(1)   Basis of Presentation

        Our consolidated balance sheet as of December 31, 2010, which was derived from our audited financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, in our opinion, the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. As discussed in Note 2—Acquisition of Qwest, these financial statements reflect the results of operations of Qwest Communications International Inc. ("Qwest") subsequent to our April 1, 2011 acquisition of Qwest.

        Our consolidated financial statements for the three and six months ended June 30, 2011 and 2010 have not been audited by independent certified public accountants; however, in our opinion, all normal recurring adjustments necessary to present fairly the results of operations for the three- and six-month periods have been included therein. The results of operations for the first six months of the year are not indicative of the results of operations which might be expected for the entire year.

        Our consolidated financial statements for the three months and six months ended June 30, 2011 and 2010 reflect changes in the way we present the effects of noncontrolling interests in certain of our subsidiaries. To simplify the overall presentation of our financial statements, we no longer display immaterial amounts attributable to noncontrolling interests as separate items. In our revised presentation we report: (i) income attributable to noncontrolling interests in other income, (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other financing activities. As a result of this change, the amounts we now report as net income correspond to amounts that we previously reported as net income attributable to CenturyLink, Inc. This presentation change has no effect on earnings per common share, total equity or the classification of our cash flows.

        During the second quarter of 2011, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative, and as a result, we reclassified previously reported amounts to conform to the current period presentation. These revised definitions resulted in the reclassification of certain expenses (primarily customer service expenses for some of our services and products) from selling, general and administrative to cost of services and products. The amounts reclassified were $38 million and $62 million for the three and six months ended June 30, 2010, respectively, and $31 million for the three months ended March 31, 2011. Our current definitions are as follows:

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  Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); charges for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our network operations.
  
  

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  Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.

        These expense classifications may not be comparable to those of other companies.

        We also have reclassified certain other prior period amounts to conform to the current period presentation, including the categorization of our revenues and our segment reporting (see Note 12—Segment Information). These changes had no impact on total operating expenses or net income for any period.

        Recent accounting pronouncements. In September 2009, the Financial Accounting Standards Board (the "FASB") updated the accounting standard regarding revenue recognition for multiple deliverable arrangements, such as the service bundles we offer to customers. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not and will not have a material impact on our consolidated financial statements.

(2)   Acquisition of Qwest

        On April 1, 2011, we acquired Qwest, and as a result Qwest became a wholly owned subsidiary of CenturyLink. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks. Each outstanding share of Qwest common stock immediately prior to the acquisition converted into the right to receive 0.1664 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. We estimate that the aggregate consideration was approximately $12.273 billion based on:

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  the number of shares of CenturyLink common stock issued to consummate the acquisition of 294 million;
  
  

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  the closing stock price of CenturyLink common stock as of March 31, 2011 of $41.55;
  
  

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  the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of $52 million (excluding the value of restricted stock included in shares issued above); and
  
  

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  cash paid in lieu of the issuance of fractional shares of $5 million.

        We have recognized the assets and liabilities of Qwest based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. We expect to complete our final determinations no later than the first quarter of 2012. Our final determinations may be significantly different than those reflected in our consolidated financial statements as of June 30, 2011. Based on our preliminary estimates, the aggregate consideration exceeds the aggregate estimated fair value of the acquired net assets and assumed liabilities by $10.005 billion, which has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes.

        The following is our preliminary assignment of the aggregate consideration based on currently available information (dollars in millions).

        The results of Qwest's operations have been included in our consolidated results of operations beginning April 1, 2011. Although our consolidated statements of operations for the three and six months ended June 30, 2011 included operating revenues (net of intercompany eliminations) of $2.746 billion attributable to the operations of Qwest, Qwest's post-acquisition operations did not contribute significantly to our consolidated net income. The following unaudited pro forma financial information presents the combined results of CenturyLink and Qwest for the three months ended June 30, 2010 and the six months ended June 30, 2011 and 2010, as though the acquisition had been consummated as of January 1, 2010.

