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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                           --------------------------
 
                                   FORM 10-K
 
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<C>           <S>                                                                              <C>
    /X/                    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                                      SECURITIES EXCHANGE ACT OF 1934
 
                                FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                                    OR
 
    / /                  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                                      SECURITIES EXCHANGE ACT OF 1934
 
                             FOR THE TRANSITION PERIOD FROM                 TO
 
                                        COMMISSION FILE NO. 1-8611
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                                 U S WEST, INC.
 
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<S>                       <C>
 A DELAWARE CORPORATION   I.R.S. EMPLOYER IDENTIFICATION
                                  NO. 84-0926774
 
   7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
            TELEPHONE NUMBER (303) 793-6500
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                           --------------------------
 
          Securities registered pursuant to Section 12(b) of the Act:
 
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<CAPTION>
                                                                               NAME OF EACH EXCHANGE ON
                            TITLE OF EACH CLASS                                    WHICH REGISTERED
---------------------------------------------------------------------------  -----------------------------
<S>                                                                          <C>
U S WEST Communications Group Common Stock                                   New York Stock Exchange
($0.01 per share, par value)                                                 Pacific Stock Exchange
U S WEST Media Group Common Stock                                            New York Stock Exchange
($0.01 per share, par value)                                                 Pacific Stock Exchange
7.96% Trust Originated Preferred Securities                                  New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
8.25% Trust Originated Preferred Securities                                  New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
U S WEST Series D Convertible Preferred Stock                                New York Stock Exchange
($1.00 per share, par value)
</TABLE>
 
                           --------------------------
 
          Securities registered pursuant to Section 12(g) of the Act::
                                      None
 
    At January 30, 1998, 485,060,950 shares of U S WEST Communications Group
common stock and 608,143,720 shares of U S WEST Media Group common stock were
outstanding.
 
    At January 30, 1998, the aggregate market value of the U S WEST
Communications Group voting stock held by non-affiliates was approximately
$23,325,202,237, and the aggregate market value of the U S WEST Media Group
voting stock held by non-affiliates was approximately $18,000,905,734.
 
    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 ____
 
                      DOCUMENTS INCORPORATED BY REFERENCE.
 
    Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the 1998 Annual Meeting of Shareholders are incorporated by
reference into Parts II and III.
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  /X/.
 
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<PAGE>
                               TABLE OF CONTENTS
                                     PART I
 
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  ITEM                                                                            PAGE
  ----                                                                            ----
  <C> <S>                                                                         <C>
    1. Business..................................................................  1
    2. Properties................................................................  8
    3. Legal Proceedings.........................................................  9
    4. Submission of Matters to a Vote of Security Holders.......................  9
 
                                        PART II
 
    5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.................................................................   10
    6. Selected Financial Data...................................................  10
    7. Management's Discussion and Analysis of Financial Condition and Results of
        Operations..............................................................   10
   7A. Quantitative and Qualitative Disclosures About Market Risk................  10
    8. Consolidated Financial Statements and Supplementary Data..................  10
    9. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure..............................................................   10
 
                                        PART III
 
   10. Directors and Executive Officers of the Registrant........................  10
   11. Executive Compensation....................................................  10
   12. Security Ownership of Certain Beneficial Owners and Management............  10
   13. Certain Relationships and Related Transactions............................  10
 
                                        PART IV
 
   14. Financial Statement Schedules, Reports on Form 8-K and Exhibits...........  11
      Reports of Independent Public Accountants.................................   15
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                                       i
<PAGE>
                                     PART I
 
ITEM 1. BUSINESS
  GENERAL
 
    U S WEST, Inc. ("U S WEST" or the "Company") is incorporated under the laws
of the State of Delaware and has its principal executive offices at 7800 East
Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S
WEST is a diversified global communications company, and conducts its operations
through U S WEST Communications Group ("Communications Group") and U S WEST
Media Group ("Media Group"). (Financial information concerning U S WEST's
operations is set forth in the Consolidated Financial Statements and Notes
thereto, which begin on page 60.) U S WEST and its subsidiaries had 67,461
employees at December 31, 1997.
 
    U S WEST has two classes of common stock: U S WEST Communications Group
Common Stock (the "Communications Stock"), which is intended to reflect
separately the performance of the Communications Group, and U S WEST Media Group
Common Stock (the "Media Stock"), which is intended to reflect separately the
performance of the Media Group.
 
    COMMUNICATIONS GROUP.  The major component of the Communications Group is U
S WEST Communications, Inc. ("U S WEST Communications"), which provides
telecommunications services to more than 25 million residential and business
customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming (collectively, the "Region"). U S WEST Communications serves
approximately 80 percent of the Region's population and approximately 40 percent
of its geographic area.
 
    MEDIA GROUP.  The Media Group has operations and investments in three
principal areas: (i) domestic and international cable and broadband
communications, (ii) domestic and international wireless communications, and
(iii) domestic and international directory and information services.
 
    RECENT DEVELOPMENTS
 
    PROPOSED SEPARATION OF U S WEST.  In October 1997, U S WEST announced a
proposal to separate itself into two independent companies (the "Separation").
Under this proposal, the Communications Group would become a separately traded
public company known as "U S WEST, Inc." and the Media Group would become a
separately traded public company known as "MediaOne Group, Inc." As a result of
developments in technology, the marketplace and the regulatory arena, the
potential for synergies between the Communications Group and the Media Group has
been greatly reduced. The Communications Group and the Media Group are currently
implementing strategies based on distinct technologies, separate sets of
customers and different regulatory environments. The Company believes that these
strategies will be executed more efficiently, and that the Communications Group
and the Media Group will be able to compete more effectively, if they are
independent companies that are not restrained by the conflicts that result from
a single corporate structure.
 
    As part of the Separation, the Company is proposing to align U S WEST Dex,
Inc. ("Dex"), the domestic directories business of the Media Group, with the
Communications Group (the "Dex Alignment"). In consultation with U S WEST's
management and its financial advisors, the Board of Directors of U S WEST has
valued Dex at $4.75 billion. In connection with the Dex Alignment, holders of
Media Stock will be issued a total of $850 million in value of shares of common
stock of New U S WEST ("New U S WEST Common Stock"), a newly formed indirect
subsidiary of U S WEST. This amount represents the $4.75 billion value of Dex
net of $3.9 billion of U S WEST debt currently allocated to the Media Group that
will be refinanced by New U S WEST in connection with the Separation.
 
    In order to complete the Separation, the Company will contribute the
businesses of the Communications Group and Dex to New U S WEST and then
distribute all of the New U S WEST Common Stock to
 
                                       1
<PAGE>
the holders of the Communications Stock, other than the $850 million in value of
New U S WEST Common Stock that will be distributed to holders of Media Stock
pursuant to the Dex Alignment. After this distribution, the name of New U S WEST
will be changed to "U S WEST, Inc." and the name of U S WEST will be changed to
"MediaOne Group, Inc."
 
    AIRTOUCH TRANSACTION.  In January 1998, U S WEST entered into an agreement
to sell the Media Group's domestic wireless business to AirTouch Communications,
Inc. ("AirTouch") for approximately $5.7 billion (subject to certain closing
adjustments) in a tax-efficient transaction (the "AirTouch Transaction"). The
Media Group's domestic wireless business is currently conducted by U S WEST
NewVector Group, Inc. ("NewVector"), which conducts the Media Group's domestic
cellular business, and by U S WEST PCS Holdings, Inc. ("PCS Holdings"), which
holds the Media Group's interest in PrimeCo Personal Communications, L.P.
("PrimeCo"), a provider of personal communications services. Pursuant to the
agreement with AirTouch, NewVector and PCS Holdings will merge with and into
AirTouch and, as a result, AirTouch will acquire the businesses of NewVector and
PCS Holdings.
 
    COMMUNICATIONS GROUP
 
    OPERATIONS.  The principal types of telecommunications services offered by
the Communications Group are: (i) local exchange telephone services, (ii)
exchange access services (which connects customers to facilities of carriers,
including long-distance providers and wireless operators), and (iii)
long-distance network services within Local Access and Transport Areas ("LATAs")
in the Region. For the year ended December 31, 1997, local service, exchange
access service and intraLATA long distance network service accounted for 33%,
22% and 6%, respectively, of the sales and other revenues of U S WEST. At
December 31, 1997, U S WEST Communications had approximately 16,033,000
telephone network access lines in service, a 3.9% increase over year-end 1996.
Excluding the effect of the sales of approximately 74,000 rural telephone access
lines during 1997, access lines increased 4.4% over year-end 1996. In 1997,
revenues from a single customer, AT&T Corp., accounted for approximately 9% of
the sales and other revenues of the Communications Group.
 
    U S WEST Communications incurred capital expenditures of approximately $2.6
billion in 1997 and expects to incur approximately $2.6 billion in 1998. The
1997 capital expenditures of U S WEST Communications were substantially devoted
to the continued modernization of telephone plant, to improve customer services,
to accommodate additional line capability in several states, and to enter the
personal communications services ("PCS") market.
 
    REGULATION.  U S WEST Communications is subject to varying degrees of
regulation by state commissions with respect to intrastate rates and service,
and access charge tariffs. U S WEST is also subject to the jurisdiction of the
Federal Communications Commission (the "FCC") with respect to interstate access
tariffs (that specify the charges for the origination and termination of
interstate communications) and other matters. The Telecommunications Act of 1996
(the "Telecommunications Act") has introduced new regulations affecting the
Communications Group's businesses in many areas.
 
    U S WEST Communications is currently working with state regulators to gain
approval of various initiatives, including efforts to rebalance prices, achieve
accelerated capital recovery and eliminate subsidies.
 
    State and local regulatory authorities may also regulate certain terms and
conditions of the offering of wireless services, such as the siting and
construction of transmitter towers, antennas and equipment shelters and zoning
and building permit approvals. See "Communications Group--Regulatory
Environment" under Management's Discussion and Analysis of Financial Condition
and Results of Operations on p. 50.
 
    COMPETITION.  The Communications Group faces competition in the local
exchange business, exchange access and intraLATA long-distance markets,
primarily from interexchange carriers ("IXCs"),
 
                                       2
<PAGE>
competitive access providers ("CAPs") and competitive local exchange carriers
("CLECs"). CAPs and CLECs compete with the Communications Group by providing
customers with network services that connect to carrier facilities or other
business locations within a serving LATA. IXCs compete with the Communications
Group by providing intraLATA long-distance services. Such competition is eroding
U S WEST Communications' market share of intra-LATA long-distance services,
including Wide Area Telephone Service and "800" services. IXCs are competing in
this area by offering lower prices and packaging these services on an intraLATA
and interLATA basis.
 
    The Telecommunications Act has altered the competitive landscape of the
telecommunications industry by permitting competition among local telephone
companies, long-distance companies and cable companies. As a result, it is
expected that additional competitors will be introduced into the Communications
Group's markets who will offer services similar to those offered by the
Communications Group, including local exchange services. The Communications
Group believes that these competitors have initially targeted high-volume
business customers in densely populated urban areas and will selectively pursue
business in smaller communities. The resulting loss of local service customers
could affect multiple revenue streams and could have a material adverse effect
on the Communications Group's operations. Court and state regulatory
deliberations on interconnection rates and newly issued FCC rules on interstate
access pricing could also result in significant changes in revenues received
from carriers. The wireless services being introduced by the Communications
Group will face competition from the two cellular providers in each of the
markets in which it operates as well as from the other providers of PCS services
in such markets. The high-speed data and Internet access services offered by the
Communications Group face competition from local exchange carriers ("LECs"),
IXCs, Internet service providers ("ISPs") and other providers of data services
in the Communications Group's markets.
 
    Technological advancements will also increase competition in the future. New
competitive carriers that are affiliates of cable television companies and power
companies are expected to play a greater role in offering local exchange
services. In addition to local exchange services, competitors are expected to
offer services that will compete with those U S WEST Communications offers and
plans to offer, including video programming and high-speed data and Internet
services.
 
    The Communications Group expects to counter the competition by expanding
services to include new retail as well as wholesale markets. Recently introduced
service offerings include PCS, high-speed data and Internet services, and
interconnection services provided for competing providers of local services.
Planned future service offerings include interLATA long-distance services as the
regulatory environment permits, while interconnection services will be expanded.
The Company believes that the Communications Group's ability to bundle local,
long-distance, PCS and other services will provide a significant opportunity to
compete by offering one-stop shopping with a package of services similar to
those that can be offered by IXCs and CLECs.
 
MEDIA GROUP
 
    OPERATIONS
 
    The Media Group is the third largest cable television system operator in the
United States. The Media Group has operations and investments in three principal
areas: (i) domestic broadband communications, (ii) international broadband and
wireless communications, and (iii) cable television programming. Among its
investments, the Media Group holds a 25.51% interest in Time Warner
Entertainment Company, L.P. ("TWE"), a provider of cable programming, filmed
entertainment and broadband communications services that is the second largest
cable television system operator in the United States. Primarily through Dex,
the Media Group is also engaged in the directory and information services
business. Dex is to be transferred to the Communications Group in connection
with the Separation.
 
                                       3
<PAGE>
    DOMESTIC BROADBAND COMMUNICATIONS--MEDIAONE NETWORKS.  As of December 31,
1997, the Media Group's cable television systems passed approximately 8.4
million homes and provided service to approximately 4.9 million basic cable
subscribers. The Media Group's systems are organized into six operating regions,
including large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern
California, Southern Florida, Detroit, Michigan and Minneapolis/St. Paul,
Minnesota. As of December 31, 1997, approximately 90% of the Media Group's total
basic subscribers were located in clusters with a population greater than
100,000 (after giving effect to announced swaps). The Media Group believes that
its operating scale in key markets generates significant benefits, including
operating efficiencies, and enhances its ability to develop and deploy new
broadband technologies and services.
 
    The Media Group's cable services are marketed under the "MediaOne" brand.
The Media Group's cable systems offer customers various levels (or "tiers") of
cable programming services consisting of broadcast television signals available
off-the-air in any locality, televisions signals from so-called "super stations"
originating in distant cities (such as WGN), various satellite-delivered
non-broadcast channels (such as CNN, MTV, USA Network, ESPN, the Discovery
Channel and Nickelodeon), displays of information featuring news, weather, stock
and financial market reports and programming originated locally by the systems
(such as public, governmental and educational access channels). The Media
Group's systems also provide premium programming services to their customers for
an extra monthly charge. These premium programming services include HBO,
Cinemax, Showtime, The Movie Channel, Encore and regional sports networks.
Customers generally pay initial connection charges and fixed monthly fees for a
tier of programming services and additional fixed monthly fees for premium
programming services. The Media Group also offers pay-per-view programming of
movies and special events for an additional per-program charge.
 
    The Media Group's systems have channel capacity and addressability that are
among the highest in the cable industry. The Media Group's systems are located
primarily in suburban communities adjacent to major metropolitan markets and in
mid-sized cities that generally are densely populated and geographically
diverse. The Media Group believes that its technologically advanced broadband
networks and the demographic profile of its subscriber base, coupled with its
effective marketing, have been essential to its ability to sustain total monthly
revenue per basic subscriber that is among the highest in the cable industry.
The Media Group believes that the geographic diversity of its system clusters
reduces its exposure to economic, competitive or regulatory factors of any
particular region.
 
    The Media Group is upgrading its cable systems to create broadband hybrid
fiber-coax ("HFC") networks. These HFC networks will provide increased channel
capacity for the delivery of additional cable programming and facilitate the
delivery of additional services, such as telephony services, enhanced video
services, Internet access services and high-speed data services. The Media Group
is selectively upgrading its systems and expects that it will have more than 70%
of its systems upgraded by the end of 1998. The Media Group has already begun to
offer additional services over upgraded HFC networks in certain markets. For
example, the Media Group currently offers MediaOne Express, and Internet access
service, over its HFC networks in Los Angeles, Boston, Detroit, Atlanta,
Jacksonville, Richmond and Southern Florida. In late 1997, the Media Group and
Time Warner, Inc. ("TWX") announced plans to merge the operations of MediaOne
Express and Road Runner, the Internet access service offered by Time Warner
Cable, to create the largest cable-based high-speed Internet access business in
the United States. In addition, the Media Group began offering telephony
services over its HFC networks in the Atlanta, Georgia metropolitan area in
January 1998 and expects to begin offering telephony services in two additional
markets in 1998.
 
    To further enhance the clustering of its cable systems, the Media Group has
entered into a letter of intent with Tele-Communications, Inc. ("TCI") to
exchange (the "TCI Exchange") certain cable television systems serving
approximately 500,000 subscribers. Consummation of the TCI Exchange is expected
to occur in late 1998, subject to the receipt of certain franchise and other
approvals.
 
                                       4
<PAGE>
    In May 1997, the Media Group entered into an agreement (the "Minnesota Sale
Agreement") to sell its cable system (the "Minnesota System") serving the
Minneapolis/St. Paul, Minnesota metropolitan area to Charter Communications,
Inc. ("Charter") for $600 million. As of December 31, 1997, the Minnesota System
served approximately 300,000 subscribers. The Minnesota System was acquired by
the Media Group as of part of its acquisition of Continental Cablevision, Inc.
("Continental") in 1996. Under current FCC cross-ownership rules, the Media
Group is prohibited from owning a cable network and a telephone network in the
same geographic area. Because the Minnesota System is located in an area where U
S WEST Communications owns the telephone network, the Media Group was mandated
by the FCC to sell the Minnesota System in connection with the acquisition of
Continental in order to comply with the cross-ownership rules. As a result of
the Separation, U S WEST Communications and the Media Group will be independent
companies and the Media Group will no longer be prohibited by federal law from
owning the Minnesota System. In February 1998, in response to U S WEST's
petition, the FCC granted to U S WEST a waiver which would permit the Media
Group to retain the Minnesota System so long as the Separation is consummated by
July 31, 1998. The Media Group has the right to terminate the Minnesota Sale
Agreement at any time upon the payment to Charter of a $30 million termination
fee. On February 26, 1998, the Media Group terminated the Minnesota Sale
Agreement.
 
    DOMESTIC BROADBAND COMMUNICATIONS--TIME WARNER CABLE.  The Media Group owns
a 25.51% priority capital and residual equity interest in TWE. The remaining
interests in TWE are owned by TWX. TWE is engaged in the cable programming,
filmed entertainment and broadband communications businesses. TWE, through Time
Warner Cable, its cable division, is the second-largest cable television system
operator in the United States. Time Warner Cable owns or manages cable systems
in 34 states. These systems include 34 clusters of more than 100,000
subscribers, including Time Warner Cable of New York City, the largest cluster
in the United States. More than 55% of Time Warner Cable's subscribers are
located in Florida, New York, North Carolina, Ohio and Texas. As of December 31,
1997, Time Warner Cable owned cable television systems that passed approximately
15.4 million homes and provided service to approximately 9.7 million basic cable
subscribers. Of these systems, systems passing approximately 7.1 million homes
and providing service to approximately 4.6 million subscribers are owned by Time
Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N"), a partnership in
which TWE owns a 66.7% interest, and the Advance/Newhouse Partnership ("A/N")
owns a 33.3% interest. In addition, Time Warner Cable manages cable television
systems owned by TWX which, as of December 31, 1997, passed approximately 3.8
million homes and provided service to approximately 2.3 million cable television
subscribers. Time Warner Cable's cable services are marketed under the "Time
Warner Cable" brand. Time Warner Cable offers cable programming services over
its networks similar to those offered by the Media Group under the MediaOne
brand. Like the Media Group, Time Warner Cable is upgrading its cable systems to
provide increased channel capacity and to facilitate the delivery of additional
services.
 
    In February 1998, TWX contributed cable systems serving approximately
675,000 subscribers to TWE-A/N, subject to approximately $1 billion in debt, in
exchange for approximately $300 million of common and preferred interests. In
connection with the transaction, A/N will make equity contributions to TWE-A/N
to maintain its 33.3% interest therein. As a result, TWE-A/N is owned
approximately 65.3% by TWE, 33.3% by A/N and 1.4% by TWX.
 
    INTERNATIONAL BROADBAND COMMUNICATIONS.  The Media Group owns interests in
various providers of broadband communications services in international markets
in continental Europe, the United Kingdom and Asia. As of December 31, 1997,
these interests represented approximately 2 million proportionate homes passed
and 900,000 proportionate subscribers.
 
    Among its international broadband interests, the Media Group holds a 26.8%
interest in Telewest Communications plc ("Telewest"), the second-largest
provider of combined cable and telecommunications services in the United
Kingdom. Telewest is constructing broadband networks capable of providing a
broad range of video, telephony and data services. As of December 31, 1997,
Telewest had approximately 687,000 cable subscribers and 1,040,000 telephony
lines. TCI also owns a 26.8% interest in Telewest. The Media
 
                                       5
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Group also holds interests in other providers of cable and broadband
communications services in international markets, including a 94% interest in
Cable Plus, a provider of cable and telephony services in the Czech Republic; a
50% interest in A2000 (KTA), a provider of cable and telephony services in the
Netherlands; a 25% interest in Telenet Flanders, a provider of cable and
telephony services over an HFC network in portions of Belgium; a 35% interest in
Aria WEST, a provider of telecommunications services in portions of Indonesia; a
25% interest in Singapore Cablevision Pte Ltd, a joint venture that is
constructing a broadband network in Singapore; and a 25% interest in Titus
Communications Corp. ("Titus") and a 19% interest in Chofu Cable Television
("Chofu"), each of which is constructing cable television systems in Japan. TWX
also holds a 25% interest in Titus and a 19% interest in Chofu.
 
    INTERNATIONAL WIRELESS COMMUNICATIONS.  The Media Group owns interests in
various providers of wireless communications services in international markets
in continental Europe, the United Kingdom and Asia. As of December 31, 1997,
these interests represented 76.9 million proportionate potential customers and
approximately 1,018,000 proportionate subscribers.
 
    Among its international wireless interests, Media Group owns a 50% interest
in Mercury Personal Communications ("One 2 One"), which provides PCS services in
the United Kingdom under the brand "One 2 One." The remaining 50% of One 2 One
is owned by Cable & Wireless plc. One 2 One was the first PCS service in the
world to commence operations in 1993. As of December 31, 1997, One 2 One's
networks served approximately 1,014,000 subscribers and provided coverage to
approximately 95% of Great Britain's population. The Media Group also holds
interests in various other providers of wireless communications services in
international markets, including a 46.6% interest in Westel 900 and a 49%
interest in Westel Radiotelefon, providers of cellular service in Hungary; 24.5%
interests in Eurotel Praha and Eurotel Bratislava, providers of wireless
services in portions of the Czech and Slovak Republics; a 22.5% interest in
Polska Telefonia Cyfrowa, a provider of Global Systems for Mobile Communications
("GSM") cellular services in Poland; a 49% interest in U S WEST BPL Cellular
Telecommunications, a provider of GSM cellular services in certain regions of
India; a 19% interest in Binariang, a provider of wireless, wireline, satellite
and international gateway services in Malaysia; and a 66.5% interest in the
Russian Telecommunications Development Corp., a provider of cellular services in
certain cities in Russia.
 
    AIRTOUCH TRANSACTION.  Pursuant to the AirTouch Transaction, AirTouch will
pay to the Media Group approximately $5.7 billion in consideration (subject to
certain closing adjustments), which will consist of (i) the assumption by
AirTouch of approximately $1.4 billion of indebtedness of NewVector and PCS
Holdings, (ii) the issuance to the Media Group of $1.6 billion in liquidation
preference of AirTouch preferred stock, and (iii) approximately $2.7 billion in
value of AirTouch common stock. The number of shares of AirTouch common stock to
be received by the Media Group in the AirTouch Transaction will depend upon the
average volume-weighted trading price of the AirTouch common stock during a
30-day period ending on the fifth trading day prior to the closing of the
AirTouch Transaction (the "AirTouch Determination Price"). If the AirTouch
Determination Price is less than or equal to $40, the Media Group will receive
67.1 million shares of AirTouch common stock. If the AirTouch Determination
Price is greater than or equal to $45, the Media Group will receive 60.8 million
shares of AirTouch common stock. If the AirTouch Determination Price is between
$40 and $45, the number of shares of AirTouch common stock to be received by the
Media Group will decrease from 67.1 million to 60.8 million on a proportionate
basis.
 
    The Media Group and AirTouch are currently parties to a multi-phased joint
venture pursuant to which they have agreed to combine their domestic cellular
businesses. The AirTouch Transaction has been entered into in lieu of such joint
venture.
 
    The Media Group expects to consummate the AirTouch Transaction in the second
quarter of 1998, subject to the receipt of certain regulatory and other third
party approvals. The approval of U S WEST's stockholders is not required to
consummate the AirTouch Transaction.
 
    Following the consummation of the AirTouch Transaction, the Media Group
intends to take appropriate actions to monetize the shares of the AirTouch
preferred stock and AirTouch common stock that it
 
                                       6
<PAGE>
receives in the AirTouch Transaction. In connection with the AirTouch
Transaction, the Media Group and AirTouch will enter into an Investment
Agreement, pursuant to which AirTouch will agree to provide to the Media Group
registration rights with respect to the shares of AirTouch preferred stock and
AirTouch common stock that it receives in the AirTouch Transaction and to assist
the Media Group in the monetization of such shares.
 
    DIRECTORY AND INFORMATION SERVICES.  The Media Group's directory and
information services businesses develop and package content and information
services, including telephone directories, database marketing, electronic
directory and other interactive services in domestic and international markets.
Dex publishes approximately 320 White and Yellow Pages directories in the
Region. The Media Group also owns an interest in a Brazilian directory
operation. During 1997, the Media Group sold Thomson Directories and U S WEST
Polska, its directory operations in the United Kingdom and Poland, respectively.
Upon the consummation of the Separation, Dex will be aligned with the
Communications Group.
 
    REGULATION.  The products and services of the Media Group are subject to
varying degrees of regulation. Under the Telecommunications Act, the regulation
of all but basic tier cable rates will be discontinued effective March 31, 1999,
or earlier if competition exists. The Telecommunications Act also (i) eliminates
certain cross-ownership restrictions among cable operations, broadcasters and
multipoint multichannel distribution services ("MMDS") operations, (ii) removes
barriers to competition with LECs, and (iii) eliminates restrictions that
previously applied to the Media Group relating to long-distance services.
 
    The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") authorizes the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services, except
for services offered on a per-channel or per-program basis, and equipment.
Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series
of rate regulations. The FCC also publicly announced that it would consider
"social contracts" as an alternative form of rate regulation for cable
operations. Continentals's social contract with the FCC was adopted by the FCC
on August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include
certain systems acquired by Continental. The social contract is a six-year
agreement covering most of Continental's franchises, including those that were
unregulated, and settled Continental's cost of service rate cases and benchmark
cable programming service tier rate cases for the covered systems. Benchmark
basic service tier rate cases in the covered systems are subject to review by
local franchise authorities. As part of the resolution, Continental agreed to,
among other things, invest at least $1.7 billion in domestic system rebuilds and
upgrades through the year 2000 to expand channel capacity and improve system
reliability and picture quality. At December 31, 1997, the investment commitment
had been substantially met. Under the social contract, Continental also reduced
its basic service tier rates for most of the subscribers covered by the social
contract. These reductions were offset by a revenue neutral increase in cable
programming service tier rates. The social contract allows for the funding of
system rebuilds and upgrades by increasing cable programming service tier rates
annually by one dollar per subscriber from 1997 through 1999 in most franchises,
and from 1996 through 1999 for the systems incorporated under the 1996 amendment
to the social contract. Rate adjustments are also allowed for inflation and
external costs such as programming. The social contract also provides that, if
the laws and regulations applicable to services offered in any Continental
franchise change in a manner that would have a material favorable financial
impact on Continental, the Media Group may petition the FCC to terminate the
social contract.
 
    Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
 
    The Media Group is also subject to various regulations in the foreign
countries in which it has operations. In the United Kingdom, the licensing,
construction, operation, sale and acquisition of cable
 
                                       7
<PAGE>
and wireline and wireless communications systems are regulated by various
government entities, including the Department of Trade and Industry and the
Department of National Heritage.
 
    COMPETITION.  The Media Group's cable television systems generally compete
for viewer attention with other providers of video programming, including direct
broadcast satellite ("DBS") systems, MMDS systems, local multipoint distribution
services systems, satellite master antenna television ("SMATV") systems and
other cable companies providing services in areas where the Media Group
operates. In addition, certain LECs, including regional bell operating companies
("RBOCs"), are beginning to offer video programming in competition with the
Media Group's cable services. In the past, federal cross-ownership restrictions
have limited entry by LECs into the cable television business. The
Telecommunications Act has eliminated many of these barriers, thereby enhancing
the ability of LECs to provide video programming in competition with the Media
Group. The extent of such competition in any franchise area is dependent, in
part, upon the quality, variety and price of the programming provided by these
services. Many of these competitive services are generally not subject to the
same local government regulation that affects cable television. The cable
television services offered by the Media Group also face competition for viewers
and advertising from other communications and entertainment media, including
off-air television broadcasting services, movie theaters, video tape rentals and
live sporting events. The competition faced by the Media Group's cable systems
may increase in the future with the development and growth of new technologies.
 
    As the Media Group begins to offer additional services over its HFC
networks, the Media Group will face additional competition. Telephony services
offered by the Media Group will face competition from other providers of local
exchange services, including RBOCs, LECs, IXCs and other providers of local
exchange services. The degree of competition will be dependent upon the state
and federal regulations concerning entry, interconnection requirements and the
degree of unbundling of the LECs' networks. Competition will be based upon
price, service quality and breadth of services offered. The Internet access and
high-speed data services offered by the Media Group compete with other providers
of such services, including LECs, IXCs, ISPs and other on-line service
providers.
 
    The Media Group's international broadband and wireless communications
businesses also face competition in their respective markets. Telewest's cable
television services compete with broadcast television stations, DBS services,
SMATV systems and certain narrowband operators in the United Kingdom. Telewest's
communications services compete with domestic telephone companies in the United
Kingdom, such as British Telecommunications plc. One 2 One competes with two
cellular operators and one PCS operator in the United Kingdom. Competition is
based upon price, geographic coverage and quality of the services offered.
 
    Dex competes with various other providers of directory services, including
providers of electronic directory services.
 
ITEM 2. PROPERTIES.
 
    The properties of U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1997, the majority of
U S WEST property was utilized in providing telecommunications services by U S
WEST Communications. Substantially all of U S WEST Communications' central
office equipment is located in owned buildings situated on land owned in fee,
while many garages and administrative and business offices are in leased
quarters.
 
                                       8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
 
    U S WEST and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. At U S WEST Communications, there are
pending certain regulatory actions in local regulatory jurisdictions that call
for price decreases, refunds or both. For a discussion of these actions, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Contingencies," on p. 47.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    Not applicable.
 
                      EXECUTIVE OFFICERS OF U S WEST, INC.
 
    Pursuant to General Instructions G(3), the following information is included
as an additional item in Part I:
 
<TABLE>
<CAPTION>
                                                                                                      DATE ASSUMED
                                                                                                         PRESENT
                                                       POSITION                             AGE         POSITION
                                ------------------------------------------------------      ---      ---------------
<S>                             <C>                                                     <C>          <C>
James T. Anderson               Vice President & Treasurer                                      58           1984
Michael P. Glinsky              Executive Vice President and Chief Financial Officer            53           1996(1)
Charles M. Lillis               Executive Vice President, and President & Chief                 56           1987(2)
                                  Executive Officer, U S WEST Media Group
Richard D. McCormick            Chairman of the Board, Chief Executive Officer &                57           1991(3)
                                  President
Charles P. Russ, III            Executive Vice President-Law, Public Policy and Human           53           1992
                                  Resources, General Counsel & Secretary
Solomon D. Trujillo             Executive Vice President, and President & Chief                 46           1995(4)
                                  Executive Officer, U S WEST Communications Group
</TABLE>
 
------------------------
 
(1) Mr. Glinsky was elected Executive Vice President and Chief Financial Officer
    effective April 15, 1996.
 
(2) Mr. Lillis was elected President and Chief Executive Officer, U S WEST Media
    Group effective August 22, 1995.
 
(3) Mr. McCormick was elected Chairman of the Board effective May 1, 1992.
 
(4) Mr. Trujillo was elected President and Chief Executive Officer of U S WEST
    Communications Group effective July 1, 1995, and Executive Vice President, U
    S WEST effective October 6, 1995. Previously, Mr. Trujillo was President and
    Chief Executive Officer of U S WEST Dex, Inc.
 
    Executive Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
 
    Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST since 1993, except for Mr. Glinsky. Mr. Glinsky
was a managing partner of Coopers & Lybrand L.L.P., from 1967 to April 1996.
 
                                       9
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
    The information required by this item is included in Note 24, Quarterly
Financial Data, on page 112. The U. S. markets for trading in U S WEST common
stock are the New York Stock Exchange and the Pacific Stock Exchange. As of
January 30, 1998, U S WEST Communications Group common stock was held by
approximately 669,060 shareholders of record and U S WEST Media Group common
stock was held by approximately 643,770 shareholders of record.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
    Reference is made to the information set forth on pages 17 through 18.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.
 
    Reference is made to the information set forth on pages 19 through 56.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
    Reference is made to the information set forth on pages 46 and 47.
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    Reference is made to the information set forth on pages 60 through 114.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.
 
    Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
    The information required by this item with respect to executive officers is
set forth in Part I, page [8], under the caption "Executive Officers of U S
WEST."
 
    The information required by this item with respect to Directors is included
in the U S WEST definitive Proxy Statement ("Proxy Statement") under "Election
of Directors" and is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
    The information required by this item is included in the Proxy Statement
under "Compensation of Executive Officers" and "Director Compensation" and is
incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
    The information required by this item is included in the Proxy Statement
under "Security Ownership of Management" and is incorporated herein by
reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
    Not applicable.
 
                                       10
<PAGE>
                                    PART IV
 
ITEM 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
 
(a) Documents filed as part of this report:
 
<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                              -----------------
<S>        <C>                                                                                <C>
(1)        Reports of Independent Accountants...............................................    57 through 58
(2)        Consolidated Financial Statements:
           Consolidated Statements of Operations--for the years ended December 31, 1997,
             1996 and 1995..................................................................    60 through 61
           Consolidated Balance Sheets as of December 31, 1997 and 1996.....................    62 through 63
           Consolidated Statements of Cash Flows--for the years ended December 31, 1997,
             1996 and 1995..................................................................         64
           Notes to Consolidated Financial Statements and supplementary data................   65 through 114
(3)        Consolidated Financial Statement Schedule:
           Reports of Independent Accountants...............................................         15
           II--Valuation and Qualifying Accounts............................................         16
</TABLE>
 
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the financial statements and
notes thereto, or because such schedules are not required or applicable.
 
(b) Reports on Form 8-K:
 
        U S WEST filed the following reports on Form 8-K during the fourth
        quarter of 1997:
 
    (i) report dated October 27, 1997 notification of a press release regarding
        U S WEST. Inc's plan to split U S WEST Media Group and U S WEST
        Communications Group into separate public companies; notification of a
        press release by U S WEST Media Group regarding the sale of its interest
        in Video Cable Communications, an Argentinean joint venture; and
        notification of the release of third quarter earnings results by U S
        WEST Communications Group and U S WEST Media Group.
 
                                       11
<PAGE>
(c) Exhibits:
 
Exhibits identified in parentheses below are on file with the Securities and
Exchange Commission ("SEC") and are incorporated herein by reference. All other
exhibits are provided as part of this electronic submission.
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
<C>        <S>
   2-A     --Form of Separation Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.") and
             USW-C, Inc. (to be renamed "U S WEST, Inc.")
 
   2-B     --Form of Employee Matters Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.")
             and USW-C, Inc. (to be renamed "U S WEST, Inc.").
 
   2-C     --Form of Tax Sharing Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.") and
             USW-C, Inc. (to be renamed "U S WEST, Inc.").
 
