mr. Gips served in the White
House as Chief Domestic Policy Advisor to Vice President Gore from April 1997 to
April 1998. Before working at the White House, Mr. Gips was at the Federal
Communications Commission as the International Bureau Chief and Director of
Strategic Policy from January 1994 to April 1997. Prior to his government
service, Mr. Gips was a management consultant at McKinsey and Company.

John Neil Hobbs has been Group Vice President Global Sales, Distribution
and Marketing Operations since September 2000. Prior to that, Mr. Hobbs was
President, Global Accounts for Concert, a joint venture between AT&T and British
Telecom from July 1999 until September 2000. Prior to that, Mr. Hobbs was
Director Transition and Implementation for the formation of Concert representing
British Telecom from June 1998 until July 1999. From April 1997 until June 1998,
Mr. Hobbs was British Telecom's General Manager for Global Sales & Service and
from April 1994 until April 1997, Mr. Hobbs was British Telecom's General
Manager for Corporate Clients.

Joseph M. Howell, III has been Group Vice President Corporate Marketing of
the Company since February 2000. Prior to that, Mr. Howell served as Senior Vice
President, Corporate Marketing of the Company from October 1997 to February 1,
2000. Prior to that, Mr. Howell was a Senior Vice President of MFS/WorldCom from
1993 to 1997.

Michael D. Jones has served Chief Executive Officer of (i)Structure, Inc.
since August 2000. Prior to that, Mr. Jones served as Group Vice President and
Chief Information Officer of the Company from February 2000 to August 2000 and
as Senior Vice President and Chief Information Officer of the Company from
December 1998 to February 1, 2000. Prior to that, Mr. Jones was Vice President
and Chief Information Officer of Corporate Express, Inc. from May 1994 to May
1998.

Brady Rafuse has been Group Vice President of the Company President of the
Company's European operations since August 2001 and Senior Vice President of
European Sales and Marketing since December 2000. Prior to that, Mr. Rafuse
served as Head of Commercial Operations for Concert, a joint venture between
AT&T and British Telecom, from September 1999 to December 2000, and in a variety
of positions with British Telecom from 1987 until December 2000. His last
position was as General Manager, Global Energy Sector which he held from August
1998 to September 1999 and prior to that he was Deputy General Manager, Banking
Sector from April 1997 to August 1998.

Edward Van Macatee has served as Group Vice President of Global Operations
of the Company since January 2001. Prior to that, Mr. Macatee was Group Vice
President of Global Customer Operations of the Company from September 1999 until
January 2001. Prior to that Mr. Macatee was Vice President, Network Operations
of the Company from April 1998 until September 1999 and Vice President of
Managed Network Services for TCI Communications, Inc.

Ronald J. Vidal has been Group Vice President Investor Relations of the
Company since February 1, 2000. Prior to that, Mr. Vidal served as Senior Vice
President, New Ventures of the Company from October 1997 to February 1, 2000.
Prior to that, Mr. Vidal was a Vice President of MFS/WorldCom from September
1992 to October 1997. Mr. Vidal joined the Company in construction project
management in July 1983.

The Board is divided into three classes, designated Class I, Class II and
Class III, each class consisting, as nearly as may be possible, of one-third of
the total number of directors constituting the Board. The Class I Directors
consist of Walter Scott, Jr., James Q. Crowe, Mogens C. Bay, Charles C. Miller,
III and Colin V.K. Williams; the Class II Directors consist of William L.
Grewcock, Richard R. Jaros, Robert E. Julian and David C. McCourt; and the Class
III Directors consist of R. Douglas Bradbury, Kevin J. O'Hara, Kenneth E.
Stinson and Michael B. Yanney. The term of the Class I Directors will terminate
on the date of the 2004 annual meeting of stockholders; the term of the Class II
Directors will terminate on the date of the 2002 annual meeting of stockholders;
and the term of the Class III Directors will terminate on the date of the 2003
annual meeting of stockholders. At each annual meeting of stockholders,
successors to the class of directors whose term expires at that annual meeting
will be elected for three-year terms. The Company's officers are elected
annually to serve until each successor is elected and qualified or until his
death, resignation or removal.

Employees

As of December 31, 2001, Level 3 had 3,178 employees in the communications
portion of its business and (i)Structure had approximately 549 employees, for a
total of 3,727 employees. These numbers do not include the employees of
Corporate Software, since this transaction closed on March 13, 2002. Corporate
Software has approximately 800 employees worldwide.

ITEM 2. PROPERTIES

The Company's headquarters are located on 46 acres in the Northwest corner
of the Interlocken Advanced Technology Environment within the City of
Broomfield, Colorado, and within Broomfield County, Colorado. The campus
facility encompasses over 850,000 square feet of office space. In addition, the
Company has leased approximately 40,000 square feet of temporary office space in
the Broomfield, Colorado area. In Europe, the Company has approximately 211,000
square feet of office space in the United Kingdom, approximately 59,000 square
feet of office space in Germany, and approximately 14,000 square feet of office
space in France. In addition, the Company is in the process of selling 340,000
square feet of excess office space located in the City of Broomfield, Colorado.

Properties relating to the Company's coal mining segment are described
under "ITEM 1. BUSINESS - The Company's Other Businesses" above. In connection
with certain existing and historical operations, the Company is subject to
environmental risks.

The Company's Gateway facilities are being designed to house local sales
staff, operational staff, the Company's transmission and IP routing/switching
facilities and technical space to accommodate colocation of equipment by
high-volume Level 3 customers. The Company has approximately 5.8 million square
feet of space for its Gateway and transmission facilities and has completed
construction on approximately 3.3 million square feet of this space.
(i)Structure also maintains its corporate headquarters in approximately 25,000
square feet of office space in the Broomfield, Colorado area and leases
approximately 16,000 square feet of office space in Omaha, Nebraska. The
computer outsourcing business of (i)Structure is located at an 89,000 square
foot office space in Omaha and at a 60,000 square foot computer center in Tempe,
Arizona. (i)Structure maintains additional office space in Bangalore, India
(approximately 18,000 square feet) and several locations in the United Kingdom
(approximately 21,000 square feet) for its systems integration business.

The Company has announced that it is evaluating its requirements for office
and technical space and may seek to dispose of excess office and technical space
in the future.

ITEM 3. LEGAL PROCEEDINGS

In May 2001, a subsidiary of the Company was named as a defendant in Bauer,
et. al. v. Level 3 Communications, LLC, et al., a purported multi-state class
action, filed in the U.S. District Court for the Southern District of Illinois
and in July 2001, the Company was named as a defendant in Koyle, et. al. v.
Level 3 Communications, Inc., et. al., a purported multi-state class action
filed in the U.S. District Court for the District of Idaho. Both of these
actions involve the Company's right to install its fiber optic cable network in
easements and right-of-ways crossing the plaintiffs' land. In general, the
Company obtained the rights to construct its network from railroads, utilities,
and others, and is installing its network along the rights-of-way so granted.
Plaintiffs in the purported class actions assert that they are the owners of
lands over which the Company's fiber optic cable network passes, and that the
railroads, utilities, and others who granted the Company the right to construct
and maintain its network did not have the legal ability to do so. The action
purports to be on behalf of a class of owners of land in multiple states over
which the Company's network passes or will pass. The complaint seeks damages on
theories of trespass, unjust enrichment and slander of title and property, as
well as punitive damages. The Company has also received, and may in the future
receive, claims and demands related to rights-of-way issues similar to the
issues in the these cases that may be based on similar or different legal
theories. Although it is too early for the Company to reach a conclusion as to
the ultimate outcome of these actions, management believes that the Company has
substantial defenses to the claims asserted in all of these actions (and any
similar claims which may be named in the future), and intends to defend them
vigorously.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information. The Company's common stock is traded on the Nasdaq
National Market under the symbol "LVLT." As of March 8, 2002, there were
approximately 6,220 holders of record of the Company's common stock, par value
$.01 per share. The table below sets forth, for the calendar quarters indicated,
the high and low per share closing sale prices of the common stock as reported
by the Nasdaq National Market.

High Low
Year Ended December 31, 2001

First Quarter.......................................................$49.69 $15.50
Second Quarter.......................................................18.44 4.53
Third Quarter.........................................................5.48 3.14
Fourth Quarter........................................................7.32 1.98

Year Ended December 31, 2000

First Quarter......................................................$130.19 $73.81
Second Quarter.......................................................98.50 66.50
Third Quarter........................................................92.44 59.50
Fourth Quarter.......................................................75.23 26.88

Dividend Policy. The Company's current dividend policy, in effect since
April 1, 1998, is to retain future earnings for use in the Company's business.
As a result, management does not anticipate paying any cash dividends on shares
of Common Stock in the foreseeable future. In addition, the Company is
effectively restricted under certain debt covenants from paying cash dividends
on shares of its Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The Selected Financial Data of Level 3 Communications, Inc. and its
Subsidiaries appears below.

Fiscal Year Ended (1)
---------------------------------------------------
---------------------------------------------------
2001 2000 1999 1998 1997
(dollars in millions, except per share amounts)
Results of Operations:
Revenue....................................................... $1,533 $ 1,184 $ 515 $ 392 $ 332
Earnings (loss) from continuing operations (2)................ (5,448) (1,407) (482) (128) 83
Net earnings (loss) (3)....................................... (4,978) (1,455) (487) 804 248
Per Common Share:
Earnings (loss) from continuing operations (2)................ (14.58) (3.88) (1.44) (0.43) 0.33
Net earnings (loss) (3)....................................... 13.32) (4.01) (1.46) 2.66 0.37
Dividends (4)................................................. - - - - -
Financial Position:
Total assets.................................................. 9,316 14,919 8,906 5,522 2,776
Current portion of long-term debt............................. 7 7 6 5 3
Long-term debt, less current portion (5)...................... 6,209 7,318 3,989 2,641 137
Stockholders' equity (deficit) (6)........................... (65) 4,549 3,405 2,165 2,230

(1) The financial position and results of operations of the former construction
and mining management businesses (''Construction Group'') of Level 3 have
been classified as discontinued operations due to the March 31, 1998
split-off of Level 3's Construction Group from its other businesses.

Level 3 sold its energy segment to MidAmerican Energy Holdings Company
(''MidAmerican'') in 1998 and classified it as discontinued operations
within the financial statements.

The operating results of the Company's Asian operations for all periods are
included in discontinued operations in the statement of operations due to
the sale to Reach Ltd. in January 2002.

Certain prior year amounts have been reclassified to conform to current
year presentation.

(2) Level 3 incurred significant expenses in conjunction with the expansion of
its communications and information services business beginning in 1998.

In 2000, 1999 and 1998, RCN Corporation issued stock in public offerings
and for certain transactions. These transactions reduced the Company's
ownership in RCN to 31%, 35% and 41% at December 31, 2000, 1999 and 1998,
respectively, and resulted in pre-tax gains to the Company of $95 million,
$117 million and $62 million in 2000, 1999 and 1998, respectively.

In 1998, Level 3 acquired XCOM Technologies, Inc. and its developing
telephone-to-IP network bridge technology. Level 3 recorded a $30 million
nondeductible charge against earnings for the write-off of in-process
research and development acquired in the transaction.

In 1998, Cable Michigan, Inc. was acquired by Avalon Cable of Michigan,
Inc. Level 3 received approximately $129 million for its shares of Cable
Michigan, Inc. in the disposition and recognized a pre-tax gain of
approximately $90 million.

In 2001, Level 3 recorded a $3.2 billion impairment charge to reflect the
reduction in the carrying amount of certain of its communications assets in
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".

(3) In 1998, Level 3 recognized a gain of $608 million equal to the difference
between the carrying value of the Construction Group and its fair value. No
taxes were provided on this gain due to the tax-free nature of the

split-off. Level 3 also recognized in 1998 an after-tax gain of $324
million on the sale of its energy segment to MidAmerican.

In 2001, the Company recorded an impairment charge of $516 million related
to its discontinued Asian operations sold in January 2002. Losses
attributable to the Asian operations were $89 million, $48 million, $5
million, $- million and $- million for fiscal 2001, 2000, 1999, 1998 and
1997, respectively.

In 2001, Level 3 also recognized an extraordinary gain of $1.1 billion as a
result of the early extinguishment of long-term debt.

(4) The Company's current dividend policy, in effect since April 1998, is to
retain future earnings for use in the Company's business. As a result,
management does not anticipate paying any cash dividends on shares of
common stock in the foreseeable future. In addition, the Company is
effectively restricted under certain covenants from paying cash dividends
on shares of its common stock.

(5) In 1998, Level 3 issued $2 billion of 9.125% Senior Notes due 2008 and
received net proceeds of $500 million from the issuance of $834 million
principal amount at maturity of 10.5% Senior Discount Notes due 2008.

In 1999, Level 3 received $798 million of net proceeds from an offering of
$823 million aggregate principal amount of its 6% Convertible Subordinated
Notes Due 2009. In addition, Level 3 and certain Level 3 subsidiaries
entered into a $1.375 billion senior secured credit facility. Level 3
borrowed $475 million in 1999 under the senior secured credit facility.

In 2000, Level 3 received net proceeds of approximately $3.2 billion from
the offering of $863 million in convertible subordinated notes, $1.4
billion in three tranches of U.S. dollar denominated senior debt
securities, $780 million from two tranches of Euro denominated senior debt
securities and $233 million from mortgage financings.

In 2001, the Company negotiated an increase in the total amount available
under its senior secured credit facility to $1.775 billion and borrowed
$650 million under the facility. Also in 2001, the Company repurchased,
using cash and common stock, approximately $1.9 billion face amount of its
long-term debt and recognized an extraordinary gain of approximately $1.1
billion as a result of the early extinguishment of debt.

(6) In 1999, the Company received approximately $1.5 billion of net proceeds
from the sale of 28.75 million shares of its Common Stock.

In 2000, the Company received approximately $2.4 billion of net proceeds
from the sale of 23 million shares of its Common Stock.

In 2001, the Company issued approximately 15.9 million shares of common
stock, valued at approximately $72 million, to repurchase long-term debt.

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

This document contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to Level 3 Communications, Inc. and its
subsidiaries (''Level 3'' or the ''Company''). When used in this document, the
words ''anticipate'', ''believe'', ''plans'', ''estimate'' and ''expect'' and
similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document. See
''Cautionary Factors That May Affect Future Results.''

The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and accompanying notes beginning on page F-1 of this annual report.

Critical Accounting Policies

The Company has identified the policies below as critical to its business
operations and the understanding of its results of operations. The effect and
any associated risks related to these policies on the Company's business
operations is discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where these policies affect the
Company's reported and expected financial results.

Revenue

Revenue for communications services, including private line, wavelengths,
colocation, Internet access, managed modem and dark fiber revenue from contracts
entered into after June 30, 1999, is recognized monthly as the services are
provided. Reciprocal compensation revenue is recognized only when an
interconnection agreement is in place with another carrier, and the relevant
regulatory authorities have approved the terms of the agreement. Revenue
attributable to leases of dark fiber pursuant to indefeasible rights-of-use
agreements (''IRUs'') that qualify for sales-type lease accounting, and were
entered into prior to June 30, 1999, is recognized at the time of delivery and
acceptance of the fiber by the customer. Certain sale and long-term IRU
agreements of dark fiber and capacity entered into after June 30, 1999 are
required to be accounted for in the same manner as sales of real estate with
property improvements or integral equipment which results in the deferral of
revenue recognition over the term of the agreement (currently up to 20 years).

Accounting practice and guidance with respect to the accounting treatment
of the above transactions is evolving. Any changes in the accounting treatment
could affect the manner in which the Company accounts for revenue and expenses
associated with these agreements in the future.

Non-Cash Compensation

The Company applies the expense recognition provisions of SFAS No. 123,
''Accounting for Stock Based Compensation'' (''SFAS No. 123''). Most companies
do not follow the expense recognition provisions of SFAS No. 123: rather, they
disclose the information only on a pro-forma basis. As a result, these pro-forma
disclosures must be considered when comparing the Company's results of
operations to that reported by other companies. Under SFAS No. 123, the fair
value of an option or other stock-based compensation (as computed in accordance
with accepted option valuation models) on the date of grant is amortized over
the vesting periods of the options in accordance with FASB Interpretation No. 28
''Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans'' (''FIN 28''). Although the recognition of the value of the
instruments results in compensation or professional expenses in an entity's
financial statements, the expense differs from other compensation and
professional expenses in that these charges, though permitted to be settled in
cash, are generally settled through issuance of common stock, which would have a
dilutive impact upon per share net income or loss, if and when such shares are
exercised.

Long-Lived Assets

Property and equipment is stated at cost, reduced by provisions to
recognize economic impairment in value when management determines that events
have occurred that require an analysis of potential impairment. Costs associated
directly with the uncompleted network and the development of business support
systems, including employee related costs, and interest expense incurred during
the construction period are capitalized. Intercity network segments, gateway
facilities, local networks and operating equipment that have been placed in
service are being depreciated over their estimated useful lives, primarily
ranging from 3-25 years. The total cost of a business support system is
amortized over a useful life of three years. When assets are sold, retired or
otherwise disposed of, the cost and related accumulated depreciation are
eliminated from the accounts and the gain or loss is recognized.

The Company evaluates the carrying value of long-lived assets, including
property and equipment, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
exists when estimated undiscounted cash flows attributable to the assets are
less than their carrying amount. If an asset is deemed to be impaired, the
amount of the impairment loss recognized represents the excess of the asset's
carrying value as compared to its estimated fair value, based on management's
assumptions and projections. The Company recorded an impairment charge of $3.2
billion in 2001 to write down the carrying amount of its North American and
European conduits, its colocation assets and its transoceanic cable systems to
their estimated fair value as these telecommunications assets were identified as
being excess, obsolete or carried at values that may not be recoverable due to
an adverse change in the extent in which these assets were being utilized caused
by the unfavorable business climate within the telecommunications industry.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133, as amended by SFAS Nos. 137 and 138, is
effective for fiscal years beginning January 1, 2001. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
designated by the transaction. The Company currently makes minimal use of
derivative instruments as defined by SFAS No. 133. Derivative instruments, as
defined by SFAS No. 133, held by the Company at December 31, 2001 include an
interest rate cap with a market value of less than $1 million. The Company did
not designate the interest rate cap as part of a hedge transaction. The adoption
of SFAS No. 133 has not had a material effect on the Company's results of
operations or its financial position.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
No. 141"). SFAS No. 141 requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method of accounting. Prior to
the issuance of SFAS No. 141, companies accounted for mergers and acquisitions
using one of two methods; pooling of interests or the purchase method. Level 3
has accounted for acquisitions using the purchase method and does not believe
the issuance of SFAS No. 141 will have a material effect on the Company's future
results of operations or financial position.

In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 is effective for fiscal years
beginning January 1, 2002. SFAS No. 142 requires companies to segregate
identifiable intangible assets acquired in a business combination from goodwill.
The remaining goodwill is no longer subject to amortization over its estimated
useful life. However, the carrying amount of the goodwill must be assessed at
least annually for impairment using a fair value based test. Goodwill
attributable to equity method investments will also no longer be amortized but
is still subject to impairment analysis using existing guidance for equity
method investments. For the goodwill and intangible assets in place as of
December 31, 2001, the Company does not believe the adoption of SFAS No. 142
will have a material effect on the Company's results of operations or its
financial position. The Company believes the impact of SFAS No. 142 will not
have a material impact on accounting for future acquisitions as the new standard
generally results in more amortized intangible assets and less non-amortized
goodwill.

In June 2001, the FASB also approved SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS No. 143")". SFAS No. 143 establishes accounting
standards for recognition and measurement of a liability

for an asset retirement obligation and the associated asset retirement cost. The
fair value of a liability for an asset retirement obligation is to be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated retirement costs are capitalized and included as part of
the carrying value of the long-lived asset and amortized over the useful life of
the asset. SFAS No. 143 will be effective for the Company beginning on January
1, 2003. The Company expects that its coal mining business will be affected by
this standard and is currently evaluating the impact of SFAS No. 143 on its
future results of operations and financial position.

In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"), which the Company elected to
early adopt during the fourth quarter of 2001 with retroactive application as of
January 1, 2001. SFAS No. 144 supersedes SFAS No. 121, but retains its
requirements to (a) recognize an impairment loss only if the carrying amount of
a long-lived asset is not recoverable from its undiscounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and the
estimated fair value of the asset. It removes goodwill from its scope and,
therefore, eliminates the requirement to allocate goodwill to long-lived assets
to be tested for impairment. It also describes a probability-weighted cash flow
estimation approach to deal with situations in which alternative courses of
action to recover the carrying amount of a long-lived asset are under
consideration or a range is estimated for possible future cash flows. It
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held and
used until it is disposed of. In these situations, SFAS No. 144 requires that an
impairment loss be recognized at the date a long-lived asset is exchanged for a
similar productive asset or distributed to owners in a spin-off if the carrying
amount of the asset exceeds its fair value. The Company monitored and reviewed
long-lived assets for possible impairment in accordance with SFAS No. 121 prior
to the adoption of SFAS No. 144. Since SFAS No. 144 retains similar requirements
as SFAS No. 121 for recognizing and measuring any impairment loss, the adoption
of SFAS No. 144 did not have a significant effect on the Company's procedures
for monitoring and reviewing long-lived assets for possible impairment. SFAS No.
144 also retains the basic provisions of APB Opinion No. 30 "Reporting the
Results of Operations" for the presentation of discontinued operations in the
income statement but broadens the definition of a discontinued operation such
that a component of an entity (rather than a segment of a business) would be
considered to be a discontinued operation if the operations and cash flows of
the component will be eliminated from the ongoing operations of the company and
the company will not have any significant continuing involvement in the
operations of the component. A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. The adoption of SFAS No. 144 in
2001 had a significant impact on the accounting presentation of the sale of the
Asian communications business as this business would not have qualified for
treatment as a discontinued operation under APB Opinion No. 30, since it would
not have qualified as a business segment.

Results of Operations 2001 vs. 2000

The operating results of the Company's Asian operations are included in
discontinued operations for all periods presented due to their sale to Reach
Ltd. in January 2002. Certain prior year amounts have been reclassified to
conform to current year presentation.

Revenue for 2001 and 2000 is summarized as follows (in millions):

2001 2000

Communications........................................................... $ 1,298 $ 857
Information Services..................................................... 123 115
Coal Mining.............................................................. 87 190
Other.................................................................... 25 22
----- -----
$ 1,533 $ 1,184
======= =======

Communications revenue increased in 2001 by 51% compared to 2000. Included
in total communications revenue of $1.298 billion for 2001 was $876 million of
services revenue which includes private line, wavelengths, colocation, managed
modem and amortized dark fiber revenue, $288 million of non-recurring revenue
from dark fiber contracts entered into before June 30, 1999 for which sales-
type lease accounting was used and $134 million attributable to reciprocal
compensation. Communications revenue for 2000 was comprised of $593 million of

services revenue, $209 million of non-recurring revenue from dark fiber and $55
million of reciprocal compensation. The increase in services revenue from 2000
was primarily due to growth in both existing customers as well as new customer
contracts. Services revenue in 2000 includes revenue of $105 million related to
submarine systems, primarily from the completion of the Company's transatlantic
submarine cable and subsequent sale to Viatel Inc. in November of 2000. Due to
the current economic conditions of the telecommunications industry, the Company
has experienced a significant increase in the number of customers disconnecting
or terminating service and believes that as much as 25% of its recurring revenue
base as of December 31, 2001, consists of financially weaker customers.
Approximately 80% of these customers are expected to disconnect services during
the first six months of 2002. These terminations, if they occur, will result in
slower growth of services revenue for 2002. For some of these customers, Level 3
is able to negotiate and collect termination penalties. Level 3 recognized $57
million of revenue in 2001 for early termination of services. Level 3 recorded
in services revenue in 2001, $35 million of revenue for construction management
services provided to other communications companies. The dark fiber revenue
reflects the substantial completion of the intercity network. Dark fiber revenue
under sales-type lease accounting is expected to be insignificant in 2002 as the
last remaining segments sold prior to June 30, 1999 were delivered to and
accepted by customers in the fourth quarter of 2001. The increase in reciprocal
compensation in 2001 is a result of increased managed modem usage and the
Company receiving regulatory approval from several states regarding its
agreements with SBC Communications Inc. and BellSouth. These agreements
established a rate structure for transmission and switching services provided by
one carrier to complete or carry traffic originating on another carrier's
network. It is the Company's policy not to recognize revenue from these
agreements until the relevant regulatory authorities approve the agreements.
Certain interconnection agreements with carriers expire in the second half of
2002 and in 2003. To the extent that the Company is unable to sign new
interconnection agreements, reciprocal compensation revenue may decline
significantly over time.

Level 3 was a party to seven non-monetary exchange transactions in 2001
whereby it sold IRUs, other capacity, or other services to a company from which
Level 3 received communications assets or services. In total these exchanges
accounted for $24 million or less than 2% of total communications revenue in
2001 and in each case, provided needed network capacity or redundancy on
unprotected transmission routes. The value of these non-monetary transactions
was determined using similar transactions for which cash consideration was
received. Level 3 recognized no revenue from non-monetary exchange transactions
in 2000.

Information services revenue, which is comprised of applications and
outsourcing businesses, increased from $115 million in 2000 to $123 million in
2001. The increase is primarily attributable to outsourcing revenue which
increased to $85 million for the year ended December 31, 2001 compared to $65
million for the same period in 2000. The increase in outsourcing revenue is
primarily due to new long-term contracts signed in the second half of 2000.
Revenue attributable to the applications business declined due to the expiration
of certain contracts. If the applications business is unable to generate new
sales in 2002, revenue is expected to decline further as a significant customer
has notified the Company that it will not be extending its contract beyond June
30, 2002. Revenue attributable to this customer represented approximately 61% of
total applications revenue in 2001.