        This pro forma information reflects certain adjustments to Qwest's previously reported operating results, primarily:

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  decreased operating revenues and expenses due to the elimination of deferred revenues and deferred costs associated with installation activities and capacity leases that were assigned no value at acquisition and the elimination of transactions between CenturyLink and Qwest that are now subject to elimination;
  
  

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  increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the fair value of property, plant and equipment;
  
  

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  decreased recognition of retiree benefit expenses due to the elimination of unrecognized actuarial losses;
  
  

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  decreased interest expense due to the amortization of an adjustment to reflect the fair value of long-term debt; and
  
  

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  the related income tax effects.

        The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at January 1, 2010, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those realized subsequent to the April 1, 2011 acquisition date).

        As of June 30, 2011, we had cumulatively incurred expenses, consisting primarily of investment banking and legal fees, totaling $76 million to consummate the Qwest acquisition. We incurred $58 million of these expenses during the three months ended June 30, 2011, which are included in our selling, general and administrative expenses. During the same three month period in 2010, our selling, general and administrative expenses included $10 million of such expenses. Qwest also incurred $71 million in costs to consummate the acquisition, which are not reflected in these financial statements, $36 million in periods prior to being acquired and $35 million on the date of the acquisition. We did not incur expenses to consummate the acquisition in either of the three-month periods ended March 31, 2011 or 2010, so our selling, general and administrative expenses for the six-month periods ended June 30, 2011 and 2010, are $58 million and $10 million, respectively.

(3)   Acquisition of Savvis

        On July 15, 2011, we acquired all outstanding common stock of SAVVIS, Inc. ("Savvis"), a provider of managed hosting and colocation services. We believe this acquisition enhances our ability to be an information technology partner with our existing business customers and strengthens our opportunities to acquire new business customers in the future. The consideration for this acquisition included $1.732 billion in cash payments and 14.313 million shares of CenturyLink common stock (valued at $552 million based on the $38.54 closing price of our stock on July 14, 2011) issued to Savvis stockholders at closing. Our final determination of aggregate consideration also will include the estimated fair value of the pre-combination portion of certain assumed share-based compensation awards.

        Upon closing of the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest, and paid related transaction costs totaling $15 million. The cash payments required on or about the closing date were funded using existing cash balances, which included the net proceeds from the issuance of senior notes with an aggregate principal amount of $2.000 billion (see Note 5—Long-term Debt and Credit Facilities for additional information about our senior notes).

        Savvis' operating results will be included in our consolidated results of operations beginning July 15, 2011. The assets acquired and liabilities assumed will be recognized at their estimated acquisition date fair values. The estimation of such fair values and the related estimation of lives of depreciable tangible assets and amortizable intangible assets will require significant judgment. Due to the timing of the Savvis acquisition, the initial accounting for this acquisition is incomplete as of the date of issuance of these financial statements. Consequently, preliminary estimates of certain components of acquisition consideration and the fair values of assets acquired and liabilities assumed cannot be made with reasonable accuracy, and at this time it is not practicable to provide supplemental pro forma information as if the Savvis acquisition had occurred as of January 1, 2010. We expect to finalize our determinations of aggregate consideration and our acquisition date fair value estimates no later than the second quarter of 2012.

(4)   Goodwill, Customer Relationships and Other Intangible Assets

        Goodwill, customer relationships and other intangible assets as of June 30, 2011 and December 31, 2010 consisted of the following:

        At June 30, 2011, the net carrying amounts of goodwill, customer relationships and other intangible assets included preliminary estimates of $10.005 billion, $7.365 billion and $1.954 billion, respectively, related to our April 1, 2011 acquisition of Qwest. We expect to complete the final determination of these estimates and related estimated lives for amortizable intangible assets no later than the first quarter of 2012. We also are in the process of assigning goodwill to our reporting units, which have been realigned within our new operating segments (see Note 12—Segment Information).

        Total amortization expense for intangible assets for the six months ended June 30, 2011 was $525 million, which includes $420 million related to the Qwest acquisition. We amortize Qwest customer relationships over an estimated life of 10 years, using the sum-of-the-years-digits and straight-line methods, depending on the classification of the customer. We amortize Qwest capitalized software using the straight-line method over estimated lives ranging up to seven years and amortize other Qwest intangible assets predominantly using the sum-of-the-years digits method over an estimated life of four years. We estimate that total amortization expense for the years ending December 31, 2011 through 2015 (excluding the effects of the Savvis acquisition that was consummated on July 15, 2011) will be as follows (dollars in millions):

        We periodically review the estimated lives and methods used to amortize our intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our periodic reviews and our final determinations of value related to Qwest's and Savvis' intangible assets.