  (3-A)    --Form of Restated Certificate of Incorporation of U S WEST, Inc. (Annex II to Registration
             Statement No. 33-59315).
 
   3-B     --Form of Amended Bylaws of U S WEST, Inc.
 
  (4-A)    --Form of Amended and Restated Rights Agreement between U S WEST, Inc. and State Street Bank and
             Trust Company, as Rights Agent (Exhibit 4-A to Registration Statement No. 33-59315).
 
   4-B     --No instrument which defines the rights of holders of long and intermediate term debt of U S
             WEST, Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item
             601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy
             of any such instrument to the SEC upon request.
 
 (10-A)    --U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K, date of report March 19,
             1993, File No. 1-8611).
 
 (10-B)    --U S WEST Executive Financial Counseling Plan (Exhibit 10j to Form 10-K, date of report March 28,
             1997, File No. 1-8611).
 
 (10-C)    --U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration
             Statement No. 2-87861).
 
 (10-D)    --Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance
             (Exhibit 10-gg to Registration Statement No. 2-87861).
 
 (10-E)    --Extract from the U S WEST Management Pension Plan regarding limitations on and payments of
             pension amounts which exceed the limitations contained in the Employee Retirement Income
             Security Act (Exhibit 10-hh to Registration Statement No. 2-87861).
 
 (10-F)    --U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March
             29, 1989, File No. 1-8611).
 
 (10-G)    --Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315).
 
 (10-H)    --Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March
             5, 1992, File No. 1-8611).
 
 (10-I)    --Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315).
 
 (10-J)    --U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to
             Registration Statement No. 2-87861).
 
 (10-K)    --Form of U S WEST, Inc. Non-Qualified Stock Option Agreement (Exhibit 10u to Form 10-K, date of
             report March 28, 1996, File No. 1-8611).
</TABLE>
 
                                       12
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
<C>        <S>
 (10-L)    --Form of U S WEST, Inc. Restricted Stock Agreement (Exhibit 10v to Form 10-K, date of report
             March 28, 1996, File No. 1-8611).
 
 (10-M)    --Employment letter from Richard D. McCormick to Charles P. Russ, III dated January 31, 1997
             (Exhibit 10w to Form 10-K, date of report March 28, 1997, File No. 1-8611).
 
 (10-N)    --Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and
             U S WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993, File No. 1-8611).
 
 (10-O)    --Form of U S WEST, Inc. Executive Change of Control Agreement, Exhibit 10y to Form 10-K, date of
             report March 28, 1997, File No. 1-8611).
 
 (10-P)    --Form of Change of Control Agreement for Chief Executive Officer (Exhibit 10-g to Form 10-K, date
             of report March 28, 1997, File, No. 1-8611).
 
 (10-Q)    --Form of Group Executive Change of Control Agreement (Exhibit 10aa to Form 10-K, date of report
             March 28, 1997, File No. 1-8611).
 
 (10-R)    --Form of Executive Severance Agreement (Exhibit 10ab to Form 10-K, date of report March 28, 1996,
             File No. 1-8611).
 
 (10-S)    --U S WEST, Inc. Executive Short-Term Incentive Plan (Exhibit 10ae to Form 10-K, date of report
             March 7, 1995, File No. 1-8611).
 
 (10-T)    --Amended U S WEST Communications Group Long-Term Incentive Plan.
 
 (10-U)    --Employment letters from Richard D. McCormick to Michael P. Glinsky dated April 2, 1996 and
             January 31, 1997.
 
 (10-W)    --364-Day and Five-Year Credit Agreements dated as of November 1, 996, among U S WEST Capital
             Funding, Inc., U S WEST, Inc. and the Banks listed therein.
 
  10-X     --Agreement and Plan of Merger, dated as of January 29, 1998, among U S WEST, Inc., U S WEST Media
             Group, Inc., U S WEST NewVector Group, Inc., U S WEST PCS Holdings, Inc. and AirTouch
             Communications, Inc.
 
   12      --Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial
             Services, Inc.
 
   21      --Subsidiaries of U S WEST, Inc.
 
   23      --Consent of Independent Accountants.
 
   24      --Powers of Attorney.
 
   27      --Financial Data Schedule.
 
   99      --Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31,
             1997, to be filed by amendment.
</TABLE>
 
                                       13
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on March 25, 1998.
 
<TABLE>
<S>                             <C>  <C>
                                U S WEST, Inc.
 
                                By:            /s/ MICHAEL P. GLINSKY
                                     -----------------------------------------
                                                 Michael P. Glinsky
                                            EXECUTIVE VICE PRESIDENT AND
                                              CHIEF FINANCIAL OFFICER
</TABLE>
 
    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 date indicated.
 
PRINCIPAL EXECUTIVE OFFICER
 
/s/ Richard D. McCormick*       Chairman of the Board,
                                  President and Chief
                                  Executive Officer
 
PRINCIPAL FINANCIAL OFFICER:
 
/s/ Michael P. Glinsky          Executive Vice President
                                  and Chief Financial
                                  Officer
 
DIRECTORS:
 
/s/ Robert L. Crandall*
 
/s/ Grant A. Dove*
 
/s/ Allan D. Gilmour*
 
/s/ Pierson M. Grieve*
 
/s/ George J. Harad*
 
/s/ Allen F. Jacobson*
 
/s/ Charles M. Lillis*
 
/s/ Richard D. McCormick*
 
/s/ Marilyn Carlson Nelson*
 
/s/ Frank Popoff*
 
/s/ Charles P. Russ*
 
/s/ Louis A. Simpson*
 
/s/ John "Jack" Slevin*
 
/s/ Solomon D. Trujillo*
 
/s/ Jerry O. Williams*
 
*By    /s/ MICHAEL P. GLINSKY
      -------------------------
         Michael P. Glinsky
         (FOR HIMSELF AND AS
          ATTORNEY-IN-FACT)
 
Dated March 25, 1998
 
                                       14
<PAGE>
                   REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in U S WEST, Inc.'s (the
"Company") Annual Report on Form 10-K for the years ended December 31, 1997 and
1996, and have issued our reports thereon dated February 12, 1998 appearing on
page 57. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule appearing on page 16 of this Form 10-K
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The information for the years 1997 and 1996
on this schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
ARTHUR ANDERSEN LLP
 
Denver, Colorado,
February 12, 1998.
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    Our report on the consolidated financial statements of U S WEST, Inc. is
included on page 58 of this Form 10-K. In connection with our audit of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule listed in the index on page 16 of this Form 10-K
for the year ended December 31, 1995.
 
    In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic information statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
 
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
 
                                       15
<PAGE>
                                 U S WEST, INC.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                         BALANCE AT                    CHARGED TO
                                                        BEGINNING OF    CHARGED TO        OTHER                      BALANCE AT
                                                           PERIOD         EXPENSE       ACCOUNTS      DEDUCTIONS    END OF PERIOD
                                                        -------------  -------------  -------------  -------------  -------------
<S>                                                     <C>            <C>            <C>            <C>            <C>
ALLOWANCE FOR CREDIT LOSSES
    1997..............................................    $     125      $     199(a)   $      20      $     208(b)   $     136
    1996..............................................           88            160(a)          25            148(b)         125
    1995..............................................           62            122(a)          13            109(b)          88
 
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING,
INCLUDING WORKFORCE AND FACILITY CONSOLIDATION
    1997..............................................          126             --             --             70             56
    1996..............................................          368             --             --            242            126
    1995..............................................          702             --             --            334            368
 
CAPITAL ASSETS SEGMENT:
REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT (after
tax)
    1997..............................................          100             --             --            (16)           116
    1996..............................................           56             --             --            (44)           100
    1995..............................................           77             --             --             21             56
</TABLE>
 
------------------------------
 
(a) Does not include amounts charged directly to expense. These amounts were $8,
    $7 and $6 for 1997, 1996 and 1995, respectively.
 
(b) Represents credit losses written off during the period, less collection of
    amounts previously written off.
 
                                       16
<PAGE>
                                 U S WEST, INC.
 
                              FINANCIAL HIGHLIGHTS
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED OR AS OF DECEMBER 31,
                                                                      -----------------------------------------------------
                                                                        1997       1996       1995       1994       1993
                                                                      ---------  ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>        <C>
                                                                         DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues(1).........................................  $  15,235  $  12,911  $  11,746  $  10,953  $  10,294
Income before extraordinary items and cumulative
 effect of change in accounting principles(2).......................        700      1,144      1,329      1,426        476
Net income (loss)(3)................................................        697      1,178      1,317      1,426     (2,806)
Total assets........................................................     39,740     40,855     25,071     23,204     20,680
Total debt(4).......................................................     14,678     15,351      8,855      7,938      7,199
Mandatorily redeemable preferred stock and Preferred
 Securities(5)......................................................      1,180      1,131        651         51         --
Shareowners' equity.................................................     11,324     11,549      7,948      7,382      5,861
Percentage of debt to total capital(4)..............................       54.0%      54.8%      50.7%      51.6%      55.1%
Capital expenditures(4).............................................  $   4,174  $   3,474  $   3,140  $   2,820  $   2,441
Employees...........................................................     67,461     69,286     61,047     61,505     60,778
  COMMUNICATIONS GROUP INFORMATION:(2, 3, 6, 7)
  Basic earnings per common share...................................  $    2.43  $    2.62  $    2.50
  Diluted earnings per common share.................................       2.41       2.58       2.46
  Basic average common shares outstanding (thousands)...............    482,751    477,549    470,716
  Diluted average common shares outstanding (thousands).............    491,232    488,591    481,933
  Dividends per common share........................................  $    2.14  $    2.14  $    2.14
  Number of common shareowners of record............................    672,517    725,560    775,125
  MEDIA GROUP INFORMATION:(2, 3, 6, 7)
  Basic and diluted earnings (loss) per common share................  $   (0.88) $   (0.16) $    0.29
  Basic average common shares outstanding (thousands)...............    606,749    491,924    470,549
  Diluted average common shares outstanding (thousands).............    606,749    491,924    471,612
  Number of common shareowners of record............................    648,077    705,341    770,346
  U S WEST, INC. INFORMATION:(2, 3, 6, 7)
  Basic earnings per common share before extraordinary items and
    cumulative effect of change in accounting principle.............                                   $    3.14  $    1.13
  Basic earnings (loss) per common share............................                                        3.14      (6.69)
  Diluted earnings (loss) per common share..........................                                        3.12      (6.68)
  Basic weighted average common shares outstanding (thousands)......                                     453,316    419,365
  Diluted weighted average common shares outstanding (thousands)....                                     463,801    419,776
  Dividends per common share........................................                                   $    2.14  $    2.14
  Number of common shareowners of record............................                                     816,099    836,328
</TABLE>
 
------------------------------
 
(1) 1997 and 1996 sales and other revenues include $2,070 and $252,
    respectively, related to the acquisition by U S WEST, Inc. ("U S WEST" or
    the "Company") of Continental Cablevision, Inc. ("Continental"), which was
    consummated on November 15, 1996 (the "Continental Acquisition" or the
    "Acquisition").
 
(2) 1997 income is before an extraordinary item and includes a $152 regulatory
    charge ($0.31 per share of Communications Stock) related primarily to the
    1997 Washington State Supreme Court ruling that upheld a Washington State
    Utilities and Transportation Commission 1996 rate order, a gain of $32
    ($0.07 per share of Communications Stock) on the sale of U S WEST
    Communications, Inc.'s ("U S WEST Communications") interest in Bell
    Communications Research, Inc. ("Bellcore") and a gain of $48 ($0.10 per
    share of Communications Stock) on the sales of certain rural telephone
    exchanges. Also included are net gains of $249 ($0.41 per share of Media
    Stock) on the sales of domestic and international investments, and net
    losses of $356 ($0.59 per share of Media Stock) related to the Continental
    Acquisition. 1996 income is before the cumulative effect of a change in
    accounting principle and includes a gain of $36 ($0.08 per share of
    Communications Stock) on the sales of certain rural telephone exchanges and
    the current effect of $15 ($0.03 per share of Communications Stock) from
    adopting Statement of Financial Accounting Standards ("SFAS") No. 121. Also
    included are net losses of $71 ($0.15 per share of Media Stock) related to
    the Continental Acquisition and a charge of $19 ($0.04 per share of Media
    Stock) from the sale of U S WEST's cable television interests in Norway,
    Sweden and Hungary. 1995 income is before an extraordinary item and includes
    a gain of $95 ($0.20 per share of Media Stock) from the merger of Telewest
    Communications plc ("Telewest") with SBC CableComms (UK), a gain of $85
    ($0.18 per share of Communications Stock) on the sales of certain rural
    telephone exchanges and costs of $17 ($0.01 per share of Communications
    Stock and $0.02 per share of Media Stock) associated with the 1995
    Recapitalization discussed in footnote 6 below. 1994 income includes a gain
    of $105 ($0.23 per share) on the partial sale of U S WEST's joint venture
    interest
 
                                       17
<PAGE>
                                 U S WEST, INC.
 
                              FINANCIAL HIGHLIGHTS
 
    in Telewest, a gain of $41 ($0.09 per share) on the sale of U S WEST's
    paging operations and a gain of $51 ($0.11 per share) on the sales of
    certain rural telephone exchanges. 1993 income is before extraordinary items
    and was reduced by a restructuring charge of $610 ($1.46 per share) and a
    charge of $54 ($0.13 per share) for the cumulative effect on deferred taxes
    of the 1993 federally mandated increase in income tax rates. 1993 income is
    from continuing operations.
 
(3) 1997 net income was reduced by an extraordinary charge of $3 ($0.01 per
    share of Communications Stock and no Media Stock impact) for the early
    extinguishment of debt. 1996 net income includes a gain of $34 ($0.07 per
    share of Communications Stock) for the cumulative effect of the adoption of
    SFAS No. 121. 1995 net income was reduced by an extraordinary item of $12
    ($0.02 per share of Communications Stock and $0.01 per share of Media Stock)
    for the early extinguishment of debt. 1993 net income was reduced by
    extraordinary charges of $3,123 ($7.45 per share) for the discontinuance of
    SFAS No. 71 and $77 ($0.18 per share) for the early extinguishment of debt.
    1993 net income also includes a charge of $120 ($0.28 per share) for U S
    WEST's decision to discontinue the operations of its capital assets segment.
    Discontinued operations provided net income of $38 ($0.09 per share) in
    1993.
 
(4) Debt at December 31, 1997 and 1996 includes debt related to the Continental
    Acquisition. Capital expenditures, debt and the percentage of debt to total
    capital excludes the capital assets segment, which has been discontinued and
    is held for sale. Percentage of debt to total capital includes
    Company-obligated mandatorily redeemable preferred securities of subsidiary
    trust holding solely Company-guaranteed debentures ("Preferred Securities")
    and mandatorily redeemable preferred stock as a component of total capital.
 
(5) Includes Preferred Securities of $1,080 at December 31, 1997 and 1996, and
    $600 at December 31, 1995, and preferred stock subject to mandatory
    redemption of $100 at December 31, 1997, and $51 at December 31, 1996, 1995
    and 1994.
 
(6) The average common shares of Media Stock outstanding for the year ended
    December 31, 1996 include 150,615,000 shares issued in connection with the
    Continental Acquisition. Effective November 1, 1995, each share of common
    stock of U S WEST was converted into one share each of Communications Stock
    and Media Stock (the "1995 Recapitalization"). Earnings per common share and
    dividends per common share for 1995 have been presented on a pro forma basis
    to reflect the two classes of stock as if they had been outstanding since
    January 1, 1995. For periods prior to the 1995 Recapitalization, the average
    shares of Communications Stock and Media Stock outstanding are assumed to
    equal the average shares of U S WEST common stock outstanding for such
    periods.
 
(7) In 1997, U S WEST adopted SFAS No. 128 "Earnings Per Share" which specifies
    new computation, presentation and disclosure requirements for earnings per
    share to be applied retroactively. SFAS No. 128 requires, among other
    things, presentation of basic and diluted earnings per share. See Note
    16--Earnings Per Share--to the U S WEST, Inc. Consolidated Financial
    Statements.
 
                                       18
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
    Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the local exchange, intraLATA
toll, cable, wireless, data and directories markets, (ii) changes in demand for
the Company's products and services, including optional custom calling features,
(iii) higher than anticipated employee levels, capital expenditures, and
operating expenses (such as costs associated with year 2000 remediation), (iv)
the loss of significant customers, (v) pending regulatory actions in state
jurisdictions, (vi) regulatory changes affecting the cable and
telecommunications industries, including changes that could have an impact on
the competitive environment in the local exchange market, (vii) a change in
economic conditions in the various markets served by the Company's operations,
including international markets, that could adversely affect the level of demand
for cable, telephone, wireless, directories or other services offered by the
Company, (viii) greater than anticipated competitive activity requiring new
pricing for services, (ix) higher than anticipated start-up costs associated
with new business opportunities, (x) increases in fraudulent activity with
respect to broadband and wireless services, (xi) delays in the Company's ability
to begin offering interLATA long-distance services, (xii) consumer acceptance of
broadband services, including telephony and data services, and wireless
services, (xiii) competition from new providers of wireless services in the
Company's wireless markets, or (xiv) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
 
THE RECAPITALIZATION PLAN
 
    In 1995, U S WEST divided its businesses into two groups: U S WEST
Communications Group (the "Communications Group") and U S WEST Media Group (the
"Media Group") and created two separate classes of common stock under the 1995
Recapitalization. One class of stock, U S WEST Communications Group Common Stock
(the "Communications Stock"), reflects the performance of the communications
businesses comprising the Communications Group and the other class of stock, U S
WEST Media Group Common Stock (the "Media Stock"), reflects the performance of
the multimedia businesses comprising the Media Group. Effective November 1,
1995, each share of common stock of U S WEST was converted into one share each
of Communications Stock and Media Stock.
 
THE SEPARATION
 
    On October 25, 1997, the Board of Directors of U S WEST (the "Board")
adopted a proposal to separate U S WEST into two independent companies (the
"Separation"). As a result of the Separation, the Communications Group will
become an independent public company and will be renamed "U S WEST, Inc." ("New
U S WEST"). In addition, the Media Group's directory business known as U S WEST
Dex, Inc. ("Dex") will be aligned with New U S WEST (the "Dex Alignment"). The
assets of New U S WEST will be accounted for at the historical values at which
they were carried by U S WEST prior to the Separation. Following the Separation,
U S WEST will continue as an independent public company comprised of the current
businesses of Media Group other than Dex and will be renamed "MediaOne Group,
Inc." ("MediaOne").
 
    The Separation will be implemented pursuant to the terms of a separation
agreement between U S WEST and New U S WEST (the "Separation Agreement"). Under
the Separation Agreement,
 
                                       19
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
U S WEST will redeem each issued and outstanding share of Communications Stock
(other than shares of Communications Stock held as treasury stock by U S WEST)
for one share of New U S WEST Common Stock, and each outstanding share of Media
Stock will remain outstanding and will thereafter represent one share of
MediaOne Common Stock. Each share of Communications Stock held as treasury stock
by U S WEST will be cancelled. Each share of Media Stock held as treasury stock
by U S WEST will remain outstanding as one share of MediaOne Common Stock held
as treasury stock by MediaOne.
 
    In connection with the Dex Alignment, (i) U S WEST will distribute, as a
dividend, an aggregate of $850 in value of New U S WEST Common Stock to holders
of Media Stock (the "Dex Dividend") and (ii) $3.9 billion of U S WEST debt,
currently allocated to Media Group, will be refinanced by New U S WEST (the "Dex
Indebtedness").
 
    MediaOne will account for the Separation as a discontinuance of the
businesses comprising New U S WEST. The measurement date for discontinued
operations accounting purposes will be the date as of which U S WEST stockholder
approval, all necessary regulatory approvals and a favorable Internal Revenue
Service ("IRS") ruling are obtained. On such date, MediaOne will recognize a
gain on the distribution of New U S WEST. Because the distribution is non
pro-rata, as compared with the businesses previously attributed to U S WEST's
two classes of stockholders, it will be accounted for at fair value. Based on
the number of shares of Communications Stock outstanding and market price as of
February 20, 1998, the gain (net of Separation costs) is estimated at
approximately $25.2 billion. The Company will incur total Separation costs
during 1998 of approximately $150, which includes severance, financial advisory,
legal, registration fee, printing and mailing costs. Separation costs also
include a one-time payment to terminate the sale of the Media Group cable
systems in Minnesota.
 
    The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the IRS. The Separation is expected to be complete sometime after mid-1998.
 
THE COMMUNICATIONS GROUP
 
    The Communications Group provides telecommunications services to more than
25 million residential and business customers in the Communications Group 14
state region (the "Region"). The Region includes the states of Arizona,
Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming. Primary telecommunications
services offered include local exchange telephone services, exchange access
services (which connect customers to the facilities of carriers, including
long-distance providers and wireless operators), and long-distance services
within Local Access and Transport Areas ("LATAs") in the Region. Other products
and services include wireless personal communications services ("PCS"),
high-speed data and Internet access services, and certain other communications
equipment sales and services for business customers and governmental agencies.
 
THE MEDIA GROUP
 
    The Media Group has operations and investments in three principal areas: (i)
cable and broadband network businesses primarily outside of the Region and
internationally, (ii) domestic and international wireless communications network
businesses and (iii) domestic and international directory and information
services businesses.
 
                                       20
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    CABLE AND BROADBAND.  Media Group is the third-largest cable operator in the
United States serving 4.9 million customers and passing 8.4 million homes. Media
Group's cable systems are organized into six operating regions, including large
clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California,
Southern Florida, Detroit, Michigan and Minneapolis/St. Paul, Minnesota. The
cable systems offer customers various levels of cable programming services,
including premium programming services such as HBO, Cinemax, Showtime, The Movie
Channel and Encore, as well as pay-per-view movies and special events.
 
    On November 15, 1996, U S WEST acquired Continental. The aggregate
consideration paid by U S WEST to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock (the "Series D Preferred Stock") with a market
value of $920 and $1.15 billion in cash. In connection with the Acquisition, U S
WEST also assumed all of Continental's outstanding indebtedness and other
liabilities as of November 15, 1996, which approximated $7.1 billion for a total
purchase price of $11.8 billion. The Acquisition was accounted for by the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. In 1997 Continental was renamed MediaOne of Delaware,
Inc. ("MediaOne Delaware").
 
    In addition to its cable operations, Media Group also holds significant
domestic cable and broadband investments including an investment in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment"), the second
largest provider of cable television services in the United States, a 10.4
percent interest in PrimeStar Partners, L.P. ("PrimeStar"), a provider of direct
broadcast satellite ("DBS") services, telephone access businesses in Florida and
Virginia, and interests in programming that include E! Entertainment Television.
Internationally, Media Group holds an investment in Telewest, the second-largest
provider of combined cable and broadband communications services in the United
Kingdom. The Media Group also holds interests in cable and broadband properties
in Singapore, the Netherlands, Belgium, the Czech Republic, Malaysia, Indonesia
and Japan.
 
    WIRELESS COMMUNICATIONS.  On January 29, 1998, U S WEST entered into an
agreement and plan of merger (the "AirTouch Merger Agreement") pursuant to which
U S WEST agreed to sell its domestic wireless business to AirTouch
Communications, Inc. ("AirTouch") in a tax-efficient transaction (the "AirTouch
Transaction"). The domestic wireless business includes cellular communication
services provided to 2.6 million customers in 12 western and midwestern states
and a 25 percent interest in PrimeCo Personal Communications, L.P. ("PrimeCo"),
a provider of PCS services. Pursuant to the AirTouch Merger Agreement, AirTouch
will acquire these cellular and PCS interests. Consideration under the AirTouch
Transaction totals approximately $5.7 billion (subject to certain closing
adjustments) and consists of (i) debt reduction of $1.4 billion, (ii) the
issuance to U S WEST of $1.6 billion in liquidation preference of dividend
bearing AirTouch preferred stock (fair value of approximately $1.45 billion),
and (iii) approximately $2.7 billion in value of AirTouch common stock. The
number of shares of AirTouch common stock to be received by U S WEST will vary
based upon the terms of the AirTouch Merger Agreement.
 
    U S WEST expects to consummate the AirTouch Transaction in the second
quarter of 1998, subject to the receipt of certain regulatory and other third
party approvals. The approval of U S WEST's stockholders is not required to
consummate the AirTouch Transaction. Consummation of the transaction will result
in the disposition of Media Group's domestic wireless businesses. If the
AirTouch Transaction had been consummated as of February 20, 1998, it would have
resulted in a gain of approximately $2.2 billion, net of
 
                                       21
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
deferred taxes of $1.6 billion, calculated in accordance with the provisions of
the AirTouch Merger Agreement.
 
    Media Group will retain its international wireless interests which include a
50 percent joint venture interest in Mercury Personal Communications ("One 2
One"), a provider of PCS services in the United Kingdom. Additionally, Media
Group owns interests in wireless properties in Hungary, the Czech and Slovak
Republics, Russia, Malaysia, India and Poland.
 
    DIRECTORY AND INFORMATION SERVICES.  The Media Group's directory and
information services businesses develop and package content and information
services, including telephone directories, database marketing, electronic
directory and other interactive services in domestic and international markets.
Dex publishes approximately 320 White and Yellow Pages directories in the Region
and will be aligned with the Communications Group as part of the Separation.
Media Group also owns an interest in a Brazilian directory operation. During
1997, Media Group sold Thomson Directories and U S WEST Polska, its directory
operations in the United Kingdom and Poland, respectively.
 
    The following discussion is based on the U S WEST, Inc. Consolidated
Financial Statements prepared in accordance with generally accepted accounting
principles ("GAAP").
 
RESULTS OF OPERATIONS--1997 COMPARED WITH 1996
 
    NET INCOME (LOSS)
 
<TABLE>
<CAPTION>
                                                        NET INCOME (LOSS)                   BASIC EARNINGS (LOSS) PER SHARE(1)
                                            ------------------------------------------  ------------------------------------------
                                                                        DECREASE                                    DECREASE
                                                                  --------------------                        --------------------
                                              1997       1996         $          %        1997       1996         $          %
                                            ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Communications Group......................  $   1,177  $   1,249  $     (72)      (5.8) $    2.43  $    2.62  $   (0.19)      (7.3)
Media Group...............................       (480)       (71)      (409)    --          (0.88)     (0.16)     (0.72)    --
                                            ---------  ---------  ---------  ---------
Total net income..........................  $     697  $   1,178  $    (481)     (40.8)
                                            ---------  ---------  ---------  ---------
                                            ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share," which
    specifies new computation, presentation and disclosure requirements for
    earnings per share. SFAS No. 128 requires, among other things, presentation
    of basic and diluted earnings per share on the face of the income statement.
    The following discussion and analysis of operations is based upon basic
    weighted average common shares outstanding. For the calculation of diluted
    earnings (loss) per share see Note 16--Earnings Per Share-- to the U S WEST,
    Inc. Consolidated Financial Statements.
 
                                       22
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
                                                                   NET INCOME                     BASIC EARNINGS PER SHARE
                                                   ------------------------------------------  -------------------------------
                                                                         INCREASE (DECREASE)                         INCREASE
                                                                                                                     (DECREASE)
                                                                         --------------------                        ---------
                                                     1997       1996         $          %       1997(1)     1996       $(1)
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                <C>        <C>        <C>        <C>        <C>        <C>        <C>
Reported net income..............................  $   1,177  $   1,249  $     (72)      (5.8) $    2.43  $    2.62  $   (0.19)
Adjustments to reported net income:
  Gains on sales of rural telephone exchanges....        (48)       (36)       (12)      33.3      (0.10)     (0.08)     (0.02)
  Gain on sale of investment in Bellcore.........        (32)    --            (32)    --          (0.07)    --          (0.07)
  Cumulative effect of change in accounting
    principle(2).................................     --            (34)        34     --         --          (0.07)      0.07
  Current year effect of change in accounting
    principle(2).................................     --            (15)        15     --         --          (0.03)      0.03
  Early extinguishment of debt(3)................          3     --              3     --           0.01     --           0.01
                                                   ---------  ---------        ---  ---------  ---------  ---------  ---------
Normalized income................................  $   1,100  $   1,164  $     (64)      (5.5) $    2.28  $    2.44  $   (0.16)
                                                   ---------  ---------        ---  ---------  ---------  ---------  ---------
                                                   ---------  ---------        ---  ---------  ---------  ---------  ---------
 
<CAPTION>
 
                                                       %
                                                   ---------
<S>                                                <C>
Reported net income..............................       (7.3)
Adjustments to reported net income:
  Gains on sales of rural telephone exchanges....       25.0
  Gain on sale of investment in Bellcore.........     --
  Cumulative effect of change in accounting
    principle(2).................................     --
  Current year effect of change in accounting
    principle(2).................................     --
  Early extinguishment of debt(3)................     --
                                                   ---------
Normalized income................................       (6.6)
                                                   ---------
                                                   ---------
</TABLE>
 
------------------------------
 
(1) Column does not add due to rounding of individual components.
 
(2) Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
    the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
    Of" which, among other things, requires that companies no longer record
    depreciation expense on assets held for sale.
 
(3) Reflects a third-quarter 1997 charge of $3 (net of income tax benefits of
    $2) related to the early extinguishment of debt.
 
    In 1997, normalized income decreased $64, or 5.5 percent, to $1,100 as
compared with $1,164 in 1996. Normalized earnings per share of Communications
Stock were $2.28, a decrease of $0.16, or 6.6 percent, as compared to 1996. The
decrease is primarily due to a $152 after-tax regulatory charge ($250 pretax),
or $0.31 per share of Communications Stock, in the fourth quarter of 1997. The
charge primarily relates to a liability for revenues that were collected subject
to refund (with interest) in the state of Washington from May 1, 1996 through
December 31, 1997. The liability was recognized in light of the Washington State
Supreme Court's ruling on December 24, 1997 that upheld a Washington State
Utilities Transportation Commission ("WUTC") 1996 rate order (the "Washington
Rate Order"). Absent the effects of the charge, Communications Group's adjusted
earnings per share were $2.59, an increase of 6.1 percent as compared to 1996.
The prospective revenue reduction as a result of the Washington Rate Order
approximates $115 annually. In a separate action in January 1998 the WUTC
authorized a rate increase of approximately $60 annually. Tariffs implementing
both orders became effective February 1, 1998. See "Contingencies."
 
    Income in 1997 was favorably impacted by strong demand for services.
Partially offsetting the effects of increased demand were higher expenses
related to interconnection, provisions for estimated regulatory liabilities
other than Washington, and start-up costs associated with growth initiatives,
including PCS.
 
                                       23
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    MEDIA GROUP NET LOSS
 
<TABLE>
<CAPTION>
                                                                       NET LOSS                     BASIC LOSS PER SHARE
                                                           ---------------------------------  ---------------------------------
                                                                                  DECREASE                           DECREASE
                                                                                 -----------                        -----------
                                                             1997       1996          $         1997       1996          $
                                                           ---------  ---------  -----------  ---------  ---------  -----------
<S>                                                        <C>        <C>        <C>          <C>        <C>        <C>
Reported net loss........................................  $    (480) $     (71)  $    (409)  $   (0.88) $   (0.16)  $   (0.72)
Adjustments to reported net loss:
  Gains on sales of investments..........................       (249)    --            (249)      (0.41)    --           (0.41)
                                                           ---------        ---       -----   ---------  ---------  -----------
Normalized loss..........................................  $    (729) $     (71)  $    (658)  $   (1.29) $   (0.16)  $   (1.13)
                                                           ---------        ---       -----   ---------  ---------  -----------
                                                           ---------        ---       -----   ---------  ---------  -----------
</TABLE>
 
    During 1997, the Media Group reported a normalized net loss of $729 ($1.29
per share of Media Stock), compared with a net loss of $71, ($0.16 per share of
Media Stock) in 1996. The Continental Acquisition contributed approximately $356
($0.59 per share of Media Stock) of the increase. The Continental Acquisition
resulted in significant increases in interest and depreciation and amortization
charges. The remaining increase in net loss is primarily due to greater losses
from unconsolidated ventures, partially offset by increased earnings from
domestic cellular and directories operations.
 
    During June 1997, Media Group incurred an extraordinary gain of $3 (net of
income tax expenses of $2) related to the early extinguishment of debt of
MediaOne Delaware. During August 1997, Media Group incurred an extraordinary
loss of $3 (net of income tax benefits of $2) related to the early
extinguishment of debt.
 
    SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                                                   INCREASE (DECREASE)
                                                                                                   --------------------
                                                                               1997       1996         $          %
                                                                             ---------  ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>        <C>
Communications Group.......................................................  $  10,319  $  10,079  $     240        2.4
Media Group................................................................      5,043      2,955      2,088       70.7
Intergroup eliminations....................................................       (127)      (123)        (4)       3.2
                                                                             ---------  ---------  ---------        ---
Total sales and other revenues.............................................  $  15,235  $  12,911  $   2,324       18.0
                                                                             ---------  ---------  ---------        ---
                                                                             ---------  ---------  ---------        ---
</TABLE>
 
                                       24
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    COMMUNICATIONS GROUP OPERATING REVENUES
 
<TABLE>
<CAPTION>
                                                                                                   INCREASE (DECREASE)
                                                                                                   --------------------
                                                                               1997       1996         $          %
                                                                             ---------  ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>        <C>
Local service..............................................................  $   5,016  $   4,770  $     246        5.2
Interstate access service..................................................      2,666      2,507        159        6.3
Intrastate access service..................................................        761        770         (9)      (1.2)
Long-distance network services.............................................        885      1,100       (215)     (19.5)
Other services.............................................................        991        932         59        6.3
                                                                             ---------  ---------  ---------  ---------
Total......................................................................  $  10,319  $  10,079  $     240        2.4
                                                                             ---------  ---------  ---------  ---------
                                                                             ---------  ---------  ---------  ---------
</TABLE>
 
    Approximately 97 percent of the Communications Group's revenues are
attributable to the operations of U S WEST Communications, of which
approximately 67 percent are derived from the states of Arizona, Colorado,
Minnesota, Oregon and Washington. The primary factors that influence changes in
revenues are customer demand for products and services, price changes (including
those related to regulatory proceedings) and refunds. Approximately 30 percent
of the access lines in service at December 31, 1997 are devoted to providing
services to business customers. The access line growth rate for business
customers, who tend to be heavier users of the network, has consistently
exceeded the growth rate of residential customers. During 1997, business access
lines grew 5.8 percent while residential access lines increased 3.9 percent,
when adjusted for the 1997 sales of rural telephone access lines.
 
    During 1997, the Communications Group's operating revenues increased 2.4
percent, to $10,319. Revenue growth was impacted by the $250 regulatory charge
in the fourth quarter of 1997. The regulatory charge was allocated among local
service revenues, interstate and intrastate access services revenues, long-
distance network service revenues and interest expense. Absent the effects of
the charge, revenues were $10,549, an increase of 4.7 percent as compared with
1996.
 
    LOCAL SERVICE REVENUES.  Local service revenues include local telephone
exchange, local private line and public telephone services. During 1997, local
service revenues increased 5.2 percent, or $246, as compared with 1996. Local
service revenue growth of 5.2 percent declined from 9.8 percent in 1996 due to
the effects of an $86 accrual recognized during fourth-quarter 1997 as part of
the Washington Rate Order and additional provisions of approximately $95 during
the year for other estimated state regulatory liabilities. See "Contingencies."
Lower wireless interconnection access prices mandated by the Telecommunications
Act of 1996 (the "Telecommunications Act") and the effects of rural exchange
sales also impacted local service revenue growth in 1997.
 
    The increase in local service revenues is primarily attributable to access
line growth and increased demand for new product and service offerings and
existing central office features. Total reported access lines increased 609,000
during 1997, or 3.9 percent, of which 294,000 is attributed to second lines.
Second line installations increased 28.2 percent compared with 1996. Access
lines grew 683,000, or 4.4 percent, when adjusted for sales of approximately
74,000 rural telephone access lines during 1997. Also contributing to the
revenues increase were rate increases of $37 in various states and interim
compensation revenues from interexchange carriers ("IXCs") as a result of the
Federal Communications Commission ("FCC") payphone orders which took effect in
April 1997.
 