The communications business generated Cash Revenue of $2.097 billion during
2001 compared to $1.261 billion in 2000. The Company defines Cash Revenue as
communications revenue plus changes in cash deferred revenue (deferred revenue
adjusted for changes in related accounts receivable) during the respective
period. Communications Cash Revenue primarily reflects cash or other
communications assets received for dark fiber and other capacity sales where
revenue is deferred and then recognized over the term of the contract under
GAAP. This increase is a result of growth in services revenue provided to
existing customers, new customer contracts and cash collections from those
customers. At December 31, 2001, deferred revenue increased by approximately
103% to $1.459 billion from $720 million at December 31, 2000. The amount of
deferred revenue billed, but not collected as of the end of the year decreased
from $205 million in 2000 to $145 million in 2001. For fiscal 2000, deferred
revenue increased by $585 million and the amount not collected increased by $181
million. Communications Cash Revenue is not intended to represent revenue under
GAAP.

2001 2000

Communications Revenue...................................................... $ 1,298 $ 857
Change in Deferred Revenue.................................................. 739 585
Change in Deferred Revenue Billed but not Collected......................... 60 (181)
----- -----
Communications Cash Revenue $ 2,097 $ 1,261
======= =======

Coal mining revenue decreased $103 million in 2001 compared to 2000. The
decrease in revenue is primarily attributable to the expiration of long-term
coal contracts with Commonwealth Edison Company ("Commonwealth Edison") and the
sale of the Company's interest in Walnut Creek Mining Company in September 2000.

Other revenue for 2001 was comparable to 2000 and is primarily attributable
to California Private Transportation Company, L.P. ("CPTC"), the owner-operator
of the SR91 tollroad in southern California.

Cost of Revenue for 2001 was $742 million, representing a 6% decrease over
2000 cost of revenue of $792 million. This decrease is a result of the continued
migration of customers off of leased capacity to the Company's network and a
decrease in the costs associated with transoceanic sales, specifically costs
attributable to the Viatel transaction in 2000. Cost of revenue includes costs
attributable to dark fiber and transoceanic sales and leased capacity,
right-of-way costs, access charges and other third party costs directly
attributable to the network. Overall the cost of revenue for the communications
business, as a percentage of revenue, decreased significantly from 73% during
2000 to 46% during 2001. The decrease can again be attributed to the migration
of customer traffic from a leased network to the Company's owned network and
increased margins resulting from recent sales efforts focused on "on-net"
services. Cost of revenue for the communications business, as a percentage of
revenue, is expected to decline from 2001 levels.

The cost of revenue for the information services businesses, as a
percentage of its revenue, in 2001 was 73% and approximated the 2000 figure of
77%. The cost of revenue for the coal mining business, as a percentage of
revenue, was 68% for 2001 up from 40% in 2000. The increase related to coal
mining is attributable to the expiration of high margin long-term coal contracts
in 2000.

Depreciation and Amortization expenses were $1.122 billion in 2001, a 94%
increase from 2000 depreciation and amortization expenses of $579 million. The
majority of the increase is a direct result of the communications assets placed
in service in the latter part of 2000 and 2001, including gateways, local
networks and intercity segments. In addition, included in 2001 depreciation
expense is $45 million for the impairment charge on a corporate facility the
Company designated as held-for-sale in June of 2001.

Depreciation expense is expected to decrease significantly in 2002 as a
result of the impairment charges taken in 2001 against the colocation assets,
conduits in North America and European intercity and metropolitan networks, and
certain transoceanic assets. The Company will continue to review the depreciable
lives of its existing telecommunications assets in order to verify that they
correspond to the period of the estimated future benefits.

Selling, General and Administrative expenses were $1.297 billion in 2001, a
17% increase over 2000. Excluding non-cash compensation expenses of $314 million
and $236 million for 2001 and 2000, respectively, operating expenses increased
12% from the prior year. This increase is attributable to higher payroll
expenses, professional fees, facilities related costs, and systems maintenance
expenses, partially offset by declines in travel, mine management services and
recruiting expenses. The increase in non-cash compensation is predominantly due
to the convertible outperform stock options granted in 2000 and 2001. Selling,
general and administrative costs for 2002 are expected to decline from 2001
levels due to the workforce reductions and cost savings initiatives implemented
in 2001.

Restructuring and Impairment Charges were $3.35 billion in 2001. The
Company announced that due to the duration and severity of the economic slowdown
for the telecommunications industry, it would be necessary to reduce operating
expenses as well as reduce and reprioritize capital expenditures in an effort to
be in a position to benefit when the economy recovers. As a result of these
actions, the Company reduced its global work force by

approximately 2,200 employees in 2001, primarily in the communications business
in the United States and Europe. Restructuring charges of approximately $10
million, $40 million and $58 million were recorded in the first, second and
fourth quarters of 2001, respectively, of which $66 million related to staff
reduction and related costs and $42 million to real estate lease termination
costs. In total, the Company has paid $49 million in severance and related
fringe benefit costs and $1 million in lease termination costs as of December
31, 2001 for these actions. The remaining $17 million of expenditures for
workforce reductions primarily relate to approximately 200 European employees
terminated in the first quarter of 2002. Lease termination obligations of $41
million are expected to be substantially paid by June 30, 2002. The Company
believes that after these restructuring charges, its cost structure will be
better aligned with estimated future revenue streams.

The economic slowdown and the related capital reprioritization discussed
above resulted in certain telecommunications assets being identified as excess,
obsolete or carried at values that may not be recoverable due to an adverse
change in the extent in which the telecommunication assets were being utilized
caused by the unfavorable business climate within the telecommunications
industry. As a result, in the second quarter of 2001 the Company recorded a
non-cash impairment charge of $61 million, representing the excess of the
carrying value over the fair value of these assets. The fair value of the spare
equipment was based on recent cash sales of similar equipment. The impaired
assets were written-off, as the Company does not expect to utilize them to
generate future cash flows.

In the fourth quarter of 2001, in light of the continued economic
uncertainty, continued customer disconnections at higher rates than expected,
increased difficulty in obtaining new revenue, and the overall slow down in the
communications industry, the Company again reviewed the carrying value of its
long-lived assets for possible impairment in accordance with SFAS No. 144. The
Company determined based upon its projections, giving effect to the continuing
economic slowdown and continued over-capacity in certain areas of the
telecommunications industry, the estimated future undiscounted cash flows
attributable to certain assets or assets groups would not exceed the current
carrying value of the assets. The Company, therefore, recorded an impairment
charge of $3.2 billion to reflect the difference between the estimated fair
value of the assets on a discounted cash flow basis and their current carrying
value as further described below.

The impairments primarily relate to colocation assets, excess conduits in
North America and European intercity and metropolitan networks, and certain
transoceanic assets. Geographically, approximately 74% of the charges are
attributable to North America, 17% are attributable to Europe and 9%
attributable to transatlantic assets.

The financial problems of many of the "dot-coms", emerging carriers and
competitors, a weakening economy, and changing customer focus, have led to an
over-capacity of colocation space in several U.S. and European markets. Level 3
is attempting to sell or sublease its excess colocation space; however, current
market rates for much of the space are below its carrying values. As a result,
the Company recorded an impairment charge of approximately $1.6 billion related
to its colocation assets, which includes owned facilities, leasehold
improvements and related equipment.

Level 3 constructed its networks in North America and Europe in such a way
that they could be continuously upgraded to the most current technology without
affecting its existing customers. Level 3 also installed additional conduits
with the intention of selling them to other carriers. To date, the Company has
sold one conduit in its North American network and, due to the current economic
environment and decreasing capital expenditure budgets of potential buyers, does
not expect additional sales in the foreseeable future. For this reason the
Company has recorded an impairment charge of approximately $1.2 billion for the
conduits that were previously determined to be available for sale to third
parties based on estimated cash flows from the disposition of the conduits.

The completion of several systems in the second half of 2001 and the
expected completion of additional systems in 2002, have resulted in an over
abundance of tranoceanic capacity. This excess capacity, combined with limited
demand, have adversely affected the transoceanic capacity markets. At current
pricing levels, the Company does not believe it will recover its investment in
transoceanic capacity from the future cash flows of these assets. As a result,
the Company has recorded an impairment charge of approximately $320 million for
its transatlantic submarine assets.

The Company also recorded an impairment charge of approximately $65 million for
spare equipment write-downs and abandoned lateral builds in the fourth quarter
of 2001.

EBITDA, as defined by the Company, consists of earnings (losses) before
interest, income taxes, depreciation, amortization, non-cash operating expenses
(including stock-based compensation and impairment charges) and other
non-operating income or expenses. The Company excludes non-cash stock
compensation due to its adoption of the expense recognition provisions of SFAS
No. 123. EBITDA improved to a loss of $300 million in 2001 from a loss of $482
million in 2000. Excluding the $108 million of restructuring charges recorded in
2001, EBITDA would have been a loss of $192 million for 2001. The improvement in
EBITDA is predominantly due to revenue growth and higher margins earned by the
communications business.

Adjusted EBITDA, as defined by the Company, is EBITDA as defined above plus
the change in cash deferred revenue and excluding the non-cash cost of goods
sold associated with certain capacity sales and dark fiber contracts. For 2001,
Adjusted EBITDA was $659 million compared to $118 million for 2000. The
increase, in addition to the higher margins noted above, can be attributed to
up-front cash payments received from customers for contracts that require
revenue to be recognized over the term of the contract.

2001 2000

EBITDA ....................................................................... $ (300) $ (482)
Change in Deferred Revenue.................................................... 739 585
Change in Deferred Revenue Billed but not Collected........................... 60 (181)
Non-cash Cost of Goods Sold................................................... 160 196
----- -----
Adjusted EBITDA $ 659 $ 118
===== =====

EBITDA and Adjusted EBITDA are not intended to represent operating cash
flow or profitability for the periods indicated and are not calculated in
accordance with GAAP. See Consolidated Statement of Cash Flows.

Interest Income declined from $328 million in 2000 to $161 million in 2001.
The decrease is primarily attributable to the average cash and marketable
securities balance declining from $5.7 billion during 2000 to $3.1 billion for
2001. In February 2000, the Company raised approximately $5.5 billion in cash
through debt and equity offerings. The Company has subsequently utilized these
proceeds to fund its business plan and repurchase outstanding debt. In addition,
the weighted average interest rate earned on the portfolio decreased by
approximately 120 basis points for 2001 versus 2000. The Company expects
interest income to continue to decline in 2002 due to utilization of funds to
repurchase debt, pay operating and interest expenses, and fund capital
expenditures, as well as lower interest rates. Pending utilization of the cash,
cash equivalents and marketable securities, the Company invests the funds
primarily in government and government agency securities. The investment
strategy will provide lower yields on the funds, but is expected to reduce the
risk to principal in the short term prior to using the funds in implementing the
Company's business plan.

Interest Expense, net increased to $646 million from $282 million in 2001
compared to 2000. The interest expense and amortization of debt issuance costs
associated with the debt raised in late February 2000, the commercial mortgages
entered into during the latter half of 2000, and the increase in the size of the
Senior Secured Credit Facility in the first quarter of 2001 all contributed to
the increase in interest expense. Additionally, the increase can be attributed
to a decrease in the amount of interest capitalized in 2001 as compared to 2000.
The Company completed a significant portion of the network and other
communications related facilities during 2001, therefore reducing the amount of
interest capitalized. Capitalized interest was $58 million in 2001 versus $353
million in 2000. Partially offsetting these increases was the retirement of
approximately $1.9 billion face amount of debt in the third and fourth quarters
of 2001 and lower variable interest rates attributable to the senior secured
credit facility and GMAC mortgage.

Interest expense is expected to decline in future periods as a result of
the convertible subordinated debt repurchased during the third quarter of 2001
and the senior debt and convertible subordinated debt securities repurchased in
the "Modified Dutch Auction" completed in October of 2001. These transactions
are expected to reduce annualized interest expense and annualized cash interest
expense by approximately $175 million and $160 million, respectively.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries was earnings of
$16 million in 2001, compared to loss of $284 million in 2000. The equity losses
in 2000 are predominantly attributable to RCN Corporation ("RCN"). RCN is a
facilities-based provider of communications services to the residential markets
primarily on the East and West coasts as well as in Chicago. RCN is also the
largest regional Internet service provider in the Northeast. RCN is incurring
significant costs in developing its business plan. The Company's proportionate
share of RCN's losses exceeded the remaining carrying value of Level 3's
investment in RCN during the fourth quarter of 2000. Level 3 does not have
additional financial commitments to RCN; therefore it only recognized equity
losses equal to its investment in RCN. The Company will not record any equity in
RCN's future profits, until unrecorded equity losses have been offset. The
Company did not recognize $249 million and $20 million of equity losses
attributable to RCN in 2001 and 2000, respectively. Level 3 recorded equity
losses attributable to RCN of $260 million for the twelve months ended December
31, 2000.

Equity in earnings/losses of Commonwealth Telephone Enterprises, Inc.
("Commonwealth Telephone") were earnings of $16 million in 2001 and losses of
$24 million in 2000. In 2000, Commonwealth Telephone recognized losses primarily
due to a charge for the restructuring of its CTCI subsidiary. As a result, Level
3 recorded a $27 million charge, in equity in earnings (losses) of
unconsolidated subsidiaries, for its proportionate share of this charge. In
2001, Commonwealth Telephone, in addition to improved operating results, was
also able to recognize a one-time benefit related to the settlement of certain
restructuring liabilities recorded in 2000.

Gain on Equity Investee Stock Transactions was $100 million for the twelve
months ended December 31, 2000. Specifically, RCN issued stock for certain
transactions, which diluted the Company"s ownership interest. The pre-tax gains
resulted from the increase in the Company's proportionate share of RCN's net
assets related to these transactions. The Company did not record any gains on
equity investee stock transactions during 2001 due to the suspended equity
losses attributable to RCN.

Other, net increased from a loss of $21 million for 2000 to a gain of $2
million for 2001. In 2001, Other, net includes a charge for an other-than
temporary decline in the value of investments of $37 million and $27 million of
gains when divine, inc. agreed to release Level 3 from a deferred revenue
obligation. Additionally, the Company recorded losses of $19 million in 2001
related to losses on certain fixed asset disposals and $31 million of other
items, primarily $17 million of realized gains from the sale of Euro denominated
marketable securities. In 2000, Other, net is primarily comprised of a $22
million gain from the sale of the Company's 50% ownership interest in the Walnut
Creek Mining Company and a loss of $37 million from the other-than temporary
decline in the value of investments.

Level 3 announced in March 2002, that it intends to sell 4,025,000 shares
of Commonwealth Telephone that it currently holds. If this sale occurs, Level 3
will recognize a significant gain on the disposition of these shares.

Income Tax Benefit for 2001 was zero as a result of the Company exhausting
the taxable income in the carryback period in 2000. As of December 31, 2001,
Level 3 had approximately $1.8 billion of net operating loss carryforwards
available to offset future taxable income. At this time, the Company is unable
to determine when it will have taxable income to offset the loss carryforwards.
The tax benefit for 2000 differs from the statutory rate due to the limited
availability of taxable income in the carryback period for which current year
losses can be offset.

On March 9, 2002, legislation was enacted that will enable the Company to
carry its taxable net operating losses back five years. As a result, the Company
expects to receive a Federal income tax refund of approximately $120 million
after it files its 2001 Federal income tax return carrying back the taxable loss
to 1996. This benefit will be reflected in the first quarter 2002 financial
statements in accordance with SFAS No. 109 "Accounting for Income Taxes".

Discontinued Operations includes the results of operations and the
estimated loss on the disposal of Level 3's Asian assets. On December 19, 2001,
Level 3 announced that it had agreed to sell its Asian telecommunications
business to Reach Ltd. for no cash consideration. The agreement covers
subsidiaries that include the Asian network operations, assets, liabilities and
future financial obligations. This includes Level 3's share of the Northern
Asian cable system, capacity on the Japan-US cable system, capital and
operational expenses related to these two systems, gateways in Hong Kong and
Tokyo, and existing customers on Level 3's Asian

network. Level 3 estimates that this transaction will reduce its future funding
requirements by approximately $300 million through a combination of reductions
in capital expenditures, network and operating expenses, taxes and working
capital.

The transaction closed on January 18, 2002. As of December 31, 2001, the
net carrying value of Level 3's Asian assets was approximately $465 million. In
accordance with SFAS No. 144, Level 3 recorded an impairment loss, within
discontinued operations, equal to the difference between the carrying value of
the assets and their fair value. Based upon the terms of the sale agreement, the
Company also accrued $51 million in certain remaining capital obligations it
assumed for the two submarine systems to be sold to Reach, and estimated
transaction costs. The losses from the discontinued Asian operating activities
in 2001 and 2000 were $89 million and $48 million, respectively. The higher
losses are primarily attributable to increases in depreciation expense and
selling, general and administrative expenses.

Extraordinary Gain on Debt Extinguishment was $1.1 billion for the twelve
months ended December 31, 2001. The Company recognized gains of approximately
$117 million, after transaction and debt issuance costs, when it exchanged
approximately 15.9 million shares of common stock, valued at approximately $72
million, for $194 million of its convertible subordinated notes in several
private transactions. The Company also recognized gains of approximately $967
million when it repurchased approximately $1.7 billion of debt for approximately
$731 million in cash, including accrued interest, through the Modified Dutch
Auction completed in October of 2001. Offsetting these gains were losses of $9
million from the write-off of debt issuance costs and prepayment expenses CPTC
incurred to refinance its long-term debt.

Level 3 continued to repurchase debt in January and February of 2002 using
cash and equity. The Company expects to recognize an extraordinary gain of
approximately $130 million in the first quarter of 2002 as a result of the
transactions completed through March 13, 2002.

Results of Operations 2000 vs. 1999

Revenue for the years ended December 31, 2000 and December 31, 1999 is
summarized as follows (in millions):

2000 1999

Communications........................................................... $ 857 $ 159
Information Services..................................................... 115 130
Coal Mining.............................................................. 190 207
Other.................................................................... 22 19
----- -----
$ 1,184 $ 515
======= =====

Communications revenue increased by 439% to $857 million in 2000. In 2000,
the Company generated services revenue, including private line, wavelengths,
colocation, managed modem, and dark fiber revenue associated with contracts
entered into after June 30, 1999, of $593 million compared to $100 million in
1999. The completion of several metropolitan networks and Gateways in the United
States and Europe are primarily responsible for the increase. At December 31,
2000, Level 3 had local networks in 32 domestic and international cities and
Gateway facilities in 60 markets. This compares to 25 local networks and 31
Gateways at the end of 1999. Level 3 also recognized revenue of $105 million
related to submarine systems, primarily from the completion of its transatlantic
submarine cable and subsequent sale to Viatel Inc. in November of 2000. Dark
fiber sales for contracts entered into before June 30, 1999 increased from $35
million in 1999 to $209 million in 2000. This is a result of a significant
portion of Level 3's North American intercity network being completed in 2000.
Also included in 2000 communications revenue was $55 million of reciprocal
compensation revenue from executed and approved interconnection agreements
compared to $24 million in 1999. Level 3 reached an agreement with SBC
Communications, Inc. in January 2001 which establishes a rate structure for
transmission and switching services provided by one carrier to complete or carry
traffic originating on another carrier's network. The implementation of the rate
structure and reciprocal compensation billing settlement is contingent upon
certain conditions including approval by relevant regulatory authorities. Level
3 did not recognize any revenue related to

this agreement in 2000. Information services revenue declined by $15 million in
2000 to $115 million. This decline is primarily attributable to Year 2000
computer processing and consulting work completed in 1999.

The communications business generated Cash Revenue of $1.26 billion in
2000. In addition to revenue, the Company includes the change in the cash
portion of deferred revenue in its definition of Cash Revenue. The increase in
cash deferred revenue for the communications business for the year was $404
million and is in part due to the implementation of FIN 43 which requires the
Company to defer the recognition of certain dark fiber contracts and IRU sales
over the term of the agreement, typically 10-20 years. For these types of
agreements, the Company normally receives a deposit at the time the contract is
signed and the remainder when the fiber is delivered and accepted by the
customer. In 1999, Cash Revenue for the communications business was $243
million.

2000 1999

Communications Revenue...................................................... $ 857 $ 159
Change in Deferred Revenue.................................................. 585 108
Change in Deferred Revenue Billed but not Collected......................... (181) (24)
----- -----
Communications Cash Revenue $ 1,261 $ 243
======= =====

Coal Mining revenue declined approximately 8% in 2000 from $207 million in
1999 to $190 million in 2000. Coal revenue was expected to decline in 2000 as a
result of the reduced shipments under long-term coal contracts and the sale of
the Company's entire interest in Walnut Creek Mining Company.

Other revenue in 2000 approximated 1999 revenue and is primarily
attributable to California Private Transportation Company, L.P.

Cost of Revenue for 2000 was $792 million, representing a 120% increase
over 1999 cost of revenue of $360 million as a result of the expanding
communications business. Overall the cost of revenue for the communications
business, as a percentage of revenue, decreased significantly from 115% during
1999 to 73% for 2000. This decrease is attributed to the expanding
communications business. The Company recognized $196 million of costs associated
with dark fiber and transoceanic cable sales in 2000. The cost of revenue for
the information services businesses, as a percentage of its revenue, was 77% for
2000 compared to 65% for 1999. Lower margins on new contracts and the omission
of Year 2000 related work resulted in the decline in margins. The cost of
revenue for the coal mining business, as a percentage of revenue, was 40% for
2000 and 45% in 1999. In December 1999, Commonwealth Edison and the Company
renegotiated certain coal contracts whereby Commonwealth Edison was no longer
required to take delivery of its coal commitments but still must pay Level 3 the
margins Level 3 would have earned had the coal been delivered.

Depreciation and Amortization expenses for 2000 were $579 million, a 154%
increase over 1999 deprecation and amortization expenses of $228 million. This
increase is a direct result of the communications assets placed in service in
the later half of 1999 and throughout 2000, including Gateways, local
metropolitan networks and domestic international and submarine networks.

Selling, General and Administrative expenses were $1.1 billion in 2000,
representing a 67% increase over 1999. This increase primarily results from the
Company's addition of over 2,350 employees during 2000. There was a substantial
increase in compensation, travel and facilities costs due to the additional
employees. The Company also recorded $236 million in non-cash compensation
expense for the year ended December 31, 2000, for expenses recognized under SFAS
No. 123 related to grants of stock options and warrants; $125 million of
non-cash compensation was recorded for the same period in 1999. The increase in
non-cash compensation is due predominantly to an increase in the number of
employees. Communications, insurance, bad debt, data processing and marketing
costs also contributed to the higher selling, general and administrative
expenses. In addition to the expenses noted above, the Company capitalized $162
million and $116 million of selling, general and administrative expenses in 2000
and 1999, respectively, which consisted primarily of compensation expense for
employees and consultants working on capital projects.

EBITDA, as defined by the Company, decreased to a loss of $482 million for
the year ended December 31, 2000 from a $383 million loss for 1999. This
decrease was predominantly due to the increase in selling, general and

administrative expenses resulting from the rapid expansion of the communications
business. EBITDA is commonly used in the communications industry to analyze
companies on the basis of operating performance.

Adjusted EBITDA, as defined by the Company, was a $118 million gain
compared to a loss of $282 million in 1999. An increase in cash deferred revenue
of $404 million and non-cash cost of goods sold related to transoceanic and dark
fiber sales of $196 million are primarily responsible for the improved Adjusted
EBITDA figures.

2000 1999

EBITDA....................................................................... $ (482) $ (383)
Change in Deferred Revenue................................................... 585 108
Change in Deferred Revenue Billed but not Collected.......................... (181) (24)
Non-cash Cost of Goods Sold.................................................. 196 17
----- -----
Adjusted EBITDA $ 118 $(282)
===== =====

EBITDA and Adjusted EBITDA are not intended to represent operating cash
flow for the periods indicated and are not GAAP. See Consolidated Statements of
Cash Flows.

Interest Income was $328 million for 2000 compared to $212 million in 1999.
This 55% increase was predominantly due to the Company's increased average cash,
cash equivalents and marketable securities balances. Average cash balances
increased largely due to the approximately $5.4 billion in proceeds received
from the February 29, 2000 debt and equity offerings. The Company's average cash
balance also increased as a result of the September 1999 6% Convertible
Subordinated Notes offering and the Senior Secured Credit Facility agreement.
The increase in interest income is also due to increasing yields on the
Company's investments due to increased market rates.

Interest Expense, net for 2000 of $282 million represents a 62% increase
from 1999. The substantial increase was due to the 6% Convertible Subordinated
Notes issued in September 1999, the Senior Secured Credit Facility entered into
in September 1999, as well as the approximately $3 billion in debt securities
issued on February 29, 2000. The amortization of the related debt issuance costs
also contributed to the increased interest expense in 2000. Partially offsetting
this increase was an increase in capitalized interest to $353 million in 2000
from $116 million in 1999.

Equity in Losses of Unconsolidated Subsidiaries was $284 million in 2000
compared to $127 million in 1999. The equity losses are predominantly
attributable to the Company's investment in RCN. RCN is incurring significant
costs in developing its business plan. The Company's share of RCN's losses,
increased to $260 million in 2000 from $135 million in 1999. During the fourth
quarter of 2000, Level 3's proportionate share of the RCN's fourth quarter
losses exceeded the remaining carrying value of Level 3's investment in RCN.
Level 3 does not have additional financial commitments to RCN; therefore it can
only recognize equity losses equal to its investment in RCN. As of December 31,
2000, Level 3 had not recorded approximately $20 million of equity losses
attributable to RCN's fourth quarter losses. Equity losses for 2000 also include
$24 million of losses attributable to Commonwealth Telephone. In December 2000,
Commonwealth Telephone announced that it was going to record a charge to
earnings for the restructuring of its CTCI subsidiary. Therefore, Level 3
recorded $27 million of equity losses, representing its proportionate share of
the restructuring charge.