(5)   Long-term Debt and Credit Facilities

        Long-term debt, including unamortized discounts and premiums, at June 30, 2011 and December 31, 2010 consisted of borrowings by CenturyLink, Inc. and certain of its subsidiaries, as follows:

        As a result of the acquisition of Qwest on April 1, 2011, Qwest's existing debt obligations, which consisted primarily of debt securities issued by Qwest Communications International Inc. and two of its subsidiaries, are now included in our consolidated debt balances. On the acquisition date, Qwest's debt securities had stated principal balances totaling $11.598 billion, predominantly fixed contractual interest rates ranging from 6.5% to 8.875% (weighted average of 7.63%) and maturities ranging from 2011 to 2043. The indentures governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from incurring additional debt, making certain payments and investments, granting liens, and selling or transferring assets. We do not anticipate that these covenants will significantly restrict our ability to manage cash balances or transfer cash between entities within our company as needed. In accounting for the Qwest acquisition, we recorded Qwest's debt securities at their estimated fair values, which totaled $12.292 billion as of April 1, 2011. We also recorded capital leases and certain other obligations of Qwest at their estimated fair values totaling $383 million as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The amount by which the fair value of Qwest debt securities exceeds their stated principal balances on the acquisition date of $693 million will be recognized as an adjustment to interest expense over the remaining terms of the debt.

        On June 8, 2011, our indirect wholly owned subsidiary, Qwest Corporation ("QC"), issued 7.375% Notes due June 1, 2051 in the aggregate principal amount of $661 million in exchange for net proceeds, after deducting underwriting discounts and expenses, of approximately $643 million. The notes are unsecured obligations of QC and may be redeemed, in whole or in part, on or after June 1, 2016 at a redemption price of 100%. QC used the net proceeds, together with available cash balances, to redeem $825 million aggregate principal amount of QC's 7.875% Notes due 2011, and to pay related fees and expenses.

        On June 16, 2011, we issued unsecured senior notes with an aggregate principal amount of $2.000 billion ("Senior Notes"), consisting of (i) $400 million of 7.60% Senior Notes, Series P, due 2039, (ii) $350 million of 5.15% Senior Notes, Series R, due 2017 and (iii) $1.250 billion of 6.45% Senior Notes, Series S, due 2021. After deducting underwriting discounts and expenses, we received aggregate net proceeds of approximately $1.959 billion in exchange for the Senior Notes. We may redeem the Senior Notes, in whole or in part, at any time at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury security rate plus 50 basis points. We used the net proceeds to fund a portion of our acquisition of Savvis and repay certain of Savvis' debt (see Note 3—Acquisition of Savvis). In April 2011, we received commitment letters from two banks to provide up to $2 billion in bridge financing for the Savvis acquisition. This arrangement was terminated in June 2011 in connection with the issuance of the Senior Notes. Other (expense) income, net for the three and six months ended June 30, 2011 includes fees totaling $16 million that were incurred under the terminated arrangement.

        Aggregate maturities of our long-term debt (excluding unamortized discounts and premiums) as of June 30, 2011 are as follows (dollars in millions):

        In January 2011, we entered into a four-year revolving credit facility with various lenders ("Credit Facility"). The Credit Facility initially allowed us to borrow up to $1.000 billion. Upon consummation of the Qwest acquisition, our borrowing capacity under the Credit Facility increased to $1.700 billion. Up to $400 million of the Credit Facility can be used for letters of credit, which reduces the amount available for other extensions of credit. At June 30, 2011, we had no borrowings and $61 million in letters of credit outstanding under the Credit Facility, leaving $1.639 billion available for future use.

        In April 2011, we entered into a $160 million uncommitted revolving letter of credit facility ("LC Facility"), which enables us to provide letters of credit under terms that may be more favorable than those under our $1.700 billion credit facility.

        At June 30, 2011, our outstanding letters of credit totaled $131 million, including $70 million under the LC Facility.

        At June 30, 2011, we were in compliance with the provisions and covenants contained in our credit facility and other debt agreements.