    INTERSTATE ACCESS SERVICE REVENUES.  Access charges are collected primarily
from IXCs for their use of the local exchange network. For interstate access
services there is also a fee collected directly from
 
                                       25
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
telephone customers. Approximately 28 percent of access revenues and 9 percent
of total revenues are derived from providing access services to AT&T Corp.
("AT&T").
 
    During 1997, interstate access service revenues increased $159, or 6.3
percent, to $2,666. The increase in interstate access service revenues resulted
primarily from greater demand for private line services, access line growth and
an increase of 6.4 percent in billed interstate access minutes of use. Also
contributing to the increase were the effects of higher accruals for refunds to
IXCs in 1996. Lower prices under the FCC's current price cap plan and a $25
charge during fourth-quarter 1997 for an FCC-ordered refund to IXCs for access
revenues collected during the last half of 1997 partially offset the effects of
greater demand for interstate access services. The Communications Group reduced
prices for interstate access services, effective July 1, 1997, as a result of
the FCC's current price cap plan. The access rate reductions, which are being
reflected through lower interstate rates over twelve months beginning July 1,
1997, have an on-going annual revenue impact of approximately $160. The rate of
growth in interstate access service revenues could decline in 1998 as a result
of the FCC's May 1997 decisions to establish rules to restructure the access
charge system (the "Access Reform Order") and the current price cap plan (the
"Price Cap Order"). See "Communications Group--Regulatory Environment."
 
    INTRASTATE ACCESS SERVICE REVENUES.  The decrease of $9, or 1.2 percent, in
intrastate access service revenues is primarily due to the effects of a $68
accrual recognized during fourth-quarter 1997 as part of the Washington Rate
Order. A 12.2 percent increase in billed intrastate minutes of use, higher
demand for private line services and $7 of rate increases in local jurisdictions
largely offset the effects of the Washington Rate Order.
 
    LONG-DISTANCE NETWORK SERVICES REVENUES.  Long-distance network services
revenues are derived from calls which both originate and terminate within the
LATA boundaries of the Region. In 1997, long-distance network services revenues
decreased $215, or 19.5 percent, as compared with 1996. The decline is partially
due to the effects of a $51 accrual recognized during fourth-quarter 1997 as
part of the Washington Rate Order. The decrease in long-distance network
services revenues is also due to the effects of competition and the
implementation of multiple toll carrier plans ("MTCPs") in various jurisdictions
in 1997 and 1996. The MTCPs essentially allow independent telephone companies to
act as toll carriers and are net income neutral with the reduction in toll
revenues largely offset by increased intrastate access service revenues and
lower access expense. Rate decreases of $20 in local jurisdictions also
contributed to the decrease in long-distance network services revenues.
 
    Long-distance network services revenues have declined over the last several
years as customers have migrated to IXCs that have the ability to offer
long-distance services on both an intraLATA and interLATA basis. A portion of
revenues lost to competition, however, is recovered through access charges paid
by the IXCs. The Communications Group believes that erosion of long-distance
network services revenues will continue due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona in February and April of 1996, respectively,
and in New Mexico and Wyoming in September and December of 1997, respectively,
and the effects of continued competitive dial-around activity in other states
within the Region. The Communications Group is responding to competition through
competitive pricing of intraLATA long-distance network services and increased
promotional efforts to retain customers.
 
    OTHER SERVICES REVENUES.  Revenues from other services primarily consist of
voice messaging services, inside wire installation and maintenance services,
billing and collection services, and the provision of customer premises
equipment ("CPE"). Other services revenues increased $59, or 6.3 percent, as
compared with 1996, primarily as a result of continued market penetration of
voice messaging services and
 
                                       26
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
greater sales of inside wire maintenance and certain other unregulated products
and services. Also contributing to the increase were revenues from the launch of
PCS services. Partially offsetting these increases was a reduction in contract
revenues due to the completion of a large federal government telephony project
in 1996.
 
    MEDIA GROUP SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                         INCREASE (DECREASE)       PRO      INCREASE (DECREASE)
                                                                                                FORMA(1)
                                                                         --------------------  -----------  --------------------
                                                     1997       1996         $          %         1996          $          %
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
<S>                                                <C>        <C>        <C>        <C>        <C>          <C>        <C>
CABLE AND BROADBAND:
  Domestic.......................................  $   2,323  $     488  $   1,835     --       $   2,125   $     198        9.3
  International..................................         18          6         12     --               6          12     --
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                       2,341        494      1,847     --           2,131         210        9.9
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
WIRELESS COMMUNICATIONS:
  Domestic:
    Cellular service.............................      1,276      1,078        198       18.4       1,078         198       18.4
    Cellular equipment...........................        152        105         47       44.8         105          47       44.8
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                       1,428      1,183        245       20.7       1,183         245       20.7
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
DIRECTORY AND INFORMATION SERVICES:
  Domestic.......................................      1,197      1,120         77        6.9       1,120          77        6.9
  International..................................         48        139        (91)     (65.5)        139         (91)     (65.5)
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                       1,245      1,259        (14)      (1.1)      1,259         (14)      (1.1)
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
Other............................................         29         19         10       52.6          19          10       52.6
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
Total............................................  $   5,043  $   2,955  $   2,088       70.7   $   4,592   $     451        9.8
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                   ---------  ---------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) Gives effect to the Continental Acquisition as though it had occurred on
    January 1, 1996.
 
    The pro forma increase in Media Group sales and other revenues was primarily
due to growth in domestic cable and broadband and cellular service revenues.
 
    CABLE AND BROADBAND.  Cable and broadband revenues consist primarily of
basic cable programming and premium cable television services, the rental of
converters and remote control devices, cable installation fees, advertising and
PrimeStar DBS services.
 
    On a pro forma basis, domestic cable and broadband revenues increased 9.3
percent, to $2,323, in 1997. Basic cable programming services revenues increased
$146, or 10.6 percent, to $1,518, primarily a result of rate increases. Rate
increases averaged approximately 6 to 8 percent and were primarily related to an
increase in programming costs and the addition of channels. This contributed to
the 4.7 percent increase in core cable revenue per average cable subscriber to
$37.76 in 1997, from $36.06 in 1996. Basic subscriber growth of 1.6 percent,
adjusted for dispositions and an acquisition, also contributed to the increase
in revenues along with growth in equipment rental and installation revenues.
Partially offsetting the increase in revenues was a decline in premium services
revenues as a result of moving the Disney Channel to the basic service tier in
several markets and discounting of premium service packages. PrimeStar DBS
services contributed $40 to the increase in domestic cable and broadband
revenues principally as a result of a 31 percent increase in DBS customers to
181,000 at December 31, 1997. Media
 
                                       27
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
Group has entered into an agreement to contribute its DBS customers and certain
assets to a newly formed company to be called "PrimeStar, Inc." ("New
PrimeStar"). In exchange, the Media Group will receive a combination of cash and
stock in New PrimeStar. The transaction is subject to various approvals and is
expected to close in 1998.
 
    International cable and broadband revenues reflect the consolidation of
Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech Republic, in
fourth-quarter 1996. The consolidation of Cable Plus is associated with a
restructuring in 1996 whereby Media Group's ownership interest increased to 94
percent.
 
    WIRELESS COMMUNICATIONS.  Cellular service revenues increased 18.4 percent,
to $1,276 in 1997, due to a 27 percent increase in subscribers during the year,
partially offset by a 12 percent drop in average revenue per subscriber to
$46.42 per month. The increase in subscribers relates to continued growth in
demand for wireless services, as well as the 1997 introduction of digital
wireless services in several major markets. Media Group believes that increasing
competition in its wireless markets, including new market entrants offering PCS
technology, will result in continued decreases in revenue per subscriber and
slowing subscriber growth.
 
    Cellular equipment revenues increased 44.8 percent, to $152 in 1997, as a
result of a 14 percent increase in gross customer additions and the introduction
of digital handsets. These volume increases were partially offset by decreased
selling prices for analog handsets. Media Group believes that growth in
equipment revenue could decline in 1998 as a result of pricing pressures
associated with increased competition.
 
    Media Group expects to sell its domestic wireless business to AirTouch by
mid-1998 pursuant to the AirTouch Transaction.
 
    DIRECTORY AND INFORMATION SERVICES.  Revenues related to Yellow Pages
directory advertising, which represents 99 percent of domestic directory and
information services revenues, increased 7.2 percent, to $1,181 in 1997. The
increases are largely a result of a 7.3 percent increase in revenue per local
advertiser, primarily resulting from price increases of 4.6 percent and an
increase in volume and complexity of advertisements sold. These increases were
offset slightly by decreased revenues associated with exited product lines which
were nonstrategic to the directory business. Interactive and other services,
which comprise the remaining domestic directory and information services
revenues, totaled $16 and $18 for the years ended December 31, 1997 and 1996,
respectively.
 
    In conjunction with the proposed Separation, the domestic directory business
will be aligned with New U S WEST.
 
    During 1997, Media Group sold its wholly owned international directory and
information services operations.
 
    OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                    INCREASE (DECREASE)
                                                                                                    --------------------
                                                                                1997       1996         $          %
                                                                              ---------  ---------  ---------  ---------
<S>                                                                           <C>        <C>        <C>        <C>
Communications Group........................................................  $   2,210  $   2,340  $    (130)      (5.6)
Media Group.................................................................        596        515         81       15.7
                                                                              ---------  ---------  ---------        ---
Total operating income......................................................  $   2,806  $   2,855  $     (49)      (1.7)
                                                                              ---------  ---------  ---------        ---
                                                                              ---------  ---------  ---------        ---
</TABLE>
 
                                       28
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    COMMUNICATIONS GROUP OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                    INCREASE (DECREASE)
                                                                                                    --------------------
                                                                                1997       1996         $          %
                                                                              ---------  ---------  ---------  ---------
<S>                                                                           <C>        <C>        <C>        <C>
Operating revenues..........................................................  $  10,319  $  10,079  $     240        2.4
Operating expenses:
  Employee-related expenses.................................................      3,697      3,594        103        2.9
  Other operating expenses..................................................      1,870      1,634        236       14.4
  Taxes other than income taxes.............................................        416        389         27        6.9
  Depreciation and amortization.............................................      2,126      2,122          4        0.2
                                                                              ---------  ---------  ---------        ---
    Total operating expenses................................................      8,109      7,739        370        4.8
                                                                              ---------  ---------  ---------        ---
Operating income............................................................  $   2,210  $   2,340  $    (130)      (5.6)
                                                                              ---------  ---------  ---------        ---
                                                                              ---------  ---------  ---------        ---
</TABLE>
 
    Operating income declined $130, or 5.6 percent, to $2,210 in 1997. Revenue
growth of $240, or 2.4 percent, was more than offset by an increase of $370, or
4.8 percent, in operating costs, including approximately $150 of expenses
related to interconnection. See "Communications Group--Regulatory Environment."
In addition, revenue growth was negatively impacted by the fourth-quarter 1997
regulatory charge. See "Sales and Other Revenues." Absent the effects of the
regulatory charge, operating income was $2,440, an increase of 4.3 percent, as
compared with 1996.
 
    Operating expense growth was primarily due to increases in employee-related
and other operating expenses. Employee-related expenses include salaries and
wages (including both basic and performance-based pay), overtime, benefits
(including pension, postretirement and health care), payroll taxes and contract
labor. During 1997, total employee-related expenses increased $103, or 2.9
percent, to $3,697, primarily due to higher contract labor costs. The contract
labor costs were predominately a result of increased systems development work
(which includes expenses related to interconnection and year 2000 costs) and
marketing and sales efforts. Increases in certain employee-related benefit costs
also contributed to the growth in total employee-related expenses. Partially
offsetting these increases were lower salaries and wages related to headcount
reductions, lower conference and travel expenses and decreases in overtime
costs.
 
    Other operating expenses include access charges paid to independent local
exchange carriers ("LECs") (incurred for the routing of long-distance traffic
through their facilities), network software expenses and other general and
administrative costs, including allocated costs from U S WEST. During 1997,
other operating expenses increased $236, or 14.4 percent, to $1,870, primarily
due to a $92 increase in advertising costs and approximately $90 of
interconnection expenses. Costs associated with strategic and growth initiatives
(primarily PCS) and increased equipment rentals also contributed to the
increase. Partially offsetting these cost increases were reduced access expenses
(primarily related to the implementation of the MTCPs in 1997 and 1996), the
completion of a large federal government telephony project in 1996 and lower
material and supplies expense. A 1996 charge of $11 to discontinue the Omaha
broadband video service trial also partially offset the increase in other
operating expenses.
 
    At December 31, 1997, approximately 69 percent of the Communications Group's
employees were represented by unions. The Communications Group's principal
collective bargaining agreements expire in August 1998. Negotiations with
respect to future collective bargaining agreements are underway.
 
                                       29
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    Taxes other than income taxes, which consist primarily of property taxes,
increased $27, or 6.9 percent, to $416, primarily due to the effects of property
tax adjustments in 1996 and increased 1997 use taxes. Partially offsetting the
increases were the effects of favorable tax valuations and mill levies on 1997
property taxes as compared with 1996.
 
    MEDIA GROUP OPERATING INCOME
 
<TABLE>
<CAPTION>
                   INCREASE      PRO       INCREASE
                  (DECREASE)   FORMA(1)   (DECREASE)
                  -----------  --------   -----------
    1997   1996     $     %      1996      $      %
    -----  -----  -----  ----  --------   ----  -----
  <C>      <C>    <C>    <C>   <C>        <C>   <C>
CABLE
  AND
  BROADBAND:
  Domestic... $(111) $ (13) $ (98)  --  $ (73) $(38)  52.1
  International...   (15)    (7)    (8)  --     (7)   (8)  --
    -----  -----  -----  ----  --------   ----  -----
     (126)   (20)  (106)  --      (80)     (46)  57.5
    -----  -----  -----  ----  --------   ----  -----
WIRELESS
COMMUNICATIONS:
  Domestic...   353   243   110 45.3    243  110  45.3
  International...   (13)    (3)   (10)  --     (3)  (10)  --
    -----  -----  -----  ----  --------   ----  -----
      340    240    100  41.7     240      100   41.7
    -----  -----  -----  ----  --------   ----  -----
DIRECTORY
  AND
  INFORMATION
  SERVICES:
  Domestic...   548   452    96 21.2    452   96  21.2
  International...   (11)     2   (13)  --      2  (13)  --
    -----  -----  -----  ----  --------   ----  -----
      537    454     83  18.3     454       83   18.3
    -----  -----  -----  ----  --------   ----  -----
Other(2)...  (155)  (159)     4 (2.5)   (159)    4  (2.5)
    -----  -----  -----  ----  --------   ----  -----
Operating
income... $ 596 $ 515 $  81 15.7  $ 455   $141   31.0
    -----  -----  -----  ----  --------   ----  -----
    -----  -----  -----  ----  --------   ----  -----
</TABLE>
 
------------------------------
 
(1) Gives effect to the Continental Acquisition as though it had occurred on
    January 1, 1996.
 
(2) Primarily includes headquarters expenses for shared services and divisional
    expenses associated with equity investments.
 
    The Media Group pro forma operating income increases were due primarily to
growth in domestic wireless and domestic directory operations, partially offset
by higher domestic cable operating losses.
 
    CABLE AND BROADBAND.  Domestic cable and broadband operating losses
increased 52.1 percent, or $38, to $111, as compared with pro forma 1996.
Revenue growth of $198, or 9.3 percent, to $2,323, was more than offset by
increases in programming costs, including programming for PrimeStar DBS
services, of $71, or 15.6 percent, to $525, increases in operating, marketing
and advertising, and general and administrative costs of $89, or 11.4 percent,
to $868, and increases in depreciation and amortization expense of $76, or 7.9
percent, to $1,041.
 
    Programming cost increases are primarily a result of rate increases and
subscriber growth. Increases in operating, marketing and advertising, and
general and administrative costs are primarily a function of customer service
initiatives, costs associated with deployment of new services such as high-speed
data, advertising costs to implement the "MediaOne" brand and increased
professional fees. A reduction in the estimated remaining useful lives of
certain assets in accordance with planned re-build activities resulted in a
depreciation adjustment of $61 which accounts for the majority of the increase
in depreciation and amortization expense during 1997.
 
                                       30
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    The domestic cable and broadband business will continue to generate
operating losses for the foreseeable future due to the amortization of
intangible assets associated with the Continental Acquisition and depreciation
associated with network upgrades.
 
    WIRELESS COMMUNICATIONS.  Domestic cellular operating income increased 45.3
percent, to $353, in 1997. The increase in operating income is a result of
revenue increases associated with the expanding subscriber base combined with
efficiency gains. These increases were somewhat offset by a decline in revenue
per subscriber, caused primarily by promotional pricing to retain subscribers
and remain competitive with other wireless service providers. On a per
subscriber basis, the 1997 decline in revenue of 11.6 percent has been more than
offset by a combined decrease of 19.4 percent in the costs incurred to acquire
and support customers. Customer acquisition costs include sales commissions,
advertising, other selling costs and equipment costs. Customer support costs
include charges for access and usage of land-line telecommunications networks,
subscriber billing, customer service and general support costs, as well as costs
associated with roaming, toll calls within LATA boundaries, and fraud. Support
costs per subscriber declined 17.6 percent in 1997. The decline is generally a
result of the efficiencies gained from an expanding customer base without
corresponding increases in headcount and infrastructure.
 
    Competitive activity increased in U S WEST's domestic cellular markets in
the second half of the year, particularly with the introduction of new PCS
wireless services in several markets. In many cases, discounted cellular service
price plans were offered in response to competition. This resulted in slowing
operating income growth during the fourth quarter of 1997. Management believes
such competitive impacts will continue in 1998.
 
    Domestic cellular depreciation and amortization increased 22.4 percent, to
$180, largely as a result of network upgrades.
 
    DIRECTORY AND INFORMATION SERVICES.  During 1997, operating income related
to domestic Yellow Pages directory advertising increased 14 percent to $582.
Revenue increases of 7.2 percent were partially offset by an 11 percent increase
in paper and printing costs, and a 7 percent increase in sales support costs.
These cost increases were associated with an increase in the volume and
complexity of advertisements sold. Additionally, 1996 results include a charge
of $25 incurred to reorganize and reduce management headcount. During 1997, the
Yellow Pages operation completed its reorganization. Centralized operating
management was divided into three regions to establish greater accountability
and to move decision making closer to the customers.
 
    Operating losses associated with ongoing product development activities,
which include development costs for Internet content services, are included in
domestic directory and information services operating income. Such losses
reduced domestic directory and information services operating income by $34 in
1997, compared with a reduction of $59 in 1996. The decrease in losses is
primarily the result of cost containment efforts in 1997 and discontinuing
various product development activities in 1996.
 
    At December 31, 1997, approximately 64 percent of the directory and
information services segment employees were represented by unions. The principal
collective bargaining agreements expire in May and October 1998. Negotiations
with respect to future collective bargaining agreements are underway.
 
    OTHER.  Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning, and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations. The
1997 results include a $30
 
                                       31
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
charge for management changes and moving costs related to relocating MediaOne
Delaware's operations from Boston to Denver. This charge was partially offset by
savings associated with lower international staff levels in 1997, combined with
a 1996 charge of $10 related to the staff reductions at international
headquarters.
 
    INTEREST EXPENSE AND OTHER
 
<TABLE>
<CAPTION>
                                                                                                 INCREASE (DECREASE)
                                                                                                 --------------------
                                                                             1997       1996         $          %
                                                                           ---------  ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>        <C>
Interest expense.........................................................  $  (1,083) $    (612) $     471       77.0
Equity losses in unconsolidated ventures.................................       (909)      (346)       563     --
Gains on sales of investments............................................        474     --            474     --
Gains on sales of rural telephone exchanges..............................         77         59         18       30.5
Guaranteed minority interest expense.....................................        (87)       (55)        32       58.2
Other expense--net.......................................................        (56)       (61)        (5)      (8.2)
</TABLE>
 
    INTEREST EXPENSE.  Interest expense increased $471, or 77.0 percent,
primarily as a result of assuming, at market value, $6.5 billion of debt related
to the Continental Acquisition. Partially offsetting the increase were lower
average debt levels at the Communications Group in 1997. U S WEST's weighted
average borrowing cost was 7.0 percent in 1997, compared with 6.85 percent in
1996. See "Liquidity and Capital Resources."
 
    EQUITY LOSSES IN UNCONSOLIDATED VENTURES.  Equity losses increased $563 in
1997, predominantly a result of greater losses generated from international
ventures and the domestic investment in PrimeCo. PrimeCo launched service in
November 1996, and losses associated with this venture have increased $68 as a
result of start-up and other costs.
 
    International equity losses increased $455 in 1997. Ventures located in
Asia, which includes Indonesia, India, Malaysia, Japan and Singapore,
contributed $397 to the increase. During late 1997, the value of Asian
currencies as compared with the U. S. dollar declined significantly,
particularly in Indonesia. These declines, coupled with political uncertainties,
led to a fourth-quarter 1997 pretax charge of $200. This charge combined with a
significant increase in foreign exchange losses at the Asian ventures related to
U. S. dollar denominated debt and increased amortization of license fees led to
the increase in equity losses.
 
    GAINS ON SALES OF INVESTMENTS.  During 1997, Media Group sold: (i) its 90
percent interest in Fintelco, S.A. ("Fintelco"), a cable and telecommunications
venture located in Argentina, for a pretax gain of $135 ($80 after tax), (ii)
its shares of Teleport Communications Group, Inc. ("TCG"), acquired in the
Continental Acquisition, for a pretax gain of $162 ($96 after tax), (iii) its
shares of Time Warner Inc. ("TWX" or "Time Warner"), acquired in the Continental
Acquisition, for a pretax gain of $44 ($25 after tax), (iv) its five percent
interest in a French wireless venture, for a pretax gain of $51 ($31 after tax),
and (v) U S WEST Polska, its wholly owned directory operation in Poland, for a
pretax gain of $29 ($17 after tax).
 
    Additionally, U S WEST Communications and the other Regional Bell Operating
Companies ("RBOCs") sold their equity interests in Bellcore. As a result of the
sale, U S WEST Communications recorded a pretax gain of $53 ($32 after tax).
 
                                       32
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    GAINS ON SALES OF RURAL TELEPHONE EXCHANGES.  During 1997, the
Communications Group sold selected rural telephone exchanges in Iowa, South
Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77. The 1996 gains
were a result of sales in Utah, North Dakota, South Dakota, Idaho and New
Mexico.
 
    GUARANTEED MINORITY INTEREST EXPENSE.  Guaranteed minority interest expense
reflects an increase of $32 related to the October 29, 1996 issuance of
Preferred Securities totaling $480.
 
    OTHER EXPENSE--NET.  Other expense decreased $5 in 1997, due primarily to a
1996 pretax charge of $31 associated with the sale of the Media Group's cable
television interests in Norway, Sweden and Hungary. Largely offsetting this
decrease was additional interest expense associated with the Communications
Group's state regulatory and interstate sharing liabilities, and increased
foreign exchange transaction losses associated with loans to international
ventures.
 
    PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                                            DECREASE
                                                                                                      --------------------
                                                                                  1997       1996         $          %
                                                                                ---------  ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>        <C>
Provision for income taxes....................................................  $     522  $     696  $    (174)     (25.0)
Effective tax rate............................................................       42.7%      37.8%    --         --
</TABLE>
 
    The increase in the effective tax rate is primarily a result of the effects
of goodwill amortization associated with the Continental Acquisition.
 
    RESTRUCTURING CHARGE
 
    In 1993, U S WEST incurred a $1 billion restructuring charge (pretax). The
related restructuring plan was designed to provide faster, more responsive
customer services, while reducing the costs of providing these services. During
1997, the restructuring reserve decreased $70, to $56. Reserve usage was
primarily a result of 645 employee separations and systems development costs
during 1997. The restructuring plan is substantially complete as of December 31,
1997.
 
RESULTS OF OPERATIONS--1996 COMPARED WITH 1995
 
    NET INCOME (LOSS)
<TABLE>
<CAPTION>
                                                         NET INCOME (LOSS)                BASIC EARNINGS (LOSS) PER SHARE
                                             ------------------------------------------  ---------------------------------
                                                                         INCREASE                                INCREASE
                                                                        (DECREASE)                               (DECREASE)
                                                                   --------------------                          ---------
                                               1996       1995         $          %        1996       1995(1)        $
                                             ---------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>          <C>
Communications Group.......................  $   1,249  $   1,176  $      73        6.2  $    2.62   $    2.50   $    0.12
Media Group................................        (71)       141       (212)    --          (0.16)       0.29       (0.45)
                                             ---------  ---------  ---------  ---------
Total net income...........................  $   1,178  $   1,317  $    (139)     (10.6)
                                             ---------  ---------  ---------  ---------
                                             ---------  ---------  ---------  ---------
 
<CAPTION>
                                                 %
                                                ---
<S>                                          <C>
Communications Group.......................        4.8
Media Group................................     --
Total net income...........................
</TABLE>
 
------------------------------
 
(1) As a result of the 1995 Recapitalization, basic earnings (loss) per share
    have been presented on a pro forma basis as if the Communications Stock and
    Media Stock had been outstanding since January 1, 1995. For periods prior to
    the 1995 Recapitalization, the average common shares outstanding are assumed
    to be equal to the average common shares outstanding for U S WEST.
 
                                       33
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    COMMUNICATIONS GROUP NET INCOME
 
<TABLE>
<CAPTION>
                                                            NET INCOME                         BASIC EARNINGS PER SHARE(1)
                                            ------------------------------------------  ------------------------------------------
                                                                        INCREASE                                    INCREASE
                                                                       (DECREASE)                                  (DECREASE)
                                                                  --------------------                        --------------------
                                              1996       1995         $          %        1996      1995(1)       $          %
                                            ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Reported net income.......................  $   1,249  $   1,176  $      73        6.2  $    2.62  $    2.50  $    0.12        4.8
 
Adjustments to reported net income:
  Gains on sales of rural telephone
    exchanges.............................        (36)       (85)        49      (57.6)     (0.08)     (0.18)      0.10      (55.6)
  Cumulative effect of change in
    accounting principle(2)...............        (34)    --            (34)    --          (0.07)    --          (0.07)    --
  Current year effect of change in
    accounting principle(2)...............        (15)    --            (15)    --          (0.03)    --          (0.03)    --
  Recapitalization costs..................     --              8         (8)    --         --           0.01      (0.01)    --
  Early extinguishment of debt(3).........     --              8         (8)    --         --           0.02      (0.02)    --
                                            ---------  ---------        ---  ---------  ---------  ---------  ---------  ---------
Normalized income.........................  $   1,164  $   1,107  $      57        5.1  $    2.44  $    2.35  $    0.09        3.8
                                            ---------  ---------        ---  ---------  ---------  ---------  ---------  ---------
                                            ---------  ---------        ---  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) As a result of the 1995 Recapitalization, basic earnings per share have been
    presented on a pro forma basis as if the Communications Stock had been
    outstanding since January 1, 1995. For periods prior to the 1995
    Recapitalization, the average common shares outstanding are assumed to be
    equal to the average common shares outstanding for U S WEST.
 
(2) Effective January 1, 1996, U S WEST adopted SFAS No. 121 which, among other
    things, requires that companies no longer record depreciation expense on
    assets held for sale.
 
(3) Represents an extraordinary charge of $8 (net of income tax benefits of $5)
    related to the refinancing of $145 of long-term debt.
 
    The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
of Communications Stock were $2.44, an increase of $0.09, or 3.8 percent, as
compared to 1995. The increase in normalized income is primarily attributable to
increased demand for services. Partially offsetting the increased revenues were
higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
 
                                       34
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    MEDIA GROUP NET INCOME (LOSS)
 
<TABLE>
<CAPTION>
                                                                                                BASIC EARNINGS (LOSS) PER
                                                                 NET INCOME (LOSS)                      SHARE(1)
                                                         ---------------------------------  ---------------------------------
                                                                                INCREASE                           INCREASE
                                                                               (DECREASE)                         (DECREASE)
                                                                               -----------                        -----------
                                                           1996       1995          $         1996      1995(1)        $
                                                         ---------  ---------  -----------  ---------  ---------  -----------
<S>                                                      <C>        <C>        <C>          <C>        <C>        <C>
Reported net income (loss).............................  $     (71) $     141   $    (212)  $   (0.16) $    0.29   $   (0.45)
 
Adjustments to reported net income (loss):
  Merger of joint venture(2)...........................     --            (95)         95      --          (0.20)       0.20
  Recapitalization costs...............................     --              9          (9)     --           0.02       (0.02)
  Early extinguishment of debt(3)......................     --              4          (4)     --           0.01       (0.01)
                                                               ---  ---------       -----   ---------  ---------  -----------
Normalized income (loss)...............................  $     (71) $      59   $    (130)  $   (0.16) $    0.12       (0.28)
                                                               ---  ---------       -----   ---------  ---------  -----------
                                                               ---  ---------       -----   ---------  ---------  -----------
</TABLE>
 
------------------------------
 
(1) As a result of the 1995 Recapitalization, basic earnings (loss) per share
    have been presented on a pro forma basis as if the Media Stock had been
    outstanding since January 1, 1995. For periods prior to the 1995
    Recapitalization, the average common shares outstanding are assumed to be
    equal to the average common shares outstanding for U S WEST.
 
(2) Relates to the merger of Telewest with SBC CableComms (UK).
 
(3) Media Group incurred an extraordinary loss of $4 (net of income tax benefits
    of $2) related to the early retirement of debt by TWE.
 
    During 1996, the Media Group recorded a net loss of $71 compared to
normalized income of $59 in 1995. Excluding the effects of the Continental
Acquisition, the Media Group would have been break-even in 1996. The decline in
1996 normalized income (loss), excluding Continental, is primarily due to higher
equity losses related to international and domestic growth initiatives,
partially offset by improvement in domestic cellular operations.
 
    SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                                                        INCREASE
                                                                                                       (DECREASE)
                                                                                                  --------------------
                                                                              1996       1995         $          %
                                                                            ---------  ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>        <C>
Communications Group......................................................  $  10,079  $   9,484  $     595        6.3
Media Group...............................................................      2,955      2,374        581       24.5
Intergroup eliminations...................................................       (123)      (112)       (11)       9.8
                                                                            ---------  ---------  ---------  ---------
Total sales and other revenues............................................  $  12,911  $  11,746  $   1,165        9.9
                                                                            ---------  ---------  ---------  ---------
                                                                            ---------  ---------  ---------  ---------
</TABLE>
 
                                       35
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    COMMUNICATIONS GROUP OPERATING REVENUES
 
<TABLE>
<CAPTION>
                                                                                                            INCREASE
                                                                                                           (DECREASE)
                                                                                                      --------------------
                                                                                  1996       1995         $          %
                                                                                ---------  ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>        <C>
Local service.................................................................  $   4,770  $   4,344  $     426        9.8
Interstate access service.....................................................      2,507      2,378        129        5.4
Intrastate access service.....................................................        770        747         23        3.1
Long-distance network services................................................      1,100      1,189        (89)      (7.5)
Other services................................................................        932        826        106       12.8
                                                                                ---------  ---------  ---------        ---
Total.........................................................................  $  10,079  $   9,484  $     595        6.3
                                                                                ---------  ---------  ---------        ---
                                                                                ---------  ---------  ---------        ---
</TABLE>
 
    LOCAL SERVICE REVENUES.  Local service revenues increased principally as a
result of access line growth and increased demand for new product and service
offerings, and existing central office features. Total reported access lines
increased 629,000 during 1996, or 4.3 percent, of which 244,000 was attributed
to second lines. Second line installations increased 30.5 percent compared with
1995. Access line growth was 5.0 percent when adjusted for sales of rural
telephone access lines during 1996.
 
    INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES.  Higher revenues from
interstate access services were driven by access line growth and an increase of
8.9 percent in interstate billed access minutes of use. The increased business
volume was partially offset by the effects of price reductions and sharing
related accrued refunds to IXCs. Intrastate access service revenues increased
primarily due to higher demand partially offset by the effects of price
reductions.
 
    LONG-DISTANCE NETWORK SERVICES REVENUES.  Long-distance network services
revenues decreased primarily due to the effects of competition and the
implementation of MTCPs in 1996. The 1996 impact of the MTCPs was a $27
reduction in long-distance network services revenues, partially offset by an
increase in intrastate access service revenues of $5 and a decrease in other
operating expenses (primarily access expense) of $21.
 
    OTHER SERVICES REVENUES.  During 1996, revenues from other services
increased primarily as a result of continued market penetration in voice
messaging services and increased inside wire maintenance services. Also
contributing to other services revenue growth were increased contract revenues
related to a large federal government telephony project and CPE sales.
 
                                       36
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    MEDIA GROUP SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                                                      INCREASE (DECREASE)
                                                                                                      --------------------
                                                                                  1996       1995         $          %
                                                                                ---------  ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>        <C>
CABLE AND BROADBAND:
  Domestic....................................................................  $     488  $     215  $     273     --
  International...............................................................          6     --              6     --
                                                                                ---------  ---------  ---------  ---------
                                                                                      494        215        279     --
                                                                                ---------  ---------  ---------  ---------
 
WIRELESS COMMUNICATIONS:
  Domestic:
    Cellular service..........................................................      1,078        845        233       27.6
    Cellular equipment........................................................        105         96          9        9.4
                                                                                ---------  ---------  ---------  ---------
                                                                                    1,183        941        242       25.7
                                                                                ---------  ---------  ---------  ---------
 
DIRECTORY AND INFORMATION SERVICES:
  Domestic....................................................................      1,120      1,058         62        5.9
  International...............................................................        139        122         17       13.9
                                                                                ---------  ---------  ---------  ---------
                                                                                    1,259      1,180         79        6.7
                                                                                ---------  ---------  ---------  ---------
Other.........................................................................         19         38        (19)     (50.0)
                                                                                ---------  ---------  ---------  ---------
Total.........................................................................  $   2,955  $   2,374  $     581       24.5
                                                                                ---------  ---------  ---------  ---------
                                                                                ---------  ---------  ---------  ---------
</TABLE>
 
    Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996 due primarily to the Continental Acquisition and to strong growth in
cellular service revenue. Excluding the effects of the Continental Acquisition,
sales and other revenues increased 13.9 percent.
 
    CABLE AND BROADBAND.  Domestic cable and broadband revenues increased $273,
to $488 in 1996, due primarily to the Continental Acquisition. Excluding the
effects of the Continental Acquisition, domestic cable and broadband revenues
increased $21, or 9.8 percent, to $236. The normalized increase was due to
higher revenues from the Media Group's cable systems in Atlanta, as a result of
a 3.9 percent increase in revenue per subscriber to $39.36 per month and a basic
subscriber increase of 4.5 percent. The increase in revenue per subscriber was
primarily a result of price increases of 6 to 7 percent.
 
    International cable and broadband revenues reflect the consolidation in the
fourth quarter of 1996 of Cable Plus.
 
    WIRELESS COMMUNICATIONS.  Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year.
The increase in subscribers was partially offset by a 12 percent drop in average
revenue per subscriber to $53.00 per month. The increase in subscribers relates
to continued growth in demand for wireless services, especially among consumers.
 
    Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment prices. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
 
                                       37
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    DIRECTORY AND INFORMATION SERVICES.  Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 in local advertisers during the year.
 
    OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                            INCREASE
                                                                                                      --------------------
                                                                                  1996       1995         $          %
                                                                                ---------  ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>        <C>
Communications Group..........................................................  $   2,340  $   2,178  $     162        7.4
Media Group...................................................................        515        467         48       10.3
                                                                                ---------  ---------  ---------  ---------
Total operating income........................................................  $   2,855  $   2,645  $     210        7.9
                                                                                ---------  ---------  ---------  ---------
                                                                                ---------  ---------  ---------  ---------
</TABLE>
 
    COMMUNICATIONS GROUP OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                           INCREASE
                                                                                                     --------------------
                                                                                 1996       1995         $          %
                                                                               ---------  ---------  ---------  ---------
<S>                                                                            <C>        <C>        <C>        <C>
Operating revenues...........................................................  $  10,079  $   9,484  $     595        6.3
Operating expenses:
  Employee-related expenses..................................................      3,594      3,341        253        7.6
  Other operating expenses...................................................      1,634      1,543         91        5.9
  Taxes other than income taxes..............................................        389        380          9        2.4
  Depreciation and amortization..............................................      2,122      2,042         80        3.9
                                                                               ---------  ---------  ---------  ---------
    Total operating expenses.................................................      7,739      7,306        433        5.9
                                                                               ---------  ---------  ---------  ---------
Operating income.............................................................  $   2,340  $   2,178  $     162        7.4
                                                                               ---------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------  ---------
</TABLE>
 
    Communications Group operating income increased $162, or 7.4 percent, to
$2,340 in 1996. Revenues increased $595, or 6.3 percent, and were partially
offset by an increase of $433, or 5.9 percent, in operating costs. Total
operating expense growth was primarily due to increases in employee-related
costs, other operating expenses and depreciation expense.
 
    Total employee-related expenses increased $253 primarily due to continued
efforts to address increased business growth, service-improvement initiatives
and new business opportunities. Salaries and wages increased primarily due to
inflation-driven and contractual wage increases. Contract labor costs increased
to support business growth and additional marketing organization costs related
to the launch of new products and services. Employee-related expenses also
included approximately $15 for contract labor and overtime as a result of
flooding in Washington and Oregon in first-quarter 1996. Partially offsetting
these increases were a reduction in postretirement benefit costs due to changes
in actuarial assumptions and favorable cost trends, lower conference and travel
expenses and decreased overtime as a result of accelerated cost reduction
efforts in the latter half of 1996.
 
    Other operating expenses increased $91, or 5.9 percent, primarily due to
higher advertising and bad debt expenses and costs associated with greater sales
of CPE. Also contributing to the increase was a reserve adjustment associated
with billing and collection activities performed for IXCs, and an $11 charge
related to the discontinuance of the Omaha broadband video service trial.
Reduced access expense (a
 
                                       38
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
portion of which relates to the 1996 implementation of MTCPs) and a reduction in
allocated costs from U S WEST partially offset these increases. Allocated costs
from U S WEST were $88 and $116 in 1996 and 1995, respectively.
 
    Taxes other than income taxes were relatively flat as compared with 1995. In
fourth-quarter 1996, taxes other than income taxes increased by $24, or 32.4
percent, due to favorable property tax valuations and mill levies recognized
during fourth-quarter 1995.
 
    Depreciation and amortization expense increased $80, or 3.9 percent, due to
the effects of a higher depreciable asset base, partially offset by the effects
of 1995 sales of certain rural telephone exchanges and the adoption of SFAS No.
121.
 
    MEDIA GROUP OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                        INCREASE (DECREASE)
                                                                                                        --------------------
                                                                                    1996       1995         $          %
                                                                                  ---------  ---------  ---------  ---------
<S>                                                                               <C>        <C>        <C>        <C>
CABLE AND BROADBAND:
  Domestic......................................................................  $     (13) $      23  $     (36)    --
  International.................................................................         (7)    --             (7)    --
                                                                                  ---------  ---------  ---------  ---------
                                                                                        (20)        23        (43)    --
                                                                                  ---------  ---------  ---------  ---------
WIRELESS COMMUNICATIONS:
  Domestic......................................................................        243        147         96       65.3
  International.................................................................         (3)    --             (3)    --
                                                                                  ---------  ---------  ---------  ---------
                                                                                        240        147         93       63.3
                                                                                  ---------  ---------  ---------  ---------
DIRECTORY AND INFORMATION SERVICES:
  Domestic......................................................................        452        399         53       13.3
  International.................................................................          2         (1)         3     --
                                                                                  ---------  ---------  ---------  ---------
                                                                                        454        398         56       14.1
                                                                                  ---------  ---------  ---------  ---------
Other(1)........................................................................       (159)      (101)       (58)      57.4
                                                                                  ---------  ---------  ---------  ---------
Operating income................................................................  $     515  $     467  $      48       10.3
                                                                                  ---------  ---------  ---------  ---------
                                                                                  ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) Primarily includes headquarters expenses for shared services and divisional
    expenses associated with equity investments.
 
    During 1996, Media Group operating income increased 10.3 percent, to $515,
due primarily to strong subscriber growth in wireless operations. Excluding the
effects of the Continental Acquisition, Media Group operating income increased
$73, or 15.6 percent.
 
    CABLE AND BROADBAND.  Domestic cable and broadband operating income
decreased $36, to a loss of $13, in 1996 due primarily to the Continental
Acquisition. Continental contributed losses of $25 since the date of the
Continental Acquisition. The Atlanta cable systems contributed operating income
of $12 in 1996, compared with $23 in 1995. An increase in depreciation expense
related to system upgrade activity at the Atlanta cable systems contributed to
the decrease in operating income.
 
    International cable and broadband operating losses reflect the
fourth-quarter 1996 consolidation of Cable Plus.
 
                                       39
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    WIRELESS COMMUNICATIONS.  Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers.
 
    DIRECTORY AND INFORMATION SERVICES.  During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. Operating losses associated with
on-going product development activities reduced domestic directory and
information services operating income by $59 in 1996, compared with a reduction
of $104 in 1995. The decrease in operating losses is primarily the result of
exiting various product development activities in 1995.
 
    OTHER.  Other operating losses increased in 1996 primarily as a result of a
change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies. Other operating
losses also include a charge of $10 related to staff reductions at international
headquarters in 1996.
 
    INTEREST EXPENSE AND OTHER
 
<TABLE>
<CAPTION>
                                                                                                      INCREASE (DECREASE)
                                                                                                      --------------------
                                                                                  1996       1995         $          %
                                                                                ---------  ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>        <C>
Interest expense..............................................................  $    (612) $    (527) $      85       16.1
Equity losses in unconsolidated ventures......................................       (346)      (207)       139       67.1
Gains on sales of rural telephone exchanges...................................         59        136        (77)     (56.6)
Gain on merger of joint venture interest......................................          -        157       (157)         -
Guaranteed minority interest expense..........................................        (55)       (14)        41          -
Other expense--net............................................................        (61)       (36)        25       69.4
</TABLE>
 
    INTEREST EXPENSE.  Interest expense increased primarily as a result of
assuming, at market value, $6.5 billion of debt related to the Continental
Acquisition. Also contributing to the increase was a higher average debt level
at the Communications Group and a decrease in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction at the Communications Group.
 
    EQUITY LOSSES.  Equity losses increased primarily due to: (1) network
expansion and additional financing costs at Telewest and One 2 One, (2) rapid
customer growth at One 2 One, (3) start-up and other costs associated with new
international investments located in Poland and Malaysia, and (4) losses related
to Continental's cable and telecommunications investments. Domestically,
improved results from the TWE partnership, related to improvements in cable and
programming operations, were more than offset by increased losses at PrimeCo
which launched service in the fourth quarter of 1996.
 
    GAINS ON SALES OF RURAL TELEPHONE EXCHANGES.  During 1996, the
Communications Group sold selected rural telephone exchanges in Utah, North
Dakota, South Dakota, Idaho and New Mexico for pretax gains of $59. The 1995
gains were a result of sales in Colorado, Washington, Oregon and Arizona.
 
                                       40
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    GAIN ON MERGER OF JOINT VENTURE INTEREST.  During 1995, Telewest merged with
SBC CableComms (UK) resulting in a pretax gain of $157.
 
    GUARANTEED MINORITY INTEREST EXPENSE.  Guaranteed minority interest expense
reflects an increase of $34 related to the September 11, 1995 issuance of
Preferred Securities totaling $600, and an increase of $7 related to an
additional $480 issuance of Preferred Securities on October 29, 1996.
 
    OTHER EXPENSE--NET.  Other expense increased primarily as a result of a
pretax charge of $31, associated with the sale of U S WEST's cable television
interests in Norway, Sweden and Hungary, and a $13 adjustment related to U S
WEST Communications' equity investment in Bellcore. Partially offsetting the
increase in other expense were foreign currency translation gains associated
with loans to international ventures and costs incurred in 1995 associated with
the 1995 Recapitalization.
 
    PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                                               DECREASE
                                                                                                         --------------------
                                                                                     1996       1995         $          %
                                                                                   ---------  ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>        <C>
Provision for income taxes.......................................................  $     696  $     825  $    (129)     (15.6)
Effective tax rate...............................................................       37.8%      38.3%    --         --
</TABLE>
 
    The decrease in the effective tax rate is primarily a result of a one-time
benefit associated with the leveraged lease portfolio.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    OPERATING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Communications Group(1)..............................................................  $   3,848  $   3,306  $   2,719
Media Group(1).......................................................................      1,318        724        640
Other................................................................................     --         --             61
                                                                                       ---------  ---------  ---------
Total cash provided by operating activities..........................................  $   5,166  $   4,030  $   3,420
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) Individual group cash flow statements are provided in Note 23--Supplemental
    Communications Group and Media Group Combined Statements--to the U S WEST,
    Inc. Consolidated Financial Statements.
 
    During 1997, the increase in the Communications Group's operating cash flow
reflects business growth, efforts to manage working capital, lower restructuring
expenditures, and a decrease in the cash funding of postretirement benefits
during 1997. Operating cash flow at Media Group increased primarily due to the
effects of the Continental Acquisition and growth in the domestic cellular and
Yellow Pages businesses. Partially offsetting the increase were higher financing
costs resulting from greater debt levels associated with the Continental
Acquisition.
 
    During 1996, cash provided by operating activities increased $610 due
primarily to growth in Communications Group operations. The increase in
operating cash flows at the Communications Group also reflects a $157 decrease
in the cash funding of postretirement benefits and lower restructuring
 
                                       41
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
expenditures. Media Group operating cash flow increased due to growth in the
cellular and Yellow Pages businesses.
 
    Future cash needs of the Communications Group could increase with the
pursuit of new business opportunities, including PCS. Future cash needs could
also increase as the Communications Group implements the interconnection
requirements and other provisions of the Telecommunications Act. However, the
impact will depend on the nature and timing of the requirements and the type of
recovery mechanisms provided for by the FCC and state commissions. See
"Communications Group--Regulatory Environment." The Communications Group expects
that such cash needs will be funded through operations and, when necessary, the
issuance of debt securities.
 
    Media Group expects that its future cash needs, primarily associated with
the domestic cable network upgrade, will exceed cash generated from operations
during the next several years. Additional financing is expected to come
primarily from a combination of new debt and, if consummated, the monetization
of the securities to be received by Media Group from AirTouch in connection with
the AirTouch Transaction.
 
    INVESTING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Communications Group(1)..............................................................  $   2,058  $   2,230  $   2,268
Media Group(1).......................................................................      1,242        818      1,238
                                                                                       ---------  ---------  ---------
Total cash used for investing activities.............................................  $   3,300  $   3,048  $   3,506
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) Individual group cash flow statements are provided in Note 23--Supplemental
    Communications Group and Media Group Combined Statements--to the U S WEST,
    Inc. Consolidated Financial Statements.
 
    Total capital expenditures, on a cash basis, were $3,690, $3,071, and $2,825
in 1997, 1996 and 1995, respectively. Communications Group capital expenditures
were $2,139, $2,419 and $2,462, and Media Group capital expenditures were
$1,551, $652 and $363 in 1997, 1996 and 1995, respectively. The majority of the
Communication Group's 1997 capital expenditures related to access line growth,
continued modernization of the telecommunications network and Telecommunications
Act requirements including interconnection and local number portability costs.
Expenditures associated with entering wireless communications markets with the
launch of PCS also impacted capital expenditures. Media Group capital
expenditures increased in 1997 associated with its domestic cable network
upgrade.
 
    In 1998, capital expenditures are expected to approximate $4.5 billion, of
which $2.6 billion pertains to the Communications Group and $1.9 billion
pertains to the Media Group. Included in the 1998 capital expenditure estimates
are Communications Group entry costs for the launch of PCS in new markets and
additional interconnection costs. Also included are costs for Media Group to
continue upgrading its domestic cable network of $1.6 billion and its domestic
cellular network of $300. The actual domestic cellular capital requirements
could vary depending on the timing of the consummation of the AirTouch
Transaction.
 
    Media Group has invested $213, $132 and $268 in PrimeCo in 1997, 1996 and
1995, respectively. Such funding was for network build activities in 1997 and
1996, and the purchase of PCS licenses in 11 markets in 1995. Funding
requirements in 1998 are expected to approximate $230. However, actual funding
requirements could vary depending on the timing of the consummation of the
AirTouch Transaction.
 
                                       42
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    Investing activities of Media Group include equity investments in
international ventures. Media Group invested $325, $243 and $681 in
international ventures in 1997, 1996 and 1995, respectively. Investments in 1997
included an additional 40 percent interest in Fintelco and capital contributions
to a wireless venture in India. Investments in 1996 included loans provided to
One 2 One, the purchase of a 23 percent interest in Polska Telefonia Cyfrowa, a
venture to provide wireless service in Poland, and the purchase of a 28 percent
interest in Telenet Flanders, a venture in Belgium to provide telephony services
on the cable network. In 1995, U S WEST invested $681 in international ventures
in Malaysia, the Netherlands, the Czech Republic and the United Kingdom. U S
WEST anticipates that investments in international ventures will approximate
$290 in 1998 to fund continued expansion in India, Japan, Belgium, and at One 2
One.
 
    During 1997, Media Group paid the cash portion of the Continental
Acquisition consideration of $1,150 to the Continental shareowners. In addition,
the Communications Group paid $73 to purchase PCS licenses in connection with
its launch of PCS service in various markets.
 
    Throughout 1997, Media Group pursued a plan to monetize nonstrategic assets,
including various domestic and international investments. Such asset sales
generated total proceeds of $2,058. Proceeds from sales of international
investments totaled $887, domestic investments totaled $931, assets held for
sale totaled $231, and disposals of property, plant and equipment totaled $9.
International sales consisted of: (a) a five percent interest in a French
wireless venture for proceeds of $81, (b) a 90 percent interest in Fintelco for
proceeds of $641, (c) Thomson Directories, the directory operation in the United
Kingdom, and U S WEST Polska, the directory operation in Poland, for net
proceeds of $121 and $27, respectively, and (d) other miscellaneous
international investment sales for proceeds of $17. Domestic sales were
comprised of the sale of shares of TCG, for net proceeds of $678, shares of TWX,
for net proceeds of $220, and miscellaneous asset sales, for proceeds of $33. In
addition, U S WEST Communications sold its equity interest in Bellcore for
proceeds of $65.
 
    The Communications Group received cash proceeds of $67, $174 and $214 during
1997, 1996 and 1995, respectively, for the sales of certain rural telephone
exchanges. Since implementing its rural telephone exchange sales program, the
Communications Group has sold approximately 342,000 access lines.
 
    FINANCING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                                      -------------------------------
                                                                                        1997       1996       1995
                                                                                      ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
Communications Group(1).............................................................  $  (1,843) $  (1,168) $    (395)
Media Group(1)......................................................................        (13)       195        525
Other...............................................................................     --         --            (61)
                                                                                      ---------  ---------  ---------
Total cash (used for) provided by financing activities..............................  $  (1,856) $    (973) $      69
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
------------------------------
 
(1) Individual group cash flow statements are provided in Note 23--Supplemental
    Communications Group and Media Group Combined Statements--to the U S WEST,
    Inc. Consolidated Financial Statements.
 
    DIVIDENDS
 
    U S WEST paid dividends on the Communications Stock totaling $992, $939 and
$926 during 1997, 1996 and 1995, respectively.
 
                                       43
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    DEBT ACTIVITY
 
    Total debt at December 31, 1997 was $14,678, a decrease of $673 compared to
December 31, 1996. This decrease was due primarily to debt redemptions. During
1996, debt increased $6,496 primarily a result of assuming, at market value,
Continental debt totaling $6,525 in conjunction with the Continental
Acquisition. Concurrently, U S WEST refinanced $3,657 of Continental's debt with
U S WEST commercial paper. In January 1997, U S WEST issued medium- and
long-term debt totaling $4.1 billion, at a weighted-average interest rate of
7.47 percent. The proceeds were used to refinance the commercial paper.
Accordingly, such commercial paper is classified as long-term debt at December
31, 1996.
 
    During 1997, U S WEST redeemed its zero coupon subordinated notes, which had
a recorded value of $571. In addition, MediaOne Delaware redeemed a 10 5/8
percent senior subordinated note with a recorded value of $110, including a
premium of $10. U S WEST financed both redemptions with floating-rate commercial
paper.
 
    In June 1997, U S WEST acquired cable systems serving approximately 40,000
subscribers in Michigan for cash of $25 and the issuance of approximately $50 in
liquidation value of U S WEST Series E Preferred Stock (the "Series E Preferred
Stock"). The Series E Preferred Stock is redeemable at U S WEST's option
beginning five years from the date of issuance. The stockholders have the right
to elect cash upon redemption, or to convert their shares into Media Stock based
on a predetermined formula.
 
    In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each such DECS will
be exchanged by U S WEST for shares of common stock of Financial Security
Assurance Holdings Ltd. ("FSA") held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent. The capital assets segment currently holds
approximately 42.1 percent of the outstanding FSA common stock. On October 29,
1996, U S WEST refinanced commercial paper through the issuance of 8.25 percent
Preferred Securities totaling $480. The payment of interest and redemption
amounts to holders of the Preferred Securities are fully and unconditionally
guaranteed by U S WEST. In 1995, U S WEST issued $130 of DECS due December 31,
1998. Upon maturity, each such DECS will be exchanged by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") or, at U S WEST's option,
redeemed at the cash equivalent. The capital assets segment currently holds
approximately 29.2 percent of the outstanding Enhance common stock.
 
    During 1995, increases in debt were partially offset by reductions in debt
related to the Media Group's investment in TWE and a refinancing of commercial
paper by issuing $600 of 7.96 percent Preferred Securities. U S WEST refinanced
$2.6 billion of commercial paper to take advantage of favorable long-term
interest rates. In addition to the commercial paper, U S WEST Communications
refinanced $145 of long-term debt.
 
    Excluding debt associated with the capital assets segment, U S WEST's
percentage of debt to total capital at December 31, 1997, was 54.0 percent
compared with 54.8 percent at December 31, 1996. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, U S WEST's percentage of debt to total capital was 58.9 percent
at December 31, 1997 compared with 59.5 percent at December 31, 1996. The
decrease in the percentage of debt to total capital in 1997 is primarily a
result of decreased debt levels.
 
    U S WEST COMMUNICATIONS CREDIT RATINGS
 
    During the first quarter of 1997, Standard & Poor's lowered U S WEST
Communications' senior unsecured debt rating from A+ to A as a result of a
modified rating criteria implemented by Standard &
 
                                       44
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
Poor's to reflect the increased competitive telecommunications environment.
During the second quarter of 1997, Moody's placed U S WEST Communications'
senior unsecured debt under review in connection with U S WEST Communications'
regulatory rulings, which may result in a downgrading. See "Contingencies."
 
    U S WEST Communications' senior unsecured debt and commercial paper ratings
by Moody's, Standard & Poor's and Duff & Phelps were Aa3, A and AA-, and P1, A1
and D1+, respectively, at December 31, 1997.
 
    In connection with U S WEST's announcement of the Separation, Standard &
Poor's placed U S WEST Communications' senior unsecured debt on credit watch
with positive implications and reaffirmed U S WEST Communications' commercial
paper ratings, and Duff & Phelps reaffirmed U S WEST Communications' senior
unsecured debt and commercial paper ratings.
 
    U S WEST CAPITAL FUNDING, INC. AND PREFERRED SECURITIES CREDIT RATINGS
 
    As a result of the Separation announcement, the credit ratings for U S WEST
Capital Funding, Inc. ("Capital Funding"), a wholly owned subsidiary of U S
WEST, and for the Preferred Securities of U S WEST Financing I ("Financing I")
and U S WEST Financing II ("Financing II"), wholly owned subsidiaries of U S
WEST, are under review by Standard & Poor's (with negative implications),
Moody's and Duff & Phelps. Senior debt at MediaOne Delaware was downgraded by
Moody's from Baa2 to Baa3 and subordinated debt from Baa3 to Ba1, and is under
review by Standard & Poor's, with negative implications. The MediaOne Delaware
debt remains under review for further downgrading by Moody's. For all
outstanding debt securities issued or guaranteed by U S WEST, U S WEST intends
to take appropriate steps to preserve bondholder value in connection with the
Separation.
 
    Capital Funding's senior unsecured debt and commercial paper ratings by
Moody's, Standard & Poor's and Duff & Phelps were Baa1, BBB+ and BBB+, and P2,
A2, and D-2, respectively, at December 31, 1997. The Preferred Securities'
ratings by Moody's, Standard & Poor's, and Duff & Phelps were baa2, BBB+ and
BBB, respectively, at December 31, 1997.
 
    OTHER ITEMS
 
    U S WEST commitments and debt guarantees associated with Media Group
international and domestic investments totaled approximately $650 and $175,
respectively, at December 31, 1997. In addition, a Media Group subsidiary
guarantees debt, nonrecourse to U S WEST, associated with its international
investment in the principal amount of approximately $600.
 
    U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. In addition, U S WEST maintains lines of credit aggregating
approximately $4.5 billion, all of which were available at December 31, 1997.
Under registration statements filed with the Securities and Exchange Commission,
as of December 31, 1997, U S WEST is permitted to issue up to approximately $900
of new debt securities.
 
    U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
 
                                       45
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    EFFECTS OF THE SEPARATION
 
    In connection with the Separation, New U S WEST and MediaOne will seek to
refinance certain indebtedness issued or guaranteed by U S WEST (the "U S WEST
Indebtedness") through a combination of tender offers, prepayments, defeasance,
consent solicitations and/or exchange offers (the "Refinancing"). At December
31, 1997, the U S WEST Indebtedness totaled approximately $7.5 billion and
included Preferred Securities of $1,080. As of February 20, 1998, the estimated
cost of the Refinancing is $346 (net of income tax benefits of $231). In
addition to refinancing costs, such costs include the difference between the
market and face value of the U S WEST Indebtedness and a charge for unamortized
debt issuance costs.
 
    New U S WEST does not expect the Separation will adversely affect its
ability to access the capital markets or the financing terms available to it.
 
    As a result of being a wholly owned business group of U S WEST, Media Group
has been able to borrow money using U S WEST's credit rating, which is supported
by the cash flows generated by the businesses of both Communications Group and
Media Group. Management believes the ability of Media Group to borrow money
using U S WEST's consolidated credit rating has permitted Media Group to have
lower borrowing costs than it would as a stand-alone entity and to access the
commercial paper market on a regular basis in order to fund its operations. The
terms of the U S WEST indebtedness include few covenants and therefore have not
interfered with the operations of Media Group or limited the flexibility of
Media Group to pursue its business objectives.
 
    Upon consummation of the Separation, MediaOne will not have access to the
cash flows generated by the businesses of New U S WEST, including cash flows
generated by Dex, to support its credit rating or otherwise. Based upon the
anticipated capitalization of MediaOne, which includes the refinancing by New U
S WEST of $3.9 billion of U S WEST debt currently allocated to Media Group, it
is expected that MediaOne's credit rating will be lower than the current credit
rating of U S WEST. This could result in higher borrowing costs and reduced
access to the commercial paper market. As a result, MediaOne may be required to
borrow from commercial banks to fund its short-term capital requirements. Such
bank indebtedness, as well as MediaOne's public indebtedness, may contain
covenants that could reduce MediaOne's operating flexibility.
 
    EFFECTS OF THE AIRTOUCH TRANSACTION
 
    Under the terms of the proposed AirTouch Transaction, Media Group debt will
be reduced by $1.4 billion. In addition, Media Group and AirTouch will enter
into an investment agreement, pursuant to which AirTouch will agree to provide
to Media Group registration rights with respect to the shares of AirTouch
preferred stock and AirTouch common stock which it receives in the AirTouch
Transaction and to assist the Media Group in the monetization of such shares. U
S WEST believes that the consummation of the AirTouch Transaction will likely
improve the credit rating to be assigned to MediaOne in the Separation.
 
    RISK MANAGEMENT
 
    U S WEST is exposed to market risks arising from changes in interest rates,
foreign exchange rates and equity prices. Derivative financial instruments are
used to selectively manage these risks. U S WEST does not use derivative
financial instruments for trading purposes.
 
                                       46
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    INTEREST RATE RISK MANAGEMENT.  The objective of the interest rate risk
management program is to minimize the total cost of debt over time and the
interest rate variability. This is achieved through the use of interest rate
swaps, which adjust the ratio of fixed- to variable-rate debt.
 
    Approximately $270 of U S WEST's floating rate debt is exposed to changes in
interest rates. Such exposure is primarily linked to the 30-day commercial paper
rate. A hypothetical 10 percent change in the 30-day commercial paper rate would
not have a material effect on the annual earnings of U S WEST.
 
    FOREIGN EXCHANGE RISK MANAGEMENT.  U S WEST selectively enters into forward
and option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations. The use of forward and option contracts allows U S
WEST to fix or cap the cost of firm foreign investment commitments, the amount
of foreign currency proceeds from sales of foreign investments, the repayment of
foreign currency denominated receivables and the repatriation of dividends. The
market values of the foreign exchange positions, including the hedging
instruments, are continuously monitored and compared with predetermined levels
of acceptable risk. All foreign exchange contracts have maturities of one year
or less. The use of such contracts was limited in 1997 and as of December 31,
1997, the market value of foreign exchange contracts outstanding was not
material.
 
    U S WEST is exposed to foreign exchange risk associated with its cash
deposits and notes receivable and payable denominated in foreign currencies. As
of December 31, 1997, Media Group has British pound-denominated notes receivable
and cash deposits in the translated amount of $245, a Czech Koruna-denominated
note receivable and cash deposits in the translated amount of $50 and a Czech
Koruna-denominated note payable in the translated amount of $17.
 
    A hypothetical adverse change of 10 percent in the British Pound and Czech
Koruna exchange rates as compared with the U. S. dollar would reduce the market
value of the cash deposits and notes receivable and payable by $28 as of
December 31, 1997.
 
    EQUITY-PRICE RISK MANAGEMENT.  U S WEST is exposed to market risks
associated with fluctuations in equity security prices related to its
investments in marketable equity securities. On a selective basis, U S WEST
enters into option contracts to manage the market risks associated with
fluctuations in equity security prices. At December 31, 1997, U S WEST had sold
call options to complete exit strategies with regard to certain individual
marketable equity securities.
 
    A hypothetical 10 percent decline in equity security prices related to U S
WEST's combined position in marketable equity securities and option contracts
would reduce the market value of the combined position at December 31, 1997, by
$12.
 
    The changes in interest rates, foreign exchange rates and equity security
prices are based on hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. Future gains and
losses will be affected by actual changes in interest rates, foreign exchange
rates and equity security prices and market exposures, and changes in derivative
financial instruments employed during the year.
 
CONTINGENCIES
 
    COMMUNICATIONS GROUP
 
    At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
 
                                       47
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    WASHINGTON.  In 1996, the WUTC acted on U S WEST Communications' 1995 rate
request. U S WEST Communications had sought to increase revenues by raising
rates primarily for basic residential services over a four-year period. Instead
of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual
net revenue reductions, effective May 1, 1996.
 
    On December 24, 1997, the Washington State Supreme Court upheld the WUTC
ruling. The Washington State Supreme Court's ruling resulted in an estimated
liability for the revenues that were collected subject to refund from May 1,
1996 through December 31, 1997, including interest, in the amount of $225. The
prospective revenue reduction as a result of this ruling approximates $115
annually, which includes the effects of business growth. In a separate action,
the WUTC authorized a rate increase of approximately $60 annually that partially
mitigates the effect of the Washington State Supreme Court's ruling. Tariffs
implementing both orders became effective February 1, 1998.
 
    OREGON.  On May 1, 1996, the Oregon Public Utilities Commission ("OPUC")
approved a stipulation terminating prematurely U S WEST Communications'
alternative form of regulation ("AFOR") plan, and it then undertook a review of
U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST
Communications to reduce its annual revenues by $97, effective May 1, 1997, and
to issue a one-time refund, including interest, of approximately $102 to reflect
the revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
 
    U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion (the "Oregon Circuit Court") which granted U S WEST Communications'
request for a stay, pending a full review of the OPUC's order. On February 19,
1998, the Oregon Circuit Court entered a judgment in U S WEST Communications'
favor on most of the appealed issues. The OPUC has announced its intent to
appeal. The potential exposure, including interest, at December 31, 1997, is not
expected to exceed $180.
 
    UTAH.  In another proceeding, the Utah Supreme Court has remanded a Utah
Public Service Commission ("UPSC") order to the UPSC for hearing, thereby
establishing two exceptions to the rule against retroactive ratemaking: 1)
unforeseen and extraordinary events, and 2) misconduct. The UPSC's initial order
denied a refund request from IXCs and other parties related to the Tax Reform
Act of 1986. The potential exposure, including interest, at December 31, 1997,
is not expected to exceed $160.
 
    STATE REGULATORY ACCRUALS.  U S WEST Communications has accrued $348 at
December 31, 1997, which represents its estimated liability for all state
regulatory proceedings, predominately the items discussed above. Approximately
$225 of the total estimated liability was recognized during fourth-quarter 1997.
It is possible that the ultimate liability could exceed the recorded liability
by an amount up to approximately $230. U S WEST Communications will continue to
monitor and evaluate the risks associated with its local regulatory
jurisdictions, and will adjust estimates as new information becomes available.
 
    MEDIA GROUP
 
    Media Group and AirTouch are currently parties to a multi-phased joint
venture (the "AirTouch Joint Venture") pursuant to which they have agreed to
combine their domestic cellular businesses. In February 1997, the King County
Superior Court in Washington state ruled that a subsidiary of Media Group
violated the terms of its partnership agreement with its minority partners in
the Seattle cellular partnership by entering into the AirTouch Joint Venture.
Similar litigation was filed in other jurisdictions regarding
 
                                       48
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
other cellular partnerships by the same minority partner that brought the
Seattle litigation. On December 1, 1997, this minority partner announced it was
selling its minority interests in the eight cellular properties where it was a
partner with a Media Group subsidiary to AirTouch. As a result of the minority
partner's actions, litigation in the states of Washington, Arizona, Colorado,
Minnesota, Idaho and Delaware has now been stayed or dismissed pending
consummation of the transfer of the minority partner's interest to AirTouch. The
AirTouch Transaction has been entered into in lieu of the AirTouch Joint
Venture.
 
COMPETITIVE AND REGULATORY ENVIRONMENT
 
    COMMUNICATIONS GROUP--COMPETITIVE ENVIRONMENT
 
    The Communications Group faces competition in the local exchange business,
exchange access and intraLATA long-distance markets, primarily from IXCs,
competitive local exchange carriers ("CLECs") and competitive access providers
("CAPs"). CLECs and CAPs compete with the Communications Group by providing
customers with network services that connect to carrier facilities or other
business locations within a serving LATA. IXCs compete with the Communications
Group by providing intraLATA long-distance services. Such competition is eroding
U S WEST Communications' market share of intraLATA long-distance services,
including Wide Area Telephone Service and "800" services. IXCs are competing in
this area by offering lower prices and packaging these services on an intraLATA
and interLATA basis.
 
    The Telecommunications Act has altered the competitive landscape of the
telecommunications industry by permitting competition among local telephone
companies, long-distance companies and cable companies. As a result, it is
expected that additional competitors will be introduced into the Communications
Group's markets who will offer services similar to those offered by the
Communications Group, including local exchange services. The Communications
Group believes that these competitors have initially targeted high-volume
business customers in densely populated urban areas and will selectively pursue
business in smaller communities. The resulting loss of local service customers
could affect multiple revenue streams and could have a material, adverse effect
on the Communications Group's operations. Court and state regulatory commission
deliberations on interconnection rates and newly issued FCC rules on interstate
access pricing could also result in significant changes in revenues received
from carriers. The wireless services being introduced by the Communications
Group will face competition from the two cellular providers in each of the
markets in which it operates as well as from the other providers of PCS services
in such markets. The high-speed data and Internet access services offered by the
Communications Group face competition from LECs, IXCs, Internet service
providers and other providers of data services in the Communications Group's
markets.
 
    Technological advancements will also increase competition in the future. New
competitive carriers that are affiliates of cable television companies and power
companies are expected to play a greater role in offering local exchange
services. In addition to local exchange services, competitors are expected to
offer services that will compete with those U S WEST Communications offers and
plans to offer, including video programming and high-speed data and Internet
services.
 
    The Communications Group expects to counter the competition by expanding
services to include new retail as well as wholesale markets. Recently introduced
service offerings include PCS, high-speed data and Internet services, and
interconnection services provided for competing providers of local services.
Planned future service offerings include interLATA long-distance services as the
regulatory environment permits, while interconnection services will be expanded.
See "Communications Group--Regulatory Environment." Management believes that the
Communications Group's ability to bundle local, long-distance, PCS
 
                                       49
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
and other services will provide a significant opportunity to compete by offering
one-stop shopping with a package of services similar to those that can be
offered by IXCs and CLECs.
 
    COMMUNICATIONS GROUP--REGULATORY ENVIRONMENT
 
    THE TELECOMMUNICATIONS ACT OF 1996.
 
    Under the Telecommunications Act, the RBOCs are permitted to provide
interLATA long-distance services by opening their local networks to
facilities-based competition and satisfying a detailed list of requirements,
including providing interconnection and number portability. The
Telecommunications Act also reaffirms the concept of universal service and
directs the FCC and state regulators to determine universal service funding
policy. The FCC and state regulators have been given the responsibility to
interpret and oversee implementation of large portions of the Telecommunications
Act.
 
    On December 31, 1997, the U. S. District Court for the Northern District of
Texas (the "U. S. District Court") declared that the restrictions placed on
RBOCs relating to the provision of in-region interLATA long-distance services
were unconstitutional and discriminatory. The FCC, the Department of Justice,
AT&T and other IXCs requested the U. S. District Court to stay its order pending
a full review and appealed the U. S. District Court's order to the Fifth Circuit
Court of Appeals. On February 11, 1998, the U. S. District Court issued a stay
of the order while denying a separate request from IXCs to prevent the RBOCs
from preparing to sell interLATA long-distance service. As a result of the U. S.
District Court's ruling, absent reversal, U S WEST intends to offer interLATA
long-distance services in the Region in 1998.
 
    INTERCONNECTION
 
    The FCC issued an order (the "FCC Order") in August of 1996 establishing a
framework of rules that enable the states and the FCC to implement the local
competition provisions of the Telecommunications Act.
 
    The FCC Order established interconnection costing and pricing rules which,
from U S WEST's perspective, significantly impeded negotiations with new
entrants to the local exchange market, state public policy interconnection
rulemakings, and interconnection arbitration proceedings.
 
    U S WEST appealed the FCC Order and sought a stay of certain of its
provisions, including certain pricing provisions, pending appellate review. On
July 18, 1997, the Eighth Circuit Court of Appeals (the "Eighth Circuit")
vacated significant portions of the FCC Order. Most significantly, the Eighth
Circuit ruled that jurisdiction over local interconnection prices rests with the
states, not the FCC. The Eighth Circuit also determined that the
Telecommunications Act does not require LECs to provide "superior" service to
their competitors or to "rebundle" network elements for their competitors. The
effect of the Eighth Circuit's decision is to have interconnection and unbundled
network element pricing be resolved through negotiations or state commission
arbitration proceedings. Some of the FCC's unbundling rules, as well as its
"pick and choose" provisions, were also vacated by the Eighth Circuit. The
Eighth Circuit is also reviewing the FCC's August 1997 order that required
shared transport be made available in combination with local switching as an
unbundled element. This review is pending.
 