Gains on Equity Investee Stock Transactions was $100 million for 2000 compared
to $118 million for 1999. RCN issued stock for the acquisition of 21st Century
Telecom Group, Inc. and for certain transactions in early 2000, which diluted
the Company's ownership of RCN from 35% at December 31, 1999 to 31% at December
31, 2000. These transactions diluted Level 3's ownership in RCN but increased
its proportionate share of RCN's common equity. As a result, Level 3 recognized
$95 million of pre-tax gains related to RCN stock activity in 2000. In 1999, RCN
issued stock in a public offering and for certain transactions, which resulted
in a pre-tax gain of $117 million to the Company. The Company does not expect to
recognize future gains on RCN stock activity unless the gains exceed the
accumulated net equity losses not recognized by the Company. Level 3 also
recognized pre-tax gains of $5 million and $1 million in 2000 and 1999,
respectively, for Commonwealth Telephone stock activity that diluted the
Company's ownership to 46% at December 31, 2000.

Gain (Loss) on Sale of Assets decreased to a $19 million loss in 2000. In
the second half of 2000, market conditions and the valuations assigned to
companies in certain Internet related sectors and the Company's view of the
business prospects of such entities declined dramatically. Therefore, the
Company recorded a $37 million pre-tax charge for an other-than-temporary
decline in the value of a publicly traded investment. Partially offsetting this
charge was a $21 million pre-tax gain on the sale of the Company's entire
interest in the Walnut Creek Mining to Peter Kiewit Sons' Inc. Also included are
gains and losses on the sale of construction and other operating equipment.

Other, net decreased to a loss of $2 million in 2000 from a $7 million gain
in 1999. The decrease is predominately due to foreign exchange losses recorded
in 2000.

Income Tax Benefit for 2000 differs from the prior year and the statutory
rate primarily due to limited availability of taxable income in the carryback
period to offset current year losses. The income tax benefit for 1999 differs
from the statutory rate of 35% primarily due to losses incurred by the Company's
international subsidiaries which cannot be included in the consolidated U.S.
federal return, nondeductible goodwill amortization expense and state income
taxes. For fiscal 2000, Level 3 recognized a benefit equal to the amount of
refund available due to utilization of net operating loss carrybacks. As of
December 31, 2000, Level 3 had approximately $638 million of net operating loss
carryforwards available to offset future taxable income.

Discontinued Operations increased from a loss of $5 million in 1999 to a
loss of $48 million in 2000. Level 3 began operations in Asia in the latter half
of 1999 and continued to expand them throughout 2000. Employee compensation and
facility related costs primarily account for the increased losses.

Financial Condition-December 31, 2001

The Company's working capital decreased from $3.1 billion at December 31,
2000 to $0.6 billion at December 31, 2001 due primarily to the use of available
funds in payment of selling, general and administrative expenses, interest
expense, construction of the Level 3 network and debt repurchases by Level 3
Finance, LLC. Proceeds from the Senior Secured Credit Facility borrowings in the
first quarter of 2001 increased working capital.

Cash provided by operations decreased from $1.0 billion in the twelve
months ended December 31, 2000 to $141 million in 2001. Fluctuations in the
components of working capital are primarily responsible for the decline.
Reductions in accounts payable and lower income tax refunds were partially
offset by an increase in deferred revenue and lower receivable balances.

Investing activities include using the proceeds from the first quarter
Senior Secured Credit Facility term loan borrowing and cash on hand to purchase
$1.2 billion of marketable securities and complete approximately $2.4 billion of
capital expenditures, primarily for the communications network. The Company also
realized $3.7 billion of proceeds from the sales and maturities of marketable
securities and $67 million of proceeds from the sale of certain operating assets
and construction equipment, and spent $110 million on assets held for sale.

Financing activities in 2001 consisted primarily of the net proceeds of
$636 million from the first quarter 2001 Senior Secured Credit Facility term
loan borrowing for the telecommunications business. CPTC received $125 million
of net cash from its refinancing and repaid long-term debt of $114 million.
Level 3 Finance, LLC repurchased approximately $1.7 billion face amount of debt
and accrued interest for approximately $695 million and $36 million,
respectively. In addition, Level 3, in non-cash transactions, exchanged
approximately $194 million of its convertible subordinated notes for
approximately $72 million of its common stock.

The Company invested approximately $226 million in its discontinued Asian
operations in 2001 including approximately $178 million for capital
expenditures.

Liquidity and Capital Resources

The Company is a facilities-based provider (that is, a provider that owns
or leases a substantial portion of the property, plant and equipment necessary
to provide its services) of a broad range of integrated communications

services. The Company has created, through a combination of construction,
purchase and, to a lesser extent, leasing of facilities and other assets, an
advanced, international, end-to-end, facilities-based communications network.
The Company has designed its network based on optical and Internet Protocol
technologies in order to leverage the efficiencies of these technologies to
provide lower cost communications services.

The further development of the communications business will continue to
require significant expenditures. These expenditures may result in substantial
negative operating cash flow and substantial net operating losses for the
Company for the foreseeable future. The Company's capital expenditures in
connection with its business plan were approximately $2.3 billion during 2001.
The majority of the spending was for construction of the U.S. and European
intercity networks, certain local networks in the U.S. and Europe, and the
transoceanic cable network. Through December 31, 2001, the total cost of the
Level 3 network by region, including intercity and metropolitan networks,
optronic and other transmission equipment, transmission facilities including
gateway facilities and the regions allocated portion of undersea cables was $9.2
billion for North America and $1.7 billion for Europe. The Company's capital
expenditures are expected to decline significantly since construction of its
North American and European networks are now substantially complete. The
substantial majority of the Company's ongoing capital expenditures are expected
to be success-based, or tied to incremental revenue. The Company estimates that
its base capital expenditures, excluding success-based capital expenditures,
will total approximately $200 million in 2002.

The cash and marketable securities already on hand and the undrawn
commitments of approximately $650 million at December 31, 2001 under the
expanded Senior Secured Credit Facility (see below), provided Level 3 with
approximately $2.1 billion of available funds at the end of 2001. Based on
information available at this time, management of the Company believes that the
Company's current liquidity and anticipated future cash flows from operations
will be sufficient to fund its business plan through free cash flow breakeven.

The Company currently estimates that the implementation of the business
plan from its inception through free cash flow breakeven will require
approximately $13 billion to $14 billion on a cumulative basis. The Company also
currently estimates that its operations will reach free cash flow breakeven
without a requirement for additional financing. The timing of free cash flow
breakeven will be a function of revenue and cash revenue growth as well as the
Company's management of network, selling, general and administrative, and
capital expenditures. The Company's successful debt and equity offerings have
given the Company the ability to implement the business plan. However, if
additional opportunities should present themselves, the Company may be required
to secure additional financing in the future. In order to pursue these possible
opportunities and provide additional flexibility to fund its business plan, in
January 2001 the Company filed a "universal" shelf registration statement for an
additional $3 billion of common stock, preferred stock, debt securities,
warrants, stock purchase agreements and depositary shares. This shelf filing, in
combination with the remaining availability under a previously existing
universal shelf registration statement, will allow Level 3 to offer an aggregate
of up to $3.2 billion of additional securities to fund its business plan.

In addition to raising capital through the debt and equity markets, the
Company may sell or dispose of existing businesses or investments to fund
portions of the business plan. In February 2002, Level 3 announced that
Commonwealth Telephone had filed a registration statement allowing the Company
to sell 3,165,500 shares of Commonwealth Telephone in a public offering. On
March 8, the registration statement was amended to increase the number of shares
to be sold by the Company up to 4,025,000. In addition, the Company has
announced that it will seek to sell or sublease excess real estate. The Company
may also sell or lease fiber optic capacity, or access to its conduits.

The Company may not be successful in producing sufficient cash flow,
raising sufficient debt or equity capital on terms that it will consider
acceptable, or selling or leasing fiber optic capacity or access to its
conduits. In addition, proceeds from dispositions of the Company's assets may
not reflect the assets' intrinsic values. Further, expenses may exceed the
Company's estimates and the financing needed may be higher than estimated.
Failure to generate sufficient funds may require the Company to delay or abandon
some of its future expansion or expenditures, which could have a material
adverse effect on the implementation of the business plan.

In connection with the implementation of the Company's business plan,
management continues to review the existing businesses, including portions of
its communications and information services businesses, to determine how those
businesses will assist with the Company's focus on delivery of communications
and information services

and reaching cash flow breakeven. To the extent that certain businesses are not
considered to be compatible with the delivery of communication and information
services or with obtaining cash flow objectives, the Company may exit those
businesses. It is possible that the decision to exit these businesses could
result in the Company not recovering its investment in the businesses, and in
those cases, a significant charge to earnings could result. For example, the
Company sold its Asian operations to Reach Ltd. and incurred a loss of $516
million.

On July 26, 2001, Level 3 announced that it had amended its Senior Secured
Credit Facility to permit the Company to acquire certain of its outstanding
indebtedness in exchange for shares of common stock. During 2001, various
issuances of Level 3's outstanding senior notes, senior discount notes and
convertible subordinated notes traded at discounts to their respective face or
accreted amounts. As of December 31, 2001, the Company had exchanged, in private
transactions, approximately $194 million of its convertible subordinated notes
for shares of its common stock valued at approximately $72 million.

On October 23, 2001, the Company announced that its first tier, wholly
owned subsidiary, Level 3 Finance, LLC had completed a "Modified Dutch Auction"
tender offer for a portion of the Company's senior notes and convertible
subordinate notes. Level 3 Finance repurchased debt with a face value of
approximately $1.7 billion, plus accrued interest, if applicable, for a total
purchase price of approximately $731 million. The net gain on the extinguishment
of the debt, including transaction costs and unamortized debt issuance costs,
was approximately $967 million and was recorded as an extraordinary item in the
consolidated statement of operations.

Through March 13, 2002, Level 3 had retired an additional $195 million face
amount of debt securities, by issuing 7.4 million shares of common stock, valued
at $32 million, and using approximately $34 million of cash. Level 3 expects to
recognize a gain of approximately $130 million, after transaction and debt
issuance costs, from these transactions in the first quarter of 2002.

Level 3 is aware that the various issuances of its outstanding senior
notes, senior discount notes and convertible subordinated notes continue to
trade at discounts to their respective face or accreted amounts. In order to
continue to reduce future cash interest payments, as well as future amounts due
at maturity, Level 3 or its affiliates may, from time to time, purchase these
outstanding debt securities for cash or exchange shares of Level 3 common stock
for these outstanding debt securities pursuant to the exemption provided by
Section 3(a)(9) of the Securities Act of 1933, as amended, in open market or
privately negotiated transactions. Level 3 will evaluate any such transactions
in light of then existing market conditions. The amounts involved in any such
transactions, individually or in the aggregate, may be material.

The Company has a $1.775 billion Senior Secured Credit Facility. As of
March 13, 2001, $1.125 billion of the $1.775 billion senior secured credit
facility was drawn. The balance represents the approximately $650 million
revolving credit facility.

The Senior Secured Credit Facility has customary covenants, or requirements
that the company and certain of its subsidiaries must meet to remain in
compliance with the contract, including a financial covenant that measures
minimum revenues (Minimum Telecom Revenue). The subsidiaries of the Company that
must comply with the terms and conditions of the credit facility are referred to
as Restricted Subsidiaries.

The Minimum Telecom Revenue covenant generally requires that the Company
meet or exceed specified levels of cash revenue from communications and
information services businesses generated by the Restricted Subsidiaries.
The Minimum Telecom Revenue covenant is calculated quarterly on a trailing
four-quarter basis and must exceed $1.5 billion for the first quarter of 2002,
increasing to $2.3 billion in the fourth quarter of 2002, $3.375 billion in the
fourth quarter of 2003, and $4.75 billion in the fourth quarter of 2004. The
Restricted Subsidiaries currently include those engaged in the Company's
communications businesses and certain subsidiaries of (i)Structure engaged in
the Company's information services businesses.

Those subsidiaries of the Company that are not subject to the limitations
of the Credit Agreement are referred to as Unrestricted Subsidiaries. The
Unrestricted Subsidiaries include Level 3's coal mining and toll road properties
and its holdings in RCN and Commonwealth Telephone.

If the Company does not remain in compliance with this financial covenant,
as well as certain other covenants, it could be in default of the terms of the
Senior Secured Credit Facility. Under this scenario, the lenders

could take actions to require repayment. The Company believes it is in full
compliance with all covenants as of December 31, 2001.

On January 29, 2002, the Company stated that it was in compliance with all
of the terms, conditions, and covenants under the Senior Secured Credit Facility
and expected to remain in compliance through the end of the first quarter 2002
based on its publicly disclosed financial projections. However, the Company
stated that if sales, disconnects and cancellations were to continue at the
levels experienced during the second half of 2001, the Company may violate the
Minimum Telecom Revenue covenant as early as the end of the second quarter 2002.
The Company also stated that to the extent the Company's operational performance
improves or it completes acquisitions that generate sufficient incremental
revenue, a potential violation of the covenant could be delayed beyond the
second quarter of 2002 or eliminated entirely.

Level 3 announced on February 25, 2002 that it had signed a definitive
agreement to acquire CorpSoft, Inc., a Norwood, Massachusetts based marketer,
distributor and reseller of business software, which conducts its business under
the name Corporate Software. Corporate Software had 2001 revenues of
approximately $1.1 billion. Corporate Software had 2001 EBITDA of approximately
$18 million, excluding stock-based compensation expense, one-time restructuring
charges and other non-recurring employee costs. Level 3 expects the acquisition
will enable its information services business to leverage CorpSoft's customer
base, worldwide presence and relationships to expand its portfolio of services.
In addition, Level 3 expects to utilize its network infrastructure to facilitate
the deployment of software to CorpSoft's customers. The transaction closed on
March 13, 2002. Since closing, revenues as measured by the Minimum Telecom
Revenue covenant include Corporate Software revenues.

As a result of this transaction, the Company believes it will remain in
compliance with the terms and conditions of the Senior Secured Credit Facility
until the second half of 2003. The Company's expectation assumes that it takes
no other actions, its sales levels do not improve beyond those experienced
during the second half of 2001, and disconnects and cancellations continue to
decrease during the second half of 2002 in accordance with the Company's
customer credit analysis.

Given other actions the Company may take, and based on its longer term
expectations for improvements in its rate of sales, disconnects and
cancellations, new product and service introductions and the potential for
additional acquisitions, the Company believes it will continue to remain in
compliance with the terms and conditions of the Senior Secured Credit Facility
over the term of that agreement.

Current economic conditions of the telecommunications and information
services industry, combined with Level 3's strong financial position, have
created potential opportunities for Level 3 to acquire telecommunications assets
at attractive prices. Level 3 continues to evaluate these opportunities and
could make acquisitions in addition to the Corporate Software transaction, and
the McLeodUSA acquisition described below, in 2002.

On January 24, 2002 Level 3 completed the acquisition of the wholesale
dial-up access business assets of McLeodUSA Incorporated (formerly Splitrock
Services) for approximately $50 million in cash consideration and the assumption
of certain operating liabilities related to that business. The acquisition
includes customer contracts, approximately 350 POPs (Points of Presence) across
the U.S. and the related facilities, equipment and underlying circuits. In
addition, the parties entered into certain operating agreements enabling
McLeodUSA to continue to support its in-region customers. The acquisition
enables Level 3 to provide managed modem service in all 50 states with a
coverage area that includes 80 percent of the U.S. population, up from 37
states, and 57 percent of the U.S. population.

In December 2000, the Company entered into a sales-leaseback transaction
involving two corporate aircraft. The Company is amortizing the $8 million gain
recognized on the transaction over the ten year term of the lease. Annual lease
payments of approximately $1.9 million are included in the operating lease
disclosures below. The Company has not entered into any bandwidth commodity
contracts through the date of this report.

The following tables summarize the contractual obligations and commercial
commitments of the Company at December 31, 2001, as further described in the
notes to the financial statements.

Payments Due by Period
Less than 4 - 5 After 5
Total 1 Year 1-3 Years Years Years
Contractual Obligations
Long-Term Debt, including current portion.. $6,216 $ 7 $ 279 $ 265 $5,665
Reclamation.................. 96 4 9 9 74
Operating Leases............. 566 54 104 102 306

Other Commercial Commitments
Letters of Credit.......... 48 38 7 5 1

On March 9, 2002, legislation was enacted that will enable the Company to
carry its taxable net operating losses back five years. As a result, the Company
expects to receive a Federal income tax refund of approximately $120 million
after it files its 2001 Federal income tax return carrying back the taxable loss
to 1996.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Level 3 is subject to market risks arising from changes in interest rates,
equity prices and foreign exchange rates. The Company's exposure to interest
rate risk increased due to the $1.375 billion Senior Secured Credit Facility
entered into by the Company in September 1999, the additional $400 million added
to the Senior Secured Credit Facility during the first quarter of 2001 and the
commercial mortgages entered into in 2000. As of December 31, 2001, the Company
had borrowed $1.125 billion under the Senior Secured Credit Facility and $233
million under the commercial mortgages. Amounts drawn on the debt instruments
bear interest at the alternate base rate or LIBOR rate plus applicable margins.
As the alternate base rate and LIBOR rate fluctuate, so too will the interest
expense on amounts borrowed under the credit facility and mortgages. The
weighted average interest rate based on outstanding amounts under these variable
rate instruments of $1.4 billion at December 31, 2001, was approximately 5.4%. A
hypothetical increase in the variable portion of the weighted average rate by 1%
(i.e. a weighted average rate of 6.4%), would increase annual interest expense
of the Company by approximately $14 million. In an effort to reduce the risk of
increased interest rates related to the Lehman commercial mortgage, the Company
entered into an interest rate cap agreement in January 2001. The terms of the
agreement provide that the net interest expense related to the Lehman commercial
mortgage will not exceed 8% plus the original spread. The agreement therefore
caps the LIBOR portion of the interest rate at 8%. At December 31, 2001, the
Company had $4.85 billion of fixed rate debt bearing a weighted average interest
rate of 9.05%. A decline in interest rates in the future will not benefit the
Company due to the terms and conditions of the loan agreements which require the
Company to repurchase the debt at specified premiums. The Company was able to
reduce its exposure to interest rate risk by acquiring certain outstanding
indebtedness in exchange for shares of common stock and cash. As a result of the
additional debt repurchases in 2002, the Company was able to reduce its fixed
rate debt outstanding to $4.65 billion. The Company continues to evaluate other
alternatives to limit interest rate risk.

Level 3 continues to hold positions in certain publicly traded entities,
primarily Commonwealth Telephone and RCN. The Company accounts for these two
investments using the equity method. The market value of these investments was
approximately $563 million at December 31, 2001, which is significantly higher
than their carrying value of $121 million. The Company has registered with the
Securities and Exchange Commission to sell a portion of its holdings in
Commonwealth Telephone. Level 3 has also stated that it may dispose of all or
part of the remaining investments in the next 12-18 months. The value received
for the investments would be affected by the market value of the underlying
stock at the time of any such transaction. A 20% decrease in the price of
Commonwealth Telephone and RCN stock would result in approximately a $113
million decrease in fair value of these investments. The Company does not
currently utilize financial instruments to minimize its exposure to price
fluctuations in equity securities.

The Company's business plan included developing and operating a
telecommunications network in Europe. As of December 31, 2001, the Company had
invested significant amounts of capital in that region and will continue to
expand its presence in Europe in 2002. The Company issued EURO 800 million (EURO
453 million outstanding at December 31, 2001) in Senior Euro Notes in February
2000 as an economic hedge against its net investment in its

European subsidiaries. Due to the historically low exchange rates involving the
U.S. Dollar and the Euro, during the fourth quarter of 2000, Level 3 elected to
set aside the remaining Euros received from the debt offerings. During the third
quarter of 2001, Level 3 elected to start funding its current European investing
and operating activities with the Euros that had previously been set aside.
Other than the issuance of the Euro denominated debt and the holding of the
Euros, the Company has not made significant use of financial instruments to
minimize its exposure to foreign currency fluctuations. The Company continues to
analyze risk management strategies to reduce foreign currency exchange risk.

The change in interest rates and equity security prices is based on
hypothetical movements and are not necessarily indicative of the actual results
that may occur. Future earnings and losses will be affected by actual
fluctuations in interest rates, equity prices and foreign currency rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary financial information for Level 3
Communications, Inc. and Subsidiaries begin on page F-1.

The financial statements of an equity method investee (RCN Corporation) are
required by Rule 3.09 and will be filed as a part of this Report by an amendment
to this Report upon the filing by RCN of their Form 10-K for the year ended
December 31, 2001. RCN's filing of their Form 10-K is not yet due.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item 10 is incorporated by reference to
the Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission, however
certain information is included in Item 1. Business above under the caption
"Directors and Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference to
the Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by reference to
the Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is incorporated by reference to
the Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial statements and financial statement schedules required to be
filed for the registrant under Items 8 or 14 are set forth following the index
page at page F-l. Exhibits filed as a part of this report are listed below.
Exhibits incorporated by reference are indicated in parentheses.

3.1 Restated Certificate of Incorporation dated March 31, 1998 (Exhibit 1 to
Registrant's Form 8-A filed on April 1,1998).

3.2 Certificate of Amendment of Restated Certificate of Incorporation of Level
3 Communications, Inc. (Exhibit 3.1 to the Registrant's Current Report on
Form 8-K dated June 3, 1999).

3.3 Specimen Stock Certificate of Common Stock, par value $.01 per share
(Exhibit 3 to the Registrant's Form 8-A filed on March 31, 1998).

3.4 Amended and Restated By-laws as of May 23, 2001 (Exhibit 3 to Registrant's
Quarterly Report on Form 10-Q for the three months ended June 30, 2001).

3.5 Rights Agreement, dated as of May 29, 1998, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent, which includes the Form of
Certificate of Designation, Preferences, and Rights of Series A. Junior
Participating Preferred Stock of the Registrant, as Exhibit A, the Form of
Rights Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Stock, as Exhibit C (Exhibit 1 to the Registrant's Form 8-A
Amendment No. 1 filed on June 10, 1998).

4.1 Indenture, dated as of April 28, 1998, between the Registrant and IBJ
Schroder Bank & Trust Company as Trustee relating to the Registrant's 9?%
Senior Notes due 2008 (Exhibit 4.1 to the Registrant's Registration
Statement on Form S-4 File No. 333-56399).

4.2 Indenture, dated as of December 2, 1998, between the Registrant and IBJ
Schroder Bank & Trust Company as Trustee relating to the Registrant's 10
1/2% Senior Discount Notes due 2008 (Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 File No. 333-71687).

4.3.1Form of Senior Indenture (incorporated by reference to Exhibit 4.1 to
Amendment 1 to the Registrant's Registration Statement on Form S-3 (File
No. 333-68887) filed with the Securities and Exchange Commission on
February 3, 1999).

4.3.2First Supplemental Indenture, dated as of September 20,1999, between the
Registrant and IBJ Whitehall Bank & Trust Company as Trustee relating to
the Registrant's 6% Convertible Subordinated Notes due 2009 (Exhibit 4.1 to
the Registrant's Current Report on Form 8-K dated September 20, 1999).

4.3.3Second Supplemental Indenture, dated as of February 29, 2000, between the
Registrant and The Bank of New York as Trustee relating to the Registrant's
6% Convertible Subordinated Notes due 2010 (Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated February 29, 2000).

4.4 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11% Senior Notes
due 2008 (Exhibit 4.1 to the Registrant's Registration Statement on Form
S-4 File No. 333-37362).

4.5 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11 1/4% Senior
Notes due 2010 (Exhibit 4.2 to the Registrant's Registration Statement on
Form S-4 File No. 333-37362).

4.6 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 12?% Senior
Discount Notes due 2010 (Exhibit 4.3 to the Registrant's Registration
Statement on Form S-4 File No. 333-37362).

4.7 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 10 3/4% Senior
Euro Notes due 2008 (Exhibit 4.1 to the Registrant's Registration Statement
on Form S-4 File No. 333-37364).

4.8 Indenture, dated as of February 29, 2000, between the Registrant and The
Bank of New York as Trustee relating to the Registrant's 11 1/4% Senior
Euro Notes due 2010 (Exhibit 4.2 to the Registrant's Registration Statement
on Form S-4 File No. 333-37364).

10.1 Separation Agreement, dated December 8, 1997, by and among Peter Kiewit
Sons', Inc., Kiewit Diversified Group Inc., PKS Holdings, Inc. and Kiewit
Construction Group Inc. (Exhibit 10.1 to the Registrant's Form 10-K for
1997).

10.2 Amendment No. 1 to Separation Agreement, dated March 18, 1997, by and among
Peter Kiewit Sons', Inc., Kiewit Diversified Group Inc., PKS Holdings, Inc.
and Kiewit Construction Group Inc. (Exhibit 10.1 to the Registrant's Form
10-K for 1997).

10.3 Credit Agreement dated as of September 30,1999 among Level 3
Communications, LLC, the Borrowers named therein, the Lenders Party thereto
and The Chase Manhattan Bank, as Agent (Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
1999).

10.4 Stock Purchase Agreement dated as of February 21, 2002 between Level 3
Holdings, Inc. and David C. McCourt.

10.5 Warrant Agreement, dated as of March 11, 2002 between the Registrant and
William L. Grewcock.

10.6 Form of Promissory Note with certain officers of the Registrant.

10.7 Form of Aircraft Time-Share Agreement

21 List of subsidiaries of the Company

23.1 Consent of Arthur Andersen LLP

23.2 Consent of PriceWaterhouseCoopers LLP

(b) Reports on Form 8-K filed by the Registrant during the fourth quarter
of 2002.