(6)   Employee Benefits

        We sponsor several defined benefit pension plans, which in the aggregate cover substantially all of our employees. In connection with the acquisition of Qwest on April 1, 2011, we assumed defined benefit pension plans sponsored by Qwest for its employees. Based on a preliminary valuation analysis, we recognized a $479 million liability as of April 1, 2011 for the unfunded status of the Qwest pension plans, reflecting estimated projected benefit obligations of $8.267 billion in excess of the $7.788 billion estimated fair value of plan assets.

        Net periodic pension (benefit) expense for the three and six months ended June 30, 2011 and 2010 consisted of the following components:

        Net periodic pension benefit for the three and six months ended June 30, 2011 includes an $18 million benefit related to Qwest plans subsequent to the April 1, 2011 acquisition date.

        We contributed $100 million to certain of our defined benefit pension plans during the six months ended June 30, 2011.

        We also sponsor plans that provide postretirement health care and other benefits to qualifying employees. In connection with the acquisition of Qwest on April 1, 2011, we assumed postretirement benefit plans sponsored by Qwest for certain of its employees. Based on a preliminary valuation analysis, we recognized a $2.516 billion liability as of April 1, 2011 for the unfunded status of Qwest's postretirement benefit plans, reflecting estimated accumulated postretirement benefit obligations of $3.284 billion in excess of the $768 million estimated fair value of the plans assets.

        Net periodic postretirement benefit expense for the three and six months ended June 30, 2011 and 2010 consisted of the following components:

        Net periodic postretirement benefit expense for the three and six months ended June 30, 2011 includes $30 million related to the Qwest plans subsequent to the April 1, 2011 acquisition date. We report net periodic pension (benefit) expense and postretirement benefit expense in cost of services and products and selling, general and administrative expenses.

(7)   Severance and Restructuring

        We have announced reductions in our workforce in prior periods and have accrued liabilities for related severance costs. These workforce reductions resulted primarily from progression or completion of merger integration plans, increased competitive pressures and the loss of access lines. In connection with our April 1, 2011 acquisition of Qwest, we assumed severance liabilities related to similar workforce reductions that Qwest had initiated prior to the acquisition date. We report severance liabilities in salaries and benefits within accrued expenses and other liabilities in our consolidated balance sheets and report severance expenses in selling, general and administrative expenses and cost of services and products in our consolidated statements of operations.

        In periods prior to our acquisition of Qwest, Qwest had ceased using certain real estate that it was leasing under long-term operating leases. As of the April 1, 2011 acquisition date, we recorded liabilities to reflect our preliminary estimates of the fair values of the existing lease obligations, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash flow techniques. Periodically, we recognize expense to reflect accretion of the discounted liabilities and we adjust the expense when our actual experience differs from our initial estimates. We report the current portion of liabilities for ceased-use real estate leases in accrued expenses and other liabilities and report the noncurrent portion in deferred credits and other liabilities in our consolidated balance sheets. We report the related expenses in selling, general and administrative expenses in our consolidated statements of operations. The remaining lease terms range up to 15 years.

        Changes in our accrued liabilities for severance expenses and leased real estate for the six months ended June 30, 2011 were as follows:

        Our severance expenses for the three and six months ended June 30, 2011 also included $11 million of share-based compensation associated with the accelerated vesting of stock awards that occurred in connection with workforce reductions relating to the Qwest acquisition.

(8)   Share-based Compensation

        We maintain programs that allow our Board of Directors (through its Compensation Committee) and our Chief Executive Officer to grant incentives to certain employees and our outside directors in any one or a combination of several forms, including incentive and non-qualified stock options; stock appreciation rights; restricted stock; restricted stock units and performance shares. As of June 30, 2011, we had reserved approximately 59 million shares of common stock that may be issued in connection with awards under our current incentive programs. We also offer an Employee Stock Purchase Plan whereby employees can purchase our common stock at a 15% discount based on the lower of the beginning or ending stock price during recurring six-month offering periods.

        During the second quarter of 2011, we granted 292,191 shares of restricted stock to certain executives and outside directors. The vesting period for these awards generally is three years. Vesting of certain awards is subject to the attainment of specified company performance measures.

