Sureel Choksi President, Transport & Infrastructure Services © 2003 Level 3 Communications, Inc. All rights reserved. Reproduced with permission. Downloading is permitted for private use only; presentation or redistribution of these materials to the public is prohibited without the express written consent of the author. Perspective on the Carrier Market: Part – Is There the End of the Tunnel? 2003 – We’re Beginning to See the Light

The Questions  Is there still a fiber optic glut?  What is the impact of carriers emerging from Chapter 11?  Is the worst behind us?  When will telecom spending improve?  What is Level 3’s strategy?  What does this mean for the equipment makers?

The Answers SORT OF YAWN PROBABLY DON’T KNOW GROW INNOVATE   Is there still a fiber optic glut?   What is the impact of carriers emerging from Chapter 11?   Is the worst behind us?   When will telecom spending improve?   What is Level 3’s strategy?   What does this mean for the equipment makers?

Flashback To 2001 – Part 1  From 2000 to 2001, the market value of 15 emerging carriers declined from $168B to $14B  Since then, market value has declined to $9B

Is There Still A Fiber Optic Glut?  The industry has been relying on pre-deployed capacity and buying equipment on the secondary market  Distressed competitors who have greater inventory sometimes price below replacement economics  Level 3 has been augmenting its network selectively over the past year Sort of

What Are The Implications Of Carriers Emerging From Bankruptcy?  Bankruptcy is a useful tool for good businesses with bad balance sheets  Bankruptcy is not effective for bad businesses with bad balance sheets  There are several carriers in or newly emerged from Chapter 11 in the latter category

Level 3’s gross margins lead the industry by a substantial margin Level 3’s EBITDA margins are superior to most competitors and have substantial upside Touch America example Chapter 11 Is No Panacea 2Q03 2Q03 GrossEBITDAMargin Level 3 76% 26% AT&T 47% 26% Sprint GMG 47% 19% MCI 44% 11% Wiltel 20% 5% GX 31% (1)% Level 3 Communications Services Source: 2Q03 Press Release and 2Q03 10Q Competitor Source: Internal Level 3 research and Banc of America research note “MCI: Much Ado About Margins IX” dated August 18, 2003

Is The Worst Behind Us? The Good News  Unit demand growth remains significant  Customers distinguish between stable and distressed providers  Certain customers are increasing spend The Not So Good News  Distressed providers continue to exist and price irrationally  Customers continue to rationalize spend from late 1990s  “Smart Money” provided life support to distressed providers  Consolidation has not occurred at a significant rate Probably

When will Telecom Spending Improve? ?

What is Level 3’s Strategy?  Focus on product development –VOIP, Ethernet, Metro - address large, existing markets  Focus on meeting the needs of growing sectors –Wireless, Cable, RBOCs, On-line content, etc.  Pursue indirect distribution channels to increase addressable market  Opportunistically pursue consolidation opportunities –New product capabilities to leverage Level 3 network –Consolidation opportunities with significant synergies Rather than waiting for telecom spend to improve, focus on growth through market share gains

2001 Flashback – Part  Scaled back business plans  Back to basics –Focus on customers who pay –Operational excellence, not price  Reducing expenses to weather the storm –SG&A –Capital expenditures What are carriers doing in this difficult environment? 2003 & Beyond   Develop & market new services   Selectively expand network footprint   Same   Selectively invest to drive growth – –Sales & marketing – –New products

2001 Flashback – Part 2 (Cont.) 2001  Selling non-core assets  Restructuring the balance sheet  Consolidation? What are carriers doing in this difficult environment? 2003 & Beyond   N/A   Improve balance sheet opportunistically   Pursue consolidation opportunities with a disciplined approach

What Does This Mean For Equipment Makers? Source: Morgan Stanley, Global Carrier CAPEX Forecasts, May 31, 2002 and June 27, 2003

What Does This Mean For Equipment Makers? (Cont.)  Carriers will begin to loosen purse strings over the next couple of years –Certain pre-deployed inventory is utilized –Will be driven by increases in enterprise spending –Carriers will continue to look to secondary market at a minimum for benchmarking purposes  R&D and long-term innovation needs to continue

Not So Bold Predictions  Segments of the industry will grow – key is to invest in those areas  Consolidation will occur… gradually  We will witness Chapter 18 & Chapter 22  Telecommunications services providers can earn an adequate return on invested capital

APPENDIX

IP & Data Services – 25% of Communications Revenue (1) Dedicated Internet Access Security & VPN DSL Aggregation Ethernet Softswitch Services – 48% of Communications Revenue (1) Managed Modem Voice Services Level 3 Service Offerings (1) Percentages are based on second quarter 2003 Communications GAAP revenue of $434 million Fiber Services Gateway Services Private Line Transatlantic & Backhaul Wavelengths Colocation Fiber Services Technical Support Transport & Infrastructure Services – 27% of Communications Revenue (1)