On October 10, 2001, the Registrant filed a Current Report on Form 8-K
relating relating to the amendment by its wholly owned subsidiary Level 3
Finance, LLC of "Modified Dutch Tender" offers for a portion of the Registrant's
outstanding debt and convertible debt securities. In addition, such Current
Report on Form 8-K reported the issuance of a press release by the Registration
relating to the actions taken by Level 3 Finance, LLC.

On October 23, 2001, the Registrant filed a Current Report on Form 8-K
relating to the completion by its wholly owned subsidiary Level 3 Finance, LLC
of "Modified Dutch Tender" offers for a portion of the Registrant's outstanding
debt and convertible debt securities.

On October 25, 2001, the Registrant filed a Current Report on Form 8-K
relating to third quarter 2001 financial results and proposed cost management
initiatives.

On December 19, 2001, the Registrant filed a Current Report on Form 8-K
relating to execution of a definitive agreement with Reach Ltd. concerning the
disposition of the Registrant's operations in Asia.

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, this 18th day of
March, 2002.

LEVEL 3 COMMUNICATIONS, INC.

/s/ James Q. Crowe
By: Name: James Q. Crowe
Title: Chief Executive 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 and on the dates indicated.

/s/ Walter Scott, Jr. Chairman of the Board March 18, 2002
Walter Scott, Jr.

/s/ James Q. Crowe Chief Executive Officer and March 18, 2002
James Q. Crowe Director

/s/ Kevin J. O'Hara President, Chief Operating March 18, 2002
Kevin J. O'Hara Officer and Director

/s/ R. Douglas Bradbury Vice Chairman and March 18, 2002
R. Douglas Bradbury Executive Vice President

/s/ Charles C. Miller, III Vice Chairman and March 18, 2002
Charles C. Miller, III Executive Vice President

/s/ Sureel A. Choksi Group Vice President March 18, 2002
Sureel A. Choksi and Chief Financial Officer
(Principal Financial Officer)

/s/ Eric J. Mortensen Vice President and Controller March 18, 2002
Eric J. Mortensen (Principal Accounting Officer)

/s/ Mogens C. Bay Director March 18, 2002
Mogens C. Bay

/s/ William L. Grewcock Director March 18, 2002
William L. Grewcock

/s./ Richard R. Jaros Director March 18, 2002
Richard R. Jaros

/s/ Robert E. Julian Director March 18, 2002
Robert E. Julian

/s/ David C. McCourt Director March 18, 2002
David C. McCourt

/s/ Kenneth E. Stinson Director March 18, 2002
Kenneth E. Stinson

/s/ Colin V.K. Williams Director March 18, 2002
Colin V.K. Williams

/s/ Michael Yanney Director March 18, 2002
Michael Yanney

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
Report of Independent Public Accountants.....................................F-2
Financial Statements as of December 31, 2001 and 2000 and for the three years
ended December 31, 2001:
Consolidated Statements of Operations...................................F-3
Consolidated Balance Sheets.............................................F-4
Consolidated Statements of Cash Flows...................................F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)....F-7
Consolidated Statements of Comprehensive Income (Loss)..................F-8
Notes to Consolidated Financial Statements..............................F-9

Schedules not indicated above have been omitted because of the absence of
the conditions under which they are required or because the information called
for is shown in the consolidated financial statements or in the notes thereto.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of
Directors of Level 3 Communications, Inc.:

We have audited the consolidated balance sheets of Level 3 Communications, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, cash flows, changes in
stockholders' equity (deficit) and comprehensive income (loss) for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Level 3
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Denver, Colorado
January 29, 2002, except with respect to the matters
discussed in Note 17, as to which the date is March 13, 2002.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For each of the three years ended December 31, 2001

2001 2000 1999

(dollars in millions, except
per share data)
Revenue........................................................................... $1,533 $ 1,184 $ 515
Costs and Expenses:
Cost of revenue.............................................................. (742) (792) (360)
Depreciation and amortization................................................ (1,122) (579) (228)
Selling, general and administrative.......................................... (1,297) (1,110) (663)
Restructuring and impairment charges......................................... (3,353) - -
------ ------ ------
Total costs and expenses................................................ (6,514) (2,481) (1,251)
------ ------ ------

Loss from Operations.............................................................. (4,981) (1,297) (736)
Other Income (Expense):
Interest income.............................................................. 161 328 212
Interest expense, net........................................................ (646) (282) (174)
Equity in earnings (losses) of unconsolidated subsidiaries, net.............. 16 (284) (127)
Gain on equity investee stock transactions................................... - 100 118
Other, net................................................................... 2 (21) 5
------ ------ ------
Total other income (expense)............................................ (467) (159) 34
------ ------ ------

Loss from Continuing Operations Before Income Tax................................. (5,448) (1,456) (702)

Income Tax Benefit................................................................ - 49 220
------ ------ ------
Net Loss from Continuing Operations............................................... (5,448) (1,407) (482)

Loss from Discontinued Operations................................................. (605) (48) (5)

Extraordinary Gain on Debt Extinguishment, net.................................... 1,075 - -
------ ------ -----
Net Loss.......................................................................... $ (4,978) $ (1,455) $ (487)
====== ======= ======

Earnings (Loss) Per Share of Level 3 Common Stock
(Basic and Diluted):
Continuing operations........................................................ $ (14.58) $ (3.88) $ (1.44)
======= ======= ======
Discontinued operations...................................................... $ (1.62) $ (.13) $ (.02)
======= ======= ======
Extraordinary gain on debt extinguishment, net............................... $ 2.88 $ - $ -
======= ======= ======
Net loss..................................................................... $ (13.32) $ (4.01) $ (1.46)
======= ======= ======

See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000

2001 2000
(dollars in millions,
except per share
data)
Assets
Current Assets:
Cash and cash equivalents.................................................................. $ 1,297 $ 1,255
Marketable securities...................................................................... 206 2,742
Restricted securities...................................................................... 155 215
Receivables, less allowances for doubtful accounts of $46 and $33, respectively............ 239 526
Current assets of discontinued Asian operations............................................ 74 107
Other...................................................................................... 63 200
------ ------
Total Current Assets......................................................................... 2,034 5,045

Net Property, Plant and Equipment............................................................ 6,890 9,014
Noncurrent Assets of Discontinued Asian Operations........................................... - 382
Other Assets, net............................................................................ 392 478
------ ------
$ 9,316 $ 14,919
======= ========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable............................................................................ $ 714 $ 1,370
Current portion of long-term debt........................................................... 7 7
Accrued payroll and employee benefits....................................................... 162 90
Accrued interest............................................................................ 86 124
Deferred revenue............................................................................ 124 68
Current liabilities of discontinued Asian operations........................................ 74 117
Other....................................................................................... 225 146
------ ------
Total Current Liabilities.................................................................... 1,392 1,922

Long-Term Debt, less current portion......................................................... 6,209 7,318
Deferred Revenue............................................................................. 1,335 652
Accrued Reclamation Costs.................................................................... 92 94
Other Liabilities............................................................................ 353 384

Commitments and Contingencies

Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares outstanding...... - -
Common stock:
Common stock, $.01 par value, authorized 1,500,000,000 shares: 384,703,922
outstanding in 2001 and 367,599,870 outstanding in 2000................................... 4 4
Class R, $.01 par value, authorized 8,500,000 shares: no shares outstanding............... - -
Additional paid-in capital................................................................ 5,602 5,167
Accumulated other comprehensive loss...................................................... (144) (73)
Accumulated deficit....................................................................... (5,527) (549)
------ -----
Total Stockholders' Equity (Deficit)........................................................ (65) 4,549
------ ------
$9,316 $14,919
======== ========

See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three years ended December 31, 2001

2001 2000 1999
(dollars in millions)
Cash Flows from Operating Activities:
Net Loss.................................................................... $(4,978) $(1,455) $ (487)
Loss from discontinued operations........................................ 605 48 5
Extraordinary gain on debt extinguishment, net........................... (1,075) - -
------- ------- -------
Loss from continuing operations.......................................... (5,448) (1,407) (482)
Adjustments to reconcile loss from continuing operations to
net cash provided by operating activities:
Equity (earnings) losses, net..................................... (16) 284 127
Depreciation and amortization..................................... 1,122 579 228
Loss on impairments............................................... 3,245 - -
Dark fiber and submarine cable non-cash cost of revenue........... 160 196 17
Amortization of premiums (discounts) on marketable securities..... 5 (41) 10
Amortization of debt issuance costs............................... 27 21 9
(Gain) loss on sale of property, plant and equipment and other
assets......................................................... 3 (19) 2
Gain on equity investee stock transactions........................ - (100) (118)
Non-cash compensation expense attributable to stock awards........ 314 236 126
Federal income tax refunds........................................ 73 246 81
Deferred income taxes............................................. 8 - (56)
Deferred revenue.................................................. 706 586 121
Deposits.......................................................... 100 24 (64)
Accrued interest on marketable securities......................... 36 (5) (7)
Accrued interest on long-term debt................................ 79 176 69
Change in working capital items:
Receivables.................................................. 275 (384) (83)
Other current assets......................................... (4) (175) (170)
Payables..................................................... (666) 644 521
Other liabilities............................................ 115 157 86
Other............................................................. 7 18 16
------- ------- -------
Net Cash Provided by Continuing Operations....................................... 141 1,036 433

Cash Flows from Investing Activities:
Proceeds from sales and maturities of marketable securities................. 3,670 7,822 5,169
Purchases of marketable securities.......................................... (1,162) (8,284) (4,555)
Decrease (increase) in restricted securities................................ 56 (150) (16)
Capital expenditures........................................................ (2,325) (5,576) (3,385)
Purchase of assets held for sale, net....................................... (110) (52) -
Investments and acquisitions, net of cash acquired.......................... - (34) (3)
Proceeds from sale of property, plant and equipment, and other investments. 67 99 12
------- ------- -------
Net Cash Provided by (Used in) Investing Activities.............................. $ 196 $(6,175) $(2,778)

(continued)
See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)

For the three years ended December 31, 2001

2001 2000 1999
(dollars in millions)
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs............................ $ 761 $ 3,195 $ 1,249
Payments and repurchases of long-term debt, including current portion....... (812) (21) (6)
Issuances of common stock, net of issuance costs............................ - 2,406 1,498
Stock options exercised..................................................... 2 16 22
------- ------- -------
Net Cash (Used in) Provided by Financing Activities.............................. (49) 5,596 2,763

Net Cash Used in Discontinued Operations......................................... (226) (358) (49)

Effect of Exchange Rates on Cash and Cash Equivalents............................ (20) (56) 1
------- ------- -------

Net Change in Cash and Cash Equivalents.......................................... 42 43 370

Cash and Cash Equivalents at Beginning of Year................................... 1,255 1,212 842
------- ------- -------

Cash and Cash Equivalents at End of Year......................................... $ 1,297 $ 1,255 $ 1,212
======= ======= =======

Supplemental Disclosure of Cash Flow Information:
Income taxes paid........................................................... $ - $ 2 $ 2
Interest paid............................................................... 471 461 104

Noncash Investing and Financing Activities:
Common stock issued in exchange for long term debt.......................... $ 72 $ - $ -
Warrants issued in exchange for construction services....................... 32 - -
Equity securities received in exchange for services......................... - 43 5
Issuances of stock for Businessnet acquisition.............................. - 3 8

See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the three years ended December 31, 2001

Accumulated Retained
Additional Other Earnings
Common Paid-in Comprehensive (Accumulated
Stock Capital Income (Loss) Deficit) Total

(dollars in millions)

Balances at December 31, 1998........................ $ 3 $ 765 $ 4 $ 1,393 $ 2,165

Common Stock:
Issuances, net of offering costs................ - 1,506 - - 1,506
Stock options exercised......................... - 22 - - 22
Stock plan grants............................... - 129 - - 129
Shareworks plan................................. - 1 - - 1
Income tax benefit from exercise of
options....................................... - 78 - - 78
Net Loss............................................. - - - (487) (487)
Other Comprehensive Loss............................. - - (9) - (9)
------- ------- ------- ------ ------
Balances at December 31, 1999........................ 3 2,501 (5) 906 3,405

Common Stock:
Issuances, net of offering costs................ 1 2,409 - - 2,410
Stock options exercised......................... - 15 - - 15
Stock plan grants............................... - 237 - - 237
Shareworks plan................................. - 5 - - 5
Net Loss............................................. - - - (1,455) (1,455)
Other Comprehensive Loss............................. - - (68) - (68)
------- ------- ------- ------- ------
Balances at December 31, 2000........................ 4 5,167 (73) (549) 4,549

Common Stock:
Issued to extinguish long-term debt............. - 72 - - 72
Warrants issued for capital assets.............. - 32 - - 32
Stock options exercised......................... - 2 - - 2
Stock plan grants............................... - 312 - - 312
Shareworks plan................................. - 17 - - 17
Net Loss............................................. - - - (4,978) (4,978)
Other Comprehensive Loss............................. - - (71) - (71)
------- ------- ------- ------- ------
Balances at December 31, 2001........................ $ 4 $ 5,602 $ (144) $(5,527) $ (65)
======= ======= ======== ======= ======

See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the three years ended December 31, 2001

2001 2000 1999
(dollars in millions)
Net Loss..................................................................... $(4,978) $(1,455) $ (487)
Other Comprehensive Income (Loss) Before Tax:
Foreign currency translation adjustments................................ (84) (73) (10)
Unrealized holding gains (losses) arising during period................. (4) 5 (3)
Reclassification adjustment for gains included in net earnings (loss)... 17 - (1)
------ ------ ------
Other Comprehensive Loss, Before Tax......................................... (71) (68) (14)
Income Tax Benefit Related to Items of Other Comprehensive Loss.............. - - 5
------ ------ ------
Other Comprehensive Loss Net of Taxes........................................ (71) (68) (9)
------ ------ ------
Comprehensive Loss........................................................... $(5,049) $(1,523) $ (496)
======= ======= ======

See accompanying notes to consolidated financial statements.

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Level 3
Communications, Inc. and subsidiaries (the ''Company'' or ''Level 3'') in which
it has control, which are engaged in enterprises primarily related to
communications, information services, and coal mining. Fifty-percent-owned
mining joint ventures are consolidated on a pro rata basis. Investments in other
companies in which the Company exercises significant influence over operating
and financial policies or has significant equity ownership are accounted for by
the equity method. All significant intercompany accounts and transactions have
been eliminated.

In 2001, the Company agreed to sell its Asian telecommunications business to
Reach Ltd. (''Reach''). Therefore, the assets, liabilities, results of
operations and cash flows for this business have been classified as discontinued
operations in the consolidated financial statements (See note 3).

Communications and Information Services Revenue and Cost of Revenue

Revenue for communications services, including private line, wavelengths,
colocation, Internet access, managed modem and dark fiber revenue from contracts
entered into after June 30, 1999, is recognized monthly as the services are
provided. Reciprocal compensation revenue is recognized only when an
interconnection agreement is in place with another carrier, and the relevant
regulatory authorities have approved the terms of the agreement. Revenue
attributable to leases of dark fiber pursuant to indefeasible rights-of-use
agreements (''IRUs'') that qualify for sales-type lease accounting, and were
entered into prior to June 30, 1999, are recognized at the time of delivery and
acceptance of the fiber by the customer.

Effective July 1, 1999, the Financial Accounting Standards Board (''FASB'')
issued Interpretation No. 43, ''Real Estate Sales, an interpretation of FASB
Statement No. 66'' (''FIN 43''). Under FIN 43, certain sale and long-term
right-of-use agreements of dark fiber and capacity entered into after June 30,
1999, are required to be accounted for in the same manner as sales of real
estate with property improvements or integral equipment. Dark fiber is
considered integral equipment and accordingly, a lease must include a provision
allowing title to transfer to the lessee in order for that lease to be accounted
for as a sales-type lease. Failure to satisfy the requirements of FIN 43 results
in revenue being recognized ratably over the term of the agreement (currently up
to 20 years).

The adoption of FIN 43 did impact revenue recognition, but did not have an
effect on the Company's cash flows. Dark fiber IRUs generally require the
customer to make a down payment due upon execution of the agreement with the
balance due upon delivery and acceptance of the fiber. These long-term dark
fiber contracts and the issuance of FIN 43 have, however, resulted in a
substantial amount of deferred revenue being recorded on the Company's balance
sheet.

On July 19, 2001, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-11 "Meeting the Ownership Transfer Requirements of
FASB Statement No. 13 for Leases of Real Estate", ("EITF 00-11"). EITF 00-11
specifically addresses the transfer of ownership requirements for leases
involving integral equipment or property improvements for which no formal title
registration system exists and was effective for all transactions occurring
after July 19, 2001. The EITF stated in order to meet the criteria for
sales-type lease accounting, the lease agreement must obligate the lessor to
deliver to the lessee documents that convey ownership to the lessee by the end
of the lease term.

Telecommunications companies have historically applied sales-type lease
accounting to certain contracts that, among other required criteria, contained a
provision that permitted the lessee the option to obtain ownership to the rights
of way and/or the integral equipment at the end of the lease term in exchange
for a nominal fee. Under EITF 00-11, the lessee must obtain title or its
equivalent to the asset if sales-type lease accounting is to be used. Level 3
treated certain transoceanic capacity agreements that met the accounting
requirements as sales-type leases. The

Company does not believe the issuance of EITF 00-11 will have a signiicant
effect on its future operating results or financial condition.

It is the Company's policy to recognize termination revenue when certain
conditions have been met. These conditions include: 1) Customer has accepted all
or partial delivery of asset or service, 2) Level 3 has received consideration
for the service provided, and 3) Level 3 is not legally obligated to provide
additional product or services to the customer or their successor. Termination
revenue is typically recognized in situations where a customer and Level 3
mutually agree to terminate service or the customer and its assets fail to
emerge from bankruptcy protection. If the conditions above are met, the Company
will recognize termination revenue equal to the fair value of consideration
received, less any amounts previously recognized. Termination revenue is
reported in the same manner as the original product or service provided.

Level 3 entered in to joint build arrangements during the construction of its
North American and European networks in which it was the sponsoring partner.
These arrangements are generally characterized as fixed fee or cost sharing
arrangements. For fixed fee joint build arrangements in which Level 3 is the
sponsor, the Company assumes the cost risk of completing the work for a fixed
price agreed upon at the inception of the arrangement between the parties. Level
3 recognizes revenue equal to the value of the contract when construction is
complete and payment is received from the joint build partner. For cost sharing
arrangements each of the joint build parties shares the cost risk of completing
the work. These contracts typically include provisions in which the sponsoring
partner receives a management fee for construction services provided. Level 3
recognizes this management fee as revenue in the period when the contract is
completed and payment is received from the joint build partner.

Level 3 was a party to seven non-monetary exchange transactions in 2001 whereby
it sold IRUs, other capacity, or other services to a company from which Level 3
received communications assets or services. In each case, the transaction
provided Level 3 needed network capacity or redundancy on unprotected
transmission routes. The value of these non-monetary transactions was determined
using similar transactions for which cash consideration was received.

The Company is obligated under dark fiber IRUs and other capacity agreements to
maintain its network in efficient working order and in accordance with industry
standards. Customers are obligated for the term of the agreement to pay for
their allocable share of the costs for operating and maintaining the network.
The Company recognizes this revenue monthly as services are provided.

Cost of revenue for the communications business includes leased capacity,
right-of-way costs, access charges and other third party circuit costs directly
attributable to the network as well as actual costs of assets sold pursuant to
sales-type leases. The cost of revenue associated with sales-type leases of dark
fiber agreements entered into prior to June 30, 1999, was determined based on an
allocation of the total estimated costs of the network to the dark fiber
provided to the customers. The allocation takes into account the service
capacity of the specific dark fiber provided to customers relative to the total
expected capacity of the network. Changes to total estimated costs and network
capacity are included prospectively in the allocation in the period in which
they become known. Cost of revenue associated with the sale of transoceanic
capacity that meet the accounting requirements as sales-type leases, is also
determined based on taking into account service capacity and actual costs
incurred by Level 3 and its contractors to construct such assets.

Accounting practice and guidance with respect to the treatment of submarine dark
fiber sales and terrestrial IRU agreements continue to evolve. Any changes in
the accounting treatment could affect the way the Company accounts for revenue
and expenses associated with these transactions in the future.

Information services revenue is primarily derived from the computer outsourcing
business and the systems integration business. Level 3 provides outsourcing
services, typically through contracts ranging from 3-5 years, to firms that
desire to focus their resources on their core businesses. Under these contracts,
Level 3 recognizes revenue in the month the service is provided. The systems
integration business helps customers define, develop and implement
cost-effective information systems. Revenue from these services is recognized on
a time and materials basis or percentage of completion basis depending on the
extent of the services provided. Cost of revenue includes costs of consultants'
salaries and other direct costs for the information services businesses.

Liquidity and Capital Resources

The communications and information services industry is highly competitive.
Additionally, the communications industry is currently operating in a difficult
economic environment. Many of the Company's existing and potential competitors
in the communications industry have financial, personnel, marketing and other
resources significantly greater than those of the Company, as well as other
competitive advantages including larger customer bases. Increased consolidation
and strategic alliances in the industry resulting from the Telecommunications
Act of 1996, the opening of the U.S. market to foreign carriers, technological
advances and further deregulation could give rise to significant new competitors
to the Company. Furthermore, as discussed in Note 9, the Company has certain
covenants under its debt and senior secured credit facility agreements,
including one related to minimum telecom revenues, as defined, that could affect
the future liquidity of the Company if such covenants are not met. Management
believes it will be able to take appropriate actions to ensure that the Company
will continue as a going concern for the foreseeable future, beyond one year.

Concentration of Credit Risk

The Company provides telecommunications services to a wide range of customers,
ranging from well capitalized national carriers to local Internet start-ups.
Beginning in 2001, Level 3 changed its customer focus to the top 300 global
users of bandwidth capacity. These top 300 global users tend to be financially
more viable than certain Internet start-ups. The Company has in place policies
and procedures to review the financial condition of potential and existing
customers and concludes that collectibility is probable prior to commencement of
services. If the financial condition of an existing customer deteriorates to a
point where payment for services is in doubt, the Company will not recognize
revenue attributable to that customer until cash is received. Based on these
policies and procedures, the Company believes its exposure to credit risk within
the communications business and the related effect on the financial statements
is limited. The Company is not immune from the affects of the downturn in the
economy and specifically the telecommunications industry; however, management
believes the concentration of credit risk with respect to receivables is
mitigated due to the dispersion of the Company's customer base among geographic
areas and remedies provided by terms of contracts and statutes.

Coal Sales Contracts

Historically, Level 3's coal is sold primarily under long-term contracts with
electric utilities, which burn coal in order to generate steam to produce
electricity. A substantial portion of Level 3's coal revenue was earned from
long-term contracts during 2001, 2000, and 1999. The remainder of Level 3's
sales are made on the spot market where prices are substantially lower than
those in the long-term contracts. Beginning in 2001, a higher proportion of
Level 3's sales occurred on the spot market as long-term contracts began to
expire. Costs of revenue related to coal sales include costs of mining and
processing, estimated reclamation costs, royalties and production taxes.

The coal industry is highly competitive. Level 3 competes not only with other
domestic and foreign coal suppliers, some of whom are larger and have greater
capital resources than Level 3, but also with alternative methods of generating
electricity and alternative energy sources. Many of Level 3's competitors are
served by two railroads and, due to the competition, often benefit from lower
transportation costs than Level 3 which is served by a single railroad.
Additionally, many competitors have more favorable geological conditions than
Level 3, often resulting in lower comparative costs of production.

Level 3 is also required to comply with various federal, state and local laws
concerning protection of the environment. Level 3 believes its compliance with
environmental protection and land restoration laws will not affect its
competitive position since its competitors are similarly affected by these laws.

Level 3's coal sales contracts are concentrated with several electric utility
and industrial companies. In the event that these customers do not fulfill
contractual responsibilities, Level 3 could pursue the available legal remedies.

Depreciation and Amortization

Property, plant and equipment are recorded at cost. Depreciation and
amortization for the Company's property, plant and equipment are computed on
accelerated and straight-line methods based on the following useful lives:

Facility and Leasehold Improvements................................20-40 years
Network Infrastructure (including fiber)............................7-25 years
Operating Equipment..................................................3-7 years
Network Construction Equipment.......................................5-7 years
Furniture, Fixtures and Office Equipment.............................3-7 years

Depletion of mineral properties is provided using the units-of-extraction method
based on the remaining tons of coal committed under sales contracts.

Investee Stock Activity

The Company recognizes gains and losses from the sale, issuance and repurchase
of stock by its equity method investees in the statements of operations unless
the Company has unrecorded equity losses attributable to the investee due to the
lack of future financial commitments to the investee.

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of
shares during each period. Diluted earnings per share is computed by including
the dilutive effect of common stock that would be issued assuming conversion or
exercise of outstanding convertible subordinated notes, stock options, stock
based compensation awards and other dilutive securities.

Intangible Assets

Intangible assets primarily include amounts allocated upon acquisitions of
businesses, franchises and subscriber lists. These assets are amortized on a
straight-line basis over the expected period of benefit.

For intangibles originating from communications or other information services
related acquisitions, the Company is amortizing these assets over a five year
period. Intangibles attributable to other acquisitions and investments are
amortized over periods which do not exceed 40 years.

Long-Lived Assets

The Company reviews the carrying amount of long-lived assets or groups of assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The determination of any impairment
includes a comparison of estimated undiscounted future operating cash flows
anticipated to be generated during the remaining life of the asset to the net
carrying value of the asset.