        Upon the April 1, 2011, closing of our acquisition of Qwest, we assumed certain obligations under Qwest's pre-existing share-based compensation arrangements. Specifically:

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  all nonvested shares of Qwest restricted stock outstanding immediately prior to the acquisition converted into an aggregate of 780,455 nonvested shares of CenturyLink restricted stock,
  
  

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  all Qwest non-qualified stock options outstanding immediately prior to the acquisition converted into an aggregate of 7,198,331 CenturyLink non-qualified stock options (including 5,562,198 fully vested options), and
  
  

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  all Qwest market-based awards outstanding immediately prior to the acquisition vested in full and were paid out by us through the issuance of an aggregate of 563,269 shares of CenturyLink common stock in April 2011.

        The aggregate fair value of the assumed awards was $114 million, of which $85 million was attributable to services performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $41.55 closing price of our common stock on March 31, 2011. For non-qualified stock options, fair value was determined using the Black-Scholes option-pricing model, reflecting a risk-free interest rate ranging from 0% to 2.1% (depending on the expected life of the option), an expected dividend yield of 6.98%, an expected term ranging from 0.1 to 4.8 years (depending on the option's remaining contractual term and exercise price and on historical experience), and expected volatility ranging from 11% to 35% (based on the expected term and historical experience). The remaining $29 million of the aggregate fair value of the assumed awards was attributable to post-acquisition services and is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting periods for the awards, which range from 0.1 years to 3.0 years.

        The following table summarizes activity involving stock option awards for the six months ended June 30, 2011:

        At June 30, 2011, the aggregate intrinsic value of options outstanding and exercisable was $83 million and $69 million, respectively. The weighted average remaining contractual term for such options was 5.0 years and 4.5 years, respectively.

        The following table summarizes activity involving restricted stock and restricted stock unit awards for the six months ended June 30, 2011:

        Total compensation expense for all share-based payment arrangements for the first six months of 2011 and 2010 was $32 million and $18 million, respectively. Compensation expense for the six months ended June 30, 2011 included $11 million for accelerated recognition of certain awards resulting from the consummation of the Qwest acquisition. As of June 30, 2011, there was $73 million of total unrecognized compensation expense related to our share-based payment arrangements, which we expect to recognize over a weighted-average period of 2.0 years.

(9)   Earnings Per Common Share

        Basic and diluted earnings per common share for the three months and six months ended June 30, 2011 and 2010 were calculated as follows:

        Our calculations of diluted earnings per common share exclude shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock during the period. Such potentially issuable shares totaled 2.541 million and 3.427 million for the three months ended June 30, 2011 and 2010, respectively, and 2.100 million and 3.495 million for the six months ended June 30, 2011 and 2010, respectively.

(10) Fair Value Disclosure

        At June 30, 2011 and December 31, 2010, our financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. At June 30, 2011, our financial instruments also included certain investment securities that we acquired on April 1, 2011 in connection with the Qwest acquisition. The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair values.

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

        The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:

        The following table presents the carrying amounts and estimated fair values of our investment securities, which are reported in noncurrent other assets, and long-term debt, excluding capital lease obligations, as well as the input levels used to determine the fair values, at June 30, 2011 and December 31, 2010:

        Our investment securities consist of auction rate debt securities maturing in 2033 to 2036 that are not actively traded in liquid markets. We have designated these securities as available for sale and, accordingly, we report them on our balance sheet at fair value on a recurring basis. We estimated the fair value of these securities at June 30, 2011 using a probability-weighted cash flow model that considers the coupon rate for the securities, probabilities of default and liquidation prior to maturity, and a discount rate commensurate with the creditworthiness of the issuer. There were no material changes in the composition or valuation of these securities during the period from the April 1, 2011 acquisition date to June 30, 2011.

(11) Income Taxes

        In connection with our acquisition of Qwest on April 1, 2011, we recognized a net current deferred tax asset of $189 million, which relates primarily to certain accrued liabilities that are expected to result in future tax deductions. We also increased our net noncurrent deferred tax liability by $570 million, which reflects the expected future tax effects of certain differences between the financial reporting carrying amounts and tax bases of Qwest's assets and liabilities. The primary differences involve Qwest's pension and other postretirement benefit obligations, intangible assets, property, plant and equipment and long-term debt, including the effects of acquisition date valuation adjustments. The net deferred tax liability is partially offset by a deferred tax asset for expected future tax deductions relating to Qwest's net operating loss carryforwards. Based on our consideration of preliminary information, we recorded a valuation allowance of $210 million on the acquisition date for a portion of the acquired net deferred tax assets that we do not believe is more likely than not to be realized. Our preliminary acquisition date estimates of deferred income taxes and the related valuation allowance are subject to adjustment as discussed in Note 2—Acquisition of Qwest.