    On October 14, 1997, the Eighth Circuit clarified that incumbent
telecommunications providers are not required to make rebundled service
offerings available to competitors at unbundled element pricing. This decision
substantially reduces new entrants' ability to arbitrage between resale of
finished services and the pricing of unbundled network elements. On January 26,
1998, the U. S. Supreme Court agreed to review the Eighth Circuit decision.
 
                                       50
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    Interconnection proceedings throughout local regulatory jurisdictions are
continuing. U S WEST Communications has secured approximately 220
interconnection agreements with 85 carriers as of December 31, 1997. At December
31, 1997, U S WEST Communications had completed or settled over 85 state
arbitrations. U S WEST Communications advocates that LECs have the right for
timely recovery of the full costs of providing interconnection services and that
they must not be placed at a competitive disadvantage if local and long-distance
markets are opened to competition at different times. U S WEST Communications is
aggressively defending its views in arbitration proceedings and, when necessary,
in the courts. U S WEST Communications cannot provide assurance that it will be
able to fully recover its costs related to providing interconnection services.
 
    NUMBER PORTABILITY
 
    The FCC has established a schedule for deployment of number portability
during 1998 that includes 10 markets in the Region. The FCC is in the final
stages of issuing its cost recovery rules as required by the Telecommunications
Act. U S WEST Communications will seek cost recovery of expenses of providing
number portability through state rate-making proceedings and interconnection
cost recovery dockets, if necessary. U S WEST Communications expects its
estimated costs for deployment of number portability to be significant over the
next few years. Due to legal and regulatory uncertainties, U S WEST
Communications cannot provide assurance that one-time costs of deploying number
portability and other interconnection related costs will be recovered.
 
    UNIVERSAL SERVICE, ACCESS REFORM AND PRICE CAP ORDER
 
    On May 7, 1997, the FCC announced three decisions that established rules to
implement the Universal Service provisions of the Telecommunications Act (the
"Universal Service Order"), as well as the Access Reform Order and the Price Cap
Order.
 
    UNIVERSAL SERVICE.  Under the Universal Service Order, all providers of
interstate telecommunications services will contribute to universal service
funding, which will be based on retail telecommunications revenues. The
Universal Service Order deferred establishing, until January 1, 1999, a new
explicit mechanism to support high-cost service in areas served by non-rural
telephone companies such as U S WEST Communications. Until the explicit
mechanism is put in place, the existing universal service support mechanisms
were left intact, except to the extent modified by the FCC's Access Reform and
Price Cap Orders discussed below.
 
    The FCC's Universal Service Order also includes the establishment of two
separate funds to help connect: 1) eligible schools and libraries, and 2) rural
health care providers to the global telecommunications network. These funds were
initially capped at $2.25 billion and $400, respectively. The FCC has now
directed that these funds be phased in during 1998. Additionally, the FCC
reduced the funding amount for the first six months of 1998 by approximately 50
percent.
 
    On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration
and clarification of certain issues in the Universal Service Order. Among other
things, U S WEST requested the FCC to reconsider: (i) establishing a national
fund to ensure high-cost support is sufficient and (ii) assessing contributions
as explicit end-user surcharges. Appeals of other issues addressed by the
Universal Service Order have been filed by various other companies.
 
    ACCESS REFORM.  In its Access Reform Order, the FCC has ordered a
substantial restructuring of interstate access pricing. A significant portion of
the services that had been charged using minutes-of-use
 
                                       51
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
pricing will now be charged using a combination of minutes-of-use rates,
flat-rate presubscribed interexchange carrier charges ("PICCs") and subscriber
line charges ("SLCs"). Although an increase in the SLC to multi-line business
users occurred on July 1, 1997, the bulk of the mandated pricing changes
occurred on January 1, 1998. Additional mandated pricing changes will also occur
on each January 1 of 1999 through 2001. The net effect of these changes will be
to decrease minutes-of-use charges up to 60 percent and increase flat-rate
charges (i.e., PICCs and SLCs). The Access Reform Order, coupled with the Price
Cap Order, will over time, significantly reduce the revenues U S WEST derives
from interstate access charges.
 
    The Access Reform Order also continued in place the current rules by which
incumbent LECs may not assess interstate access charges on information service
providers and purchasers of unbundled network elements. The FCC will separately
address issues surrounding information service providers' usage of the public
switched network in a related notice of inquiry.
 
    U S WEST and other incumbent LECs have appealed the Access Reform Order. U S
WEST's primary challenge is that the FCC acted unlawfully by exempting
purchasers of unbundled network elements from payment of interstate access
charges, while not providing for the immediate replacement of subsidies
contained within those same access charges. U S WEST's position is that the new
access charge structure is contrary to the universal service provisions of the
Telecommunications Act and fails to make subsidies explicit. This case is
pending in the Eighth Circuit and was argued on January 15, 1998.
 
    PRICE CAP ORDER.  U S WEST's interstate services have been subject to price
cap regulation since January 1991. Price caps are an alternative form of
regulation designed to limit prices rather than profits. The FCC's previous
price cap plan included sharing of earnings in excess of authorized levels. The
price cap index for most services was subject to annual adjustments for
inflation, productivity level and exogenous costs. The previous price cap plan
provided for three productivity options, including a no-sharing option, and for
increased flexibility for adjusting prices downward in response to competition.
 
    The FCC's May 1997 Price Cap Order required LECS that were subject to price
cap regulation to increase their price cap index productivity factor to 6.5
percent. The order eliminated the lower productivity factor options ( i.e., 4.0
percent and 4.7 percent) that required sharing of earnings above a specified
level. The order further required LECs that were subject to price cap regulation
to set their 1997 price cap index assuming that the 6.5 percent factor had been
in effect at the time of the 1996 tariff filing.
 
    Under the FCC's previous price cap plan, U S WEST Communications had elected
the lowest productivity factor resulting in U S WEST Communications remaining
subject to sharing requirements for the first half of 1997. On June 26, 1997,
the FCC granted U S WEST Communications' request for a waiver of the price cap
sharing rules for the first half of 1997, resulting in a one-time exogenous cost
adjustment of $22, reflected in the consolidated financial statements as a
reduction of 1997 interstate access revenues. The access rate reductions in U S
WEST Communications' 1997 interstate access tariff filing as determined under
the Price Cap Order, which have an on-going annual revenue impact of $160, are
being reflected through lower interstate rates over twelve months beginning July
1, 1997.
 
    On June 23, 1997, U S WEST petitioned the Tenth Circuit Court of Appeals
(the "Tenth Circuit") for a review of the Price Cap Order. The Tenth Circuit has
transferred review of the Price Cap Order to the District of Columbia Court of
Appeals. Among other things, U S WEST and other appellants are requesting the
District of Columbia Court of Appeals to review the use of a 6.5 percent
productivity factor and the retroactive application of the 6.5 percent
productivity factor to July 1, 1996 when determining the price cap index for the
1997 price cap filing. This case will be heard in 1998.
 
                                       52
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on U S WEST's future results remains unclear.
 
    MEDIA GROUP COMPETITIVE AND REGULATORY ENVIRONMENT
 
    CABLE AND BROADBAND.  The Media Group's cable television systems generally
compete for viewer attention with other providers of video programming,
including DBS systems, multipoint multichannel distributions services ("MMDS")
systems, local multipoint distribution services ("LMDS") systems, satellite
master antenna service ("SMATV") systems and other cable companies providing
services in areas where the Media Group operates. In addition, certain LECs,
including RBOC's, are beginning to offer video programming in competition with
the Media Group's cable services. In the past, federal cross-ownership
restrictions have limited entry by LEC's into the cable television business. The
Telecommunications Act has eliminated many of these barriers, thereby enhancing
the ability of LEC's to provide video programming in competition with the Media
Group. The cable television services offered by the Media Group also face
competition for viewers and advertising from other communications and
entertainment media, including off-air television broadcasting services, movie
theaters, video tape rentals and live sporting events. The competition faced by
the Media Group's cable systems may increase in the future with the development
and growth of new technologies.
 
    As the Media Group begins to offer additional services over its hybrid
fiber-coax ("HFC") networks, the Company will face additional competition.
Telephone services offered by the Media Group will face competition from other
providers of local exchange services, including RBOC's, LEC's, IXCs and other
providers of local exchange services. The degree of competition will be
dependent upon the state and federal regulations concerning entry,
interconnection requirements and the degree of unbundling of the LEC's networks.
Competition will be based upon price, service quality and breadth of services
offered. Internet access and high-speed data services offered by MediaOne
compete with other providers of such services, including LEC's, IXCs, Internet
service providers ("ISPs") and other on-line service providers.
 
    The products and services of the Media Group are subject to varying degrees
of regulation. Under the Telecommunications Act, the regulation of all but basic
tier cable rates will be discontinued effective March 31, 1999, or earlier if
competition exists. The Telecommunications Act also (i) eliminates certain
cross-ownership restrictions among cable operations, broadcasters and MMDS
operations, (ii) removed barriers to competition with LEC's, and (iii)
eliminated restrictions that previously applied to the Media Group relating to
long-distance services.
 
    The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") authorizes the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services, except
for services offered on a per-channel or per-program basis, and equipment.
Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series
of rate regulations. The FCC also publicly announced that it would consider
"social contracts" as an alternative form of rate regulation for cable
operators. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include
certain systems acquired by Continental. The social contract is a six-year
agreement covering most of Continental's franchises, including those that were
unregulated, and settled Continental's cost of service rate cases and benchmark
cable programming service tier rate cases for the covered systems. Benchmark
basic service tier rate cases in the covered systems are subject to review by
local franchise authorities. As part of the resolution, Continental agreed to,
among other things, invest at least $1.7 billion in domestic system rebuilds and
upgrades through the year 2000 to expand channel capacity and improve system
reliability and picture
 
                                       53
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
quality. At December 31, 1997, the investment commitment has been substantially
met. Under the social contract, Continental also reduced its basic service tier
rates for most of the subscribers covered by the social contract. These
reductions were offset by a revenue neutral increase in cable programming
service tier rates. The social contract allows for the funding of system
rebuilds and upgrades by increasing cable programming service tier rates
annually by one dollar per subscriber from 1997 through 1999 in most franchises,
and from 1996 through 1999 for the systems incorporated under the 1996 amendment
to the social contract. Rate adjustments are also allowed for inflation and
external costs such as programming. The social contract also provides that, if
the laws and regulations applicable to services offered in any Continental
franchise change in a manner that would have a material favorable financial
impact on Continental, Media Group may petition the FCC to terminate the social
contract.
 
    Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
 
    WIRELESS COMMUNICATIONS.  The wireless operations are subject to regulation
by federal and some state and local authorities. Pursuant to the Communications
Act of 1934, the FCC regulates the construction, transfer and operation of
cellular systems in the United States and regulates licensing and technical
standards for the provision of cellular telephone service. Pursuant to Congress'
1993 Omnibus Budget Reconciliation Act, the FCC adopted rules preempting state
and local governments from regulating wireless entry and most rates.
 
    There are two competitive cellular licenses in each market. Media Group's
cellular networks face competition from the other provider of cellular services
in each of the markets in which it operates, as well as from providers of PCS
services in such markets which have recently commenced operations. PCS faces
competition from each of the two providers of cellular services in each of the
markets in which it operates, as well as from the other providers of PCS
services in such markets. Media Group's wireless networks also face competition
from other current or developing wireless technologies, including enhanced
specialized mobile radio networks and paging networks. Competition is based upon
price, quality of the service offered and geographic coverage.
 
    DIRECTORY AND INFORMATION SERVICES.  Information services may face emerging
competition in the provision of interactive services from cable and
entertainment companies, on-line services and other information providers.
Directory listings are being offered via electronic databases through telephone
company and third party networks. As such offerings expand and are enhanced
through interactivity and other features, the directory publishing businesses
may experience heightened competition.
 
    INTERNATIONAL.  Media Group's international broadband and wireless
communications businesses also face competition in their respective markets.
Telewest's cable television services compete with broadcast television stations,
DBS services, satellite master antenna service systems and certain narrowband
operators in the United Kingdom. Telewest's telecommunications services compete
with domestic telephone companies in the United Kingdom, such as British
Telecommunications plc. One 2 One competes with two cellular operators and one
PCS operator in the United Kingdom. Competition is based upon price, geographic
coverage and the quality of the services offered.
 
                                       54
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
YEAR 2000 COSTS
 
    COMMUNICATIONS GROUP
 
    During 1997 the Communications Group conducted a comprehensive review of its
computer systems and related software to ensure systems properly recognize the
year 2000 and continue to process data. The systems evaluated include all
internal systems and those that manage the public switched network. This
evaluation includes the Communications Group's significant vendors in
determining the impact on the Communications Group if those third parties fail
to remediate their own year 2000 issues. Based on its internal assessment, the
Communications Group has determined that it will have to modify or replace
certain portions of its internal use software, whether developed by U S WEST or
provided by a third party. For public network software, there are central office
and remote switches from a variety of vendors in addition to interoffice and
loop transport equipment that also require conversion. To date, inventory is
complete for all major network elements, compliance standards have been
published and key vendors have agreed to compliance dates. Detailed plans for
the year 2000 project for all systems have been completed and conversion
activity is underway.
 
    The estimated remaining costs of the related projects approximate $150
through 1999. Management's estimate of the costs and completion dates of the
year 2000 project are dependent on various factors including availability of
skilled resources, the ability to locate and modify all relevant software code
and vendor compliance. The Communications Group cannot provide assurance that
actual results will not differ from management's estimates. Failure to complete
the project in a timely or complete manner, or within its estimate of project
costs, could have a material impact on future results of operations.
 
    MEDIA GROUP
 
    Media Group uses software and related technologies throughout its businesses
that will be affected by the date change in the year 2000. Media Group has
established accountabilities and priorities for addressing the issue. Media
Group is now in the process of finalizing its assessment of the impact of the
year 2000 date change on its operations. An internal study is underway to
determine the full scope of the issue and related costs. Media Group's
assessment should be complete in mid-1998. Media Group anticipates that costs
related to year 2000 remediation will begin to be incurred in 1998.
 
NEW ACCOUNTING STANDARDS
 
    In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share." This
accounting standard specifies new computation, presentation and disclosure
requirements for earnings per share to be applied retroactively. SFAS No. 128
requires, among other things, presentation of basic and diluted earnings per
common share on the face of the income statement.
 
    In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires that the components and total amount of
comprehensive income be displayed in the financial statements for interim and
annual periods beginning in 1998. Comprehensive income includes net income and
all changes in equity during a period that arise from nonowner sources, such as
foreign currency items and unrealized gains and losses on certain investments in
equity securities. SFAS No. 131 requires, among other things, the reporting of
detailed operating segment information of an enterprise for annual periods
beginning in 1998 and for interim periods beginning in 1999.
 
                                       55
<PAGE>
                                 U S WEST, INC.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
 
    Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. Adoption of SOP 98-1 is required as of
January 1, 1999, but earlier adoption is allowed. U S WEST is currently
evaluating the impact of SOP 98-1 and believes that it could initially have a
significant impact upon results of operations.
 
                                       56
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We have audited the accompanying Consolidated Balance Sheets of U S WEST,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related Consolidated Statements of Operations and Cash Flows for the
years then ended. These consolidated financial statements and the Supplementary
Selected Proportionate Results of Operations referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and supplementary information
based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. 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 U S WEST, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
 
    We have also audited the Supplementary Selected Proportionate Results of
Operations for the years ended December 31, 1997 and 1996, presented on page
114. The Supplementary Selected Proportionate Results of Operations have been
prepared by management to present relevant financial information that is not
provided by the consolidated financial statements and is not intended to be a
presentation in conformity with generally accepted accounting principles. In our
opinion, the Supplementary Selected Proportionate Results of Operations referred
to above fairly states, in all material respects, the information set forth
therein on the basis of accounting described on page 114.
 
ARTHUR ANDERSEN LLP
 
Denver, Colorado,
February 12, 1998.
 
                                       57
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We have audited the accompanying Consolidated Statements of Operations and
Cash Flows of U S WEST, Inc. for the year ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
    We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations of U S WEST,
Inc. and its cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
 
COOPERS & LYBRAND L.L.P.
 
Denver, Colorado
February 12, 1996
 
                                       58
<PAGE>
                              REPORT OF MANAGEMENT
 
    The Consolidated Financial Statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The integrity and objectivity of information in these financial
statements, including estimates and judgments, are the responsibility of
management, as is all other financial information included in this report.
 
    U S WEST maintains a system of internal accounting controls designed to
provide reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to objectively assess the
effectiveness of internal controls and recommend improvements therein.
 
    Limitations exist in any system of internal accounting controls based upon
the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the Company's system does provide reasonable
assurance that transactions are executed in accordance with management's general
or specific authorizations and is adequate to accomplish the stated objectives.
 
    The independent certified public accountants, whose reports are included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinions are based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
 
    In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the Board of
Directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
 
Richard D. McCormick
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
 
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
 
February 12, 1998
 
                                       59
<PAGE>
                                 U S WEST, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                         DOLLARS IN MILLIONS
<S>                                                                                <C>        <C>        <C>
Sales and other revenues.........................................................  $  15,235  $  12,911  $  11,746
 
Operating expenses:
  Employee-related expenses......................................................      4,917      4,412      4,071
  Other operating expenses.......................................................      3,617      2,671      2,323
  Taxes other than income taxes..................................................        475        429        416
  Depreciation and amortization..................................................      3,420      2,544      2,291
                                                                                   ---------  ---------  ---------
    Total operating expenses.....................................................     12,429     10,056      9,101
                                                                                   ---------  ---------  ---------
 
Operating income.................................................................      2,806      2,855      2,645
 
Interest expense.................................................................     (1,083)      (612)      (527)
Equity losses in unconsolidated ventures.........................................       (909)      (346)      (207)
Gains on asset sales:
  Investments....................................................................        474     --         --
  Rural telephone exchanges......................................................         77         59        136
  Merger of joint venture interest...............................................     --         --            157
Guaranteed minority interest expense.............................................        (87)       (55)       (14)
Other expense--net...............................................................        (56)       (61)       (36)
                                                                                   ---------  ---------  ---------
Income before income taxes, extraordinary items and cumulative effect of change
  in accounting principle........................................................      1,222      1,840      2,154
Provision for income taxes.......................................................       (522)      (696)      (825)
                                                                                   ---------  ---------  ---------
Income before extraordinary items and cumulative effect of change in accounting
  principle......................................................................        700      1,144      1,329
 
Extraordinary items--early extinguishment of debt--net of tax....................         (3)    --            (12)
                                                                                   ---------  ---------  ---------
Income before cumulative effect of change in accounting principle................        697      1,144      1,317
Cumulative effect of change in accounting principle--net of tax..................     --             34     --
                                                                                   ---------  ---------  ---------
NET INCOME.......................................................................  $     697  $   1,178  $   1,317
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Dividends on preferred stock.....................................................        (52)        (9)        (3)
                                                                                   ---------  ---------  ---------
EARNINGS AVAILABLE FOR COMMON STOCK..............................................  $     645  $   1,169  $   1,314
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                       60
<PAGE>
                                 U S WEST, INC.
 
               CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                            IN THOUSANDS
                                                                                     (EXCEPT PER SHARE AMOUNTS)
<S>                                                                                <C>        <C>        <C>
COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE: (See Note 16)
  Income before extraordinary items and cumulative effect of change in accounting
    principle....................................................................  $    2.44  $    2.55  $    2.52
  Extraordinary items--early extinguishment of debt..............................      (0.01)    --          (0.02)
  Cumulative effect of change in accounting principle............................     --           0.07     --
                                                                                   ---------  ---------  ---------
COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE.............................  $    2.43  $    2.62  $    2.50
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
COMMUNICATIONS GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING.....................    482,751    477,549    470,716
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE: (See Note 16)
  Income before extraordinary items and cumulative effect of change in accounting
    principle....................................................................  $    2.42  $    2.51  $    2.48
  Extraordinary items--early extinguishment of debt..............................      (0.01)    --          (0.02)
  Cumulative effect of change in accounting principle............................     --           0.07     --
                                                                                   ---------  ---------  ---------
COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE...........................  $    2.41  $    2.58  $    2.46
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
COMMUNICATIONS GROUP DILUTED AVERAGE COMMON SHARES OUTSTANDING...................    491,232    488,591    481,933
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
 
MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE: (See Note 16)
  Income (loss) before extraordinary item........................................  $   (0.88) $   (0.16) $    0.30
  Extraordinary item--early extinguishment of debt...............................     --         --          (0.01)
                                                                                   ---------  ---------  ---------
MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE...................  $   (0.88) $   (0.16) $    0.29
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
MEDIA GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING..............................    606,749    491,924    470,549
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                       61
<PAGE>
                                 U S WEST, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1997       1996
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................................................  $     211  $     201
  Accounts and notes receivable, less allowance for credit
    losses of $136 and $125, respectively...................................................      2,249      2,113
  Inventories and supplies..................................................................        179        159
  Deferred directory costs..................................................................        257        259
  Deferred tax asset........................................................................        373        213
  Prepaid and other.........................................................................        130        167
                                                                                              ---------  ---------
Total current assets........................................................................      3,399      3,112
 
Property, plant and equipment--net..........................................................     18,580     18,281
Investment in Time Warner Entertainment.....................................................      2,486      2,477
Net investment in international ventures....................................................        475      1,548
Net investment in assets held for sale......................................................        419        409
Intangible assets--net......................................................................     12,674     12,595
Other assets................................................................................      1,707      2,433
                                                                                              ---------  ---------
Total assets................................................................................  $  39,740  $  40,855
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                       62
<PAGE>
                                 U S WEST, INC.
 
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1997       1996
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
                                                                                               (EXCEPT PER SHARE
                                                                                                    AMOUNTS)
<S>                                                                                           <C>        <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
  Short-term debt...........................................................................  $   1,430  $   1,051
  Accounts payable..........................................................................      1,751      1,316
  Due to Continental Cablevision shareowners................................................     --          1,150
  Employee compensation.....................................................................        521        470
  Dividends payable.........................................................................        268        263
  Deferred revenues and customer deposits...................................................        444        379
  Other.....................................................................................      1,901      1,445
                                                                                              ---------  ---------
Total current liabilities...................................................................      6,315      6,074
 
Long-term debt..............................................................................     13,248     14,300
Postretirement and other postemployment benefit obligations.................................      2,570      2,479
Deferred income taxes.......................................................................      4,068      4,349
Unamortized investment tax credits..........................................................        168        173
Deferred credits and other..................................................................        867        800
 
Commitments and contingencies
 
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
  solely Company-guaranteed debentures......................................................      1,080      1,080
Preferred stock subject to mandatory redemption.............................................        100         51
 
Shareowners' equity:
  Series D Preferred Stock--$1.00 per share par value, 20,000,000 shares authorized,
    19,999,478 shares issued and outstanding................................................        923        920
  Common shares--
    Communications Stock--$0.01 per share par value, 2,000,000,000 shares authorized,
      484,522,015 and 480,460,536 issued, 484,515,415 and 480,457,336 outstanding,
      respectively..........................................................................
    Media Stock--$0.01 per share par value, 2,000,000,000 shares authorized, 626,565,410 and
      624,782,710 issued, 607,807,934 and 608,863,327 outstanding, respectively.............     10,876     10,741
  Retained earnings (deficit)...............................................................       (334)        18
  LESOP guarantee...........................................................................        (46)       (91)
  Foreign currency translation adjustments..................................................        (95)       (39)
                                                                                              ---------  ---------
Total shareowners' equity...................................................................     11,324     11,549
                                                                                              ---------  ---------
Total liabilities and shareowners' equity...................................................  $  39,740  $  40,855
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                       63
<PAGE>
                                 U S WEST, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                      1997       1996       1995
                                                                                    ---------  ---------  ---------
                                                                                          DOLLARS IN MILLIONS
<S>                                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income......................................................................  $     697  $   1,178  $   1,317
  Adjustments to net income:
    Depreciation and amortization.................................................      3,420      2,544      2,291
    Equity losses in unconsolidated ventures......................................        909        346        207
    Gains on asset sales:
      Rural telephone exchanges...................................................        (77)       (59)      (136)
      Merger of joint venture interest............................................     --         --           (157)
      Investments.................................................................       (474)    --         --
    Cumulative effect of change in accounting principle...........................     --            (34)    --
    Deferred income taxes and amortization of investment tax credits..............       (164)        18        274
  Changes in operating assets and liabilities:
    Restructuring payments........................................................        (70)      (242)      (334)
    Postretirement medical and life costs, net of cash fundings...................         90         39        (24)
    Accounts and notes receivable.................................................       (138)       (56)      (169)
    Inventories, supplies and other current assets................................       (104)        31        (79)
    Accounts payable and accrued liabilities......................................        782        225         45
  Other--net......................................................................        295         40        185
                                                                                    ---------  ---------  ---------
  Cash provided by operating activities...........................................      5,166      4,030      3,420
                                                                                    ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment..................................     (3,690)    (3,071)    (2,825)
  Payment to Continental Cablevision shareowners..................................     (1,150)    --         --
  Investments in international ventures...........................................       (325)      (243)      (681)
  Proceeds from sales of investments..............................................      1,883     --         --
  Proceeds from disposals of property, plant and equipment........................         98        189        201
  Cash from net investment in assets held for sale................................        231        213     --
  Other--net......................................................................       (347)      (136)      (201)
                                                                                    ---------  ---------  ---------
  Cash (used for) investing activities............................................     (3,300)    (3,048)    (3,506)
                                                                                    ---------  ---------  ---------
FINANCING ACTIVITIES
  Net proceeds from (repayments of) short-term debt...............................     (4,195)     3,987     (1,281)
  Repayments of long-term debt....................................................       (824)    (4,699)    (1,058)
  Proceeds from issuance of Preferred Securities--net.............................     --            465        581
  Proceeds from issuance of long-term debt........................................      4,152        383      2,732
  Proceeds from issuance of common stock..........................................        106        136         87
  Purchases of treasury stock.....................................................        (53)      (297)       (63)
  Dividends paid on common and preferred stock....................................     (1,042)      (948)      (929)
                                                                                    ---------  ---------  ---------
  Cash (used for) provided by financing activities................................     (1,856)      (973)        69
                                                                                    ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase (decrease).............................................................         10          9        (17)
  Beginning balance...............................................................        201        192        209
                                                                                    ---------  ---------  ---------
  Ending balance..................................................................  $     211  $     201  $     192
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                       64
<PAGE>
                                 U S WEST, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE 1: RECAPITALIZATION PLAN
 
    In 1995, U S WEST divided its businesses into two groups: the Communications
Group and the Media Group and created two separate classes of common stock under
the 1995 Recapitalization. One class of stock, the Communications Stock,
reflects the performance of the communications businesses comprising the
Communications Group, and the other class of stock, the Media Stock, reflects
the performance of the multimedia businesses comprising the Media Group.
Effective November 1, 1995, each share of common stock of U S WEST was converted
into one share each of Communications Stock and Media Stock.
 
    The Communications Group is comprised of U S WEST Communications, U S WEST
Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST
Advanced Technologies, Inc., U S WEST Business Resources, Inc., U S WEST Long
Distance, Inc. and U S WEST Information Technologies, Inc. Primary services
provided include telecommunications services for more than 25 million
residential and business customers in the Communications Group's 14 state
Region. The Region includes the states of Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming. Primary telecommunications services offered
include local telephone services, exchange access services (which connect
customers to the facilities of carriers, including long-distance providers and
wireless operators), and long-distance services within LATAs in the Region.
Other products and services include wireless PCS, high-speed data and Internet
access services, and certain other communications equipment sales and services
for business customers and governmental agencies.
 
    Media Group is the third largest cable operator in the United States,
organized into six operating regions including large clusters in Atlanta,
Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit,
Michigan, and Minneapolis/St. Paul, Minnesota. Media Group is comprised of
MediaOne Delaware, formerly Continental; U S WEST Multimedia Communications,
Inc., which owns an investment in Time Warner Entertainment; Dex, which
publishes White and Yellow Pages telephone directories and provides directory
and information services; U S WEST NewVector Group, Inc., which provides
communications and information products and services over wireless networks; and
U S WEST International Holdings, Inc., which primarily owns investments in
international cable and broadband, wireless communications and directory
publishing operations.
 
NOTE 2: U S WEST SEPARATION
 
    On October 25, 1997, the Board adopted a proposal to separate U S WEST into
two independent companies. As a result of the Separation, the Communications
Group will become an independent public company and will be renamed U S WEST,
Inc. ("New U S WEST"). In addition, the Media Group's directory business known
as Dex will be aligned with New U S WEST. The assets of New U S WEST will be
accounted for at the historical values at which they were carried by U S WEST
prior to the Separation. Following the Separation, U S WEST will continue as an
independent public company comprised of the current businesses of Media Group
other than Dex and will be renamed "MediaOne Group, Inc."
 
    The Separation will be implemented pursuant to the terms of the Separation
Agreement between U S WEST and New U S WEST. Under the Separation Agreement, U S
WEST will redeem each issued and outstanding share of Communications Stock
(other than shares of Communications Stock held as treasury stock by U S WEST)
for one share of New U S WEST Common Stock, and each outstanding share of Media
Stock will remain outstanding and will thereafter represent one share of
MediaOne Common Stock. Each share of Communications Stock held as treasury stock
by U S WEST will be
 
                                       65
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: U S WEST SEPARATION (CONTINUED)
cancelled. Each share of Media Stock held as treasury stock by U S WEST will
remain outstanding as one share of MediaOne Common Stock held as treasury stock
by MediaOne.
 
    In connection with the Dex Alignment, (i) U S WEST will distribute, as a
dividend, an aggregate of $850 in value of New U S WEST Common Stock to holders
of Media Stock and (ii) $3.9 billion of U S WEST debt, currently allocated to
Media Group, will be refinanced by New U S WEST.
 
    The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the IRS. The Separation is expected to be complete sometime after mid-1998.
 
    MediaOne will account for the Separation as a discontinuance of the
businesses comprising New U S WEST. The measurement date for discontinued
operations accounting purposes will be the date as of which U S WEST stockholder
approval, all necessary regulatory approvals and a favorable IRS ruling are
obtained. On such date, MediaOne will recognize a gain on the distribution of
New U S WEST. Because the distribution is non pro-rata, as compared with the
businesses previously attributed to U S WEST's two classes of stockholders, it
will be accounted for at fair value. Based on the number of shares of
Communications Stock outstanding and market price as of February 20, 1998, the
gain (net of Separation costs) is estimated at approximately $25.2 billion. The
Company will incur total Separation costs during 1998 of approximately $150,
which includes severance, financial advisory, legal, registration fee, printing
and mailing costs. Separation costs also include a one-time payment to terminate
the sale of the Media Group cable systems in Minnesota.
 
    In connection with the Separation, U S WEST's existing employee benefit and
incentive compensation plans will be amended and adjusted. In addition, New U S
WEST and MediaOne will enter into a series of agreements governing the
allocation of tax and certain other liabilities and obligations arising from
periods prior to the Separation. The effects of such items will be included in
the financial statements upon effectiveness of the Separation. Following is a
summary of the more significant items:
 
    - STOCK INCENTIVE PLANS. Stock options, whether held by those individuals
      who will become employees of MediaOne or New U S WEST, will continue to
      remain outstanding as stock options for MediaOne and New U S WEST Common
      Stock following the Separation. In the case of MediaOne, the number of
      shares subject to and the exercise price of such stock options will be
      adjusted to reflect the fact that holders of such stock options will not
      receive the Dex Dividend.
 
    - PENSION PLAN. Effective immediately prior to the Separation, New U S WEST
      will assume sponsorship of the U S WEST pension plan (the "New U S WEST
      Pension Plan"). Effective as of the Separation date, MediaOne will
      establish a new defined benefit pension plan for eligible MediaOne
      employees (the "MediaOne Pension Plan"). In connection with the
      Separation, a portion of the existing assets of the U S WEST pension plan
      will be transferred at fair value to the MediaOne Pension Plan such that,
      immediately following consummation of the Separation, the ratio of plan
      assets to plan liabilities, calculated on a projected benefit obligations
      basis as determined by independent actuaries, will be the same for the New
      U S WEST Pension Plan and the MediaOne Pension Plan. The U S WEST pension
      plan has approximately $12 billion of assets. Subject to final
      adjustments, it is anticipated that the MediaOne Pension Plan will receive
      between approximately $190 and $240 of such assets, with the remainder of
      such assets being retained by the New U S WEST Pension Plan. It is
      currently anticipated that the benefit expense and required cash
      contributions by MediaOne to the MediaOne Pension Plan after the
      Separation will be substantially
 
                                       66
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: U S WEST SEPARATION (CONTINUED)
     the same as the benefit expense and required cash contributions of the
      Media Group to the U S WEST pension plan prior to the Separation.
 
    - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. U S WEST currently maintains
      an employee welfare benefit program that includes retiree medical and life
      insurance benefits for its employees. Under such program, U S WEST
      maintains three funded retiree medical and life insurance benefits trusts.
      One of these trusts covers hourly employees only and will be transferred
      in its entirety to New U S WEST. The remaining two trusts will be
      transferred to New U S WEST, and MediaOne will establish new trusts. A
      portion of the assets of the U S WEST trusts will be transferred at fair
      value to the MediaOne trusts based upon the same methodology used to
      transfer assets of the U S WEST pension plan to the MediaOne Pension Plan,
      except that the liabilities will be calculated by independent actuaries
      using the accumulated postretirement benefit obligations basis. It is
      anticipated that approximately $5 and $3, respectively, will be
      transferred by the U S WEST trusts to the MediaOne trusts out of the total
      assets of $225 and $600, respectively, of the U S WEST trusts.
 
    - TAX SHARING AGREEMENT. U S WEST and New U S WEST will enter into a tax
      sharing agreement that will govern the allocation between U S WEST and New
      U S WEST of federal, state, local and foreign tax liabilities that pertain
      to taxable periods ending on or prior to the Separation. The tax sharing
      agreement also governs related tax matters such as the preparation and
      filing of tax returns and the conduct of audits and other tax proceedings
      for taxable periods before and after the Separation. In general, the tax
      sharing agreement will provide that (i) New U S WEST will be responsible
      for and will indemnify U S WEST against tax liabilities relating to the
      Communications Group for taxable periods ending on or prior to the
      Separation, and (ii) MediaOne will be responsible for and will indemnify
      New U S WEST against tax liabilities relating to the Media Group for
      taxable periods ending on or prior to the Separation.
 
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS OF PRESENTATION.  The Consolidated Financial Statements include the
accounts of U S WEST and its majority-owned subsidiaries, except for the capital
assets segment, which is held for sale. All significant intercompany amounts and
transactions have been eliminated. Investments in less than majority-owned
ventures are generally accounted for using the equity method.
 
    Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
 
    INDUSTRY SEGMENTS.  The Communications Group operates in one industry
segment (communications and related services) and the Media Group operates in
four industry segments (cable and broadband, wireless communications, directory
and information services, and capital assets, which is held for sale) as defined
in SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
 
    USE OF ESTIMATES.  The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
 
    CASH AND CASH EQUIVALENTS.  Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
 
                                       67
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    INVENTORIES AND SUPPLIES.  New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of all other U S WEST subsidiaries
are carried at the lower of cost or market on a first-in, first-out basis.
 
    PROPERTY, PLANT AND EQUIPMENT.  The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred.
 