Reserves for Reclamation

The Company follows the policy of providing an accrual for reclamation of mined
properties, based on the estimated total cost of restoration of such properties
to meet compliance with laws governing strip mining, by applying per-ton
reclamation rates to coal mined. These reclamation rates are determined using
the remaining estimated reclamation costs and tons of coal committed under sales
contracts. The Company reviews its reclamation cost estimates annually and
revises the reclamation rates on a prospective basis, as necessary.

Income Taxes

Deferred income taxes are provided for the temporary differences between the
financial reporting and tax basis of the Company's assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. In 2000, Level 3 utilized a portion of its accumulated net operating
tax losses to offset prior

years' taxable income. The remaining net operating losses not utilized can be
carried forward for 20 years to offset future taxable income. A valuation
allowance has been recorded against deferred tax assets, as the Company is
unable to conclude under relevant accounting standards that it is more likely
than not that deferred tax assets will be realizable. See Note 17.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings (loss) and other non-owner
related changes in equity not included in net earnings (loss), such as
unrealized gains and losses on marketable securities classified as available for
sale and foreign currency translation adjustments related to foreign
subsidiaries.

Foreign Currencies

Generally, local currencies of foreign subsidiaries are the functional
currencies for financial reporting purposes. Assets and liabilities are
translated into U.S. dollars at year-end exchange rates. Revenue, expenses and
cash flows are translated using average exchange rates prevailing during the
year. Gains or losses resulting from currency translation are recorded as a
component of accumulated other comprehensive income (loss) in stockholders'
equity (deficit) and in the statements of comprehensive income (loss).

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Derivatives

In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, ''Accounting for Derivative Instruments and Hedging
Activities''. SFAS No. 133 as amended by SFAS Nos. 137 and 138, is effective for
fiscal years beginning January 1, 2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction, the type of hedge, and the extent of hedge
ineffectiveness. The Company currently makes minimal use of derivative
instruments as defined by SFAS No. 133, so the adoption of SFAS No. 133 in 2001
did not have a material effect on the Company's results of operations or its
financial position.

Recently Issued Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No.
141"). SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting. Prior to the
issuance of SFAS No. 141, companies accounted for mergers and acquisitions using
one of two methods; pooling of interests or the purchase accounting method.
Level 3 has accounted for acquisitions using the purchase method and does not
believe the issuance of SFAS No. 141 will have a material effect on the
Company's future results of operations or financial position.

In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 is effective for fiscal years beginning
January 1, 2002. SFAS No. 142 requires companies to segregate identifiable
intangible assets acquired in a business combination from goodwill. The
remaining goodwill is no longer subject to amortization over its estimated
useful life. However, the carrying amount of the goodwill must be assessed at
least annually for impairment using a fair value based test. Goodwill
attributable to equity method investments will also no longer be amortized but
is still subject to impairment analysis using existing guidance for equity
method investments. For the goodwill and intangible assets in place as of
December 31, 2001, the Company does not believe the adoption of SFAS No. 142
will have a material impact on the Company's results of operations or its
financial position. The Company believes the impact of SFAS No. 142 will not
have a material effect on accounting for future acquisitions as the new standard
generally results in more amortized intangible assets and less non-amortized
goodwill.

In June 2001, the FASB also approved SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS No. 143"). SFAS No. 143 establishes accounting
standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. The fair value of a
liability for an asset retirement obligation is to be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized and included as part of the carrying
value of the long-lived asset and amortized over the useful life of the asset.
SFAS No. 143 will be effective for the Company beginning on January 1, 2003. The
Company expects that its coal mining business will be affected by this standard
and is currently evaluating the potential effect of SFAS No. 143 on its future
results of operations and financial position.

In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which the Company elected to
early adopt during the fourth quarter of 2002 retroactive to January 1, 2001.
SFAS No. 144 supersedes SFAS No. 121, but retains its requirements to (a)
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and (b) measure an
impairment loss as the difference between the carrying amount and the estimated
fair value of the asset. It removes goodwill from its scope and, therefore,
eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment. It also describes a probability-weighted cash flow
estimation approach to deal with situations in which alternative courses of
action to recover the carrying amount of a long-lived asset are under
consideration or a range is estimated for possible future cash flows. It
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held and
used until it is disposed of. In these situations, SFAS No. 144 requires that an
impairment loss be recognized at the date a long-lived asset is exchanged for a
similar productive asset or distributed to owners in a spin-off if the carrying
amount of the asset exceeds its fair value. The Company continued to monitor and
review long-lived assets for possible impairment in accordance with SFAS No. 121
prior to the adoption of SFAS No. 144. Since SFAS No. 144 retains similar
requirements as SFAS No. 121 for recognizing and measuring any impairment loss,
the adoption of SFAS No. 144 did not have a significant effect on the Company's
procedures for monitoring and reviewing long-lived assets for possible
impairment. SFAS No. 144 also retains the basic provisions of APB Opinion No. 30
"Reporting the Results of Operations" for the presentation of discontinued
operations in the income statement but broadens the definition of a discontinued
operation such that a component of an entity (rather than a segment of a
business) would be considered to be a discontinued operation if the operations
and cash flows of the component will be eliminated from the ongoing operations
of the company and the company will not have any significant continuing
involvement in the operations of the component. A component of an entity
comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The adoption of SFAS No. 144 in 2001 had a significant impact on the accounting
presentation of the sale of the Asian communications business as this business
would not have qualified for treatment as a discontinued operation under APB
Opinion No. 30, since it did not meet the definition of a business segment.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

(2) Restructuring and Impairment Charges

In 2001, the Company announced that due to the duration and severity of the
slowdown in the economy and the telecommunications industry, that it would be
necessary to reduce operating expenses as well as reduce and reprioritize
capital expenditures in an effort to be in a position to benefit when the
economy recovers. As a result of these actions, the Company has reduced its
global work force, primarily in the communications business in the United States
and Europe by approximately 2,200 employees in 2001. Restructuring charges of
approximately $10 million, $40 million and $58 million were recorded in the
first, second and fourth quarters of 2001, respectively, of which $66 million
related to staff reduction and related costs and $42 million to real estate
lease termination costs. In total, the Company has paid $49 million in severance
and related fringe benefit costs and $1 million in lease termination costs as of
December 31, 2001 for these actions. The remaining estimated cash expenditures
of $17 million relating to the workforce reductions primarily relate to
approximately 200 European employees terminated in the first quarter of 2002.
Lease termination obligations of $41 million are expected to be substantially
paid by June 30, 2002.

The economic downturn and related capital reprioritization discussed above
resulted in certain telecommunications assets being identified as excess,
obsolete or carried at values that may not be recoverable due to an adverse
change in the extent in which the telecommunication assets were being utilized
caused by the unfavorable business climate within the telecommunications
industry. As a result, in the second quarter of 2001 the Company recorded a
non-cash impairment charge of $61 million, representing the excess of the
carrying value over the estimated fair value of these assets. The estimated fair
value of these assets was based on recent cash sales of similar assets. The
impaired assets were written-off, as the Company does not expect to utilize them
to generate future cash flows.

In the fourth quarter of 2001, in light of the continued economic uncertainty,
continued customer disconnections at higher rates than expected, increased
difficulty in obtaining new revenue and the overall slow down in the
communications industry, the Company again reviewed the carrying value of its
long-lived assets for possible impairment in accordance with SFAS No. 144. The
Company determined based upon its projections, giving effect to the continuing
economic slowdown and continued over-capacity in certain areas of the
telecommunications industry, the estimated future undiscounted cash flows
attributable to certain assets would not exceed the current carrying value of
the assets. The Company, therefore, recorded an impairment charge of $3.2
billion to reflect the difference between the estimated fair value of the assets
on a discounted cash flow basis and their current carrying value as further
described below.

The impairments primarily relate to colocation assets, excess conduits in North
America and European intercity and metropolitan networks, and certain
transoceanic assets. Geographically, approximately 74% of the charges are
attributable to North America, 17% are attributable to Europe and 9%
attributable to transatlantic assets.

The financial problems of many of the "dot-coms", emerging carriers and
competitors, a weakening economy, and changing customer focus, have led to an
over-capacity of colocation space in several U.S. and European markets. Level 3
is attempting to sell or sublease its excess colocation space; however, current
market rates for much of the space are below its carrying values. As a result,
the Company recorded an impairment charge of approximately $1.6 billion related
to its colocation assets, primarily owned facilities, leasehold improvements and
related equipment.

Level 3 constructed its networks in North America and Europe in such a way that
they could be continuously upgraded to the most current technology without
affecting its existing customers. Level 3 also installed additional conduits
with the intention of selling them to other carriers. To date, the Company has
only sold one conduit in its North American network and, due to the current
economic environment and decreasing capital expenditure budgets of potential
buyers, does not expect additional sales in the foreseeable future. For this
reason the Company has recorded an impairment charge of approximately $1.2
billion for the five conduits that were previously determined to be available
for sale to third parties, based on estimated cash flows from the disposition of
the conduits.

The completion of several transoceanic cable systems in the second half of 2001
and the expected completion of additional systems in 2002, have resulted in an
over abundance of transoceanic capacity. This excess capacity, combined with
limited demand, have adversely affected the transoceanic capacity markets. At
current pricing levels, the Company does not believe it will recover its
investment from future cash flows. As a result, the Company has recorded an
impairment charge of approximately $320 million for its transatlantic submarine
assets.

The Company also recorded an impairment charge of approximately $65 million for
spare equipment write-downs and abandoned lateral fiber builds in the fourth
quarter of 2001.

(3) Discontinued Asian Operations

On December 19, 2001, Level 3 announced that it had agreed to sell its Asian
telecommunications business to Reach Ltd. for no cash consideration. The
agreement covers subsidiaries that included the Asian network operations,
assets, liabilities and future financial obligations. This includes Level 3's
share of the Northern Asian cable system, capacity on the Japan-US cable system,
capital and operational expenses related to these two systems, gateways in Hong
Kong and Tokyo, and existing customers on Level 3's Asian network.

The transaction closed on January 18, 2002. As of December 31, 2001, the net
carrying value of Level 3's Asian assets was approximately $465 million. In
accordance with SFAS No. 144, Level 3 recorded an impairment loss on these
assets held for sale within discontinued operations, equal to the difference
between the carrying value of the

assets and their fair value. Based upon the terms of the agreement, the Company
also accrued $51 million in certain capital obligations it retained for the two
submarine systems to be sold to Reach, and estimated transaction costs.

The following is summarized financial information for the discontinued Asian
operations for the three years ending December 31, 2001:

Operations 2001 2000 1999
(dollars in millions)
Revenue........................................................................... $ 13 $ 1 $ -
Costs and Expenses:
Cost of revenue.............................................................. (17) (2) -
Depreciation and amortization................................................ (27) (5) -
Selling, general and administrative.......................................... (58) (42) (5)
------ ------ ------
Total costs and expenses................................................ (102) (49) (5)
------ ------ ------

Loss from Operations.............................................................. (89) (48) (5)

Loss on Impairment of Asian Assets................................................ (516) - -
------ ------ ------

Loss from Discontinued Operations................................................. $(605) $ (48) $ (5)
====== ====== ======

SFAS No. 144 requires that long-lived assets that have met the relevant criteria
should be classified as "held for sale" and shall be identified separately in
the asset and liability sections of the balance sheet. The assets and
liabilities of the Asian operations met these criteria as of December 31, 2001
and are classified as current due to their sale to Reach in January of 2002.

The following is summarized financial information for the discontinued Asian
operations as of December 31, 2001 and 2000:

Financial Position 2001 2000
(dollars in millions)
Current Assets:
Cash and cash equivalents.............................................................. $ 34 $ 13
Restricted securities.................................................................. 17 -
Receivables............................................................................ 21 91
Other.................................................................................. ------ ------
Total Current Assets........................................................................ 74 107

Net Property, Plant and Equipment........................................................... - 369
Other Assets, net........................................................................... - 13
------ ------
$ 74 $489
====== ======
Current Liabilities:
Accounts payable....................................................................... $ 58 $ 116
Current portion of long-term debt...................................................... 8 -
Deferred revenue....................................................................... 6 -
Other.................................................................................. 2 1
Total Current Liabilities................................................................... 74 117
------ ------

Net Assets.................................................................................. $ - $372
====== ======

(4) Loss Per Share

The Company had a loss from continuing operations for the three years ended
December 31, 2001. Therefore, the dilutive effect of the approximately 15
million, 19 million and 13 million shares at December 31, 2001, 2000 and 1999,
respectively, attributable to the convertible subordinated notes and the
approximately 53 million, 21 million and 23 million options and warrants
outstanding at December 31, 2001, 2000 and 1999 respectively, have not been
included in the computation of diluted loss per share because their inclusion
would have been anti-dilutive to the computation.

The following details the earnings (loss) per share calculations for the Level 3
Common Stock.

Year Ended
2001 2000 1999
Loss from Continuing Operations (in millions)............................... $ (5,448) $ (1,407) $ (482)
Discontinued Operations..................................................... (605) (48) (5)
Extraordinary Gain on Debt Extinguishment, net.............................. 1,075 - -
------ ------- -------
Net Loss.................................................................... $ (4,978) $ (1,455) $ (487)
======== ======== =======

Total Number of Weighted Average Shares Outstanding used to Compute
Basic and Dilutive Earnings Per Share (in thousands)..................... 373,792 362,539 334,348
Earnings (Loss) per Share (Basic and Diluted):
Continuing operations.................................................. $ (14.58) $ (3.88) $ (1.44)
======== ======= =======
Discontinued operations................................................ $ (1.62) $ (.13) $ (.02)
======== ======= =======
Extraordinary gain on debt extinguishment, net......................... $ 2.88 $ - $ -
======== ======= =======
Net loss............................................................... $ (13.32) $ (4.01) $ (1.46)
======== ======= =======

(5) Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to determine classification and
fair values of financial instruments:

Cash and Cash Equivalents

Cash equivalents generally consist of funds invested in highly liquid
instruments purchased with an original maturity of three months or less. The
securities are stated at cost, which approximates fair value.

Marketable and Restricted Securities

Level 3 has classified all marketable and restricted securities as
available-for-sale. Restricted securities primarily include investments in
mutual funds that are restricted to fund certain reclamation liabilities of its
coal mining ventures, cash deposits related to construction renovations for the
New York Gateway facility, and cash to collateralize letters of credit. The cost
of the securities used in computing unrealized and realized gains and losses is
determined by specific identification. Fair values are estimated based on quoted
market prices for the securities on hand or for similar investments. Net
unrealized holding gains and losses are included in accumulated other
comprehensive income (loss) within stockholders' equity.

At December 31, 2001 and 2000, the cost, unrealized holding gains and losses,
and estimated fair values of marketable and restricted securities were as
follows:

Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
(dollars in millions)
2001
Marketable Securities:
U.S. Treasury securities............................................. $ 206 $ - $ - $ 206
======= ======= ======= =======
Restricted Securities:
Cash and cash equivalents............................................ $ 128 $ - $ - $ 128
Wilmington Trust:
Intermediate term bond fund................................... 15 - - 15
Equity fund................................................... 11 1 - 12
------ ------- ------- -------
$ 154 $ 1 $ - $ 155
======= ======= ======= =======

Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
(dollars in millions)
2000
Marketable Securities:
Commercial Paper..................................................... $ 204 $ - $ - $ 204
U.S. Treasury securities............................................. 2,534 4 - 2,538
------ ------- ------- -------
$2,738 $ 4 $ - $ 2,742
======= ======= ======= =======
Restricted Securities:
Cash and cash equivalents............................................ $ 173 $ - $ - $ 173
Wilmington Trust:
Intermediate term bond fund..................................... 14 - - 14
Equity fund..................................................... 11 4 - 15
------ ------- ------- -------
$ 198 $ 4 $ - $ 202
======= ======= ======= =======

For debt securities, costs do not vary significantly from principal amounts. The
Company recognized $17 million of gains in 2001 from the sale of marketable
securities; all of which were attributable to foreign currency gains on
securities denominated in Euros. The Company did not recognize any realized
gains and losses on sales of marketable and equity securities in 2000. Realized
gains and losses on sales of marketable and equity securities were $17 million
and $16 million in 1999.

At December 31, 2001, the contractual maturities of the debt securities are as
follows:

Fair
Cost Value
(dollars in millions)
U.S. Treasury Securities:
Less than 1 year................................................................. $ 206 $ 206
======= =======

Maturities for the restricted securities have not been presented, as the types
of securities are either cash or mutual funds which do not have a single date.

Long-Term Debt

The fair value of long-term debt was estimated using the December 31, 2001 and
2000 average of the bid and ask price for the publicly traded debt instruments.
Amounts under the Tranche A and Tranche C of the Senior Secured Credit Facility
and the commercial mortgages are not publicly traded. The fair value for these
instruments is assumed to approximate their carrying value at December 31, 2001
as they are secured by underlying assets and are at variable interest rates thus
minimizing credit and interest rate risks.

The carrying amount and estimated fair values of Level 3's financial instruments
are as follows:

2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
(dollars in millions)

Cash and Cash Equivalents..................................................... $ 1,297 $ 1,297 $ 1,256 $ 1,256
Marketable Securities......................................................... 206 206 2,742 2,742
Restricted Securities......................................................... 155 155 215 215
Investments (Note 8).......................................................... 127 569 146 569
Long-term Debt, including current portion (Note 9)............................ 6,216 3,354 7,325 5,766

(6) Receivables

Receivables at December 31, 2001 and 2000 were as follows:

Information
Communications Services Coal Other Total
(dollars in millions)
2001
Accounts Receivable - Trade:
Services........................ $ 151 $ 21 $ 11 $ 1 $ 184
Dark Fiber...................... 40 - - - 40
Joint Build Costs...................... 20 - - - 20
Other Receivables...................... 41 - - - 41
Allowance for Doubtful Accounts........ (43) (3) - - (46)
------ ------- ------- ------- -------
Total $ 209 $ 18 $ 11 $ 1 $ 239
======= ======= ======= ======= =======
2000
Accounts Receivable - Trade:
Services........................ $ 141 $ 25 $ 19 $ 1 $ 186
Dark Fiber...................... 161 - - - 161
Joint Build Costs...................... 162 - - - 162
Other Receivables...................... 49 1 - - 50
Allowance for Doubtful Accounts........ (29) (4) - - (33)
------ ------- ------- ------- -------
Total $ 484 $ 22 $ 19 $ 1 $ 526
======= ======= ======= ======= =======

Joint build receivables primarily relate to costs incurred by the Company for
construction of network assets in which Level 3 is partnering with other
companies. Generally, under these types of agreements, the sponsoring partner
will incur 100% of the construction costs and bill the other party as certain
construction milestones are accomplished.

The Company recognized bad debt expense in selling, general and administrative
expenses of $42 million, $31 million and $11 million in 2001, 2000 and 1999,
respectively. The Company decreased accounts receivable and allowance for
doubtful accounts by approximately $29 million and $7 million in 2001 and 2000,
respectively, for amounts the Company deemed as uncollectible.

(7) Property, Plant and Equipment

The Company has substantially completed the construction of its communications
network. Costs associated directly with the uncompleted network, including
employee related costs, are capitalized, and interest expense incurred during
construction is capitalized based on the weighted average accumulated
construction expenditures and the interest rates related to borrowings
associated with the construction (Note 9). Intercity segments, gateway
facilities, local networks and operating equipment that have been placed in
service are being depreciated over their estimated useful lives, primarily
ranging from 3-25 years.

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

As noted previously, in 2001, the Company recorded a charge on the statement of
operations for impairment of certain assets. The impairments primarily relate to
colocation assets ($1.6 billion), conduits in North America and European
intercity and metropolitan networks ($1.2 billion), and certain transoceanic
assets ($320 million). For those assets that are determined to be impaired, the
fair value of the asset becomes the new basis or "cost" of the asset and the
accumulated depreciation that had previously been recorded, is eliminated.

Capitalized business support systems and network construction costs that have
not been placed in service have been classified as construction-in-progress
within Property, Plant & Equipment below.

Accumulated Book
Cost Depreciation Value
(dollars in millions)
2001
Land and Mineral Properties.................................................. $ 218 $ (22) $ 192
Facility and Leasehold Improvements
Communications.......................................................... 1,423 (22) 1,401
Information Services.................................................... 26 (5) 21
Coal Mining............................................................. 65 (62) 3
CPTC.................................................................... 92 (14) 78
Network Infrastructure....................................................... 4,111 (107) 4,004
Operating Equipment
Communications.......................................................... 1,152 (367) 785
Information Services.................................................... 69 (41) 28
Coal Mining............................................................. 82 (72) 10
CPTC.................................................................... 18 (11) 7
Network Construction Equipment............................................... 67 (17) 50
Furniture, Fixtures and Office Equipment..................................... 180 (94) 86
Construction-in-Progress..................................................... 225 - 225
------- ------- -------
$7,728 $ (838) $ 6,890
====== ======= ========

Accumulated Book
Cost Depreciation Value
(dollars in millions)
2000
Land and Mineral Properties.................................................. $ 191 $ (11) $ 180
Facility and Leasehold Improvements
Communications.......................................................... 1,280 (51) 1,229
Information Services.................................................... 25 (4) 21
Coal Mining............................................................. 68 (64) 4
CPTC.................................................................... 92 (12) 80
Network Infrastructure....................................................... 3,400 (43) 3,357
Operating Equipment
Communications.......................................................... 1,577 (554) 1,023
Information Services.................................................... 50 (26) 24
Coal Mining............................................................. 93 (85) 8
CPTC.................................................................... 17 (9) 8
Network Construction Equipment............................................... 139 (27) 112
Furniture, Fixtures and Office Equipment..................................... 146 (44) 102
Construction-in-Progress..................................................... 2,866 - 2,866
------- ------- -------
$ 9,944 $ (930) $ 9,014
======= ======= ========

Depreciation expense was $1,082 million in 2001, $529 million in 2000 and $192
million in 1999. Depreciation expense attributable to the network construction
equipment is capitalized and included in Construction-in-Progress until such
time the constructed asset is placed in service.

(8) Other Assets

At December 31, 2001 and 2000 other non-current assets consisted of the
following:

2001 2000
(in millions)

Investments.................................................................................... $127 $146
Debt Issuance Costs, net....................................................................... 113 161
Goodwill, net of accumulated amortization of $142 and $102.................................... 28 68
Prepaid Network Assets......................................................................... 21 35
CPTC Deferred Development and Financing Costs.................................................. 20 14
Assets Held for Sale.......................................................................... 62 -
Employee and Officer Notes Receivable......................................................... 10 -
Deposits...................................................................................... - 40
Other.......................................................................................... 11 14
----- -----
Total other assets........................................................................ $392 $478
====== ======

The Company holds significant equity positions in two publicly traded companies:
RCN Corporation ("RCN") and Commonwealth Telephone Enterprises, Inc.
("Commonwealth Telephone"). RCN is a facilities-based provider of bundled local
and long distance phone, cable television and Internet services to residential
markets primarily on the East and West coasts as well as Chicago. Commonwealth
Telephone holds Commonwealth Telephone Company, an incumbent local exchange
carrier operating in various rural Pennsylvania markets, and CTSI, Inc., a
competitive local exchange carrier which commenced operations in 1997.

On December 31, 2001, Level 3 owned approximately 27% and 45% of the outstanding
shares of RCN and Commonwealth Telephone, respectively, and accounts for each
entity using the equity method. The market value of the Company's investment in
RCN and Commonwealth Telephone was $78 million and $485 million, respectively,
on December 31, 2001.

During the fourth quarter of 2000, Level 3's proportionate share of RCN's losses
exceeded the remaining carrying value of Level 3's investment in RCN. Level 3
does not have additional financial commitments to RCN; therefore it recognized
equity losses only to the extent of its investment in RCN. If RCN becomes
profitable, Level 3 will not record its equity in RCN's profits until unrecorded
equity losses have been offset. The Company's investment in RCN, including
goodwill, was zero at December 31, 2001 and December 2000, respectively. The
Company did not recognize approximately $249 million of suspended equity losses
attributable to RCN in 2001, bringing the total amount of suspended equity
losses to approximately $269 million. Level 3 recorded equity losses
attributable to RCN of $260 million and $134 million for the twelve months ended
December 31, 2000 and 1999, respectively.

The Company recognizes gains from the sale, issuance and repurchase of stock by
its equity method investees in its statements of operations. During 2000, RCN
issued stock for the acquisition of 21st Century Telecom Group, Inc., completed
in April, 2000, and for certain transactions which diluted the Company's
ownership of RCN from 35% at December 31, 1999 to 31% at December 31, 2000. The
increase in the Company's proportionate share of RCN's net assets as a result of
these transactions resulted in a pre-tax gain of $95 million for the Company for
the year ended December 31, 2000. The Company recognized a similar pre-tax gain
of $117 million in 1999. The Company did not recognize any gains in 2001 and
does not expect to recognize future gains on RCN stock activity until the
suspended equity losses are recognized by the Company.

The following is summarized financial information of RCN for the year ended
December 31, 2001(unaudited) and the years ended December 31, 2000 and 1999, and
as of December 31, 2001 (unaudited) and December 31, 2000.