        Our effective income tax rate was 37.9% and 38.6% for the six months ended June 30, 2011 and 2010, respectively. For the three and six months ended June 30, 2011, our effective income tax rate exceeds the federal statutory rate of 35% primarily due to state income taxes and certain nondeductible acquisition expenses, partially offset by the reversal of a deferred tax asset valuation allowance that arose from a second quarter 2011 change in Wisconsin tax law.

(12) Segment Information

        We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business and wholesale customers, including local exchange, long distance, Internet access and broadband services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. In connection with our acquisition of Qwest on April 1, 2011, we revised the way we categorize our products and services and report our related revenues. Currently, we categorize our products and services into the following three categories:

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  Strategic services, which include primarily private line (including special access), broadband, MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting, video, voice over Internet Protocol, or VoIP, services and Verizon Wireless services;
  
  

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

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

        Our operating revenues for our products and services consisted of the following categories for the three and six months ended June 30, 2011 and 2010:

        Other operating revenues include revenue from universal support funds which allows us to recover a portion of our costs under federal and state cost recovery mechanisms and certain surcharges to our customers, including billings for our required contributions to several USF programs. These surcharge billings to our customers are reflected on a gross basis in our statements of operations (included in both operating revenues and expenses) and aggregated approximately $150 million for the six months ended June 30, 2011 and $61 million for the six months ended June 30, 2010. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. We centrally manage the activities that generate other operating revenues and consequently these revenues are not included in any of our three segments described below.

        Prior to April 1, 2011, our operations were reported as a single segment. In connection with our acquisition of Qwest on April 1 2011, we now manage our business in three operating segments: (i) regional markets (which consists generally of providing products and services to consumers, small- to medium-sized businesses and regional enterprise customers), (ii) business markets (which consists generally of providing products and services to enterprise and government customers) and (iii) wholesale markets (which consists generally of providing products and services to other communications providers). Our chief operating decision maker now reviews discrete financial information for each of these segments to evaluate performance and allocate resources. The information reviewed by our chief operating decision maker does not include asset information by segment. We will continue to refine our segment reporting to reflect ongoing changes in the way we manage our business.

        Our segment revenues include all revenues from strategic services, legacy services and data integration. Our segment expenses include direct expenses, which are specific, incremental expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities. Our segment financial results also reflects allocations, using activity-based costing and other methodologies, of most other expenses that we report in cost of products and services and selling, general and administrative expenses. However, we do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrally managed. Other unassigned operating expenses consist primarily of expenses for administrative functions (such as finance, information technology, legal and human resources), severance expenses, restructuring charges, and pension and postretirement benefits expenses for all employees. Interest expense is also excluded from segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. In addition, other (expense) income does not relate to our segment operations and is therefore excluded from our segment results. We have recast our prior period operating results based on our new segment reporting criteria.

        Segment information for the three and six months ended June 30, 2011 and 2010 is summarized below:

        The following table reconciles segment income to net income for the three and six months ended June 30, 2011 and 2010:

(13) Commitments and Contingencies

• Previously Reported Litigation Matters

        Over 60 years ago, one of our indirect subsidiaries, Centel Corporation, acquired entities that may have owned or operated seven former plant sites that produced "manufactured gas" under a process widely used through the mid-1900s. Centel has been a subsidiary of Embarq since being spun-off in 2006 from Sprint Nextel, which acquired Centel in 1993. None of these plant sites are currently owned or operated by either Sprint, Nextel, Embarq or their subsidiaries. On three sites, Embarq and the current landowners are working with the Environmental Protection Agency ("EPA") pursuant to administrative consent orders. Remediation expenditures pursuant to the orders are not expected to be material. On five sites, including the three sites where the EPA is involved, Centel has entered into agreements with other potentially responsible parties to share remediation costs. Further, Sprint Nextel has agreed to indemnify Embarq for most of any eventual liability arising from all seven of these sites. Based upon current circumstances, we do not expect this issue to have a material adverse impact on our results of operations or financial condition.