    U S WEST Communications and in certain cases, MediaOne Delaware, provide for
depreciation of property, plant and equipment using various straight-line group
methods and remaining useful (economic) lives based on industry-wide studies.
When the depreciable property, plant and equipment of U S WEST Communications
and MediaOne Delaware is retired or sold, the original cost less the net salvage
value is generally charged to accumulated depreciation. The remaining assets are
depreciated using the straight-line method. When such depreciable property,
plant and equipment is retired or sold, the resulting gain or loss is included
in income.
 
    Communications Group average depreciable lives for major categories of
property, plant and equipment follow:
 
<TABLE>
<CAPTION>
                                                                               AVERAGE LIFE
CATEGORY                                                                          (YEARS)
--------------------------------------------------------------------------  -------------------
<S>                                                                         <C>
General purpose computers.................................................           6
Digital switching and circuit equipment...................................          10
Aerial and underground copper cable.......................................          15
Buried copper and fiber cable.............................................          20
Buildings.................................................................         27-49
</TABLE>
 
    Media Group depreciates buildings between 10 to 40 years, cable distribution
systems between 3 to 15 years, cellular systems between 5 to 15 years, and
general purpose computers and other between 3 to 20 years.
 
    Depreciation expense was $2,890, $2,411 and $2,215 in 1997, 1996 and 1995,
respectively.
 
    Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized were $56, $67 and $72 in 1997, 1996 and
1995, respectively.
 
    COMPUTER SOFTWARE.  Communications Group capitalizes and amortizes initial
operating systems software over the life of the related hardware. Also, initial
network applications software costs are capitalized and amortized over three
years. All other computer software costs, whether purchased or developed
internally, are expensed. MediaOne Delaware capitalizes computer software,
whether purchased or developed internally. Capitalized software costs are
amortized over five years. All other Media Group computer software costs,
whether purchased or developed internally, are expensed.
 
    Capitalized computer software of $157 and $223 at December 31, 1997 and
1996, respectively, is recorded in property, plant and equipment. The Company
amortized capitalized computer software costs of $87, $83 and $70 in 1997, 1996
and 1995, respectively.
 
    INTANGIBLE ASSETS.  Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by
 
                                       68
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the straight-line method over periods ranging from 5 to 40 years. These assets
are evaluated for impairment, with other related assets, using the methodology
as prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
 
    INVESTMENTS IN DEBT AND EQUITY SECURITIES.  Debt and equity securities are
classified as available for sale and are carried at fair market value with
unrealized gains and losses included in equity.
 
    FOREIGN CURRENCY TRANSLATION.  Assets and liabilities of international
subsidiaries and investments are translated at year-end exchange rates, and
income statement items are translated at average exchange rates for the year.
Resulting translation adjustments are recorded as a separate component of
equity. Gains and losses resulting from foreign currency transactions are
included in income.
 
    FINANCIAL INSTRUMENTS.  Synthetic instrument accounting is used for interest
rate swaps and foreign currency swaps if the index, maturity, and amount of the
instrument match the terms of the underlying debt. Net interest accrued is
recognized over the life of the instruments as an adjustment to interest expense
and is a component of cash provided by operating activities. Any gain or loss on
the termination of an instrument that qualifies for synthetic instrument
accounting would be deferred and amortized over the remaining life of the
original instrument.
 
    Hedge accounting is used for foreign currency forward and option contracts
which qualify for and are designated as hedges of firm equity investment
commitments and for forward and option contracts which qualify as hedges of
future debt issues or investments in equity securities. To qualify for hedge
accounting, the contracts must have a high inverse correlation to the exposure
being hedged, and reduce the risk or volatility associated with changes in
foreign exchange rates, interest rates or equity prices. Qualified foreign
exchange contracts and equity contracts are carried at market value with gains
and losses recorded in equity until sale of the investment. Qualified interest
rate contracts are associated with the related debt and amortized as yield
adjustments. Any gain or loss on the termination of a contract that qualifies
for hedge accounting would be deferred and accounted for with the underlying
transaction being hedged.
 
    Market value accounting is used for derivative contracts which do not
qualify for synthetic instrument or hedge accounting. Market value accounting is
also used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income (expense). U S WEST does not use derivative financial instruments for
trading purposes.
 
    STOCK OPTIONS.  The Company accounts for its stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Effective January 1, 1996, U S WEST adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." See Note 17--Stock Incentive Plans--to the Consolidated Financial
Statements.
 
    REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS.  Local telephone,
wireless, cellular and cable television services are generally billed monthly in
advance, and revenues are recognized the following month when services are
provided. Revenues derived from other cable television services, including pay-
per-view and advertising, other telephone services, including exchange access
and long-distance, and wireless airtime usage are billed and recognized monthly
as services are provided.
 
                                       69
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Directory advertising revenues and related directory costs of selling,
composition, printing and distribution are generally deferred and recognized
over the period during which directories are used, normally 12 months.
 
    ADVERTISING COSTS.  Costs related to advertising are expensed as incurred.
Advertising expense was $421, $190 and $135 in 1997, 1996 and 1995,
respectively.
 
    INCOME TAXES.  The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
 
    EARNINGS PER COMMON SHARE.  In 1997, U S WEST adopted SFAS No. 128,
"Earnings Per Share." This accounting standard specifies new computation,
presentation and disclosure requirements for earnings per share to be applied
retroactively. SFAS No. 128, among other things, requires presentation of basic
and diluted earnings per common share on the face of the income statement. See
Note 16--Earnings Per Share--to the Consolidated Financial Statements. Unless
otherwise indicated, all per share amounts in the notes to the Consolidated
Financial Statements are computed on basic weighted average common shares
outstanding.
 
    For 1995, earnings per share for Communications Stock and Media Stock have
been presented on a pro forma basis to reflect the two classes of stock as if
they had been outstanding since January 1, 1995. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be equal
to the average common shares outstanding for U S WEST.
 
    NEW ACCOUNTING STANDARDS.  In 1998, U S WEST will adopt SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 requires that the
components and total amount of comprehensive income be displayed in the
financial statements for interim and annual periods beginning in 1998.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities. SFAS
No. 131 requires, among other things, the reporting of detailed operating
segment information of an enterprise for annual periods beginning in 1998 and
for interim periods beginning in 1999.
 
    SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," was issued in March 1998. SOP 98-1, among other
things, requires that certain costs of internal use software, whether purchased
or developed internally, be capitalized and amortized over the estimated useful
life of the software. Adoption of SOP 98-1 is required as of January 1, 1999,
but earlier adoption is allowed. The Company is currently evaluating the impact
of SOP 98-1 and believes that it could initially have a significant impact upon
results of operations.
 
NOTE 4: CONTINENTAL ACQUISITION
 
    On November 15, 1996, U S WEST acquired Continental, the third largest cable
operator in the United States. The aggregate consideration paid by U S WEST to
shareowners of Continental consisted of 150,615,000 shares of Media Stock valued
at $2.59 billion, 20,000,000 shares of U S WEST Series D Preferred Stock with a
market value of $920 and $1.15 billion in cash. In connection with the
Acquisition, U S WEST also assumed all of Continental's outstanding indebtedness
and other liabilities as of November 15, 1996, which approximated $7.1 billion
for a total purchase price of $11.8 billion.
 
                                       70
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4: CONTINENTAL ACQUISITION (CONTINUED)
    The Acquisition was accounted for by the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Because Continental
was acquired late in 1996 and is a large and complex operation, a comprehensive
appraisal of asset values and liabilities was not completed until 1997. The
determination of the final fair value resulted in an increase to intangibles and
a decrease to property, plant and equipment. The $8.7 billion excess of purchase
price over net tangible assets acquired and goodwill related to a deferred
income tax liability of $3.0 billion are being amortized over 25 years.
Intangible amortization related to Continental's equity method investments is
recorded as a component of equity losses in unconsolidated ventures. The
intangible assets acquired consist principally of the cable television
franchises of Continental and goodwill. Continental's results of operations have
been included in the consolidated results of operations since the Acquisition
date.
 
    Following are summarized, combined, unaudited pro forma results of
operations for U S WEST for the years ended December 31, 1996 and 1995. Amounts
are before non-recurring items directly attributable to the Acquisition and
assume that the Acquisition occurred as of the beginning of the respective
periods:
 
<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER
                                                                                      31,
                                                                              --------------------
SUMMARIZED RESULTS OF OPERATIONS                                                1996       1995
----------------------------------------------------------------------------  ---------  ---------
<S>                                                                           <C>        <C>
Revenues....................................................................  $  14,618  $  13,528
Income before extraordinary item and cumulative effect of change in
 accounting principle.......................................................        702        835
Net income..................................................................        736        823
 
Media Group basic and diluted loss per common share*........................      (0.90)     (0.64)
</TABLE>
 
       -------------------------------------
 
       *  Before extraordinary item.
 
    In May 1997, pursuant to an FCC order, U S WEST entered into an agreement to
sell its cable systems in Minnesota for proceeds of $600. Under the terms of the
agreement, Media Group had the right to terminate the agreement at any time upon
payment of a $30 termination fee. As a result of the Separation, Media Group
will no longer be prohibited by federal law from owning the Minnesota cable
systems. In February 1998, in response to U S WEST's petition, the FCC granted
to U S WEST a waiver which would permit Media Group to retain the Minnesota
cable systems so long as the Separation is consummated by July 31, 1998. On
February 26, 1998, Media Group terminated the agreement to sell the Minnesota
cable systems.
 
    Media Group owns a 10.4 percent interest in PrimeStar, a nationwide provider
of DBS services. Each of the partners of PrimeStar, including Media Group, have
entered into an agreement whereby each partner's DBS customers and certain
related assets will be contributed to PrimeStar, Inc., which will be a newly
formed company. In exchange, Media Group will receive a combination of cash and
stock in PrimeStar, Inc. In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
Media Group has stopped depreciation and amortization related to these assets.
The transaction is subject to various approvals and is expected to close in
1998.
 
NOTE 5: INDUSTRY SEGMENTS
 
    The businesses comprising the Communications Group operate in a single
industry segment-- communications and related services. Approximately 97 percent
of the revenues of the Communications
 
                                       71
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
Group are attributable to the operations of U S WEST Communications, of which
approximately 67 percent are derived from the states of Arizona, Colorado,
Minnesota, Oregon and Washington.
 
    The Media Group operates in four industry segments: cable and broadband,
wireless communications, directory and information services, and capital assets,
which is held for sale. The cable and broadband segment consists of cable
television properties serving 4.9 million domestic subscribers and passing 8.4
million domestic homes. The wireless communications segment provides information
products and services over wireless networks in 12 western and midwestern
states. The directory and information services segment publishes White and
Yellow Pages telephone directories, and provides database marketing and
interactive services in domestic markets. Yellow Pages advertising generates
approximately 95 percent of the revenue of the directory and information
services segment.
 
    On June 4, 1997, U S WEST sold Thomson Directories, its directory operation
in the United Kingdom, for proceeds of $121. On October 1, 1997, U S WEST sold U
S WEST Polska, its directory operation in Poland, for proceeds of $30, and a
pretax gain of $29. These sales have resulted in the disposition of U S WEST's
wholly owned international directory operations.
 
    Industry segment financial information follows:
<TABLE>
<CAPTION>
                                   COMMUNI-
                                  CATIONS AND   CABLE AND    WIRELESS     DIRECTORY AND    CORPORATE       INTER-
                                    RELATED      BROAD-      COMMUNI-      INFORMATION        AND          SEGMENT
                                   SERVICES      BAND(1)    CATIONS(2)     SERVICES(3)       OTHER      ELIMINATIONS
                                  -----------  -----------  -----------  ---------------  -----------  ---------------
<S>                               <C>          <C>          <C>          <C>              <C>          <C>
1997
Sales and other revenues........   $  10,319    $   2,341    $   1,428      $   1,245      $      29      $    (127)
Operating income (loss).........       2,210         (126)         340            537           (155)        --
Identifiable assets.............      17,246       18,687        2,370            606            951           (120)
Depreciation and amortization...       2,126        1,050          182             45             17         --
Capital expenditures............       2,643        1,232          258             31             10         --
 
1996
Sales and other revenues........      10,079          494        1,183          1,259             19           (123)
Operating income (loss).........       2,340          (20)         240            454           (159)        --
Identifiable assets.............      16,915       20,146        2,371            716            828           (121)
Depreciation and amortization...       2,122          212          150             48             12         --
Capital expenditures............       2,806          353          266             36             13         --
 
1995
Sales and other revenues........       9,484          215          941          1,180             38           (112)
Operating income (loss).........       2,178           23          147            398           (101)        --
Identifiable assets.............      16,585        5,163        2,000            614            838           (129)
Depreciation and amortization...       2,042           77          121             36             15         --
Capital expenditures............       2,739           64          277             37             23         --
 
<CAPTION>
 
                                  CONSOLIDATED
                                  -------------
<S>                               <C>
1997
Sales and other revenues........    $  15,235
Operating income (loss).........        2,806
Identifiable assets.............       39,740
Depreciation and amortization...        3,420
Capital expenditures............        4,174
1996
Sales and other revenues........       12,911
Operating income (loss).........        2,855
Identifiable assets.............       40,855
Depreciation and amortization...        2,544
Capital expenditures............        3,474
1995
Sales and other revenues........       11,746
Operating income (loss).........        2,645
Identifiable assets.............       25,071
Depreciation and amortization...        2,291
Capital expenditures............        3,140
</TABLE>
 
------------------------------
 
(1) Includes results for Continental since the date of Acquisition. Includes
    revenues of $18 and $6, operating losses of $15 and $7, and identifiable
    assets of $103 and $122 associated with cable operations in the Czech
    Republic for 1997 and 1996, respectively.
 
(2) Includes operating losses from wireless operations in Russia of $(13) and
    $(3), and identifiable assets of $105 and $121 in 1997 and 1996,
    respectively.
 
(3) Includes revenues from directory publishing activities in the United Kingdom
    and Poland of $48, $139 and $122, and operating income (loss) of $(11), $2,
    and $(1) for 1997, 1996 and 1995, respectively, and identifiable assets of
    $154 and $133 in 1996 and 1995, respectively.
 
    Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes.
 
                                       72
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
    Certain costs relating to U S WEST's general and administrative services,
including executive management, legal, tax, accounting and auditing, treasury,
strategic planning and public policy services, are directly assigned by U S WEST
to the Communications Group (the communications and related services segment)
and the Media Group (the cable and broadband, wireless communications, and
directory and information services segments). U S WEST costs are directly
assigned based on actual utilization or are allocated based on operating
expenses, number of employees, external revenues, average capital and/or average
equity.
 
    Corporate and other operating losses include such U S WEST costs related to
services provided by U S WEST to the Media Group. Also included are Media Group
costs related to managing its international operations. Corporate and other
operating losses increased in 1996 primarily as a result of a change in cost
allocation policy.
 
    Identifiable assets are those assets and investments that are used in, or
pertain to, each segment's operations. Corporate and other assets consist
primarily of cash, debt and equity securities, the net investment in assets held
for sale and other corporate assets.
 
    SIGNIFICANT CONCENTRATIONS.  The largest volume of the Communications
Group's services are provided to AT&T. During 1997, 1996 and 1995, revenues from
services provided to AT&T were $1,049, $1,046 and $1,085, respectively. Related
accounts receivable at December 31, 1997 and 1996, totaled $80 and $89,
respectively. As of December 31, 1997, the Communications Group is not aware of
any other significant concentration of business transacted with a particular
customer or supplier that could, if suddenly eliminated, severely impact
operations.
 
    The domestic cellular business utilizes Motorola as its primary vendor for
cellular infrastructure equipment and cellular mobile telephone equipment and
accessories. In addition, Motorola provides ongoing technological support for
the infrastructure equipment. As a result, the wireless segment receives
significant discounts on the purchase of cellular equipment from Motorola. The
infrastructure of approximately 75 percent of the Media Group's cellular markets
are comprised of Motorola equipment.
 
    At December 31, 1997, approximately 69 percent of the communications and
related services segment employees and 64 percent of the directory and
information services segment employees are represented by unions. The Company's
principal collective bargaining agreements expire in May, August and October
1998. Negotiations with respect to future collective bargaining agreements are
underway.
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT
 
    On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment for an aggregate purchase price of $2.553 billion. TWE owns and
operates substantially all of the entertainment assets previously owned by Time
Warner, consisting primarily of its filmed entertainment, programming-HBO and
cable television businesses.
 
    U S WEST has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or U S WEST may elect that the exercise price for
the option be paid with partnership interests rather than cash.
 
                                       73
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the general partners); A preferred priority capital (held pro rata by the
general and limited partners); B preferred priority capital (held by the general
partners); and residual equity capital (held pro rata by the general and limited
partners). Of the $2.553 billion contributed by U S WEST, $1.658 billion
represents A preferred priority capital and $895 represents residual equity
capital. The TWE Partnership Agreement provides for special allocations of
income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' residual equity capital accounts according to their
residual partnership interests. To the extent partnership income is insufficient
to satisfy all special allocations in a particular accounting period, the
unearned portion is carried over until satisfied out of future partnership
income. Partnership losses generally are allocated in reverse order, first to
eliminate prior allocations of partnership income, except senior preferred and
special tax income, next to reduce initial capital amounts, other than senior
preferred, then to reduce the senior preferred account and finally, to eliminate
special tax allocations.
 
    A summary of the contributed capital and priority capital rates of return
follows:
 
<TABLE>
<CAPTION>
                                                                     PRIORITY
                                                                   CAPITAL RATES                LIMITED PARTNERS
                                                                   OF RETURN(D)      TIME        (OWNERSHIP %)
                                       UNDISTRIBUTED  CUMULATIVE   (% PER ANNUM     WARNER    --------------------
                                        CONTRIBUTED    PRIORITY     COMPOUNDED     GENERAL      TIME        U S
PRIORITY OF CONTRIBUTED CAPITAL         CAPITAL(A)    CAPITAL(B)    QUARTERLY)     PARTNERS    WARNER      WEST
-------------------------------------  -------------  -----------  -------------  ----------  ---------  ---------
<S>                                    <C>            <C>          <C>            <C>         <C>        <C>
Senior preferred.....................    $     900     $   1,100(c)       8.00%      100.00%     --         --
A preferred priority capital.........        5,600        11,300        13.00%        63.27%     11.22%     25.51%
B preferred priority capital.........        2,900         6,000        13.25%       100.00%     --         --
Residual equity capital..............        3,300         3,300        --            63.27%     11.22%     25.51%
</TABLE>
 
------------------------------
 
(a) Represents the estimated fair value of net assets contributed as of
    formation of TWE, excluding partnership income or loss allocated thereto.
 
(b) Cumulative priority capital is not necessarily indicative of the fair value
    of the underlying priority capital interests.
 
(c) Net of $900 of cumulative cash distributions received by Time Warner.
 
(d) To the extent income allocations are concurrently distributed, the priority
    capital rates of return on the A preferred capital and the B preferred
    capital are 11% and 11.25%, respectively.
 
    Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions are paid to the partners on a
current basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the general partners receive
their full share of distributions. No cash distributions have been made to U S
WEST.
 
    Through the TWE management committee, U S WEST and Time Warner jointly
direct the businesses and affairs of TWE cable systems, subject in certain cases
to regulatory approval. The TWE management committee has full discretion and
final authority with respect to the businesses and affairs of such cable
systems. The TWE management committee consists of six voting members, of which
three members are
 
                                       74
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
designated by U S WEST and three members are designated by Time Warner. Each
voting member of the TWE management committee has one vote. Any action required
or permitted to be taken by the TWE management committee must be approved by a
majority of its members. Determinations of the TWE management committee are
binding upon TWE and the TWE board of representatives.
 
    U S WEST accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by U S WEST's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
U S WEST's recorded share of TWE operating results represents allocated TWE net
income or loss adjusted for the amortization of the excess of fair market value
over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, U S WEST's
recorded pretax share of TWE operating results before extraordinary item was
$11, $(4) and $(31) in 1997, 1996 and 1995, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. U S
WEST's share of this extraordinary loss was $4, net of income tax benefits of
$2.
 
    As consideration for its expertise and participation in the cable operations
of TWE, U S WEST earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in each of 1997, 1996 and 1995. The Consolidated
Balance Sheets include management fee receivables of $42 and $56 at December 31,
1997 and 1996, respectively. In addition, Media Group purchases cable television
programming from TWE at market prices. These services totaled $110, $23 and $10
in 1997, 1996 and 1995, respectively.
 
                                       75
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    Summarized financial information for TWE is presented below:
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
SUMMARIZED OPERATING RESULTS                                                          1997       1996       1995
----------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
Revenues..........................................................................  $  11,318  $  10,852  $   9,517
Operating expenses(1, 2)..........................................................      9,874      9,774      8,557
Interest and other expense, net(3, 4).............................................        722        798        777
Income before income taxes and extraordinary item.................................        722        280        183
Income before extraordinary item..................................................        637        210         97
Net income........................................................................        614        210         73
</TABLE>
 
------------------------------
 
(1) Includes depreciation and amortization of $1,370, $1,235, and $1,039 in
    1997, 1996 and 1995, respectively.
 
(2) 1997 operating expenses are reflected net of approximately $200 of net gains
    related to the sale or exchange of certain cable television systems.
 
(3) Includes corporate services of $72, $69 and $64 in 1997, 1996 and 1995,
    respectively, and minority interest expense of $305, $207 and $133 in 1997,
    1996 and 1995, respectively.
 
(4) 1997 interest and other expense includes a gain of approximately $250
    related to the sale of TWE's interest in E! Entertainment Television, Inc.
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
SUMMARIZED FINANCIAL POSITION                                                                   1997       1996
--------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                           <C>        <C>
Current assets(5)...........................................................................  $   3,622  $   3,146
Noncurrent assets(6)........................................................................     17,109     16,827
Current liabilities.........................................................................      3,974      4,075
Noncurrent liabilities, including minority interest.........................................      9,306      7,781
Senior preferred capital....................................................................      1,118      1,543
Partners' capital(7)........................................................................      6,333      6,574
</TABLE>
 
------------------------------
 
(5) Includes cash of $322 and $216 at December 31, 1997 and 1996, respectively.
 
(6) Includes a loan receivable from Time Warner of $400 at December 31, 1997 and
    1996.
 
(7) Contributed capital is based on the estimated fair value of the net assets
    that each partner contributed to the partnership. The aggregate of such
    amounts is significantly higher than TWE's partners' capital as reflected in
    this Summarized Financial Position, which is based on the historical cost of
    the contributed net assets.
 
                                       76
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES
 
    U S WEST's equity method investments in international ventures follow:
 
<TABLE>
<CAPTION>
                                                                                   PERCENTAGE OF
                                                                                 OWNERSHIP DECEMBER
                                                                                        31,
                                                                                --------------------
VENTURE                                                                           1997       1996
------------------------------------------------------------------------------  ---------  ---------
<S>                                                                             <C>        <C>
CABLE AND BROADBAND
Telewest Communications, United Kingdom.......................................       26.8       26.8
Binariang SDN BHD, Malaysia...................................................       19.0(1)      20.0
A2000 (KTA), Netherlands......................................................       50.0       50.0
Fintelco, S.A., Argentina.....................................................     --           50.0
Telenet Flanders, Belgium.....................................................       25.0(1)      28.0
Aria WEST, Indonesia..........................................................       35.0       35.0
Singapore Cablevision, Singapore..............................................       25.0       25.0
Titus Communications Corp., Japan.............................................       25.0       25.0
Chofu Cable Television, Japan.................................................       19.1       19.1
 
WIRELESS
One 2 One, United Kingdom.....................................................       50.0       50.0
Delta Telecommunications, Russia(2)...........................................       42.5       42.5
Moscow Cellular Communications, Russia(2).....................................       22.0       22.0
Westel Radiotelefon, Hungary..................................................       49.0       49.0
Westel 900 GSM Mobile Telecommunications, Hungary.............................       46.6       46.6
Eurotel Praha, Czech Republic.................................................       24.5       24.5
Eurotel Bratislava, Slovak Republic...........................................       24.5       24.5
Polska Telefonia Cyfrowa, Poland..............................................       22.5       22.5
U S WEST BPL Cellular Telecommunications, India...............................       49.0       49.0
 
DIRECTORY
Listel, Brazil................................................................       50.0       50.0
</TABLE>
 
        --------------------------------------
 
        (1)  Decrease in ownership reflects venture equity issuances in 1997.
 
        (2)  Investments are held by Russian Telecommunications Development
             Corporation owned 66.5 percent by U S WEST.
 
    At December 31, 1997 and 1996, the difference between the carrying amount
and U S WEST's interest in the underlying equity of the international ventures
was approximately $162 and $365, respectively. This difference has been
allocated primarily to licenses and is being amortized over lives ranging from 5
to 20 years.
 
    During late 1997, the value of Asian currencies as compared with the U. S.
dollar declined significantly, particularly in Indonesia. These declines,
coupled with political uncertainties, led to a fourth-quarter 1997 pretax charge
of $200.
 
                                       77
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
 
    The following table shows summarized combined financial information for U S
WEST's investments in international ventures, accounted for on the equity
method:
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                      -------------------------------
COMBINED RESULTS OF OPERATIONS                                          1997       1996       1995
--------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>
Revenues............................................................  $   3,353  $   1,869  $   1,163
Operating losses....................................................       (601)      (540)      (373)
Net loss............................................................     (1,696)      (857)      (514)
</TABLE>
 
       -------------------------------------
 
       Note:  Combined Results of Operations for Continental ventures have been
              included since the date of Acquisition.
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                                 --------------------
COMBINED FINANCIAL POSITION                                                        1997       1996
-------------------------------------------------------------------------------  ---------  ---------
<S>                                                                              <C>        <C>
Current assets.................................................................  $   1,140  $   1,126
Property, plant and equipment--net.............................................      6,625      5,105
Other assets...................................................................      1,610      2,226
                                                                                 ---------  ---------
Total assets...................................................................  $   9,375  $   8,457
                                                                                 ---------  ---------
                                                                                 ---------  ---------
Current liabilities............................................................  $   1,570  $   1,275
Long-term debt.................................................................      5,527      3,880
Other liabilities..............................................................        389        478
Equity.........................................................................      1,889      2,824
                                                                                 ---------  ---------
Total liabilities and equity...................................................  $   9,375  $   8,457
                                                                                 ---------  ---------
                                                                                 ---------  ---------
</TABLE>
 
    During the first quarter of 1997, U S WEST sold its five percent interest in
a French wireless venture for proceeds of $81. U S WEST recognized a gain of
$31, net of income tax expenses of $20.
 
    On October 27, 1997, U S WEST sold its 90 percent interest in Fintelco, for
proceeds of $641. U S WEST acquired a 50 percent interest in Fintelco in
connection with the Continental Acquisition and then acquired an additional 40
percent interest in August 1997, to bring its total interest in Fintelco to 90
percent. U S WEST recognized a gain on the sale of $80, net of income tax
expenses of $55.
 
    On October 2, 1995, Telewest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and broadband services in the United Kingdom. U S
WEST recognized a gain of $95, net of $62 in deferred income taxes, in
conjunction with the merger.
 
    Telewest, which is the only equity method investment of U S WEST for which a
quoted market price is available, had a market value of $464 and $786 at
December 31, 1997 and 1996, respectively.
 
    FOREIGN CURRENCY TRANSACTIONS.  U S WEST selectively enters into forward and
option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations. The use of forward and option contracts allows U S
WEST to fix or cap the cost of firm foreign investment commitments, the amount
of foreign currency proceeds from sales of foreign investments, the repayment of
foreign currency denominated receivables and the repatriation of dividends. All
foreign exchange contracts have maturities of one year or less. The use of such
contracts was limited in 1997 and 1996. As of December 31, 1997, the market
value of foreign exchange contracts outstanding was not material and there were
none outstanding at December 31, 1996.
 
                                       78
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
    Forward contracts were selectively used to hedge foreign denominated
proceeds from the sale of foreign investments and foreign denominated
receivables during 1997 and 1996. Foreign currency pretax hedging gains of $5
and pretax hedging losses of $24 were included in earnings in the years ended
December 31, 1997 and 1996, respectively.
 
    The counterparties to these contracts are major financial institutions. U S
WEST is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
 
    Foreign currency transaction pretax losses of $40 and pretax gains of $27
were included in earnings in the years ended December 31, 1997 and 1996,
respectively.
 
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
 
    The composition of property, plant and equipment follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1996
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Land and buildings......................................................  $   2,764  $   2,722
Telecommunications network equipment....................................     13,513     12,925
Telecommunications outside plant........................................     13,802     13,148
Cable distribution systems..............................................      2,787      2,640
Cellular systems........................................................      1,124        897
General purpose computers and other.....................................      4,137      4,414
Construction in progress................................................      1,096      1,010
                                                                          ---------  ---------
                                                                             39,223     37,756
Less accumulated depreciation...........................................     20,643     19,475
                                                                          ---------  ---------
Property, plant and equipment--net......................................  $  18,580  $  18,281
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    Property, plant and equipment balances at December 31, 1997 include the
results of a comprehensive appraisal conducted on the Continental properties. As
compared with estimated amounts recorded at December 31, 1996, cable
distribution systems decreased approximately $630.
 
    In 1997, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $160. Consideration received for the sales was $237, including
$67 in cash. In 1996 and 1995, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $243 and $258, respectively, and
received consideration of $306 (including $174 in cash) during 1996, and $388
(including $214 in cash) during 1995.
 
    Effective January 1, 1996, U S WEST adopted SFAS No. 121. SFAS No. 121
requires that long-lived assets and associated intangibles be written down to
fair value whenever an impairment review indicates that the carrying value
cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also
requires that a company no longer record depreciation expense on assets held for
sale. Adoption of SFAS No. 121 resulted in income of $34 (net of income tax
expense of $22) in 1996 from the cumulative effect of reversing depreciation
expense recorded in prior years related to rural telephone exchanges held for
sale. Depreciation expense was reversed from the date U S WEST formally
committed to a plan to dispose of the rural telephone exchange assets to January
1, 1996. The income was recorded as a cumulative effect of
 
                                       79
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 8: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
change in accounting principle in accordance with SFAS No. 121. As a result of
adopting SFAS No. 121, depreciation expense for 1996 was reduced by $24.
 
NOTE 9: INTANGIBLE ASSETS
 
    The composition of intangible assets follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1996
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Identified intangibles, primarily franchise value.......................  $   9,263  $   8,388
Goodwill................................................................      4,159      4,465
                                                                          ---------  ---------
                                                                             13,422     12,853
Less accumulated amortization...........................................        748        258
                                                                          ---------  ---------
Total intangible assets--net............................................  $  12,674  $  12,595
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    Intangible balances at December 31, 1997 include the results of a
comprehensive appraisal conducted on the Continental cable properties. As
compared with estimated amounts recorded at December 31, 1996, franchise value
increased approximately $770 and goodwill decreased approximately $300.
Amortization expense for 1997, 1996 and 1995 was $530, $133 and $76,
respectively.
 
NOTE 10: DEBT
 
SHORT-TERM DEBT
 
    The components of short-term debt follow:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                               1997       1996
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Notes payable:
  Commercial paper.........................................................  $     812  $     842
  Bank loan................................................................         17     --
  Other....................................................................     --             55
Current portion of long-term debt..........................................        701        300
Allocated to the capital assets segment--net...............................       (100)      (146)
                                                                             ---------  ---------
Total......................................................................  $   1,430  $   1,051
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
    The weighted-average interest rate on commercial paper was 6.15 percent and
5.73 percent at December 31, 1997 and 1996, respectively.
 
    The bank loan at December 31, 1997 is a floating-rate loan denominated in
Czech Koruna. Other notes payable at December 31, 1996 included $50 associated
with U S WEST's increase in ownership of Cable Plus. This note was repaid in
January 1997.
 
    In January 1997, U S WEST paid the cash portion of the Continental
Acquisition consideration totaling $1,150. This payment was financed with
commercial paper.
 
                                       80
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
    In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear annual interest at 7.625
percent. Upon maturity, each DECS will be redeemed by U S WEST for shares of
Enhance held by U S WEST or the cash equivalent, at U S WEST's option. The
number of shares to be delivered at maturity varies based on the per share
market price of Enhance. If the market price is $24.00 per share or less, one
share of Enhance will be delivered for each note; if the market price is between
$24.00 and $28.32 per share, a fractional share equal to $24.00 is delivered; if
the market price is greater than $28.32 per share, .8475 of a share is delivered
for each note. At December 31, 1997, the Enhance shares had a market price of
$59.50 per share. The capital assets segment currently owns 29.2 percent of the
outstanding Enhance common stock.
 
    U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST is permitted to borrow up to approximately $4.5 billion under
lines of credit, all of which were available at December 31, 1997.
 
LONG-TERM DEBT
 
    On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Acquisition. Concurrently, U S WEST
refinanced $3,657 of the assumed debt with commercial paper. In January 1997, U
S WEST issued medium- and long-term debt totaling $4.1 billion, at a
weighted-average interest rate of 7.47 percent. The net proceeds were used to
refinance outstanding commercial paper. At December 31, 1996, such commercial
paper was classified as long-term debt in the accompanying Consolidated Balance
Sheets and the following table.
 
    The components of long-term debt follow:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1996
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Senior unsecured notes, debentures, medium-term notes and refinanced
  commercial paper......................................................  $  12,246  $  12,536
Zero coupon subordinated notes, 7.3 percent yield to maturity
  convertible at any time into equal shares of Communications Stock and
  Media Stock...........................................................     --          1,529
Senior subordinated debt................................................        300        400
Debt exchangeable for common stock......................................        254        384
Insurance company notes.................................................         36         68
Leveraged employee stock ownership plans (LESOP)........................     --             53
Capital lease obligations...............................................         88        140
Other...................................................................        169        134
Unamortized discount--net...............................................       (132)    (1,118)
Unamortized premium--net................................................        287        335
Allocated to the capital assets segment--net............................     --           (161)
                                                                          ---------  ---------
Total...................................................................  $  13,248  $  14,300
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    Senior unsecured notes and debentures and senior subordinated debt totaling
$2.3 billion as of December 31, 1997 were assumed by U S WEST in connection with
the Continental Acquisition and are not guaranteed by U S WEST. These notes and
debentures limit MediaOne Delaware's ability to, among
 
                                       81
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
other things, pay dividends, create liens, incur additional debt, dispose of
property, investments and leases, and require certain minimum ratios of cash
flow to debt and cash flow to related fixed charges.
 
    During 1997, U S WEST redeemed its zero coupon subordinated notes due June
25, 2011. Upon redemption, the notes had a recorded value of $571. The debt
extinguishment resulted in a loss of $6 (net of income tax benefits of $4)
primarily related to the write-off of deferred debt issuance costs. Also during
1997, MediaOne Delaware redeemed a 10 5/8 percent senior subordinated note with
a recorded value of $110, including a premium of $10. The debt extinguishment
resulted in a gain of $3 (net of income tax expenses of $2). The net loss on the
redemptions is reflected as an extraordinary charge in the accompanying
Consolidated Statements of Operations. U S WEST financed the redemptions with
floating-rate commercial paper.
 
    On May 13, 1996, U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear annual interest at 7.625
percent. Upon maturity, each DECS will be mandatorily redeemed by U S WEST for
shares of FSA held by U S WEST or the cash equivalent, at U S WEST's option. The
number of shares to be delivered at maturity varies based on the per share
market price of FSA. If the market price is $26.63 per share or less, one share
of FSA will be delivered for each note; if the market price is between $26.63
and $32.48 per share, a fractional share is delivered so that the value at
maturity is equal to $26.63; if the market price is greater than $32.48 per
share, .8197 of a share is delivered for each note. At December 31, 1997, the
FSA shares had a market price of $48.25 per share. The capital assets segment
currently owns approximately 42.1 percent of the outstanding FSA common stock.
 