Year Ended December 31,
2001 2000 1999
Operations:
RCN Corporation:
Revenue . $ 456 $ 333 $ 276
Net loss available to common shareholders................................... (836) (891) (369)

Level 3's Share:
Net loss.................................................................... - (260) (134)
Goodwill amortization....................................................... - (1) (1)
----- ----- -----
$ - $ (261) $ (135)
====== ====== ======

December 31,
2001 2000
Financial Position:
Current Assets................................................................... $ 956 $ 1,854
Other Assets .................................................................... 2,647 2,922
------ ------
Total assets................................................................ 3,603 4,776

Current Liabilities.............................................................. 313 531
Other Liabilities................................................................ 1,929 2,284
Minority Interest................................................................ 51 75
Preferred Stock.................................................................. 2,142 1,991
------ ------
Total liabilities and preferred stock....................................... 4,435 4,881
------ ------
Common shareholders' deficit........................................... $ (832) $ (105)
====== ======
Level 3's Investment:
Equity in net assets........................................................ $ - $ -
Goodwill.................................................................... - -
------ ------
$ - $ -
====== ======

The Company's investment in Commonwealth Telephone, including goodwill, was $121
million and $105 million at December 31, 2001 and 2000, respectively.

The Company previously made investments in certain public and private companies
in connection with those entities agreeing to purchase various services from the
Company. The Company originally recorded these transactions as investments and
deferred revenue on the balance sheet. The value of the investment and deferred
revenue is equal to the estimated fair value of the securities at the time of
the transaction or the value of the services to be provided, whichever was more
readily determinable. Level 3 closely monitors the success of these investees in
executing their business plans. For those companies that are publicly traded,
Level 3 also monitors current and historical market values of the investee as it
compares to the carrying value of the investment. The Company recorded a charge
of $37 million during 2001 for an other-than temporary decline in the value of
such investments, which is included in Other, net on the consolidated condensed
statements of operations. Future appreciation will be recognized only upon sale
or other disposition of these securities. The carrying amount of the investments
was zero at December 31, 2001 and $37 million at December 31, 2000. The Company
recognized revenue of approximately $13 million and less then $1 million for
actual services provided to other entities involved in the program for the
twelve months ended December 31, 2001 and 2000, respectively. As of December 31
2001, the Company had deferred revenue obligations of $9 million with respect to
these transactions.

In August, 2001, the Company and divine, inc., a company included in those
described above, entered into an agreement whereby divine would repurchase
shares of common stock issued to Level 3 and absolve Level 3 of any further
obligations with respect to the deferred revenue recorded at the time of the
original transaction. As a result, Level 3 recorded a $27 million gain in Other,
net on the consolidated statement of operations in 2001.

As of December 31, 2001, the goodwill identified in Other Assets is attributable
to technology purchased in the XCOM Technologies, Inc. acquisition in 1998. This
technology was used by Level 3 to develop an interface between its Internet
protocol-network and the existing public switched telephone network. In
accordance with SFAS No. 142, the Company will continue to amortize this
intangible asset over its remaining useful economic life. Goodwill amortization
expense, excluding amortization expense attributable to equity method investees,
was $40 million in 2001, $50 million in 2000, and $36 million in 1999.

Assets held for sale includes certain corporate facilities that management of
the Company has elected to dispose as soon as practicable. The Company recorded
an impairment charge in depreciation expense of $45 million in 2001,
representing the difference between the carrying value and adjusted market value
of these facilities, as determined through consultations with a commercial real
estate broker. Also included in assets held for sale are certain
telecommunications equipment identified as excess and which management expects
to sell within the next year due to the Company's decision in June 2001 to
reprioritize its capital expenditures.

Loans were made to certain employees and officers of the Company. The loans are
generally secured by Level 3 common stock or other personal assets of the
borrower and bear interest at rates ranging from 6% to 9.5%.

(9) Long-Term Debt

At December 31, 2001 and 2000, long-term debt was as follows:

2001 2000
(dollars in millions)
Senior Secured Credit Facility:
Term Loan Facility
Tranche A (4.69% due 2007).......................................................... $ 450 $ 200
Tranche B (5.69% due 2008).......................................................... 275 275
Tranche C (6.08% due 2008).......................................................... 400 -
Senior Notes (9.125% due 2008)........................................................... 1,430 2,000
Senior Notes (11% due 2008).............................................................. 442 800
Senior Discount Notes (10.5% due 2008)................................................... 583 619
Senior Euro Notes (10.75% due 2008)...................................................... 307 465
Senior Discount Notes (12.875% due 2010)................................................. 386 399
Senior Euro Notes (11.25% due 2010)...................................................... 93 279
Senior Notes (11.25% due 2010)........................................................... 129 250
Commercial Mortgage:
GMAC (4.52% due 2003)............................................................... 120 120
Lehman (5.64% due 2004)............................................................. 112 113
Convertible Subordinated Notes (6.0% due 2010)........................................... 728 863
Convertible Subordinated Notes (6.0% due 2009)........................................... 612 823
CPTC Long-term Debt (with recourse only to CPTC)
(7.63% due 2004-2028)............................................................... 140 115
Other................................................................................... 9 4
------ ------
6,216 7,325
Less current portion..................................................................... (7) (7)
------ ------
$ 6,209 $ 7,318
======= =======

In July 2001, Level 3 announced that it had amended its Senior Secured Credit
Facility to permit the Company to acquire certain of its outstanding
indebtedness in exchange for shares of common stock. Various issuances of Level
3's outstanding senior notes, senior discount notes and convertible subordinated
notes have traded at discounts to their respective face or accreted amounts.

The Company purchased $130 million of its 6% Convertible Subordinated Notes due
in 2009 and $64 million of its 6% Convertible Subordinated Notes due in 2010
during the second half of 2001. The Company issued approximately 15.9 million
shares of its common stock worth approximately $72 million in exchange for the
debt. The net gain on the early extinguishment of the debt, including
transaction costs and unamortized debt issuance costs, was $117 million and is
classified as an extraordinary item in the consolidated statement of operations.
Level 3 will continue to evaluate these transactions in the future. The amounts
involved in any such transactions, individually or in the aggregate, may be
material.

In September 2001, the Company announced that its first tier, wholly owned
subsidiary, Level 3 Finance, LLC was commencing a "Modified Dutch Auction"
tender offer for a portion of the Company's senior debt and convertible debt
securities. Under the "Modified Dutch Auction" procedures, Level 3 Finance
accepted tendered notes in each offer in the order of the lowest to the highest
tender prices specified by the tendering holders within the applicable price
range for the applicable series of notes (see table below.)

In October 2001, Level 3 Finance completed the purchase of Company debt with a
face value of approximately $1.7 billion, plus accrued interest, for a total
purchase price of approximately $731 million. The net gain on the extinguishment
of the debt, including transaction costs, foreign currency gains and unamortized
debt issuance costs, was approximately $967 million and was recorded as an
extraordinary item in the consolidated statement of operations.

Maximum Actual Principal Actual
Principal Amount at Weighted
Amount at Purchase Price Maturity Average
Maturity Sought Range per Repurchased Purchase
($ millions) $1,000 ($ millions) Price/$1,000
Principal

Senior Notes (9.125%) ................................. $ 725 $350 - $450 $ 570 $ 450
Senior Notes (11%) .................................... 450 380 - 480 359 480
Senior Discount Notes (10.5%) ......................... 125 210 - 250 125 210
Senior Euro Notes (10.75%) ............................ 267 370 - 440 136 440
Senior Discount Notes (12.875%) ....................... 100 150 - 180 100 150
Senior Euro Notes (11.25%) ............................ 178 370 - 440 173 440
Senior Notes (11.25%) ................................. 150 370 - 460 121 460
Convertible Subordinated Notes (due 2010) ............. 325 190 - 220 71 220
Convertible Subordinated Notes (due 2009) ............. 525 190 - 220 80 220
------ ------
$ 2,845 $ 1,735
======= =======
Assumes 1EURO = .89 USD

Senior Secured Credit Facility

On September 30, 1999, Level 3 and certain Level 3 subsidiaries entered into a
$1.375 billion secured credit facility (''Senior Secured Credit Facility''). The
facility was originally comprised of a senior secured revolving credit facility
in the amount of $650 million and a two-tranche senior secured term loan
facility aggregating $725 million. The secured term loan facility consists of a
$450 million tranche A and a $275 million tranche B term loan facility,
respectively. At December 31, 2000, Level 3 had borrowed $200 million and $275
million under the tranche A and tranche B secured term loan facility,
respectively. On January 8, 2001, the Company borrowed the remaining $250
million available under the existing tranche A of the Senior Secured Credit
Facility.

On March 22, 2001, Level 3 entered into an amendment to increase the borrowing
capacity under the Senior Secured Credit Facility by $400 million, to $1.775
billion. As part of the agreement, Level 3 borrowed $400 million under a new
tranche C of the term loan facility. The net proceeds will be used for
implementing the business plan, including the purchase of telecommunications
assets.

The obligations under the revolving credit facility are secured by substantially
all the assets of Level 3 and, subject to certain exceptions, its wholly owned
domestic subsidiaries (other than the borrower under the term loan facility).
Such assets will also secure a portion of the term loan facility. Additionally,
all obligations under the term loan facility will be secured by the equipment
that is purchased with the proceeds of the term loan facility.

Amounts drawn under the secured credit facility will bear interest, at the
option of the Company, at an alternate base rate or reserve-adjusted LIBOR plus
applicable margins. The applicable margins for the revolving credit facility and
tranche A term loan facility range from 50 to 175 basis points over the
alternate base rate and from 150 to 275 basis points over LIBOR and are fixed
for the tranche B term loan facility at 250 basis points over the alternate base
rate and 375 basis points over LIBOR. The tranche C applicable margins are fixed
at 300 basis points over the alternate base rate and 400 basis points over
LIBOR. Interest and commitment fees on the revolving credit facility and the
term loan facilities are payable quarterly with specific rates determined by
actual borrowings under each facility. Debt issuance costs of $38 million were
capitalized and will be amortized as interest expense over the terms of Senior
Secured Credit Facility.

The revolving credit facility provides for automatic and permanent quarterly
reductions of the amount available for borrowing under that facility, commencing
at $17.25 million on March 31, 2004, and increasing to approximately $61 million
per quarter. The tranche A term loan facility amortizes in consecutive quarterly
payments beginning on March 31, 2004, commencing at $9 million per quarter and
increasing to $58.5 million per quarter. The revolving credit facility and
tranche A term loan facility mature on September 30, 2007. The tranche B term
loan facility amortizes in consecutive quarterly payments beginning on March 31,
2004, commencing at less than $1 million and increasing to $67 million in 2007.
Tranche C of the term loan facility amortizes in consecutive quarterly payments

beginning on June 30, 2004, commencing at $1 million per quarter and increasing
to $97 million per quarter in 2007, with the final installment due January 30,
2008.

As of December 31, 2001, Level 3 had not borrowed any funds under the $650
million revolving credit facility. The availability of funds and any requirement
to repay previously borrowed funds is contingent upon the continued compliance
with the relevant debt covenants.

The Senior Secured Credit Facility has customary covenants, or requirements that
the company and certain of its subsidiaries must meet to remain in compliance
with the contract, including a financial covenant that measures minimum revenues
(Minimum Telecom Revenue). The subsidiaries of the Company that must comply with
the terms and conditions of the credit facility are referred to as Restricted
Subsidiaries.

The Minimum Telecom Revenue covenant generally requires that the Company meet or
exceed specified levels of cash revenue from communications and information
services businesses generated by the Restricted Subsidiaries. The Minimum
Telecom Revenue covenant is calculated quarterly on a trailing four-quarter
basis and must exceed $1.5 billion for the first quarter of 2002, increasing to
$2.3 billion in the fourth quarter of 2002, $3.375 billion in the fourth quarter
of 2003, and $4.75 billion in the fourth quarter of 2004. The Restricted
Subsidiaries currently include those engaged in the Company's communications
businesses and certain subsidiaries of (i)Structure engaged in the company's
information services businesses.

Those subsidiaries of the Company that are not subject to the limitations of the
Senior Secured Credit Facility are referred to as Unrestricted Subsidiaries. The
Unrestricted Subsidiaries include Level 3's coal mining and toll road properties
and its holdings in RCN and Commonwealth Telephone.

If the Company does not remain in compliance with this financial covenant, as
well as certain other covenants, it could be in default under the terms of the
Senior Secured Credit Facility. Under this scenario, the lenders could take
actions to require repayment. The Company believes it is in full compliance with
all covenants as of December 31, 2001.

On January 29, 2002, the Company stated that it was in compliance with all of
the terms, conditions, and covenants under its credit facility and expected to
remain in compliance through the end of the first quarter based on its publicly
disclosed financial projections. However, the Company stated that if sales,
disconnects and cancellations were to continue at the levels experienced during
the second half of 2001, it may violate the Minimum Telecom Revenue covenant as
early as the end of the second quarter 2002. The Company also stated that to the
extent the Company's operational performance improves or it completes
acquisitions that generate sufficient incremental revenue, a potential violation
of the covenant could be delayed beyond the second quarter of 2002 or eliminated
entirely. See Note 17 for additional information on actions taken to address
covenant issues.

9.125% Senior Notes

In April 1998, Level 3 Communications, Inc. received $1.94 billion of net
proceeds from an offering of $2 billion aggregate principal amount 9.125% Senior
Notes Due 2008 (''9.125% Senior Notes''). Interest on the notes accrues at
9.125% per year and is payable on May 1 and November 1 each year in cash.

The 9.125% Senior Notes are subject to redemption at the option of Level 3
Communications, Inc., in whole or in part, at any time or from time to time on
or after May 1, 2003, plus accrued and unpaid interest thereon to the redemption
date, if redeemed during the twelve months beginning May 1, of the years
indicated below:

Year Redemption Price
2003 ....................................................... 104.563%
2004 ....................................................... 103.042%
2005 ....................................................... 101.521%
2006 and thereafter......................................... 100.000%

The 9.125% Senior Notes are senior, unsecured obligations of Level 3
Communications, Inc., ranking pari passu with all existing and future senior
unsecured indebtedness of the Company. The notes contain certain covenants,
which among other things, limit consolidated debt, dividend payments, and
transactions with affiliates. Level 3 Communications, Inc. used the net proceeds
of the note offering in connection with the implementation of its business plan.

Debt issuance costs of $65 million were originally capitalized and are being
amortized as interest expense over the term of the Senior Notes. As a result of
amortization and debt repurchases, the capitalized debt issuance costs have been
reduced to $30 million at December 31, 2001.

11% Senior Notes due 2008

In February 2000, Level 3 Communications, Inc. received $779 million of net
proceeds, after transaction costs, from a private offering of $800 million
aggregate principal amount of its 11% Senior Notes due 2008 ("11% Senior
Notes"). Interest on the notes accrues at 11% per year and is payable
semi-annually in arrears in cash on March 15 and September 15, beginning
September 15, 2000. The 11% Senior Notes are senior, unsecured obligations of
Level 3 Communications, Inc., ranking pari passu with all existing and future
senior debt. The 11% Senior Notes cannot be prepaid by Level 3 Communications,
Inc., and mature on March 15, 2008. The 11% Senior Notes contain certain
covenants, which among other things, limit additional indebtedness, dividend
payments, certain investments and transactions with affiliates.

Debt issuance costs of $21 million were originally capitalized and are being
amortized as interest expense over the term of the 11% Senior Notes. As a result
of amortization and debt repurchases, the capitalized debt issuance costs have
been reduced to $9 million at December 31, 2001.

10.5% Senior Discount Notes due 2008

In December 1998, Level 3 Communications, Inc. sold $834 million aggregate
principal amount at maturity of 10.5% Senior Discount Notes Due 2008 (''10.5%
Senior Discount Notes''). The sales proceeds of $500 million, excluding debt
issuance costs, were recorded as long term debt. Interest on the 10.5% Senior
Discount Notes accretes at a rate of 10.5% per annum, compounded semiannually,
to an aggregate principal amount of $834 million ($709 million after the Dutch
auction conducted in October of 2001) by December 1, 2003. Cash interest will
not accrue on the 10.5% Senior Discount Notes prior to December 1, 2003;
however, Level 3 Communications, Inc. may elect to commence the accrual of cash
interest on all outstanding 10.5% Senior Discount Notes on or after December 1,
2001, in which case the outstanding principal amount at maturity of each 10.5%
Senior Discount Note will on the elected commencement date be reduced to the
accreted value of the 10.5% Senior Discount Note as of that date and cash
interest shall be payable on that Note on June 1 and December 1 thereafter.
Commencing June 1, 2004, interest on the 10.5% Senior Discount Notes will accrue
at the rate of 10.5% per annum and will be payable in cash semiannually in
arrears. Accrued interest expense for the year ended December 31, 2001 on the
10.5% Senior Discount Notes of $65 million was added to long-term debt.

The 10.5% Senior Discount Notes will be subject to redemption at the option of
Level 3 Communications, Inc., in whole or in part, at any time or from time to
time on or after December 1, 2003 at the following redemption prices (expressed
as percentages of accreted value) plus accrued and unpaid interest thereon to
the redemption date, if redeemed during the twelve months beginning December 1,
of the years indicated below:

Year Redemption Price
2003 ..................................................... 105.25%
2004 ..................................................... 103.50%
2005 ..................................................... 101.75%

These notes are senior unsecured obligations of Level 3 Communications, Inc.,
ranking pari passu with all existing and future senior unsecured indebtedness of
Level 3 Communications, Inc. The 10.5% Senior Discount Notes contain certain
covenants which, among other things, restrict the Company's ability to incur
additional debt, make

certain restricted payments, pay dividends, enter into sale and leaseback
transactions, enter into transactions with affiliates, and sell assets or merge
with another company.

The net proceeds of $486 million were used to accelerate the implementation of
its business plan, primarily the funding for the increase in committed number of
route miles of the Company's U.S. intercity network.

Debt issuance costs of $14 million were originally capitalized and are being
amortized over the term of the 10.5% Senior Discount Notes. As a result of
amortization and debt repurchases, the capitalized debt issuance costs have been
reduced to $8 million at December 31, 2001.

10.75% Senior Euro Notes due 2008

On February 29, 2000, Level 3 Communications, Inc. received EURO 488 million
($478 million when issued) of net proceeds, after debt issuance costs, from an
offering of EURO 500 million aggregate principal amount 10.75% Senior Euro Notes
due 2008 ("10.75% Senior Euro Notes"). Interest on the notes accrues at 10.75%
per year and is payable in Euros semi-annually in arrears on March 15 and
September 15 each year beginning on September 15, 2000. The 10.75% Senior Euro
Notes are not redeemable by Level 3 Communications, Inc. prior to maturity. Debt
issuance costs of EURO 12 million ($12 million) were originally capitalized and
are being amortized over the term of the 10.75% Senior Euro Notes. As a result
of the amortization and debt repurchases, the net capitalized debt issuance
costs had been reduced to $6 million at December 31, 2001.

The 10.75% Senior Euro Notes are senior, unsecured obligations of the Company,
ranking pari passu with all existing and future senior debt. The 10.75% Senior
Euro Notes contain certain covenants, which among other things, limit additional
indebtedness, dividend payments, certain investments and transactions with
affiliates.

The issuance of the EURO 500 million 10.75% Senior Euro Notes has been
designated as, and is effective as, an economic hedge against the investment in
certain of the Company's foreign subsidiaries. Therefore, foreign currency gains
and losses resulting from the translation of the debt have been recorded in
other comprehensive income (loss) to the extent of translation gains or losses
on such investment. The 10.75% Senior Euro Notes were valued, based on current
exchange rates, at $307 million in the Company's financial statements at
December 31, 2001. The difference between the carrying value at December 31,
2000 and the value at issuance, after repurchases, was recorded in other
comprehensive income.

12.875% Senior Discount Notes due 2010

On February 29, 2000, Level 3 Communications, Inc. sold in a private offering
$675 million aggregate principal amount at maturity ($575 million after the
Dutch auction conducted in October of 2001) of its 12.875% Senior Discount Notes
due 2010 ("12.875% Senior Discount Notes"). The sale proceeds of $360 million,
excluding debt issuance costs, were recorded as long-term debt. Interest on the
12.875% Senior Discount Notes accretes at a rate of 12.875% per year, compounded
semi-annually, to an aggregate principal amount of $675 million by March 15,
2005. Cash interest will not accrue on the 12.875% Senior Discount Notes prior
to March 15, 2005. However, Level 3 Communications, Inc. may elect to commence
the accrual of cash interest on all outstanding 12.875% Senior Discount Notes on
or after March 15, 2003. In that case, the outstanding principal amount at
maturity of each 12.875% Senior Discount Note will, on the elected commencement
date, be reduced to the accreted value of the 12.875% Senior Discount Note as of
that date and cash interest shall be payable on the 12.875% Senior Discount
Notes on March 15 and September 15 thereafter. Commencing September 15, 2005,
interest on the 12.875% Senior Discount Notes will accrue at the rate of 12.875%
per year and will be payable in cash semi-annually in arrears. Accrued interest
expense from the date of issuance through December 31, 2001 on the 12.875%
Senior Discount Notes of $52 million was added to long-term debt.

The 12.875% Senior Discount Notes are subject to redemption at the option of
Level 3 Communications, Inc., in whole or in part, at any time or from time to
time on or after March 15, 2005. Level 3 Communications, Inc. may redeem the
12.875% Senior Discount Notes at the redemption prices set for the below, plus
interest, if any, to the redemption date. The following prices are for 12.875%
Senior Discount Notes redeemed during the 12-month period commencing on March 15
of the years set forth below and are expressed as percentages of principal
amount.

Year Redemption Price
2005 ................................................... 106.438%
2006 ................................................... 104.292%
2007 ................................................... 102.146%
2008 and thereafter..................................... 100.000%

In addition, at any time and from time to time, prior to March 15, 2003, Level 3
Communications, Inc. may redeem up to a maximum of 35% of the aggregate
principal amount at maturity of the 12.875% Senior Discount Notes with the
proceeds of one or more private placements to persons other than affiliates of
the Company or underwritten public offerings of common stock of Level 3
Communications, Inc. resulting in gross proceeds of at least $100 million in the
aggregate. Level 3 Communications, Inc. may redeem the 12.875% Senior Discount
Notes at a redemption price equal to 112.875% of the accreted value of the notes
plus accrued interest, if any, to the redemption date.

The 12.875% Senior Discount Notes are senior, unsecured obligations of the
Company, ranking pari passu with all existing and future senior debt. The
12.875% Senior Discount Notes contain certain covenants, which among other
things, limit additional indebtedness, dividend payments, certain investments
and transactions with affiliates.

Debt issuance costs of $9 million were originally capitalized and are being
amortized as interest expense over the term of the 12.875% Senior Discount
Notes. As a result of amortization and debt repurchases, the capitalized debt
issuance costs have been reduced to $6 million at December 31, 2001.

11.25% Senior Euro Notes due 2010

On February 29, 2000, Level 3 Communications, Inc. received EURO 293 million
($285 million when issued) of net proceeds, after debt issuance costs, from an
offering of EURO 300 million aggregate principal amount 11.25% Senior Euro Notes
due 2010 ("11.25% Senior Euro Notes"). Interest on the notes accrues at 11.25%
per year and is payable semi-annually in arrears in Euros on March 15 and
September 15 each year beginning September 15, 2000.

The 11.25% Senior Euro Notes are subject to redemption at the option of Level 3
Communications, Inc., in whole or in part, at any time or from time to time on
or after March 15, 2005. The 11.25% Senior Euro Notes may be redeemed at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date. The following prices are for 11.25% Senior Euro Notes
redeemed during the 12-month period commencing on March 15 of the years set
forth below, and are expressed as percentages of principal amount.

Year Redemption Price
2005 .................................................. 105.625%
2006 .................................................. 103.750%
2007 .................................................. 101.875%
2008 and thereafter.................................... 100.000%

In addition, at any time and from time to time, prior to March 15, 2003, Level 3
Communications, Inc. may redeem up to a maximum of 35% of the original aggregate
principal amount of the 11.25% Senior Euro Notes. The Notes may be redeemed at a
redemption price equal to 111.25% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the redemption date. The redemption must
be made with the proceeds of one or more private placements to persons other
than affiliates of the Company or underwritten public offerings of common stock
of Level 3 Communications, Inc. resulting in gross proceeds of at least $100
million in the aggregate.

Debt issuance costs of EURO 7 million ($7 million) were originally capitalized
and are being amortized over the term of the 11.25% Senior Euro Notes. As a
result of amortization and debt repurchases, the capitalized debt issuance costs
have been reduced to $3 million at December 31, 2001. The 11.25% Senior Euro
Notes are senior, unsecured obligations of the Company, ranking pari passu with
all existing and future senior debt. The 11.25% Senior Euro

Notes containcertain covenants, which among other things, limit additional
indebtedness, dividend payments, certain investments and transactions with
affiliates.

The issuance of the EURO 300 million 11.25% Senior Euro Notes has been
designated as, and is effective as, an economic hedge against the investment in
certain of the Company's foreign subsidiaries. Therefore, foreign currency gains
and losses resulting from the translation of the debt have been recorded in
other comprehensive income (loss) to the extent of translation gains or losses
on such net investment. The 11.25% Senior Euro Notes were valued, based on
current exchange rates, at $93 million in the Company's financial statements at
December 31, 2001.

11.25% Senior Notes due 2010

In February 2000, Level 3 Communications, Inc. received $243 million of net
proceeds, after transaction costs, from a private offering of $250 million
aggregate principal amount of its 11.25% Senior Notes due 2010 ("11.25% Senior
Notes"). Interest on the notes accrues at 11.25% per year and is payable
semi-annually in arrears on March 15 and September 15 in cash beginning
September 15, 2000.