        In William Douglas Fulghum, et al. v. Embarq Corporation, et al., filed on December 28, 2007 in the United States District Court for the District of Kansas (Civil Action No. 07-CV-2602), a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications to Embarq's retiree benefits programs generally effective January 1, 2008 (which resulted in a $300 million reduction to the liability for retiree benefits at the time of the modifications). Defendants include Embarq, certain of its benefit plans, its Employee Benefits Committee and the individual plan administrator of certain of its benefits plans. Additional defendants include Sprint Nextel and certain of its benefit plans. The Court has certified a class on certain of plaintiffs' claims, but rejected class certification as to other claims. Embarq and other defendants continue to vigorously contest these claims and charges. We believe it is premature to estimate the impact this lawsuit could have to our results of operations or financial condition. In 2009, a ruling in Embarq's favor was entered in an arbitration proceeding filed by 15 former Centel executives, similarly challenging the benefits changes.

        In December 2009, subsidiaries of CenturyLink filed two lawsuits against subsidiaries of Sprint Nextel to recover terminating access charges for VoIP traffic owed under various interconnection agreements and tariffs which presently approximate $34 million. The lawsuits allege that Sprint Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges. One lawsuit, filed on behalf of all legacy Embarq operating entities, was tried in federal court in Virginia in August 2010 and, in March 2011, a ruling was issued in our favor and against Sprint Nextel. We currently expect Sprint Nextel to file an appeal of this decision. The other lawsuit, filed on behalf of all legacy CenturyLink operating entities, is pending in federal court in Louisiana. In that case, the Court recently dismissed certain of CenturyLink's claims, referred other claims to the FCC, and stayed the litigation for 12 months. We have not accrued a liability related to these matters.

        From time to time, we are involved in other proceedings incidental to our business, including administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, various tax issues, occasional grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. The outcome of these other proceedings is not predictable. However, we do not believe that the ultimate resolution of these other proceedings, after considering available insurance coverage, will have a material adverse effect on our financial position, results of operations or cash flows.

• Litigation Matters Relating to Qwest

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

        To the extent appropriate, Qwest has accrued liabilities for the matters described below.

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

        On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which Qwest was a major shareholder) filed a lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. Qwest and Koninklijke KPN N.V. ("KPN") are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest, some of whom were formerly affiliated with Qwest. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately $6.1 billion based on the exchange rate on June 30, 2011), plus statutory interest. Two lawsuits asserting similar claims were previously filed against Qwest and others in federal courts in New Jersey in 2004 and Colorado in 2009; those courts dismissed the lawsuits without prejudice on the grounds that the claims should not be litigated in the United States.

        On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands, against Qwest, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $320 million based on the exchange rate on June 30, 2011).

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

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

        A putative class action filed on behalf of certain of Qwest's retirees was brought against Qwest, the Qwest Group Life Insurance Plan and other related entities in federal district court in Colorado in connection with Qwest's decision to reduce the life insurance benefit for these retirees to a $10,000 benefit. The action was filed on March 30, 2007. The plaintiffs allege, among other things, that Qwest and other defendants were obligated to continue their life insurance benefit at the levels in place before Qwest decided to reduce them. Plaintiffs seek restoration of the life insurance benefit to previous levels and certain equitable relief. The district court ruled in Qwest's favor on the central issue of whether Qwest properly reserved its right to reduce the life insurance benefit under applicable law and plan documents. The plaintiffs subsequently amended their complaint to assert additional claims. In 2009, the court dismissed or granted summary judgment to Qwest on all of the plaintiffs' claims. The plaintiffs appealed the court's decision to the Tenth Circuit Court of Appeals. On June 2, 2011, the Tenth Circuit affirmed the District Court's decision.

The following is our preliminary assignment of the aggregate consideration based on currently available information (dollars in millions).

The following unaudited pro forma financial information presents the combined results of CenturyLink and Qwest for the three months ended June 30, 2010 and the six months ended June 30, 2011 and 2010, as though the acquisition had been consummated as of January 1, 2010.

We estimate that total amortization expense for the years ending December 31, 2011 through 2015 (excluding the effects of the Savvis acquisition that was consummated on July 15, 2011) will be as follows (dollars in millions):