    Interest rates and maturities of long-term debt at December 31 follow:
 
<TABLE>
<CAPTION>
                                                                      MATURITIES
                                                -------------------------------------------------------    TOTAL      TOTAL
INTEREST RATES                                    1999       2000       2001       2002     THEREAFTER     1997       1996
----------------------------------------------  ---------  ---------  ---------  ---------  -----------  ---------  ---------
<S>                                             <C>        <C>        <C>        <C>        <C>          <C>        <C>
Up to 5%......................................  $  --      $      90  $  --      $     100   $      50   $     240  $     275
Above 5% to 6%................................     --         --             50     --             221         271        701
Above 6% to 7%................................        380        304        170      1,012       2,877       4,743      4,728
Above 7% to 8%................................     --         --         --             10       4,365       4,375      5,876
Above 8% to 9%................................          2     --            240     --           1,725       1,967      2,018
Above 9% to 10%...............................         15        200         10     --             525         750        750
Above 10%.....................................         35     --         --         --             300         335        467
Variable-rate debt indexed to two- and
  ten-year constant maturity U. S. Treasury
  rates.......................................        155     --         --         --          --             155        155
                                                ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                $     587  $     594  $     470  $   1,122   $  10,063      12,836     14,970
                                                ---------  ---------  ---------  ---------  -----------
                                                ---------  ---------  ---------  ---------  -----------
Capital lease obligations and other...........                                                                 257        274
Unamortized discount--net.....................                                                                (132)    (1,118)
Unamortized premium--net......................                                                                 287        335
Allocated to the capital assets
  segment--net................................                                                              --           (161)
                                                                                                         ---------  ---------
Total.........................................                                                           $  13,248  $  14,300
                                                                                                         ---------  ---------
                                                                                                         ---------  ---------
</TABLE>
 
                                       82
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
    Interest payments, net of amounts capitalized, were $946, $658 and $518 for
1997, 1996 and 1995, respectively, of which $47, $59 and $87, respectively,
related to the capital assets segment.
 
    Total debt at December 31, 1997 was approximately $14.6 billion and
Preferred Securities totaled approximately $1.1 billion. The total debt and
Preferred Securities of approximately $15.7 billion includes $5.5 billion of U S
WEST Communications debt, $2.7 billion of MediaOne Delaware debt and $7.5
billion of U S WEST Indebtedness.
 
    In connection with the Separation, New U S WEST and MediaOne will seek to
refinance the U S WEST Indebtedness through a combination of tender offers,
prepayments, defeasance, consent solicitations and/or exchange offers. As of
February 20, 1998, the estimated cost of the Refinancing is $346 ($231 after
tax). In addition to refinancing costs, such costs include the difference
between the market and face value of the U S WEST Indebtedness and a charge for
unamortized debt issuance costs.
 
INTEREST RATE RISK MANAGEMENT
 
    The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the interest rate variability. This is
achieved through the use of interest rate swaps, which adjust the ratio of
fixed- to variable-rate debt.
 
    Under an interest rate swap, U S WEST agrees with another party to exchange
interest payments at specified intervals over a defined term. Interest payments
are calculated by reference to the notional amount based on the fixed- and
variable-rate terms of the swap agreements.
 
    U S WEST Communications entered into currency swaps to convert Swiss
franc-denominated debt to U. S. dollar-denominated debt. This allowed U S WEST
Communications to achieve interest savings over issuing fixed-rate,
dollar-denominated debt. The currency swap and foreign currency debt are
combined and accounted for as if fixed-rate, dollar-denominated debt were issued
directly.
 
    The following table summarizes terms of swaps and interest rate contracts.
Variable rates are indexed to two- and ten-year constant maturity U. S. Treasury
and 30-day commercial paper rates.
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 1997                                 DECEMBER 31, 1996
                                  ------------------------------------------------  ------------------------------------------------
                                                            WEIGHTED- AVERAGE RATE                            WEIGHTED- AVERAGE RATE
                                   NOTIONAL                 ----------------------   NOTIONAL                 ----------------------
                                    AMOUNT     MATURITIES     RECEIVE       PAY       AMOUNT     MATURITIES     RECEIVE       PAY
                                  -----------  -----------  -----------  ---------  -----------  -----------  -----------  ---------
<S>                               <C>          <C>          <C>          <C>        <C>          <C>          <C>          <C>
Variable to fixed...............   $     700    1998-2004         5.68        6.93   $   1,235    1997-2004         5.70        6.89
Currency........................         204    1999-2001       --            6.55         204    1999-2001       --            6.55
</TABLE>
 
    During fourth-quarter 1996, U S WEST purchased $1.5 billion notional of put
options on U. S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. U S WEST Communications executed
forward U. S. Treasury Bond contracts to lock in the U. S. Treasury rate
component of future debt issues. At December 31, 1997, deferred gains of $8 and
deferred losses of $50 on the closed forward contracts are included as part of
the carrying value of the underlying debt. The deferred gains and losses are
being recognized as yield adjustments over the life of the related debt, which
mature at various dates through 2043.
 
                                       83
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
    The counterparties to swaps or other interest rate contracts are major
financial institutions. U S WEST is exposed to credit loss in the event of
nonperformance by these counterparties. U S WEST manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
 
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS
 
    Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
 
    The carrying values of mandatorily redeemable preferred stock and long-term
receivables approximate the fair values based on quoted market prices or
discounting future cash flows. The carrying value of foreign exchange contracts
approximate the carrying values based on estimated amounts U S WEST would
receive or pay to terminate such agreements. It is not practicable to estimate
the fair value of financial guarantees because there are no quoted market prices
for similar transactions.
 
    The fair values of interest rate swaps are based on estimated amounts U S
WEST would receive or pay to terminate such agreements taking into account
current interest rates and creditworthiness of the counterparties.
 
    The fair values of long-term debt, including debt associated with the
capital assets segment, Preferred Securities and Series D Preferred Stock, are
based on quoted market prices where available or, if not available, are based on
discounting future cash flows using current interest rates.
 
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                        ------------------------------------------
                                                                                1997                  1996
                                                                        --------------------  --------------------
                                                                        CARRYING     FAIR     CARRYING     FAIR
                                                                          VALUE      VALUE      VALUE      VALUE
                                                                        ---------  ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>        <C>
Debt (includes short-term portion)....................................  $  15,050  $  15,770  $  15,832  $  15,850
Interest rate swap agreements--assets.................................     --         --         --            (22)
Interest rate swap agreements--liabilities............................     --             47         17         47
                                                                        ---------  ---------  ---------  ---------
Debt--net.............................................................  $  15,050  $  15,817  $  15,849  $  15,875
                                                                        ---------  ---------  ---------  ---------
                                                                        ---------  ---------  ---------  ---------
Preferred Securities..................................................  $   1,080  $   1,110  $   1,080  $   1,074
Series D Preferred Stock..............................................        923      1,234        920        960
</TABLE>
 
    Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt securities have various maturity
dates through the year 2002. The market value of these securities is based on
quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
 
                                       84
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
    The amortized cost and estimated market value of debt and equity securities
follow:
<TABLE>
<CAPTION>
                                                     DECEMBER 31, 1997                               DECEMBER 31, 1996
                                    ----------------------------------------------------  ---------------------------------------
                                                     GROSS          GROSS                                GROSS          GROSS
                                                  UNREALIZED     UNREALIZED      FAIR                 UNREALIZED     UNREALIZED
SECURITIES                             COST          GAINS         LOSSES        VALUE      COST         GAINS         LOSSES
----------------------------------      ---      -------------  -------------  ---------  ---------  -------------  -------------
<S>                                 <C>          <C>            <C>            <C>        <C>        <C>            <C>
Equity securities.................   $      21     $      19      $      --    $      40  $     713    $       2      $      --
Debt securities...................          18            --             --           18         20           --             --
Securitized loan..................          55            --             (3)          52         55           --             (6)
                                                                         --                                                  --
                                           ---           ---                   ---------  ---------          ---
Total.............................   $      94     $      19      $      (3)   $     110  $     788    $       2      $      (6)
                                                                         --                                                  --
                                                                         --                                                  --
                                           ---           ---                   ---------  ---------          ---
                                           ---           ---                   ---------  ---------          ---
 
<CAPTION>
 
                                      FAIR
SECURITIES                            VALUE
----------------------------------  ---------
<S>                                 <C>
Equity securities.................  $     715
Debt securities...................         20
Securitized loan..................         49
 
                                    ---------
Total.............................  $     784
 
                                    ---------
                                    ---------
</TABLE>
 
    During 1997, U S WEST received proceeds of $898 from the sales of TCG and
TWX shares and realized pretax gains totaling $206. Net unrealized gains and
losses on marketable securities are included in equity. The 1997 net unrealized
gains were $13 (net of deferred taxes of $6). The 1996 net unrealized gains were
$1 (net of deferred taxes).
 
NOTE 12: LEASING ARRANGEMENTS
 
    U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $304, $245 and $263 in
1997, 1996 and 1995, respectively. Future minimum lease payments as of December
31, 1997, under noncancelable operating leases, follow:
 
<TABLE>
<CAPTION>
YEAR
-------------------------------------------------------------------------------------
<S>                                                                                    <C>
1998.................................................................................  $     194
1999.................................................................................        187
2000.................................................................................        157
2001.................................................................................        149
2002.................................................................................        108
Thereafter...........................................................................        777
                                                                                       ---------
Total................................................................................  $   1,572
                                                                                       ---------
                                                                                       ---------
</TABLE>
 
    Minimum rentals to be received under noncancelable subleases total $52. The
minimum future lease payments have not been reduced by the minimum sublease
rentals.
 
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
         SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
 
    On October 29, 1996, Financing II issued $480 of 8.25 percent Preferred
Securities and $15 of common securities. U S WEST holds all of the outstanding
common securities of Financing II. Financing II used the proceeds from such
issuance to purchase from Capital Funding $495 principal amount of Capital
Funding's 8.25 percent Subordinated Deferrable Interest Notes (the "Subordinated
Debt Securities") due 2036, the obligations under which are fully and
unconditionally guaranteed by U S WEST (the "Debt Guarantee"). The sole assets
of Financing II are and will be the Subordinated Debt Securities and the Debt
Guarantee.
 
    On September 11, 1995, Financing I issued $600 of 7.96 percent Preferred
Securities and $19 of common securities. U S WEST holds all of the outstanding
common securities of Financing I. Financing I
 
                                       85
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
         SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
         (CONTINUED)
used the proceeds from such issuance to purchase from Capital Funding $619
principal amount of Capital Funding's 7.96 percent Subordinated Debt Securities
due 2025, the obligations under which are fully and unconditionally guaranteed
by U S WEST. The sole assets of Financing I are and will be the Subordinated
Debt Securities and the Debt Guarantee.
 
    U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II's costs, expenses and other obligations (the
"Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I and II's obligations under the Preferred Securities. The interest
and other payment dates on the Subordinated Debt Securities correspond to the
distribution and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I and II.
 
    The 7.96 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing I is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 24,000,000 shares of the 7.96 percent Preferred Securities were
outstanding.
 
    The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 19,200,000 shares of the 8.25 percent Preferred Securities were
outstanding.
 
    In connection with the Separation, MediaOne will seek to refinance the
Preferred Securities. See Note 10--Debt--to the Consolidated Financial
Statements.
 
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
 
    On June 30, 1997, U S WEST acquired cable systems serving approximately
40,000 subscribers in Michigan for cash of $25 and the issuance of 994,082
shares of U S WEST Series E Preferred Stock. Dividends are payable quarterly at
the annual rate of 6.34 percent. The Series E Preferred Stock was recorded at
fair value of $50.00 per share at June 30, 1997, which was equal to its
liquidation value. Upon redemption, the preferred stockholders may elect to
receive cash or convert their Series E Preferred Stock into Media Stock. Cash
redemption is equal to the Series E Preferred Stock's liquidation value of
$50.00 per share, plus accrued dividends. The number of shares of Media Stock to
be received upon conversion is $47.50 per share divided by the then current
market price of Media Stock. The conversion rate is subject to adjustment by U S
WEST under certain circumstances.
 
                                       86
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED)
    The Series E Preferred Stock is redeemable as follows: (a) U S WEST may call
for redemption all or any part of the Series E Preferred Stock beginning on June
30, 2002; (b) on a yearly basis beginning August 1, 2007, and continuing through
August 1, 2016, U S WEST will redeem 49,704 shares of Series E Preferred Stock,
and on June 30, 2017, all of the remaining outstanding shares of Series E
Preferred Stock; or (c) all of the outstanding Series E Preferred Stock shall be
redeemed upon the occurrence of certain events, including the dissolution or
sale of all or substantially all of Media Group.
 
    On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred Stock") for a total of $50.
See Note 22--Net Investment in Assets Held for Sale--to the Consolidated
Financial Statements. The preferred stock was recorded at the fair market value
of $51 at the issue date. Media Group has the right commencing September 2,
1999, to redeem the shares for one thousand dollars per share plus unpaid
dividends and a redemption premium. The shares are mandatorily redeemable in
2004 at face value plus unpaid dividends. At the option of FFC, the preferred
stock also can be redeemed for common shares of FSA. The market value of the
option was $71 and $35 (based on the Black-Scholes model) at December 31, 1997
and 1996, respectively, with no carrying value.
 
    The Series E and Series C Preferred Stocks rank senior to all classes of U S
WEST common stock, are subordinated to any senior debt and the Preferred
Securities, and rank equally with the Series D Preferred Stock.
 
                                       87
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
                                                            MEDIA                   COMMON                     RETAINED
                                        COMMUNICATIONS      STOCK     U S WEST       STOCK       PREFERRED     EARNINGS
                                         STOCK SHARES      SHARES      SHARES       AMOUNT     STOCK AMOUNT    (DEFICIT)
                                       -----------------  ---------  -----------  -----------  -------------  -----------
                                                  SHARES IN THOUSANDS
<S>                                    <C>                <C>        <C>          <C>          <C>            <C>
Balance December 31, 1994............                                   469,343    $   8,056                   $    (458)
  Issuance of common stock...........                                     2,791          117
  Benefit trust contribution
    (OPEB)...........................                                     1,500           61
  Purchase of treasury stock.........                                    (1,705)         (63)
  Other..............................                                                      3
November 1, 1995.....................
  Recapitalization Plan..............        471,929        471,922    (471,929)
  Recapitalization Plan
    dissenters(1)....................             (6)
  Issuance of Communications Stock...          1,712                                      52
  Issuance of Media Stock............                           392                        7
  Net income.........................                                                                              1,317
  Common dividends declared ($2.14
    per Communications share)........                                                                             (1,010)
  Preferred dividends................                                                                                 (3)
  Market value adjustment for debt
    securities.......................                                                                                 36
  Foreign currency translation.......
  Other..............................                                                     (5)                          3
                                             -------      ---------  -----------  -----------        -----    -----------
Balance December 31, 1995............        473,635        472,314      --            8,228                        (115)
  Issuance of Communications Stock...          6,822                                     216
  Issuance of Media Stock for
    Continental Acquisition..........                       150,615                    2,590
  Other issuances of Media Stock.....                         1,853                       38
  Issuance of Series D Preferred
    Stock............................                                                            $     920
  Purchase of treasury stock.........                       (15,919)                    (297)
  Net income.........................                                                                              1,178
  Common dividends declared ($2.14
    per Communications share)........                                                                             (1,024)
  Preferred dividends................                                                                                 (9)
  Market value adjustment for debt
    and equity securities............                                                                                 (6)
  Foreign currency translation.......
  Other..............................                                                    (34)                         (6)
                                             -------      ---------  -----------  -----------        -----    -----------
Balance December 31, 1996............        480,457        608,863      --           10,741           920            18
  Issuance of Communications Stock...          4,058                                     138
  Issuance of Media Stock............                         1,783                       40
  Purchase of treasury stock.........                        (2,838)                     (53)
  Net income.........................                                                                                697
  Common dividends declared ($2.14
    per Communications share)........                                                                             (1,034)
  Preferred dividends................                                                                                (52)
  Market value adjustment for debt
    and equity securities............                                                                                 35
  Foreign currency translation.......
  Other..............................                                                     10             3             2
                                             -------      ---------  -----------  -----------        -----    -----------
Balance December 31, 1997............        484,515        607,808      --        $  10,876     $     923     $    (334)
                                             -------      ---------  -----------  -----------        -----    -----------
                                             -------      ---------  -----------  -----------        -----    -----------
 
<CAPTION>
                                           FOREIGN
                                          CURRENCY          LESOP
                                         TRANSLATION      GUARANTEE
                                       ---------------  -------------
 
<S>                                    <C>              <C>
Balance December 31, 1994............     $     (29)      $    (187)
  Issuance of common stock...........
  Benefit trust contribution
    (OPEB)...........................
  Purchase of treasury stock.........
  Other..............................
November 1, 1995.....................
  Recapitalization Plan..............
  Recapitalization Plan
    dissenters(1)....................
  Issuance of Communications Stock...
  Issuance of Media Stock............
  Net income.........................
  Common dividends declared ($2.14
    per Communications share)........
  Preferred dividends................
  Market value adjustment for debt
    securities.......................
  Foreign currency translation.......            (9)
  Other..............................                            60
                                                ---           -----
Balance December 31, 1995............           (38)           (127)
  Issuance of Communications Stock...
  Issuance of Media Stock for
    Continental Acquisition..........
  Other issuances of Media Stock.....
  Issuance of Series D Preferred
    Stock............................
  Purchase of treasury stock.........
  Net income.........................
  Common dividends declared ($2.14
    per Communications share)........
  Preferred dividends................
  Market value adjustment for debt
    and equity securities............
  Foreign currency translation.......            (1)
  Other..............................                            36
                                                ---           -----
Balance December 31, 1996............           (39)            (91)
  Issuance of Communications Stock...
  Issuance of Media Stock............
  Purchase of treasury stock.........
  Net income.........................
  Common dividends declared ($2.14
    per Communications share)........
  Preferred dividends................
  Market value adjustment for debt
    and equity securities............
  Foreign currency translation.......           (56)
  Other..............................                            45
                                                ---           -----
Balance December 31, 1997............     $     (95)      $     (46)
                                                ---           -----
                                                ---           -----
</TABLE>
 
------------------------------
 
(1) Under the Recapitalization Plan, Media Stock was not issued to shareowners
    who elected to receive cash rather than Communications Stock and Media
    Stock. Dissenting shareowners were paid $47.9375 per U S WEST share on
    December 15, 1995.
 
                                       88
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
 
    SERIES D PREFERRED STOCK.  On November 15, 1996, U S WEST issued 19,999,478
shares of 4.5 percent, 20 year, Series D Preferred Stock to Continental
shareowners. Dividends are payable quarterly on the nonvoting Series D Preferred
Stock as and when declared by the Board out of funds legally available. The
Series D Preferred Stock has a liquidation value of $50 per share and was
recorded at the November 15, 1996 fair value of $46 per share. The Series D
Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Series D Preferred Stock is redeemable at par, at the option of U S
WEST, into shares of Media Stock if the market price of Media common shares have
closed at $35.44 per share for at least 20 of the 30 consecutive trading days
prior to the notice of redemption. After November 15, 2001, the Series D
Preferred Stock is redeemable at par, at the option of U S WEST, in cash, Media
Stock, or any combination of cash and stock. If Media Stock is elected, the
number of shares to be issued will be determined based on the average market
price for the ten consecutive trading days ending on the third business day
prior to redemption, reduced by five percent. On November 15, 2016, U S WEST is
required to redeem the Series D Preferred Stock, at its election, for cash,
Media Stock, or any combination of cash and stock. Upon certain events,
including the disposition of all or substantially all of the properties and
assets attributed to the Media Group, the Series D Preferred Stock becomes
mandatorily redeemable. The Series D Preferred Stock ranks senior to all classes
of U S WEST common stock, is subordinated to any senior debt and the Preferred
Securities, and ranks equally with the Series E and C Preferred Stocks.
 
    COMMON STOCK.  In connection with the November 15, 1996, Continental
Acquisition, U S WEST issued 150,615,000 shares of Media Stock to Continental
shareowners, valued at $2,590.
 
    SHARE REPURCHASE.  During 1997 and 1996, U S WEST purchased and placed into
treasury 2,838,000 and 15,919,000 shares of Media Stock, at an average price per
share of $18.71 and $18.66, and a cost basis of $53 and $297, respectively.
Under the 1995 Recapitalization, shares of U S WEST stock held in treasury were
canceled.
 
    FOREIGN CURRENCY TRANSLATION.  Included in U S WEST's cumulative foreign
currency translation adjustment are cumulative tax benefits of $61, $24 and $24
at December 31, 1997, 1996 and 1995, respectively.
 
    LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP").  U S WEST maintains a
defined contribution savings plan for substantially all management and
occupational employees of the Company, except for employees of the Atlanta cable
systems and foreign national employees. U S WEST matches a percentage of
eligible employee contributions with shares of Communications Stock and/or Media
Stock in accordance with participant elections. Participants may also elect to
reallocate past Company contributions between Communications Stock and Media
Stock. In 1989, U S WEST established two LESOPs to provide Company stock for
matching contributions to the savings plan. Shares in the LESOP are released as
principal and interest are paid on the debt. At December 31, 1997, 11,966,157
shares of Communications Stock and 12,100,791 shares of Media Stock had been
allocated from the LESOP to participants' accounts, while 918,494 and 1,050,657
shares of Communications Stock and Media Stock, respectively, remained
unallocated.
 
    The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Consolidated Balance
Sheets and corresponding amounts have been recorded as reductions to
shareowners' equity. Contributions from U S WEST as well as dividends on
unallocated shares held by the LESOP ($3, $5 and $8 in 1997, 1996 and 1995,
respectively) are used for
 
                                       89
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
debt service. Beginning with the dividend paid in fourth-quarter 1995, dividends
on allocated shares are being paid annually to participants. Previously,
dividends on allocated shares were used for debt service with participants
receiving additional shares from the LESOP in lieu of dividends.
 
    U S WEST recognizes expense based on the cash payments method. Total Company
contributions to the plan (excluding dividends) were $89, $77 and $86 in 1997,
1996 and 1995, respectively, of which $7, $10 and $15, respectively, have been
classified as interest expense.
 
    SHAREHOLDER RIGHTS PLAN.  The Board has adopted a shareholder rights plan
which, in the event of a takeover attempt, would entitle existing shareowners to
certain preferential rights. The rights expire on April 6, 1999, and are
redeemable by the Company at any time prior to the date they would become
effective.
 
NOTE 16: EARNINGS PER SHARE
 
    In 1997, the Company adopted SFAS No. 128 which specifies new computation,
presentation and disclosure requirements for earnings per share to be applied
retroactively. Among other things, SFAS No. 128 requires presentation of basic
and diluted earnings per common share on the face of the income statement. The
following reflects the computation of diluted earnings (loss) per share for
Communications Stock and Media Stock. Income and earnings per share are before
extraordinary items and the cumulative effect of change in accounting principle.
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                         SHARES IN THOUSANDS
<S>                                                                                <C>        <C>        <C>
COMMUNICATIONS GROUP
Income used for basic earnings per share.........................................  $   1,180  $   1,215  $   1,184
Interest on convertible zero coupon subordinated notes, net of tax...............          9         13         12
                                                                                   ---------  ---------  ---------
Income used for diluted earnings per share.......................................  $   1,189  $   1,228  $   1,196
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
 
Weighted average number of shares used for basic earnings per share..............    482,751    477,549    470,716
Effect of dilutive securities:
  Stock options..................................................................      2,386      1,536      1,459
  Convertible zero coupon subordinated notes.....................................      6,095      9,506      9,758
                                                                                   ---------  ---------  ---------
Weighted average number of shares used for diluted earnings per share............    491,232    488,591    481,933
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Communications Group basic earnings per share....................................  $    2.44  $    2.55  $    2.52
Communications Group diluted earnings per share..................................  $    2.42  $    2.51  $    2.48
</TABLE>
 
    The Communications Group dilutive securities represent the incremental
weighted average shares from the assumed exercise of Communications Group stock
options and the assumed conversion of the
 
                                       90
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 16: EARNINGS PER SHARE (CONTINUED)
zero coupon subordinated notes for the period they were outstanding. The zero
coupon subordinated notes were redeemed in August 1997.
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                         SHARES IN THOUSANDS
<S>                                                                                <C>        <C>        <C>
MEDIA GROUP
Income (loss)....................................................................  $    (480) $     (71) $     145
Dividends on preferred stock.....................................................        (52)        (9)        (3)
                                                                                   ---------  ---------  ---------
Income (loss) available to common shareowners used for basic and diluted earnings
  per share......................................................................  $    (532) $     (80) $     142
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
 
Weighted average number of shares used for basic earnings per share..............    606,749    491,924    470,549
Effect of dilutive securities:
  Stock options..................................................................     --         --          1,063
                                                                                   ---------  ---------  ---------
Weighted average number of shares used for diluted earnings per share............    606,749    491,924    471,612
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Media Group basic and diluted earnings (loss) per share..........................  $   (0.88) $   (0.16) $    0.30
</TABLE>
 
    Media Group diluted loss per share for 1997 and 1996 does not include
potential share issuances associated with stock options, convertible zero coupon
subordinated notes and the convertible Series D Preferred Stock due to their
antidilutive effects. In 1995, convertible zero coupon subordinated notes are
not included in Media Group's diluted earnings per share due to their
antidilutive effects. The zero coupon subordinated notes were redeemed in August
1997.
 
NOTE 17: STOCK INCENTIVE PLANS
 
    U S WEST maintains stock incentive plans for executives and other employees
and nonemployees, primarily members of the Board. The Amended 1994 Stock Plan
(the "Plan") was approved by shareowners on October 31, 1995, in connection with
the Recapitalization Plan. The Plan is a successor plan to the U S WEST Stock
Incentive Plan and the U S WEST 1991 Stock Incentive Plan (the "Predecessor
Plans"). No further grants of options or restricted stock may be made under the
Predecessor Plans. The Plan is administered by the Human Resources Committee of
the Board of Directors with respect to officers, executive officers and outside
directors and by a special committee with respect to all other eligible
employees and eligible nonemployees.
 
    Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
 
    The maximum aggregate number of shares of Communications Stock and Media
Stock that may be granted in any calendar year for all purposes under the Plan
is nine-tenths of one percent (0.90 percent) and three-quarters of one percent
(0.75 percent), respectively, of the shares of such class outstanding (excluding
shares held in U S WEST's treasury) on the first day of such calendar year. In
the event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in any such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. Options granted vest over periods up
to three years and may be exercised no later than 10 years after the grant date.
 
                                       91
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
    During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $1, $3 and $7 in 1997, 1996 and
1995, respectively, all of which related to the Plan modifications.
 
    U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, the pro forma
net income and earnings per share for U S WEST and both the Communications and
Media Groups would have been the following:
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                  --------------------------------------------------------------------------------------------------
                                                 1997                                 1996                            1995
                                  -----------------------------------  -----------------------------------  ------------------------
                                                  EARNINGS (LOSS)                      EARNINGS (LOSS)                    EARNINGS
                                                     PER SHARE                            PER SHARE                       PER SHARE
                                  NET INCOME   ----------------------  NET INCOME   ----------------------               -----------
                                    (LOSS)       BASIC      DILUTED      (LOSS)       BASIC      DILUTED    NET INCOME      BASIC
                                  -----------  ---------  -----------  -----------  ---------  -----------  -----------     -----
<S>                               <C>          <C>        <C>          <C>          <C>        <C>          <C>          <C>
COMMUNICATIONS GROUP:
  As reported...................   $   1,177   $    2.43   $    2.41    $   1,249   $    2.62   $    2.58    $   1,176    $    2.50
  Pro forma.....................       1,164        2.41        2.40        1,247        2.61        2.58        1,178         2.50
MEDIA GROUP:
  As reported...................        (480)      (0.88)      (0.88)         (71)      (0.16)      (0.16)         141         0.29
  Pro forma.....................        (501)      (0.91)      (0.91)         (82)      (0.18)      (0.18)         140         0.29
 
<CAPTION>
 
                                    DILUTED
                                  -----------
<S>                               <C>
COMMUNICATIONS GROUP:
  As reported...................   $    2.46
  Pro forma.....................        2.48
MEDIA GROUP:
  As reported...................        0.29
  Pro forma.....................        0.29
</TABLE>
 
    The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
 
    Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
during 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                               ----------------------------------
                                                                                  1997        1996        1995
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
COMMUNICATIONS GROUP:
  Risk-free interest rate....................................................       6.40%       6.50%       6.00%
  Expected dividend yield....................................................       5.80%       6.70%       6.70%
  Expected life..............................................................   4.0 years   4.5 years   4.5 years
  Expected volatility........................................................       25.0%       19.6%       19.6%
MEDIA GROUP:
  Risk-free interest rate....................................................       6.40%       6.30%       6.00%
  Expected life..............................................................   5.0 years   5.0 years   5.0 years
  Expected volatility........................................................       30.0%       28.5%       28.5%
</TABLE>
 
                                       92
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
    Data for outstanding options under the Plan is summarized as follows:
 
<TABLE>
<CAPTION>
                                         COMMUNICATIONS GROUP            MEDIA GROUP              U S WEST, INC.
                                       -------------------------  -------------------------  ------------------------
                                                      WEIGHTED-                  WEIGHTED-                 WEIGHTED-
                                                       AVERAGE                    AVERAGE                   AVERAGE
                                        NUMBER OF     EXERCISE     NUMBER OF     EXERCISE     NUMBER OF    EXERCISE
                                          SHARES        PRICE        SHARES        PRICE       SHARES*       PRICE
                                       ------------  -----------  ------------  -----------  -----------  -----------
<S>                                    <C>           <C>          <C>           <C>          <C>          <C>
Outstanding January 1, 1995..........                                                          7,386,037   $   38.66
                                                                                             -----------  -----------
  Granted(1).........................                                                          4,814,856       41.12
  Exercised..........................                                                           (430,631)      34.03
  Canceled or expired(1).............                                                         (1,927,083)      37.02
                                                                                             -----------  -----------
Outstanding October 31, 1995.........                                                          9,843,179   $   40.39
                                                                                             -----------  -----------
Recapitalization Plan................     9,843,179   $   24.11      9,843,179   $   16.28    (9,843,179)  $  (40.39)
                                       ------------  -----------  ------------  -----------  -----------  -----------
                                                                                             -----------  -----------
  Granted............................       138,309       32.16         71,580       18.51
  Exercised..........................      (543,037)      21.23       (191,243)      14.71
  Canceled or expired................       (15,350)      24.91        (15,350)      16.82
                                       ------------  -----------  ------------  -----------
Outstanding December 31, 1995........     9,423,101   $   24.39      9,708,166   $   16.33
                                       ------------  -----------  ------------  -----------
  Granted............................     3,624,602       30.97      5,523,728       19.36
  Exercised..........................    (1,205,730)      22.37       (507,329)      14.93
  Canceled or expired................      (429,058)      25.01       (610,471)      17.86
                                       ------------  -----------  ------------  -----------
Outstanding December 31, 1996........    11,412,915   $   26.67     14,114,094   $   17.49
                                       ------------  -----------  ------------  -----------
  Granted............................     9,491,642       34.87      8,733,782       20.33
  Exercised..........................    (2,648,569)      25.41     (1,371,529)      16.30
  Canceled or expired................      (637,411)      27.54     (1,027,388)      18.35
                                       ------------  -----------  ------------  -----------
Outstanding December 31, 1997........    17,618,577   $   31.23     20,448,959   $   18.74
                                       ------------  -----------  ------------  -----------
                                       ------------  -----------  ------------  -----------
</TABLE>
 
------------------------------
 
*   Includes options granted in tandem with stock appreciation rights.
 
(1) Amounts have been restated to include modified options which, under the
    provisions of SFAS No. 123, are treated as an exchange of the original award
    (i.e., canceled) for a new award (i.e., stock grant).
 
    The number of exercisable options under the Plan and the weighted-average
exercise prices follow:
 
<TABLE>
<CAPTION>
                                                                    COMMUNICATIONS GROUP          MEDIA GROUP
                                                                   -----------------------  -----------------------
                                                                                WEIGHTED-                WEIGHTED-
                                                                                 AVERAGE                  AVERAGE
                                                                   NUMBER OF    EXERCISE    NUMBER OF    EXERCISE
EXERCISABLE OPTIONS AT:                                              SHARES       PRICE       SHARES       PRICE
-----------------------------------------------------------------  ----------  -----------  ----------  -----------
<S>                                                                <C>         <C>          <C>         <C>
December 31, 1995................................................   2,672,666   $   22.22    3,021,166   $   14.89
December 31, 1996................................................   3,881,100       25.71    4,867,207       16.74
December 31, 1997................................................   5,299,955       25.72    7,235,685       16.54
</TABLE>
 
                                       93
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
    The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                OUTSTANDING OPTIONS
                                                     ------------------------------------------    EXERCISABLE OPTIONS
                                                                      WEIGHTED-                  -----------------------
                                                                       AVERAGE       WEIGHTED-                WEIGHTED-
                                                                      REMAINING       AVERAGE                  AVERAGE
                                                        NUMBER       CONTRACTUAL     EXERCISE      NUMBER     EXERCISE
RANGE OF EXERCISE PRICES                             OUTSTANDING    LIFE (YEARS)       PRICE     EXERCISABLE    PRICE
---------------------------------------------------  ------------  ---------------  -----------  ----------  -----------
<S>                                                  <C>           <C>              <C>          <C>         <C>
COMMUNICATIONS GROUP
$16.08 - $26.11....................................     4,449,954          6.63      $   23.71    3,518,013   $   23.12
$26.34 - $33.13....................................     4,238,914          7.99          31.03    1,577,356       30.30
  $33.25...........................................     4,637,013          9.31          33.25        6,375       33.25
$33.63 - $46.13....................................     4,292,696          9.19          37.02      198,211       35.36
                                                     ------------           ---     -----------  ----------  -----------
  Total............................................    17,618,577          8.28      $   31.23    5,299,955   $   25.72
                                                     ------------           ---     -----------  ----------  -----------
                                                     ------------           ---     -----------  ----------  -----------
MEDIA GROUP
$10.86 - $16.13....................................     4,632,940          5.88      $   14.92    3,994,271   $   14.73
$16.17 - $18.50....................................     6,009,898          8.46          18.06    1,627,574       17.59
$18.54 - $20.50....................................     4,276,400          8.00          19.56    1,477,907       19.89
$20.56 - $22.13....................................     4,241,765          8.69          21.32      135,933       20.65
$22.31 - $28.88....................................     1,287,956          9.80          24.47       --          --
                                                     ------------           ---     -----------  ----------  -----------
  Total............................................    20,448,959          7.91      $   18.74    7,235,685   $   16.54
                                                     ------------           ---     -----------  ----------  -----------
                                                     ------------           ---     -----------  ----------  -----------
</TABLE>
 
    A total of 9,491,642, 3,624,602 and 4,953,165 Communications Group options
and 8,733,782, 5,523,728 and 4,886,436 Media Group options were granted in 1997,
1996 and 1995, respectively. Included in the total grants were 198,027 and
1,751,936 of modified Communications Group options and 249,827 and 1,751,936 of
modified Media Group options revalued as new grants during 1996 and 1995,
respectively. The modified Communications Group or Media Group options were not
significant during 1997. The weighted-average grant date fair value of
Communications Group and Media Group options granted during the year, inclusive
of modified options, using the Black-Scholes option-pricing model was $3.87 and
$7.10, respectively, for 1996, and $3.19 and $6.07, respectively, for 1995.
Excluding the modifications, the weighted-average grant date fair value was
$5.70 and $7.81, respectively, for 1997, $3.67 and $7.23, respectively, for
1996, and $2.92 and $6.45, respectively, for 1995. The exercise price of
Communications Group and Media Group stock options, excluding modified options,
equals the market price on the grant date. The exercise prices of modified stock
options may be greater or less than the market price on the revaluation date.
 