The 11.25% Senior Notes are subject to redemption at the option of Level 3
Communications, Inc., in whole or in part, at any time or from time to time on
or after March 15, 2005. Level 3 Communications, Inc. may redeem the 11.25%
Senior Notes at the redemption prices set forth below, plus accrued and unpaid
interest, if any, to the redemption date. The following prices are for 11.25%
Senior Notes redeemed during the 12-month period commencing on March 15 of the
years set forth below:

Year Redemption Price
2005 ...................................................... 105.625%
2006 ...................................................... 103.750%
2007 ...................................................... 101.875%
2008 and thereafter........................................ 100.000%

In addition, at any time and from time to time, prior to March 15, 2003, Level 3
Communications, Inc. may redeem up to a maximum of 35% of the original aggregate
principal amount of the 11.25% Senior Notes. The redemption must be made with
the proceeds of one or more private placements to persons other than affiliates
of the Company or underwritten public offerings of common stock of Level 3
Communications, Inc. resulting in gross proceeds of at least $100 million in the
aggregate. Level 3 Communications, Inc. may redeem the 11.25% Senior Notes at a
redemption price equal to 111.25% of the principal amount of the notes plus
accrued interest, if any, to the redemption date.

The 11.25% Senior Notes are senior, unsecured obligations of the Company,
ranking pari passu with all existing and future senior debt. The 11.25% Senior
Notes contain certain covenants, which among other things, limit additional
indebtedness, dividend payments, certain investments and transactions with
affiliates.

Debt issuance costs of $7 million were originally capitalized and are being
amortized as interest expense over the term of the 11.25% Senior Notes. As a
result of amortization and debt repurchases, the capitalized debt issuance costs
have been reduced to $3 million at December 31, 2001.

GMAC Commercial Mortgage due 2003

In June 2000, HQ Realty, Inc. (a wholly owned subsidiary of the Company) entered
into a $120 million floating-rate loan ("GMAC Mortgage") providing secured,
non-recourse debt to finance the Company's world headquarters. HQ Realty, Inc.
is a single purpose entity organized solely to own, hold, operate and manage the
world headquarters which has been 100% leased to Level 3 Communications, LLC in
Broomfield Colorado. Under the terms of the loan agreement, HQ Realty, Inc.,
will not engage in any business other than the ownership, management,
maintenance and operation of the world headquarters. The assets of HQ Realty
Inc. are not available to satisfy any third party obligations other than those
of HQ Realty, Inc. In addition, the assets of the Company are not available to
satisfy the obligations of HQ Realty, Inc. HQ Realty, Inc. received $119 million
of net proceeds after transaction costs. Level 3 was required to place $13
million of the net proceeds in a restricted account. The release of these

funds is contingent upon Level 3's debt rating increasing to BBB by S&P and Baa2
by Moody's which did not occur in 2001.

The initial term of the GMAC Mortgage is 36 months with two one-year no cost
extension options. Interest varies monthly with the 30 day London Interbank
Offering Rate ("LIBOR") for U.S. Dollar Deposits as follows:

The Index plus:

(1) 240 basis points during the Initial Term;
(2) 250 basis points during the First Extension Option; and
(3) 260 basis points during the Second Extension Option.

At December 31, 2001 the interest rate was 4.52%.

The GMAC Mortgage may not be prepaid during the first twenty four months.
Thereafter, the GMAC Mortgage may be prepaid at par in whole or in part in
multiples of $100,000. The entire principal is due at maturity or at the end of
the elected extension period. Interest only is due during the initial three-year
term. Interest and amortization are due during the extension terms based on a 30
year amortization period with a balloon payment at maturity.

Debt issuance costs of $1 million were capitalized and are being amortized as
interest expense over the term of the GMAC Mortgage.

Lehman Commercial Mortgage due 2004

In December 2000, 85 Tenth Avenue, LLC (a wholly owned subsidiary of the
Company) entered into a $113 million floating-rate loan ("Lehman Mortgage")
providing secured, non-recourse debt to finance the purchase and renovations of
the New York Gateway facility. 85 Tenth Avenue, LLC is a single purpose entity
organized solely to own, hold, sell, lease, transfer, exchange, operate and
manage the New York Gateway facility. Under the terms of the loan agreement, 85
Tenth Avenue, LLC will not engage in any business other than the ownership,
management, maintenance and operation of the New York Gateway facility. The New
York Gateway facility has been 100% leased to Level 3 Communications, LLC. The
assets of 85 Tenth Avenue, LLC are not available to satisfy any third party
obligations other than those of 85 Tenth Avenue, LLC. In addition, the assets of
the Company are not available to satisfy the obligations of 85 Tenth Avenue,
LLC.

85 Tenth Avenue, LLC received $105 million of net proceeds after transaction
costs. Under the terms of the loan agreement, the gross loan proceeds plus $32
million, deposited by 85 Tenth Avenue, LLC, are to be maintained in a Renovation
Reserve account. The reserve is held by 85 Tenth Avenue, LLC as restricted cash
and is maintained solely to perform the renovations of the New York Gateway
facility. At December 31, 2001, approximately $57 million remained in the
reserve account.

The initial term of the Lehman Mortgage is 36 months with two (2) one year no
cost extension options. There is a penalty if a principal payment is made prior
to January 1, 2002. The entire principal is due at maturity or at the end of the
elected extension period. Interest varies monthly with the 30 day LIBOR for U.S.
Dollar Deposits plus approximately 350 basis points. Interest and amortization
are due during the initial term based on a 20 year amortization period. At
December 31, 2001 the interest rate was 5.64%.

Debt issuance costs of $8 million were capitalized and are being amortized as
interest expense over the term of the Lehman Mortgage.

In an effort to reduce the risk of increased interest rates related to the
Lehman commercial mortgage, in January 2001 the Company entered into an interest
rate cap agreement. The interest rate cap notional amount is $113 million and
has a maturity date of January 31, 2004. The terms of the agreement provide that
the net interest expense related to the Lehman commercial mortgage will not
exceed 8% plus 400 basis points. The Company has elected not to account for this
transaction as a hedge as permitted by SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). Upon inception of the
agreement, the Company recorded an asset equal to the fair value of the interest
rate cap of less than $1 million. For twelve months ended December

31, 2001, the Company recorded, in the statement of operations, less than $1
million in losses related to the change in the fair value of the interest rate
cap.

The Company has elected not to complete the build-out of the New York Gateway
facility due to the excess capacity in the local market. As a result, the
Company is in negotiations with the lender to refinance the existing loan. The
refinancing will likely result in the reduction of long term debt and the
reserve account balance included in restricted securities. See Note 17.

6% Convertible Subordinated Notes due 2010

In February 2000, the Company received $836 million of net proceeds, after
transaction costs, from a public offering of $863 million aggregate principal
amount of its 6% Convertible Subordinated Notes due 2010 ("Subordinated Notes
2010"). The Subordinated Notes 2010 are unsecured and subordinated to all
existing and future senior indebtedness of the Company. Interest on the
Subordinated Notes 2010 accrues at 6% per year and is payable semi-annually in
cash on March 15 and September 15 beginning September 15, 2000. The principal
amount of the Subordinated Notes 2010 will be due on March 15, 2010.

The Subordinated Notes 2010 may be converted into shares of common stock of
Level 3 Communications, Inc. at any time prior to the close of business on the
business day immediately preceding maturity, unless previously redeemed,
repurchased or Level 3 Communications, Inc. has caused the conversion rights to
expire. The conversion rate is 7.416 shares per each $1,000 principal amount of
Subordinated Notes 2010, subject to adjustment in certain events.

Prior to March 18, 2003, Level 3 Communications, Inc. at its option, may redeem
the Subordinated Notes 2010, in whole or in part, at the redemption prices
specified below plus accrued interest. Level 3 may exercise this option if the
current market price of its common stock equals or exceeds triggering levels
specified below for at least 20 trading days within any period of 30 consecutive
trading days, including the last trading day of the period.

Period Trigger Percentage Redemption Price
March 15, 2001 through March 14, 2002................................. 160% ($215.74) 105.4%
March 15, 2002 through March 17, 2003................................. 150% ($202.26) 104.8%

On or after March 18, 2003, Level 3, at its option, may cause the conversion
rights to expire. Level 3 may exercise this option only if the current market
price exceeds approximately $188.78 (which represents 140% of the conversion
price) for at least 20 trading days within any period of 30 consecutive trading
days, including the last trading day of that period. At December 31, 2001, no
debt had been converted into shares of common stock.

Debt issue costs of $27 million were originally capitalized and are being
amortized as interest expense over the term of the Subordinated Notes. As a
result of amortization and debt repurchases, the capitalized debt issuance costs
have been reduced to $18 million at December 31, 2001.

6% Convertible Subordinated Notes due 2009

On September 14, 1999, the Company received $798 million of proceeds, after
transaction costs, from an offering of $823 million aggregate principal amount
of its 6% Convertible Subordinated Notes Due 2009 (''Subordinated Notes 2009'').
The Subordinated Notes 2009 are unsecured and subordinated to all existing and
future senior indebtedness of the Company. Interest on the Subordinated Notes
2009 accrues at 6% per year and is payable each year in cash on March 15 and
September 15. The principal amount of the Subordinated Notes 2009 will be due on
September 15, 2009. The Subordinated Notes 2009 may be converted into shares of
common stock of the Company at any time prior to maturity, unless the Company
has caused the conversion rights to expire. The conversion rate is 15.3401
shares per each $1,000 principal amount of Subordinated Notes 2009, subject to
adjustment in certain circumstances. On or after September 15, 2002, Level 3, at
its option, may cause the conversion rights to expire. Level 3 may exercise this
option only if the current market price exceeds approximately $91.27 (which
represents 140% of the conversion price) for 20 trading days within any period
of 30 consecutive trading days including the

last day of that period. At December 31, 2001, less than $1 million of debt had
been converted into shares of common stock.

Debt issuance costs of $25 million were originally capitalized and are being
amortized as interest expense over the term of the Subordinated Notes 2009. As a
result of amortization and debt repurchases, the capitalized debt issuance costs
have been reduced to $14 million at December 31, 2001.

The debt instruments above contain certain covenants which the Company believes
it is in compliance with as of December 31, 2001.

Level 3 currently is using the proceeds from the senior securities, Senior
Secured Credit Facility and subordinated notes for working capital, capital
expenditures and other general corporate purposes in connection with the
implementation of its business plan, including the acquisition of
telecommunications assets.

The Company capitalized $58 million, $353 million and $116 million of interest
expense and amortized debt issuance costs related to network construction and
business systems development projects for the years ended December 31, 2001,
2000 and 1999, respectively.

CPTC

In July 2001, CPTC completed the refinancing of its development and construction
debt. The $135 million financing proceeds were used to repay CPTC's original
lenders, repay subordinated debt carried by Orange County Transportation
Authority and cover refinancing and prepayment costs. The prepayment costs and
write-off of debt issuance costs on the old debt of $9 million are reflected as
an extraodinary loss, net of other gains, on early extinguishment of debt in the
2001 consolidated statement of operations. The debt carries an interest rate of
7.63% and requires principal payments in varying amounts through 2028. The debt
is the obligation of CPTC and is nonrecourse to Level 3 Communications, Inc.

Future Debt Maturities:

Scheduled maturities of long-term debt are as follows (in millions):
2002-$7; 2003-$125; 2004-$154; 2005-$121; 2006-$144 and $5,665 thereafter.

(10) Employee Benefit Plans

The Company applies the recognition provisions of SFAS No. 123, ''Accounting for
Stock Based Compensation'' (''SFAS No. 123''). Under SFAS No. 123, the fair
value of an option or other stock-based compensation (as computed in accordance
with accepted option valuation models) on the date of grant is amortized over
the vesting periods of the options in accordance with FASB Interpretation No. 28
''Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans''(''FIN 28''). Although the recognition of the value of the
instruments results in compensation or professional expenses in an entity's
financial statements, the expense differs from other compensation and
professional expenses in that these charges, though permitted to be settled in
cash, are generally settled through issuance of common stock.

The adoption of SFAS No. 123 has resulted in material non-cash charges to
operations since its adoption in 1998, and will continue to do so. The amount of
the non-cash charge will be dependent upon a number of factors, including the
number of grants and the fair value of each grant estimated at the time of its
award.

The Company recognized on the statement of operations a total of $314 million,
$236 million and $125 million of non-cash compensation in 2001, 2000 and 1999,
respectively. Included in discontinued operations is non-cash compensation
expense of $7 million, $5 million and $1 million for fiscal 2001, 2000 and 1999,
respectively. In addition, the Company capitalized $17 million, $12 million and
$10 million in 2001, 2000 and 1999, respectively, of non-cash compensation for
those employees directly involved in the construction of the network or
development of the business support systems.

The following table summarizes non-cash compensation expense and capitalized
non-cash compensation for the three years ended December 31, 2001.

2001 2000 1999
Expense Capitalized Expense Capitalized Expense Capitalized

NQSO ......................... $ 9 $ - $ 9 $ - $ 3 $ 1
Warrants ..................... 10 32 1 - 4 -
OSO .......................... 221 10 189 9 111 7
C-OSO ........................ 55 4 17 1 - -
Restricted Stock ............. 2 - 4 - 4 -
Stock Issued ................. - - 5 - - -
Shareworks Match Plan ........ 11 3 3 2 1 1
Shareworks Grant Plan ........ 13 - 13 - 3 1
------ ------ ------ ------ ------ ------
$ 321 $ 49 $ 241 $ 12 $ 126 $ 10
Discontinued Operations ...... (7) - (5) - (1) -
------ ------ ------ ------ ------ ------
$ 314 $ 49 $ 236 $ 12 $ 125 $ 10
======= ====== ====== ====== ======== ======

Non-qualified Stock Options and Warrants

The Company issued approximately 9.8 million warrants to Peter Kiewit Sons' Inc
("Kiewit") as payment for certain construction services. The warrants, which
allow Kiewit to purchase Common Stock at $8 per share, were fully vested at
issuance and will expire on June 30, 2009. The fair value of the warrants
granted in 2001 was $32 million and calculated using the Black-Scholes valuation
model with a risk free interest rate of 4.8% and an expiration date of June 30,
2009. The Company used an expected volatility rate of 70% to reflect the longer
exercise period. Kiewit has pledged these warrants as collateral to Level 3
while the two parties resolve outstanding claims with regard to the North
American intercity network. If it is determined through the dispute resolution
process, that Kiewit is liable for certain claims, it may settle, at Level 3's
option, the obligation with cash or by returning all or part of the outstanding
warrants.

In addition to the warrants issued to Kiewit, the Company had approximately 2.8
million warrants outstanding on December 31, 2001 ranging in prices from $18.50
to $29.00. Of these warrants, approximately 2.2 million are exercisable at
December 31, 2001, with a weighted average exercise price of $23.43 per warrant.

Transactions involving NQSO stock options granted are summarized as follows:

Weighted Average
Exercise Price Exercise Price
Shares Per Share
Balance December 31, 1998................................ 18,979,319 .12-41.25 6.50
Options granted..................................... 55,100 41.44-84.75 58.61
Options cancelled................................... (1,005,328) .12-41.25 10.84
Options exercised................................... (3,950,528) .12-41.25 5.60
----------
Balance December 31, 1999................................ 14,078,563 .12-84.75 6.64
Options granted..................................... 230,000 21.69 21.69
Options cancelled................................... (228,029) .12-61.75 9.58
Options exercised................................... (2,079,326) .12-56.75 8.00
----------
Balance December 31, 2000................................ 12,001,208 .12-84.75 6.63
Options granted..................................... - - -
Options cancelled................................... (348,956) 1.76-56.75 10.18
Options exercised................................... (460,546) .12-35.31 5.32
----------
Balance December 31, 2001................................ 11,191,706 $ .12-$84.75 $ 6.58
========== ============ =========

Options exercisable
December 31, 1999................................... 6,291,624 .12-$41.25 6.13
December 31, 2000................................... 7,166,636 .12-$84.75 6.67
December 31, 2001................................... 9,013,915 .12-$84.75 6.70

Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
as of Life Exercise as of Exercise
Range of Exercise Prices 12/31/01 (years) Price 12/31/01 Price

$ 0.12- $0.12 ............................................82,807 6.27 $ .12 81,134 $ .12
1.76- 1.79 ............................................18,914 6.33 1.76 9,962 1.76
4.04- 5.43 .........................................7,965,203 5.33 5.11 6,638,203 5.05
6.20- 8.50 .........................................2,604,793 6.05 6.94 1,767,768 6.97
17.50- 25.03 ...........................................235,839 3.41 21.77 235,839 21.77
26.80- 39.13 ...........................................241,383 1.54 30.67 241,383 30.67
40.38- 51.88 ............................................25,667 1.70 41.43 25,292 41.36
56.00- 57.47 ............................................10,500 2.46 56.91 8,834 56.81
61.75- 84.75 .............................................6,600 2.28 84.75 5,500 84.75
------ ------ ------ ------ ------
11,191,706 5.37 $ 6.58 9,013,915 $ 6.70
========== ======= ======== ========= =======

Outperform Stock Option Plan

In April 1998, the Company adopted an outperform stock option (''OSO'') program
that was designed so that the Company's stockholders would receive a market
return on their investment before OSO holders receive any return on their
options. The Company believes that the OSO program aligns directly management's
and stockholders' interests by basing stock option value on the Company's
ability to outperform the market in general, as measured by the Standard &
Poor's (''S&P'') 500 Index. Participants in the OSO program do not realize any
value from awards unless the Common Stock price outperforms the S&P 500 Index.
When the stock price gain is greater than the corresponding gain on the S&P 500
Index (or less than the corresponding loss on the S&P Index), the value received
for awards under the OSO plan is based on a formula involving a multiplier
related to the level by which the Common Stock outperforms the S&P 500 Index. To
the extent that the Common Stock outperforms the S&P 500, the value of OSOs to a
holder may exceed the value of nonqualified stock options.

OSO awards are made quarterly to eligible participants on the date of the grant.
Each award vests in equal quarterly installments over two years and has a
four-year life. Awards granted prior to December 2000 typically have a two-

year moratorium on exercise from the date of grant. As a result, once a
participant is 100% vested in the grant, the two-year moratorium expires.
Therefore, awards granted prior to December 2000 have an exercise window of two
years. Level 3 granted 3.1 million OSOs to employees in December 2000. Included
in the grant were 2.1 million OSOs that vest 25% after six months with the
remaining 75% vesting after 18 months. These OSOs and all additional OSOs
granted after March 1, 2001 are exercisable immediately upon vesting and have a
four-year life.

The fair value under SFAS No. 123 for the approximately 15.8 million OSOs
granted to employees for services performed for the year ended December 31, 2001
was $225 million. As of December 31, 2001, the Company had not yet recognized
$108 million of unamortized compensation costs for OSOs granted in 1999, 2000
and 2001.

Transactions involving OSO stock awards granted are summarized below:

Weighted
Average
Option Price Per Option
Shares Share Price
Balance December 31, 1998...................................... 2,092,513 29.78- 37.13 34.85
Options granted........................................... 3,241,599 56.00- 78.50 66.58
Options cancelled......................................... (157,623) 29.78- 78.50 51.31
Options exercised......................................... (37,500) 29.78- 37.13 34.64
Balance December 31, 1999...................................... 5,138,989 29.78- 78.50 54.15
Options granted........................................... 5,402,553 26.87- 113.87 52.96
Options cancelled......................................... (262,545) 26.87- 113.87 72.55
Options exercised......................................... (214,409) 29.78- 37.13 36.28
Balance December 31, 2000...................................... 10,064,588 26.87- 113.87 53.50
Options granted........................................... 15,757,972 3.82- 25.31 9.52
Options cancelled......................................... (1,758,725) 3.82- 113.87 25.69
Options expired........................................ (406,387) 25.31- 113.87 48.65
Options exercised......................................... (96,031) 3.82- 34.50 8.45
----------- --------
Balance December 31, 2001...................................... 23,561,417 $ 3.82- $ 113.87 $ 26.43
=========== ================ =========

Options vested as of:
December 31, 1999......................................... 2,098,337 $ 29.78- $ 78.50 $ 44.69
December 31, 2000......................................... 4,237,277 29.78- 113.87 56.18
December 31, 2001......................................... 8,738,516 3.82- 113.87 47.33

OSOs Outstanding OSOs Vested
at December 31, 2001 at December 31, 2001

Weighted
Average Weighted Weighted
Remaining Average Average
Number Life Option Number Option
Range of Exercise Prices Outstanding (years) Price Vested Price
$ 3.82 - 5.58 .....................................8,231,134 3.79 $ 4.67 503,088 $ 3.82
11.20 ...............................................4,160,329 3.42 11.20 1,034,762 11.20
25.31 - 37.12 .....................................6,518,000 2.45 28.17 3,102,087 30.19
56.00 - 78.50 .....................................3,436,553 1.75 68.61 3,239,972 68.14
87.23 - 113.87 .....................................1,215,401 2.48 97.34 858,607 99.76
----- ------ ---------- -------- -------- --------- --------
23,561,417 2.99 $26.43 8,738,516 $ 47.33
========== ======== ======== ========= ========

Of the approximately 8.7 million OSO units vested at December 31, 2001,
approximately 7.0 million units are exercisable due to the two year moratorium
on OSOs granted prior to December 1, 2000.

In July 2000, the Company adopted a convertible outperform stock option program,
("C-OSO") as an extension of the existing OSO plan. The program is a component
of the Company's ongoing employee retention efforts and offers similar features
to those of an OSO, but provides an employee with the greater of the value of a
single share of the Company's common stock at exercise, or the calculated OSO
value of a single OSO at the time of exercise.

C-OSO awards were made to eligible employees employed on the date of the grant.
The awards were made in September 2000, December 2000, and September 2001. The
awards granted in 2000 vest over three years as follows: 1/6 of each grant at
the end of the first year, a further 2/6 at the end of the second year and the
remaining 3/6 in the third year. The September 2001 awards vest in equal
quarterly installments over three years. Each award is immediately exercisable
upon vesting. Awards expire four years from the date of the grant.

The fair value of the OSOs and C-OSOs granted in 2001 was calculated by applying
a modified Black-Scholes formula with an S&P 500 expected dividend yield rate of
1.8% and an expected life of 2 years. The Company used an S&P 500 expected
volatility rate of 23% and the Level 3 Common Stock expected volatility rate of
55%. The expected correlation factor of 0.81 was used to measure the movement of
Level 3 stock relative to the S&P 500.

The fair value recognized under SFAS No. 123 for the approximately 5 million
C-OSOs awarded to employees for services performed for the year ended December
31, 2001 was approximately $37 million. As of December 31, 2001, the Company had
not reflected $64 million of unamortized compensation expense in its financial
statements for C-OSOs awarded in 2000 and 2001.

Transactions involving C-OSO stock awards are summarized below:

Weighted
Average
Option Price Per Option
Shares Share Price
Balance December 31, 1999............................................... - $ - $ -
Options granted.................................................... 1,965,509 26.87 - 87.23 56.67
Options cancelled.................................................. (25,522) 87.23 87.23
---------
Balance December 31, 2000............................................... 1,939,987 26.87 - 87.23 56.67
Options granted.................................................... 4,958,786 3.82 3.82
Options cancelled............................................... (890,057) 3.82 - 87.23 28.07
Options expired................................................. (7,822) 87.23 87.23
Options exercised.................................................. (35,366) 3.82 - 87.23 46.56
---------
Balance December 31, 2001............................................... 5,965,528 $ 3.82 - $ 87.23 $ 16.90
========= ================= =======

Options vested as of:
December 31, 2000.................................................. - - -
December 31, 2001.................................................. 622,675 $ 3.82 - $ 87.23 $ 24.70
======== ================= =======

C-OSOs Outstanding C-OSOs Exercisable
at December 31, 2001 at December 31, 2001
Weighted
Average Weighted Weighted
Remaining Average Average
Number Life Option Number Option
Range of Exercise Prices Outstanding (years) Price Exercisable Price
$ 3.82............................ .................. 4,458,961 3.7 $ 3.82 371,580 3.82
26.87............................ .................. 789,594 2.9 26.87 131,599 26.87
87.23............................ .................. 716,973 2.7 87.23 119,496 87.23
-------- --------
5,965,528 3.5 $ 16.90 622,675 $ 24.70
========= ====== ======= ========= ========

Restricted Stock

In 2001, 2000 and 1999, approximately 96 thousand, 116 thousand and 17 thousand
shares, respectively, of restricted stock were granted to employees. The
restricted stock shares were granted to employees at no cost. The shares
typically vest over a one to three year period; however, the employees are
restricted from selling these shares for three years. The fair value of
restricted stock granted in 2001, 2000 and 1999 of less than $1 million, $7
million and $1 million, respectively, was calculated using the value of the
Common Stock the day prior to the grant.

As of December 31, 2001, the Company had not yet recognized $1 million of
unamortized compensation costs for restricted stock granted since 1998.

Shareworks

Level 3 has designed its compensation programs with particular emphasis on
equity-based, long-term incentive programs. The Company has developed two plans
under its Shareworks program: the Match Plan and the Grant Plan.

Match Plan-The Match Plan allows eligible employees to defer between 1% and 7%
of their eligible compensation to purchase Common Stock at the average stock
price for the quarter. Any full time employee is considered eligible on the
first day of the calendar quarter after their hire. The Company matches the
shares purchased by the employee on a one-for-one basis. Stock purchased with
payroll deductions is fully vested. Stock purchased with the Company's matching
contributions vests three years after the end of the quarter in which it was
made.

The Company's quarterly matching contribution is amortized to compensation
expense over the vesting period of 36 months. The Company's matching
contributions were $16 million, $14 million and $10 million under the Match Plan
in 2001, 2000 and 1999, respectively.

As of December 31, 2001, the Company had not yet reflected unamortized
compensation expense of $19 million related to the Company's matching
contributions.

Grant Plan-The Grant Plan enables the Company to grant shares of Common Stock to
eligible employees based upon a percentage of employees eligible salary up to a
maximum of 5%. Level 3 employees employed on December 31 of each year, who are
age 21 or older with a minimum of 1,000 hours credited service are considered
eligible. The shares granted are valued at the fair market value as of the last
business day of the calendar year. All prior and future grants vest immediately
upon the employee's third anniversary of joining the Shareworks Plan.

Foreign subsidiaries of the Company adopted Shareworks programs in 2000. These
programs primarily include a grant plan and a stock purchase plan whereby
employees may purchase Level 3 Common Stock at 80% of the share price at the
beginning of the plan year.

Other

The Company recorded approximately $5 million of non-cash compensation expense
for stock issued to employees during the year ended December 31, 2000. The
non-cash compensation charge was based on the Company's stock price on the day
prior to the grant. The Company did not issue stock to employees in 2001 and
1999.

401(k) Plan

The Company and its subsidiaries offer its qualified employees the opportunity
to participate in a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code. Each employee was
eligible to contribute, on a tax deferred basis, a portion of annual earnings
not to exceed $10,500 in 2001. The Company does not match employee contributions
and therefore does not incur any compensation expense related to the 401(k)
plan.

(11) Income Taxes

An analysis of the income tax (provision) benefit attributable to earnings
(loss) from continuing operations before income taxes for the three years ended
December 31, 2001 follows:

2001 2000 1999
(dollars in millions)
Current:
United States Federal.......................................................... $ - $ 50 $ 161
State.......................................................................... - (1) 3
- 49 164
Deferred:
United States Federal.......................................................... 1,357 255 56
State.......................................................................... - - -
1,357 255 56
------ ----- -----
Valuation Allowance................................................................. (1,357) (255) -
------ ----- -----
Income Tax Benefit $ - $ 49 $ 220
======= ======= ======

The United States and foreign components of earnings (loss) from continuing
operations before income taxes follows:

2001 2000 1999
(dollars in millions)
United States.................................................................... $ (4,508) $ (995) $(578)
Foreign.......................................................................... (940) (509) (129)
------ ----- -----
$ (5,448) $ (1,504) $(707)
======== ======== =====

A reconciliation of the actual income tax (provision) benefit and the tax
computed by applying the U.S. Federal rate (35%) to the earnings (loss) from
continuing operations, before income taxes for the three years ended December
31, 2001 follows:

2001 2000 1999
(dollars in millions)
Computed Tax Benefit at Statutory Rate........................................... $ 1,907 $ 526 $ 247
State Income Taxes............................................................... - (1) 2
Coal Depletion................................................................... 1 2 2
Goodwill Amortization............................................................ (13) (17) (12)
Taxes on Unutilized Losses of Foreign Operations................................. (63) (35) (9)
Foreign Tax Credits.............................................................. - - (10)
Other............................................................................ (90) (1) -
Valuation Allowance.............................................................. (1,742) (425) -
------- ------ -----
Income Tax Benefit............................................................... $ - $ 49 $ 220
======= ======= =====

For federal income tax reporting purposes, the Company has approximately $1.8
billion of net operating loss carryforwards, net of previous carrybacks,
available to offset future Federal taxable income. The net operating loss
carryforwards expire in 2021 and are subject to examination by the tax
authorities.

The Internal Revenue Code contains provisions which may limit the net operating
loss carryforwards available to be used in any given year upon the occurrence of
certain events, including significant changes in ownership interests.

For federal income tax reporting purposes, the Company has approximately $19
million of alternative minimum tax credits available to offset future regular
federal income tax. The credits can be carried forward until fully utilized.

The components of the net deferred tax assets (liabilities) for the years ended
December 31, 2001 and 2000 were as follows:

2001 2000
(dollars in
millions)
Deferred Tax Assets:
Net operating loss carryforwards ................................................................ $ 613 $ 223
Compensation and related benefits ............................................................... 254 154
Investment in subsidiaries. ..................................................................... 2 11
Provision for estimated expenses. ............................................................... 189 94
Investment in joint ventures. ................................................................... 52 69
Asset bases - accumulated depreciation .......................................................... 1,109 -
Other. .......................................................................................... 45 12
----- -----
Total Deferred Tax Assets. 2,264 563

Deferred Tax Liabilities:
Investments in securities...................................................................... 9 18
Investments in joint ventures.................................................................. - 4
Asset bases-accumulated depreciation........................................................... - 38
Coal sales..................................................................................... 32 32
Provision for estimated expenses............................................................... - 12
Other.......................................................................................... 22 22
----- -----
Total Deferred Tax Liabilities.................................................................... 63 126
----- -----

Net Deferred Tax Assets before valuation allowance................................................ 2,201 437

Valuation Allowance Components:
Net Deferred Tax Assets........................................................................ (2,152) (410)
Stockholders' Equity (primarily tax benefit from option exercises)............................. (120) (92)
------ -----
Net Deferred Tax Liabilities after Valuation Allowance............................................ $ (71) $ (65)
====== =====

The current net deferred tax assets at December 31, 2001 and 2000 are zero and
$15 million, respectively, after current valuation allowances of ($206) million
and ($86) million and the non-current deferred tax liabilities are ($71) million
and ($80) million, respectively, after non-current valuation allowance of
($2,066) million and ($416) million respectively.

(12) Stockholders' Equity

During August and December 2001, the Company issued approximately 15.9 million
shares, valued at approximately $72 million, in exchange for $194 million in
convertible subordinated notes. The Company recognized an extraordinary gain,
after transaction costs and unamortized debt issuance costs, of $117 million on
these transactions.

In February 2000, the Company raised $2.4 billion, after underwriting discounts
and offering expenses, from an offering of 23 million shares of its common stock
through an underwritten public offering. In March 1999, the Company raised $1.5
billion, after underwriting discounts and offering expenses, from the offering
of 28.75 million shares of its common stock through an underwritten public
offering. The net proceeds from both offerings are beingused for working
capital, capital expenditures, acquisitions and other general corporate purposes
in connection with the implementation of the Company's business plan.

Issuances of common stock, for sales, conversions, option exercises and
acquisitions for the three years ended December 31, 2001 are shown below. The
Level 3 Stock Plan permits option holders to tender shares to the Company to
cover income taxes due on option exercises.

December 31, 1998................................................ 307,874,706

Shares Issued............................................... 28,750,000
Option and Shareworks Activity.............................. 4,371,578
Shares Issued for Acquisition............................... 396,379
6% Convertible Notes Converted to Shares.................... 4,064
-----------
December 31, 1999................................................ 341,396,727

Shares Issued............................................... 23,000,000
Option and Shareworks Activity.............................. 3,202,760
6% Convertible Notes Converted to Shares.................... 383
-----------
December 31, 2000................................................ 367,599,870

Option and Shareworks Activity.............................. 1,245,093
Debt for Equity Exchanges................................... 15,858,959
-----------
December 31, 2001................................................ 384,703,922
===========

(13) Industry and Geographic Data

SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" defines operating segments as components of an enterprise for which
separate financial information is available and which is evaluated regularly by
the Company's chief operating decision maker, or decision making group, in
deciding how to allocate resources and assess performance. Operating segments
are managed separately and represent strategic business units that offer
different products and serve different markets. The Company's reportable
segments include: communications, information services, and coal mining. Other
primarily includes the CPTC, equity investments, and other corporate assets and
overhead not attributable to a specific segment.

EBITDA, as defined by the Company, consists of earnings (loss) before interest,
income taxes, depreciation, amortization, non-cash operating expenses (including
stock-based compensation and impairments) and other non-operating income or
expense. The Company excludes non-cash compensation due to its adoption of the
expense recognition provisions of SFAS No. 123. EBITDA is commonly used in the
communications industry to analyze companies on the basis of operating
performance. EBITDA is not intended to represent cash flow for the periods
presented and is not recognized under Generally Accepted Accounting Principles
("GAAP").

The information presented in the tables following includes information for
twelve months ended December 31, 2001, 2000 and 1999 for all statement of
operations and cash flow information presented, and as of December 31, 2001 and
2000 for all balance sheet information presented. Revenue and the related
expenses are attributed to countries based on where services are provided.

Industry and geographic segment financial information follows. Certain prior
year information has been reclassified to conform with the 2001 presentation.

Information Coal
Communications Services Mining Other Total
(dollars in millions)
2001
Revenue:
North America....................... $ 1,137 $ 110 $ 87 $ 25 $ 1,359
Europe.............................. 161 13 - - 174
------- ------- ------- ------- -------
$ 1,298 $ 123 $ 87 $ 25 $ 1,533
========= ======= ====== ====== ========
EBITDA:
North America....................... $ (216) $ 4 $ 23 $ (7) $ (196)
Europe.............................. (106) 2 - - (104)
------- ------- ------- ------- -------
$ (322) $ 6 $ 23 $ (7) $ (300)
========= ======= ====== ====== ========
Capital Expenditures:
North America....................... $ 2,131 $ 17 $ 5 $ 1 $ 2,154
Europe.............................. 171 - - - 171
------- ------- ------- ------- -------
$ 2,302 $ 17 $ 5 $ 1 $ 2,325
========= ======= ====== ====== ========
Depreciation and Amortization:
North America....................... $ 912 $ 15 $ 3 $ 6 $ 936
Europe.............................. 184 2 - - 186
------- ------- ------- ------- -------
$ 1,096 $ 17 $ 3 $ 6 $ 1,122
========= ======= ====== ====== ========
2000
Revenue:
North America....................... $ 744 $ 103 $ 190 $ 22 $ 1,059
Europe.............................. 113 12 - - 125
------- ------- ------- ------- -------
$ 857 $ 115 $ 190 $ 22 $ 1,184
========= ======= ====== ====== ========
EBITDA:
North America....................... $ (442) $ 2 $ 86 $ 7 $ (347)
Europe.............................. (139) 4 - - (135)
------- ------- ------- ------- -------
$ (581) $ 6 $ 86 $ 7 $ (482)
======== ====== ===== ====== ========
Capital Expenditures:
North America....................... $ 4,625 $ 11 $ 2 $ - $ 4,638
Europe.............................. 989 1 - 990
------- ------- ------- ------- -------
$ 5,614 $ 12 $ 2 $ - $ 5,628
========= ====== ====== ====== ========
Depreciation and Amortization:
North America....................... $ 436 $ 18 $ 5 $ 6 $ 465
Europe.............................. 112 2 - - 114
------- ------- ------- ------- -------
$ 548 $ 20 $ 5 $ 6 $ 579
========= ====== ====== ====== ========

Information Coal
Communications Services Mining Other Total
(dollars in millions)
1999
Revenue:
North America....................... $ 145 $ 122 $ 207 $ 19 $ 493
Europe.............................. 14 8 - - 22
------- ------- ------- ------- -------
$ 159 $ 130 $ 207 $ 19 $ 515
======== ====== ====== ====== =======
EBITDA:
North America....................... $ (391) $ 8 $ 81 $ 6 $ (296)
Europe.............................. (88) 1 - - (87)
------- ------- ------- ------- -------
$ (479) $ 9 $ 81 $ 6 $ (383)
======== ====== ====== ====== =======
Capital Expenditures:
North America....................... $ 2,583 $ 12 $ 3 $ 1 $ 2,599
Europe.............................. 786 - - - 786
------- ------- ------- ------- -------
$ 3,369 $ 12 $ 3 $ 1 $ 3,385
======== ====== ====== ====== =======

Depreciation and Amortization:
North America....................... $ 176 $ 12 $ 5 $ 9 $ 202
Europe.............................. 24 2 - - 26
------- ------- ------- ------- -------
$ 200 $ 14 $ 5 $ 9 $ 228
======== ====== ====== ====== =======

Identifiable Assets
December 31, 2001
North America....................... $ 5,547 $ 74 $ 303 $1,603 $ 7,527
Europe.............................. 1,763 5 - 37 1,805
Discontinued Asian Operations....... 74 - - - 74
------- ------- ------- ------- -------
$ 7,384 $ 79 $ 303 $1,640 $ 9,406
======== ====== ====== ====== =======
December 31, 2000
North America....................... $ 8,091 $ 78 $ 310 $4,009 $12,488
Europe.............................. 1,811 9 - 122 1,942
Discontinued Asian Operations....... 476 - - 13 489
------- ------- ------- ------- -------
$ 10,378 $ 87 $ 310 $4,144 $14,919
========= ====== ====== ====== =======
Long-Lived Assets
December 31, 2001
North America....................... $ 5,278 $ 50 $ 16 $ 228 $ 5,572
Europe............................. 1,709 1 - - 1,710
Discontinued Asian Operations....... - - - - -
------- ------- ------- ------- -------
$ 6,987 $ 51 $ 16 $ 228 $ 7,282
======== ====== ====== ======== =======
December 31, 2000
North America....................... $ 7,548 $ 49 $ 15 $ 217 $ 7,829
Europe.............................. 1,660 3 - - 1,663
Discontinued Asian Operations....... 382 - - - 382
------- ------- ------- ------- -------
$ 9,590 $ 52 $ 15 $ 217 $ 9,874
======== ====== ====== ======== =======

Product information for the Company's communications segment follows:

Reciprocal Up-front Dark
Services Compensation Fiber Total
(dollars in millions)
Communications Revenue
2001
North America................................... $ 715 $ 134 $ 288 $ 1,137
Europe.......................................... 161 - - 161
------- ------- ------- -------
$ 876 $ 134 $ 288 $ 1,298
======== ======= ======== ========
2000
North America................................... $ 480 $ 55 $ 209 $ 744
Europe.......................................... 113 - - 113
------- ------- ------- -------
$ 593 $ 55 $ 209 $ 857
======== ======= ======== ========
1999
North America................................... $ 86 $ 24 $ 35 $ 145
Europe.......................................... 14 - - 14
------- ------- ------- -------
$ 100 $ 24 $ 35 $ 159
======== ======= ======== ========

The majority of North American revenue consists of services and products
delivered within the United States. The majority of European revenue consists of
services and products delivered within the United Kingdom. Transoceanic revenue
is allocated equally between North America and Europe as it represents services
provided between these two regions.

In 1999, Commonwealth Edison Company, a coal mining customer, accounted for 22%
of total revenue.

The following information provides a reconciliation of EBITDA to loss from
continuing operations for the three years ended December 31, 2001:

2001 2000 1999
(dollars in millions)
EBITDA . ............................................................................ $ (300) $ (482) $ (383)
Depreciation and Amortization Expense................................................. (1,122) (579) (228)
Non-Cash Compensation Expense......................................................... (314) (236) (125)
Non-Cash Impairment Expense........................................................... (3,245) - -
------ ------ -----

Loss from Operations............................................................. (4,981) (1,297) (736)
Other Income (Expense)................................................................ (467) (159) 34
Income Tax Benefit.................................................................... - 49 220
------ ------ -----
Loss from Continuing Operations....................................................... $ (5,448) $ (1,407) $ (482)
======== ======== ======

(14) Commitments and Contingencies

In May 2001, a subsidiary of the Company was named as a defendant in Bauer, et.
al. v. Level 3 Communications, LLC, et al., a purported multi-state class
action, filed in the U.S. District Court for the Southern District of Illinois
and in July 2001, the Company was named as a defendant in Koyle, et. al. v.
Level 3 Communications, Inc., et. al., a purported multi-state class action
filed in the U.S. District Court for the District of Idaho. Both of these
actions involve the Company's right to install its fiber optic cable network in
easements and right-of-ways crossing the plaintiffs' land. In general, the
Company obtained the rights to construct its network from railroads, utilities,
and others, and is installing its network along the rights-of-way so granted.
Plaintiffs in the purported class actions assert that they are the owners of
lands over which the Company's fiber optic cable network passes, and that the
railroads, utilities, and others who granted the Company the right to construct
and maintain its network did not have the legal ability to do so. The action
purports to be on behalf of a class of owners of land in multiple states over
which the Company's network passes or will pass. The complaint seeks damages on
theories of trespass, unjust enrichment and slander of title and property, as
well as punitive damages. The Company has also received, and may in the future
receive, claims and demands related to rights-of-way issues similar to the
issues in the these cases that may be based on similar or different legal
theories. Although it is too early for the Company to reach a conclusion as to
the ultimate outcome of these actions, management believes that the Company has
substantial defenses to the claims asserted in all of these actions (and any
similar claims which may be named in the future), and intends to defend them
vigorously.

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

Operating Leases

The Company is leasing rights of way, communications capacity and premises under
various operating leases which, in addition to rental payments, require payments
for insurance, maintenance, property taxes and other executory costs related to
the lease. Certain leases provide for adjustments in lease cost based upon
adjustments in the consumer price index and increases in the landlord's
management costs. The lease agreements have various expiration dates through
2030.

The Company has obligations under non-cancelable operating leases for certain
facilities and equipment. Future minimum payments for the next five years under
these leases, including those identified in the restructuring analysis, consist
of the following at December 31, 2001 (in millions):

2002............................................................... $ 54
2003............................................................... 53
2004............................................................... 51
2005............................................................... 51
2006............................................................... 51
Thereafter......................................................... 306
Total............................................................ $566

Rent expense under non-cancelable lease agreements was $79 million in 2001, $52
million in 2000 and $37 million in 1999.

(15) Related Party Transactions

Kiewit acted as the general contractor on several significant projects for the
Company in 2001, 2000 and 1999. These projects include the Phoenix Data Center,
the U.S. intercity network, certain metropolitan networks and certain Gateway
sites, the Company's corporate headquarters and other office space in Colorado.
Kiewit provided approximately $693 million, $1,764 million, and $1,024 million
of construction services related to these projects in 2001, 2000, and 1999
respectively. In 2001, Level 3 issued warrants, valued at $32 million, in lieu
of cash for services related to construction of the North American intercity
network. It is anticipated that Kiewit will transfer a portion of these warrants
to Walter Scott, Jr. and William L. Grewcock, directors of Level 3 and Kiewit,
for consideration in 2002.

Level 3 also receives certain mine management services from Kiewit. The expense
for these services was $5 million for 2001, $29 million for 2000, and $33
million for 1999, and is recorded in selling, general and administrative
expenses.

In September 2000, the Company sold its entire interest in Walnut Creek Mining
Company to Kiewit for cash of $37 million. The sale resulted in a pre-tax gain
of $21 million to the Company, which is included in gain on sale of assets in
the accompanying consolidated statement of operations.

RCN purchased less than $3 million, $2 million and $1 million of
telecommunications services from the Company in 2001, 2000 and 1999,
respectively.

(16) Other Matters

On January 18, 2001, Level 3 announced that in order to provide the Company with
additional flexibility in funding its business plan, it filed a "universal"
shelf registration statement with the Securities and Exchange Commission
relating to $3.0 billion of common stock, preferred stock, debt securities,
warrants, stock purchase agreements and depositary shares. The registration
statement, (declared effective by the Securities and Exchange Commission on
January 31, 2001), allows Level 3 to publicly offer these securities from time
to time at prices and terms to be determined at the time of the offering. When
combined with the remaining availability under its previously existing effective
universal shelf registration statement, the availability under the registration
statements allows Level 3 to offer an aggregate of up to approximately $3.2
billion of securities.

It is customary in Level 3's industries to use various financial instruments in
the normal course of business. These instruments include items such as letters
of credit. Letters of credit are conditional commitments issued on behalf of
Level 3 in accordance with specified terms and conditions. As of December 31,
2001, Level 3 had outstanding letters of credit of approximately $47 million.
The Company does not believe it is practicable to estimate the fair value of the
letters of credit and does not believe exposure to loss is likely nor material.

(17) Subsequent Events

On January 24, 2002 Level 3 completed the acquisition of the wholesale dial-up
access business assets of McLeodUSA Incorporated (formerly Splitrock Services)
for approximately $50 million in cash consideration and the assumption of
certain operating liabilities related to that business. The acquisition includes
customer contracts, approximately 350 POPs (Points of Presence) across the U.S.
and the related facilities, equipment and underlying circuits. In addition, the
parties entered into certain operating agreements enabling McLeodUSA to continue
to support its in-region customers. The acquisition enables Level 3 to provide
managed modem service in all 50 states with a coverage area that includes 80
percent of the U.S. population, up from 37 states, and 57 percent of the U.S.
population.

On February 8, 2002, Level 3 announced that Commonwealth Telephone had filed a
registration statement with the Securities and Exchange Commission relating to
the sale of 2,750,000 shares (plus 412,500 additional shares subject to the
underwriters' over-allotment option) of Commonwealth Telephone common stock by a
wholly-owned subsidiary of Level 3 Communications, Inc. On March 8, 2002,
Commonwealth amended the filing to increase the number available for sale to
3,500,000 (plus 525,000 additional shares subject to over-allotment options).
The 3.5 million shares represent approximately 33 percent of Level 3's economic
ownership in Commonwealth Telephone and based on the March 11, 2002 closing
price of $39.83 per share, would result in approximately $139 million of gross
proceeds to the Company.

On February 22, 2002, the Company paid David C. McCourt, a Director of the
Company, $15 million for his 10% interest in Level 3 Telecom Holdings, Inc, the
entity that holds the investments in RCN and Commonwealth Telephone.

From January 1, 2002 through March 13, 2002, Level 3 had retired
approximately $195 million face amount of debt securities, by issuing 7.4
million shares, valued at $32 million and through Level 3 Finance, LLC using
approximately $34 million of cash. Level 3 expects to recognize an extraordinary
gain of approximately $130 million, after transaction and debt issuance costs,
from these transactions in the first quarter of 2002.

On March 6, 2002, the Company completed the refinancing of the Lehman Commercial
Mortgage. The terms of the agreement with iStar Financial Group include:
reducing the outstanding loan amount to $60 million through repayment, releasing
the restrictions on $57 million securities held in escrow and increasing the
borrowing rate to 650 basis points over LIBOR.

On March 9, 2002, legislation was enacted that will enable the Company to carry
its taxable net operating losses back five years. As a result, the Company
expects to receive a Federal income tax refund of approximately $120 million
after it files its 2001 Federal income tax return carrying back the taxable loss
to 1996. This benefit will be reflected in the first quarter 2002 financial
statements in accordance with SFAS No. 109 "Accounting for Income Taxes".

On March 13, 2002, the Company acquired privately held CorpSoft, Inc.
("CorpSoft"), a major distributor, marketer and reseller of business software.
Level 3 paid approximately $89 million in cash and assumed approximately $31
million in net debt to acquire CorpSoft. CorpSoft generated approximately $1.1
billion in revenue in 2001 and had EBITDA of approximately $18 million,
excluding stock-based compensation, one-time restructuring charges and other
non-recurring employee costs. Level 3 expects the acquisition will enable its
information services business to leverage CorpSoft's customer base, worldwide
presence and relationships to expand its portfolio of services. The Company
believes that communications price performance will improve more rapidly than
computing and data storage price performance. As a result, companies will, over
time seek to gain information technology operating efficiency by acquiring
software functionality and data storage capability as commercial services
purchased and then delivered over broadband networks such as the Level 3
network. In addition, Level 3 expects to utilize its network infrastructure to
facilitate the deployment of software to CorpSoft's customers. Revenue
attributable to CorpSoft subsequent to the acquisition date, will be included in
Minimum Telecom Revenue as defined in the Senior Secured Credit Facility.

As a result of this transaction, the Company believes it will remain in
compliance with the terms and conditions of the Senior Secured Credit Facility
until the second half of 2003. The Company's expectation assumes that it takes

no other actions, its sales levels do not improve beyond those experienced
during the second half of 2001, and disconnects and cancellations trend down
during the second half of 2002 in accordance with the Company's customer credit
analysis.

Given other actions the Company may take, and based on its longer term
expectations for improvements in its rate of sales, disconnects and
cancellations, new product and service introductions and the potential for
additional acquisitions, the Company believes it will continue to remain in
compliance with the terms and conditions of the Senior Secured Credit Facility
over the term of that agreement.

(18) Unaudited Quarterly Financial Data

March June September December

2001 2000 2001 2000 2001 2000 2001 2000
(in millions except per share data)
Revenue . $ 448 $ 17 $ 387 $ 234 $ 372 $ 341 $ 326 $ 432
Loss from Operations.............................. (413) (272) (572) (298) (396) (308) (3,600) (419)
Net Loss.......................................... (535) (271) (731) (281) (437) (351) (3,275) (552)
Loss per Share (Basic and Diluted):
Net Loss from Continuing Operations.......... $(1.41) $(.76) $(1.92) $(.74) $(1.35) $(.92) $(9.70) $(1.44)
Discontinued Operations...................... (.04) (.01) (.07) (.03) (.07) (.04) (1.40) (.06)
Extraordinary Gain on Debt Extinguishment.... - - - - .25 - 2.56 -
Net Loss..................................... $(1.45) $(.77) $(1.99) $(.77) $(1.17) $(.96) $(8.54) $(1.50)

Loss per share was calculated for each three-month period on a stand-alone
basis. As a result of stock transactions during the periods, the sum of the loss
per share for the four quarters of each year may not equal the loss per share
for the twelve month periods.

In the fourth quarter of 2001, the Company determined that, due to the
continuing economic slowdown and continued over-capacity in certain areas of the
telecommunications industry, the estimated future undiscounted cash flows
attributable to certain assets would not exceed the current carrying value of
the assets. The Company, therefore, recorded an impairment charge of $3.2
billion to reflect the difference between the estimated fair value of the assets
and their current carrying value.

As described in Note 3, the Company sold its Asian telecommunication operations
to Reach Ltd. in January 2002. In accordance with SFAS No. 144, the Company
classified these assets as held-for-sale and accordingly reclassified the losses
attributable to the Asian operations to Discontinued Operations. In the fourth
quarter of 2001, the Company recognized a loss of $516 million within
discontinued operations, equal to the difference between the carrying value of
the Asian operations and its estimated fair value.

The Company repurchased approximately $1.8 billion of its long-term debt using
cash and equity in 2001. The Company recognized extraordinary gains of
approximately $93 million and $981 million on these transactions in the third
and fourth quarters of 2001, respectively.