    Approximately 3,100,000 and 2,950,000 shares of Communications Stock and
2,700,000 and 2,200,000 of Media Stock were available for grant under the plans
in effect at December 31, 1997 and 1996, respectively. Approximately 20,720,000
shares of Communications Stock and 23,150,000 shares of Media Stock were
reserved for issuance under the Plan at December 31, 1997.
 
                                       94
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS
 
PENSION PLAN
 
    U S WEST sponsors a defined benefit pension plan covering substantially all
management and occupational employees of the Company, except for foreign
national employees. Effective January 1, 1997, Continental's defined benefit
pension plan was merged into the U S WEST plan. On April 1, 1997, employees of
the cable systems in Atlanta, Georgia joined the U S WEST plan. Management
benefits are based on a final pay formula while occupational benefits are based
on a flat benefit formula. U S WEST uses the projected unit credit method for
the determination of pension cost for financial reporting purposes and the
aggregate cost method for funding purposes. U S WEST's policy is to fund amounts
required under the Employee Retirement Income Security Act of 1974 and no
funding was required in 1997, 1996 and 1995.
 
    The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follow:
 
<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                   1997       1996       1995
                                                                                 ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
Details of pension cost:
  Service cost--benefits earned during the period..............................  $     189  $     203  $     173
  Interest cost on projected benefit obligation................................        612        575        558
  Actual return on plan assets.................................................     (1,996)    (1,509)    (1,918)
  Net amortization and deferral................................................      1,159        726      1,185
                                                                                 ---------  ---------  ---------
Net pension credit                                                               $     (36) $      (5) $      (2)
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
    The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1997, 1996 and 1995.
 
    The funded status of the U S WEST plan follows:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1997       1996
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
Accumulated benefit obligation, including vested benefits of $7,404 and $6,544,
  respectively..............................................................................  $   8,278  $   7,446
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Plan assets at fair value, primarily stocks and bonds(1)....................................  $  12,260  $  10,958
Less: Projected benefit obligation..........................................................      9,167      8,310
                                                                                              ---------  ---------
Plan assets in excess of projected benefit obligation.......................................      3,093      2,648
Unrecognized net (gain).....................................................................     (1,966)    (1,502)
Prior service cost not yet recognized in net periodic pension cost..........................          6         31
Balance of unrecognized net asset at January 1, 1987........................................       (546)      (626)
                                                                                              ---------  ---------
Prepaid pension cost........................................................................  $     587  $     551
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
------------------------------
 
(1) Pension plan assets include Communications Stock and Media Stock of $12 and
    $8, respectively, in 1997, and $8 and $7, respectively, in 1996.
 
                                       95
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
 
    The actuarial assumptions used to calculate the projected benefit obligation
follow:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1997       1996
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Discount rate..................................................................................      7.00%      7.50%
Weighted-average rate of compensation increase.................................................      5.50%      5.50%
</TABLE>
 
    Anticipated future benefit changes have been reflected in the above
calculations.
 
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
    U S WEST and most of its subsidiaries provide certain health care and life
insurance benefits to retired employees. In conjunction with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," U S
WEST immediately recognized the accumulated postretirement benefit obligation
for current and future retirees. However, the FCC and certain state
jurisdictions permit amortization of the transition obligation over the average
remaining service period of active employees for regulatory accounting purposes
with most jurisdictions requiring funding as a stipulation for rate recovery.
 
    U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
 
<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                            -------------------------------
                                                                                              1997       1996       1995
                                                                                            ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
Service cost--benefits earned during the period...........................................  $      66  $      70  $      65
Interest on accumulated benefit obligation................................................        296        259        267
Actual return on plan assets..............................................................       (394)      (231)      (415)
Net amortization and deferral.............................................................        211         68        286
                                                                                            ---------  ---------  ---------
Net postretirement benefit costs..........................................................  $     179  $     166  $     203
                                                                                            ---------  ---------  ---------
                                                                                            ---------  ---------  ---------
</TABLE>
 
    The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1997, 1996 and 1995.
 
                                       96
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
    The funded status of the plans follows:
 
<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 1997       1996
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
Accumulated postretirement benefit obligation attributable to:
  Retirees...................................................................................  $   2,403  $   2,255
  Fully eligible plan participants...........................................................        820        347
  Other active plan participants.............................................................      1,183      1,289
                                                                                               ---------  ---------
Total accumulated postretirement benefit obligation..........................................      4,406      3,891
Unrecognized net gain........................................................................        631        534
Unamortized prior service cost...............................................................       (160)        32
Fair value of plan assets, primarily stocks, bonds and life insurance(1).....................     (2,413)    (2,063)
                                                                                               ---------  ---------
Accrued postretirement benefit obligation....................................................  $   2,464  $   2,394
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>
 
------------------------------
 
(1) Medical plan assets include Communications Stock and Media Stock of $155 and
    $94, respectively, in 1996.
 
    The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                    --------------
                                                     1997    1996
                                                    ------  ------
<S>                                                 <C>     <C>
Discount rate.....................................    7.00%   7.50%
Medical cost trend rate*..........................    8.00%   8.00%
</TABLE>
 
------------------------------
 
*   Medical cost trend rate gradually declines to an ultimate rate of 5.5
    percent in 2011.
 
    A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1997 net postretirement benefit cost by approximately $11 and
increased the 1997 accumulated postretirement benefit obligation by
approximately $394.
 
    For U S WEST, the annual funding amount is based on its cash requirements,
with the funding at U S WEST Communications based on regulatory accounting
requirements.
 
    Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
 
                                       97
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 19: INCOME TAXES
 
    The components of the provision for income taxes follow:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                      DECEMBER 31,
                                                    ----------------
                                                    1997  1996  1995
                                                    ----  ----  ----
<S>                                                 <C>   <C>   <C>
FEDERAL:
  Current.........................................  $587  $601  $481
  Deferred........................................  (147)    5   225
  Investment tax credits--net.....................   (15)  (28)  (38)
                                                    ----  ----  ----
                                                     425   578   668
                                                    ----  ----  ----
STATE AND LOCAL:
  Current.........................................   100    75    64
  Deferred........................................   (16)   11    54
                                                    ----  ----  ----
                                                      84    86   118
                                                    ----  ----  ----
FOREIGN:
  Current.........................................    (1)    2     6
  Deferred........................................    14    30    33
                                                    ----  ----  ----
                                                      13    32    39
                                                    ----  ----  ----
Provision for income taxes........................  $522  $696  $825
                                                    ----  ----  ----
                                                    ----  ----  ----
</TABLE>
 
    U S WEST paid $636, $693 and $566 for income taxes in 1997, 1996 and 1995,
respectively, inclusive of the capital assets segment.
 
    The effective tax rate differs from the statutory tax rate as follows:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER
                                                            31,
                                                    -------------------
                                                    1997   1996   1995
                                                    -----  -----  -----
                                                       (IN PERCENT)
<S>                                                 <C>    <C>    <C>
Federal statutory tax rate........................   35.0   35.0   35.0
State income taxes--net of federal effect.........    4.4    3.0    3.5
Foreign taxes--net of federal effect..............    0.7    1.1    1.2
Goodwill amortization.............................    4.6    0.8    0.4
Investment tax credit amortization................   (0.8)  (0.9)  (1.2)
Other.............................................   (1.2)  (1.2)  (0.6)
                                                    -----  -----  -----
Effective tax rate................................   42.7   37.8   38.3
                                                    -----  -----  -----
                                                    -----  -----  -----
</TABLE>
 
                                       98
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 19: INCOME TAXES (CONTINUED)
    The components of the net deferred tax liability follow:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                    --------------
                                                     1997    1996
                                                    ------  ------
<S>                                                 <C>     <C>
Intangible assets.................................  $2,605  $2,414
Property, plant and equipment.....................   1,862   1,891
State deferred taxes--net of federal effect.......     871   1,141
Leases............................................     591     679
Investments.......................................    --       373
Other.............................................     345     126
                                                    ------  ------
  Deferred tax liabilities........................   6,274   6,624
                                                    ------  ------
Postemployment benefits, including pension........     768     698
State deferred taxes--net of federal effect.......     221     223
Restructuring, assets held for sale and other.....     209     301
Investments.......................................     203    --
Net operating loss and tax credit carryforwards...     155     466
Unamortized investment tax credit.................      59      61
Valuation allowance...............................    (320)   (387)
Other.............................................     615     455
                                                    ------  ------
  Deferred tax assets.............................   1,910   1,817
                                                    ------  ------
Net deferred tax liability........................  $4,364  $4,807
                                                    ------  ------
                                                    ------  ------
</TABLE>
 
    In connection with the Continental Acquisition, U S WEST has net operating
loss carryforwards of approximately $300 for federal income tax purposes,
expiring in various years through 2011. U S WEST also acquired investment tax
credit carryforwards of approximately $50, expiring in various years through
2005. A valuation allowance of $320 has been established for the carryforwards
and a deferred tax asset associated with an investment due to potential
limitations on utilization which may exist for U S WEST. If in future periods
the realization of the carryforwards or deferred tax asset becomes more likely
than not, any reduction in the valuation allowance will be allocated to reduce
goodwill and acquired intangible assets.
 
    The current portion of the deferred tax asset was $373 and $213 at December
31, 1997 and 1996, respectively, resulting primarily from restructuring charges
and compensation-related items. The net deferred tax liability includes $669 and
$671 in 1997 and 1996, respectively, related to the capital assets segment.
Foreign operations contributed pretax losses of $604, $362, and $35 during 1997,
1996 and 1995, respectively.
 
NOTE 20: COMMITMENTS AND CONTINGENCIES
 
COMMUNICATIONS GROUP CONTINGENCIES
 
    At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
 
                                       99
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
    WASHINGTON.  In 1996, the WUTC acted on U S WEST Communications' 1995 rate
request. U S WEST Communications had sought to increase revenues by raising
rates primarily for basic residential services over a four-year period. Instead
of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual
net revenue reductions, effective May 1, 1996.
 
    On December 24, 1997, the Washington State Supreme Court upheld the WUTC
ruling. The Washington State Supreme Court's ruling resulted in an estimated
liability for the revenues that were collected subject to refund from May 1,
1996 through December 31, 1997, including interest, in the amount of $225. The
prospective revenue reduction as a result of this ruling approximates $115
annually, which includes the effects of business growth. In a separate action,
the WUTC authorized a rate increase of approximately $60 annually that partially
mitigates the effect of the Washington State Supreme Court's ruling. Tariffs
implementing both orders became effective February 1, 1998.
 
    OREGON.  On May 1, 1996, the OPUC approved a stipulation terminating
prematurely U S WEST Communications' AFOR plan, and it then undertook a review
of U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST
Communications to reduce its annual revenues by $97, effective May 1, 1997, and
to issue a one-time refund, including interest, of approximately $102 to reflect
the revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
 
    U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court which granted U S
WEST Communications' request for a stay, pending a full review of the OPUC's
order. On February 19, 1998, the Oregon Circuit Court entered a judgment in U S
WEST Communications' favor on most of the appealed issues. The OPUC has
announced its intent to appeal. The potential exposure, including interest, at
December 31, 1997, is not expected to exceed $180.
 
    UTAH.  In another proceeding, the Utah Supreme Court has remanded a UPSC
order to the UPSC for hearing, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The UPSC's initial order denied a refund request from interexchange
carriers and other parties related to the Tax Reform Act of 1986. The potential
exposure, including interest, at December 31, 1997, is not expected to exceed
$160.
 
    STATE REGULATORY ACCRUALS.  U S WEST Communications has accrued $348 at
December 31, 1997, which represents its estimated liability for all state
regulatory proceedings, predominately the items discussed above. Approximately
$225 of the total estimated liability was recognized during fourth-quarter 1997.
It is possible that the ultimate liability could exceed the recorded liability
by an amount up to approximately $230. U S WEST Communications will continue to
monitor and evaluate the risks associated with its local regulatory
jurisdictions, and will adjust estimates as new information becomes available.
 
MEDIA GROUP CONTINGENCIES
 
    In February 1997, the King County Superior Court in Washington state ruled
that a subsidiary of Media Group violated the terms of its partnership agreement
with its minority partners in the Seattle cellular partnership by entering into
the AirTouch Joint Venture. Similar litigation was filed in other
 
                                      100
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. On December 1, 1997, this minority partner
announced it was selling its minority interests in the eight cellular properties
where it was a partner with a Media Group subsidiary to AirTouch. As a result of
the minority partner's actions, litigation in the states of Washington, Arizona,
Colorado, Minnesota, Idaho and Delaware has now been stayed or dismissed pending
consummation of the transfer of the minority partner's interest to AirTouch. The
AirTouch Transaction has been entered into in lieu of the AirTouch Joint
Venture.
 
U S WEST GUARANTEES
 
    U S WEST commitments and debt guarantees associated with Media Group
international and domestic investments totaled approximately $650 and $175
respectively, at December 31, 1997. In addition, a Media Group subsidiary
guarantees debt, non-recourse to U S WEST, associated with its international
investment in the principal amount of approximately $600.
 
NOTE 21: SUBSEQUENT EVENT
 
SALE OF DOMESTIC WIRELESS BUSINESSES
 
    On January 29, 1998, U S WEST entered into the AirTouch Merger Agreement
pursuant to which U S WEST agreed to sell its domestic wireless business to
AirTouch in a tax-efficient transaction. The domestic wireless business includes
cellular communication services provided to 2.6 million customers in 12 western
and midwestern states and a 25 percent interest in PrimeCo. Pursuant to the
AirTouch Merger Agreement, AirTouch will acquire these cellular and PCS
interests. Consideration under the AirTouch Transaction totals approximately
$5.7 billion (subject to certain closing adjustments) and consists of (i) debt
reduction of approximately $1.4 billion, (ii) the issuance to U S WEST of $1.6
billion in liquidation preference of dividend bearing AirTouch preferred stock
(fair value of approximately $1.45 billion), and (iii) approximately $2.7
billion in value of AirTouch common stock. The number of shares of AirTouch
common stock to be received by U S WEST will depend on the volume-weighted
average trading price of the AirTouch common stock during a 30-day period ending
on the fifth trading day prior to the closing of the transaction (the "AirTouch
Determination Price"). If the AirTouch Determination Price is greater than or
equal to $45, U S WEST will receive 60.8 million shares of AirTouch common
stock. If the AirTouch Determination Price is $40 or lower, U S WEST will
receive 67.1 million shares of AirTouch common stock. If the AirTouch
Determination Price is between $40 and $45, the number of shares of AirTouch
common stock to be received will decrease from 67.1 million to 60.8 million on a
proportionate basis.
 
    U S WEST expects to consummate the AirTouch Transaction in the second
quarter of 1998, subject to the receipt of certain regulatory and other third
party approvals. The approval of U S WEST's stockholders is not required to
consummate the AirTouch transaction. Consummation of the transaction will result
in the disposition of Media Group's domestic wireless businesses. If the terms
of the AirTouch Determination Price were applied as of February 20, 1998, this
transaction would result in a gain of approximately $2.2 billion, net of
deferred taxes of $1.6 billion.
 
    In connection with this transaction, U S WEST and AirTouch will enter into
an investment agreement, pursuant to which AirTouch will agree to provide to U S
WEST registration rights with respect to the shares of AirTouch preferred stock
and AirTouch common stock which U S WEST receives in the AirTouch Transaction.
 
                                      101
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 21: SUBSEQUENT EVENT (CONTINUED)
    U S WEST and AirTouch are currently parties to a multi-phased joint venture
pursuant to which they have agreed to combine their domestic cellular
businesses. The AirTouch Transaction has been entered into in lieu of such joint
venture.
 
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE
 
    The Consolidated Financial Statements include the discontinued operations of
the capital assets segment. In 1993, the Board approved a plan to dispose of the
capital assets segment through the sale of segment assets and businesses. The
capital assets segment includes activities related to financial services and
financial guarantee insurance operations. Also included in the segment is U S
WEST Real Estate, Inc., for which disposition was announced in 1991.
 
    Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "net investment in assets held for sale." The net
realizable value of the assets is evaluated on an ongoing basis with adjustments
to the existing reserve, if any, charged to continuing operations. No such
adjustment was required in 1997, 1996 or 1995.
 
    In second-quarter 1996, U S WEST received proceeds of $98 from the sale of
3,750,000 shares of FSA common stock. This sale reduced U S WEST's ownership in
FSA to approximately 40 percent. Also in second-quarter 1996, U S WEST issued
DECS due May 15, 1999. The shares of FSA to be delivered upon maturity of the
DECS, combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated,
substantially dispose of U S WEST's ownership in FSA. See Note 10--Debt and Note
14--Preferred Stock Subject to Mandatory Redemption--to the Consolidated
Financial Statements.
 
    In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance by December 1998. During 1997, in order to monetize unrealized gains
associated with its investment in Enhance, U S WEST sold options for the
purchase of 828,000 residual shares of Enhance common stock at the DECS
maturity. At December 31, 1997, an unrecognized loss of $10 (net of income tax
benefits of $7) was included in equity related to these contracts. The shares of
Enhance to be delivered upon maturity of the DECS combined with the option
would, if consummated, result in a complete disposition of U S WEST's ownership
in Enhance. See Note 10--Debt--to the Consolidated Financial Statements.
 
    U S WEST Real Estate, Inc. has sold various assets for proceeds of $88, $156
and $120 in each of the three years ended December 31, 1997, respectively. The
sales proceeds were in line with estimates. Proceeds from sales were primarily
used to repay related debt. U S WEST expects to substantially complete the
liquidation of this portfolio by the end of 1998. The balance of real estate and
related assets subject to sale is approximately $213, net of reserves, as of
December 31, 1997.
 
    Building sales and operating revenues of the capital assets segment were
$116, $223 and $237 in 1997, 1996 and 1995, respectively. Income or losses from
the capital assets segment are being deferred and are included within the
reserve for assets held for sale.
 
    The assets and liabilities of the capital assets segment have been
separately classified on the Consolidated Balance Sheets as net investment in
assets held for sale.
 
                                      102
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
    The components of net investment in assets held for sale follow:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                    --------------
                                                     1997    1996
                                                    ------  ------
<S>                                                 <C>     <C>
ASSETS
Cash and cash equivalents.........................  $   54  $   21
Finance receivables--net..........................     777     869
Investment in real estate--net of valuation
  allowance.......................................     156     182
Bonds, at market value............................     119     146
Investment in FSA.................................     365     326
Other assets......................................     197     165
                                                    ------  ------
Total assets......................................  $1,668  $1,709
                                                    ------  ------
                                                    ------  ------
 
LIABILITIES
Debt..............................................  $  372  $  481
Deferred income taxes.............................     669     671
Accounts payable, accrued liabilities and other...     197     137
Minority interests................................      11      11
                                                    ------  ------
Total liabilities.................................   1,249   1,300
                                                    ------  ------
Net investment in assets held for sale............  $  419  $  409
                                                    ------  ------
                                                    ------  ------
</TABLE>
 
    Finance receivables primarily consist of contractual obligations under
long-term leases that U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
 
    The components of finance receivables follow:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                    --------------
                                                     1997    1996
                                                    ------  ------
<S>                                                 <C>     <C>
Receivables.......................................  $  719  $  821
Unguaranteed estimated residual values............     431     444
                                                    ------  ------
                                                     1,150   1,265
Less: Unearned income.............................     355     380
Credit loss and other allowances..................      18      16
                                                    ------  ------
Finance receivables--net..........................  $  777  $  869
                                                    ------  ------
                                                    ------  ------
</TABLE>
 
    Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of equity.
 
    The amortized cost of $117 and $147 at December 31, 1997 and 1996,
respectively, of investments in debt securities approximates market value. Total
net unrealized gains in 1997 of $22 (net of deferred taxes of $16) and 1996 net
unrealized losses of $7 (net of deferred taxes of $5) are included in equity.
 
                                      103
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT
 
    Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
 
<TABLE>
<CAPTION>
                                                                    MATURITIES
                                    --------------------------------------------------------------------------    TOTAL      TOTAL
INTEREST RATES                         1998        1999        2000         2001         2002      THERE- AFTER   1997       1996
----------------------------------     -----     ---------     -----        -----        -----     -----------  ---------  ---------
<S>                                 <C>          <C>        <C>          <C>          <C>          <C>          <C>        <C>
Above 6% to 7%....................   $      --   $      --   $      --    $      --    $      --    $      --   $      --  $      15
Above 7% to 8%....................          12          12          --           --            1          148         173         --
Above 8% to 9%....................          --          95           4           --           --           --          99        154
Above 9% to 10%...................          --          --          --           --           --           --          --          5
                                           ---   ---------         ---          ---          ---        -----   ---------  ---------
                                     $      12   $     107   $       4    $      --    $       1    $     148         272        174
                                           ---   ---------         ---          ---          ---        -----
                                           ---   ---------         ---          ---          ---        -----
Allocated to the capital assets
  segment--net....................                                                                                    100        307
                                                                                                                ---------  ---------
Total.............................                                                                              $     372  $     481
                                                                                                                ---------  ---------
                                                                                                                ---------  ---------
</TABLE>
 
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK--FINANCIAL GUARANTEES
 
    U S WEST retained certain risks in asset-backed obligations related to the
commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                                --------------------
TERMS OF MATURITY                                                                 1997       1996
------------------------------------------------------------------------------  ---------  ---------
<S>                                                                             <C>        <C>
0 to 5 Years..................................................................  $     449  $     416
5 to 10 Years.................................................................        266        436
10 to 15 Years................................................................     --              8
                                                                                ---------  ---------
Total.........................................................................  $     715  $     860
                                                                                ---------  ---------
                                                                                ---------  ---------
</TABLE>
 
    Concentrations of collateral associated with insured asset-backed
obligations follow:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                                --------------------
TYPE OF COLLATERAL                                                                1997       1996
------------------------------------------------------------------------------  ---------  ---------
<S>                                                                             <C>        <C>
Commercial mortgages:
  Commercial real estate......................................................  $     319  $     341
  Corporate secured...........................................................        396        519
                                                                                ---------  ---------
Total.........................................................................  $     715  $     860
                                                                                ---------  ---------
                                                                                ---------  ---------
</TABLE>
 
                                      104
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
 
ADDITIONAL FINANCIAL INFORMATION
 
    Information for U S WEST Financial Services, Inc. ("USWFS"), a member of the
capital assets segment, follows:
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED OR AS OF DECEMBER
                                                                                 31,
                                                                   -------------------------------
SUMMARIZED FINANCIAL INFORMATION                                     1997       1996       1995
-----------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
Revenue..........................................................  $      23  $      26  $      44
Net finance receivables..........................................        824        859        931
Total assets.....................................................      1,208      1,058      1,085
Total debt.......................................................        363        236        274
Total liabilities................................................      1,121        998      1,024
Equity...........................................................         87         60         61
</TABLE>
 
    In September 1997, USWFS pledged certain finance receivables as collateral
for a nonrecourse loan totaling $173. The loan bears interest at an annual rate
of 7.2 percent and matures in the year 2009.
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
 
    The Supplemental Combined Statements of the Communications Group and the
Media Group (collectively the "Groups") comprise all of the accounts included in
the corresponding Consolidated Financial Statements of U S WEST. Investments in
less than majority-owned ventures are generally accounted for using the equity
method. The separate Supplemental Group Combined Statements have been prepared
on a basis that management believes to be reasonable and appropriate and
include: (i) the combined historical balance sheets, results of operations and
cash flows of the businesses that comprise each of the Groups, with all
significant intra-group amounts and transactions eliminated; (ii) in the case of
the Communications Group Supplemental Combined Statements, certain corporate
assets and liabilities of U S WEST and related transactions identified with the
Communications Group; (iii) in the case of the Media Group Supplemental Combined
Statements, all other corporate assets and liabilities and related transactions
of U S WEST; and (iv) an allocated portion of the corporate expense of U S WEST.
Transactions between the Communications Group and the Media Group have not been
eliminated. Certain reclassifications within the Supplemental Group Combined
Statements have been made to conform to the current year presentation.
 
    Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareowners' equity between the Communications Group
and the Media Group for the purpose of preparing the respective supplemental
statements of such Group, owners of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Financial effects arising from
either Group that affect U S WEST's results of operations or financial condition
could, if significant, affect the results of operations or financial position of
the other Group or the market price of the class of common stock relating to the
other Group. Any net losses of the Communications Group or the Media Group, and
dividends or distributions on, or repurchases of Communications Stock, Media
Stock or preferred stock, will reduce the funds of U S WEST legally available
for payment of dividends on both the Communications Stock and Media Stock.
Accordingly, each of the Group's Supplemental Combined Statements should be read
in conjunction with U S WEST's Consolidated Financial Statements and the other
Group's Supplemental Combined Statements.
 
                                      105
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS OF INCOME                           1997       1996       1995
                                                                                    ---------  ---------  ---------
                                                                                          DOLLARS IN MILLIONS
<S>                                                                                 <C>        <C>        <C>
Operating revenues:
  Local service...................................................................  $   5,016  $   4,770  $   4,344
  Interstate access service.......................................................      2,666      2,507      2,378
  Intrastate access service.......................................................        761        770        747
  Long-distance network services..................................................        885      1,100      1,189
  Other services..................................................................        991        932        826
                                                                                    ---------  ---------  ---------
    Total operating revenues......................................................     10,319     10,079      9,484
 
Operating expenses:
  Employee-related expenses.......................................................      3,697      3,594      3,341
  Other operating expenses........................................................      1,870      1,634      1,543
  Taxes other than income taxes...................................................        416        389        380
  Depreciation and amortization...................................................      2,126      2,122      2,042
                                                                                    ---------  ---------  ---------
    Total operating expenses......................................................      8,109      7,739      7,306
                                                                                    ---------  ---------  ---------
 
Operating income..................................................................      2,210      2,340      2,178
 
Interest expense..................................................................       (403)      (445)      (427)
Gains on sales of rural telephone exchanges.......................................         77         59        136
Gain on sale of investment in Bellcore............................................         53     --         --
Other expense--net................................................................        (73)       (41)       (41)
                                                                                    ---------  ---------  ---------
Income before income taxes, extraordinary items and cumulative effect of change in
  accounting principle............................................................      1,864      1,913      1,846
Provision for income taxes........................................................       (684)      (698)      (662)
                                                                                    ---------  ---------  ---------
Income before extraordinary items and cumulative effect of change in accounting
  principle.......................................................................      1,180      1,215      1,184
Extraordinary items--early extinguishment of debt--net of tax.....................         (3)    --             (8)
                                                                                    ---------  ---------  ---------
Income before cumulative effect of change in accounting principle.................      1,177      1,215      1,176
Cumulative effect of change in accounting principle--net of tax...................     --             34     --
                                                                                    ---------  ---------  ---------
NET INCOME........................................................................  $   1,177  $   1,249  $   1,176
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
                                      106
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
U S WEST COMMUNICATIONS GROUP COMBINED BALANCE SHEETS                                           1997       1996
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
ASSETS
 
Current assets:
  Cash and cash equivalents.................................................................  $      27  $      80
  Accounts and notes receivable, less allowance for credit
    losses of $54 and $40, respectively.....................................................      1,681      1,622
  Inventories and supplies..................................................................        150        144
  Deferred tax asset........................................................................        247        171
  Prepaid and other.........................................................................         77         65
                                                                                              ---------  ---------
Total current assets........................................................................      2,182      2,082
 
Gross property, plant and equipment.........................................................     33,408     32,645
Less accumulated depreciation...............................................................     19,176     18,639
                                                                                              ---------  ---------
Property, plant and equipment--net..........................................................     14,232     14,006
 
Other assets................................................................................        832        827
                                                                                              ---------  ---------
Total assets................................................................................  $  17,246  $  16,915
                                                                                              ---------  ---------
                                                                                              ---------  ---------
 
LIABILITIES AND EQUITY
 
Current liabilities:
  Short-term debt...........................................................................  $     626  $     834
  Accounts payable..........................................................................      1,325        897
  Employee compensation.....................................................................        375        342
  Dividends payable.........................................................................        259        257
  Advanced billings and customer deposits...................................................        292        250
  Current portion state regulatory liability................................................        225     --
  Accrued property taxes....................................................................        205        193
  Payable to Media Group....................................................................         90         92
  Other.....................................................................................        603        602
                                                                                              ---------  ---------
Total current liabilities...................................................................      4,000      3,467
 
Long-term debt..............................................................................      5,020      5,664
Postretirement and other postemployment benefit obligations.................................      2,468      2,387
Deferred income taxes.......................................................................        805        749
Unamortized investment tax credits..........................................................        168        173
Deferred credits and other..................................................................        586        558
 
Contingencies
 
Communications Group equity.................................................................      4,199      3,917
                                                                                              ---------  ---------
Total liabilities and equity................................................................  $  17,246  $  16,915
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
                                      107
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS OF CASH FLOWS                       1997       1996       1995
                                                                                    ---------  ---------  ---------
                                                                                          DOLLARS IN MILLIONS
<S>                                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income......................................................................  $   1,177  $   1,249  $   1,176
  Adjustments to net income:
    Depreciation and amortization.................................................      2,126      2,122      2,042
    Gains on sales of rural telephone exchanges...................................        (77)       (59)      (136)
    Gain on sale of investment in Bellcore........................................        (53)    --         --
    Cumulative effect of change in accounting principle...........................     --            (34)    --
    Deferred income taxes and amortization of investment tax
      credits.....................................................................        (18)        91        172
  Changes in operating assets and liabilities:
    Restructuring payments........................................................        (67)      (226)      (315)
    Postretirement medical and life costs, net of cash fundings...................         80         28        (90)
    Accounts receivable...........................................................        (46)        (5)      (117)
    Inventories, supplies and other current assets................................        (45)        27        (51)
    Accounts payable and accrued liabilities......................................        564         98          7
  Other--net......................................................................        207         15         31
                                                                                    ---------  ---------  ---------
  Cash provided by operating activities...........................................      3,848      3,306      2,719
                                                                                    ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment..................................     (2,139)    (2,419)    (2,462)
  Purchase of PCS licenses........................................................        (73)    --         --
  Proceeds from sales of rural telephone exchanges................................         67        174        214
  Proceeds from sale of investment in Bellcore....................................         65     --         --
  Proceeds from (payments on) disposals of property, plant and equipment..........         22         15        (18)
  Other--net......................................................................     --         --             (2)
                                                                                    ---------  ---------  ---------
  Cash (used for) investing activities............................................     (2,058)    (2,230)    (2,268)
                                                                                    ---------  ---------  ---------
FINANCING ACTIVITIES
  Net proceeds from (repayments of) short-term debt...............................       (510)        96       (832)
  Proceeds from issuance of long-term debt........................................         29         23      1,647
  Repayments of long-term debt....................................................       (445)      (482)      (334)
  Dividends paid on common stock..................................................       (992)      (939)      (926)
  Proceeds from issuance of common stock..........................................         75        134         50
                                                                                    ---------  ---------  ---------
  Cash (used for) financing activities............................................     (1,843)    (1,168)      (395)
                                                                                    ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase (decrease).............................................................        (53)       (92)        56
  Beginning balance...............................................................         80        172        116
                                                                                    ---------  ---------  ---------
  Ending balance..................................................................  $      27  $      80  $     172
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
                                      108
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
U S WEST MEDIA GROUP COMBINED STATEMENTS OF OPERATIONS                                   1997       1996       1995
                                                                                       ---------  ---------  ---------
                                                                                             DOLLARS IN MILLIONS
<S>                                                                                    <C>        <C>        <C>
Sales and other revenues:
  Cable and broadband................................................................  $   2,341  $     494  $     215
  Wireless communications............................................................      1,428      1,183        941
  Directory and information services.................................................      1,245      1,259      1,180
  Other..............................................................................         29         19         38
                                                                                       ---------  ---------  ---------
    Total sales and other revenues...................................................      5,043      2,955      2,374
 
Operating expenses:
  Cost of sales and other revenues...................................................      1,666        966        772
  Selling, general and administrative expenses.......................................      1,487      1,052        886
  Depreciation and amortization......................................................      1,294        422        249
                                                                                       ---------  ---------  ---------
    Total operating expenses.........................................................      4,447      2,440      1,907
                                                                                       ---------  ---------  ---------
 
Operating income.....................................................................        596        515        467
 
Interest expense.....................................................................       (680)      (168)      (100)
Equity losses in unconsolidated ventures.............................................       (909)      (346)      (207)
Gains on sales of investments........................................................        421     --         --
Gain on merger of joint venture interest.............................................     --         --            157
Guaranteed minority interest expense.................................................        (87)       (55)       (14)
Other income (expense)--net..........................................................         17        (19)         5
                                                                                       ---------  ---------  ---------
Income (loss) before income taxes and extraordinary item.............................       (642)       (73)       308
(Provision) benefit for income taxes.................................................        162          2       (163)
                                                                                       ---------  ---------  ---------
Income (loss) before extraordinary item..............................................       (480)       (71)       145
Extraordinary item--early extinguishment of debt--net of tax.........................     --         --             (4)
                                                                                       ---------  ---------  ---------
NET INCOME (LOSS)....................................................................  $    (480) $     (71) $     141
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Dividends on preferred stock.........................................................        (52)        (9)        (3)
                                                                                       ---------  ---------  ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK...........................................  $    (532) $     (80) $     138
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
                                      109
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
U S WEST MEDIA GROUP COMBINED BALANCE SHEETS                                                    1997       1996
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................................................  $     184  $     121
  Accounts and notes receivable, less allowance for credit
    losses of $82 and $85, respectively.....................................................        589        508
  Deferred directory costs..................................................................        257        259
  Receivable from Communications Group......................................................         90         92
  Marketable securities.....................................................................     --             58
  Deferred tax asset........................................................................        126         43
  Other.....................................................................................         82         58
                                                                                              ---------  ---------
Total current assets........................................................................      1,328      1,139
 
Property, plant and equipment--net..........................................................      4,348      4,275
Investment in Time Warner Entertainment.....................................................      2,486      2,477
Net investment in international ventures....................................................        475      1,548
Net investment in assets held for sale......................................................        419        409
Intangible assets--net......................................................................     12,597     12,595
Other assets................................................................................        961      1,618
                                                                                              ---------  ---------
Total assets................................................................................  $  22,614  $  24,061
                                                                                              ---------  ---------
                                                                                              ---------  ---------
 
LIABILITIES AND EQUITY
Current liabilities:
  Short-term debt...........................................................................  $     804  $     217
  Due to Continental Cablevision shareholders...............................................     --          1,150
  Accounts payable..........................................................................        432        425
  Accrued interest payable..................................................................        212         84
  Deferred revenue and customer deposits....................................................        152        129
  Employee compensation.....................................................................        146        128
  Other.....................................................................................        680        583
                                                                                              ---------  ---------
Total current liabilities...................................................................      2,426      2,716
 
Long-term debt..............................................................................      8,228      8,636
Deferred income taxes.......................................................................      3,262      3,600
Deferred credits and other..................................................................        393        346
 
Commitments and contingencies
 
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
  solely Company-guaranteed debentures......................................................      1,080      1,080
Preferred stock subject to mandatory redemption.............................................        100         51
 
Media Group equity..........................................................................      7,171      7,723
Company LESOP guarantee.....................................................................        (46)       (91)
                                                                                              ---------  ---------
Total equity................................................................................      7,125      7,632
                                                                                              ---------  ---------
Total liabilities and equity................................................................  $  22,614  $  24,061
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
                                      110
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
         (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
U S WEST MEDIA GROUP COMBINED STATEMENTS OF CASH FLOWS                                1997       1996       1995
                                                                                    ---------  ---------  ---------
                                                                                          DOLLARS IN MILLIONS
<S>                                                                                 <C>        <C>        <C>
 
OPERATING ACTIVITIES
  Net income (loss)...............................................................  $    (480) $     (71) $     141
  Adjustments to net income (loss):
    Depreciation and amortization.................................................      1,294        422        249
    Equity losses in unconsolidated ventures......................................        909        346        207
    Gains on sales of investments.................................................       (421)    --         --
    Gain on merger of joint venture interest......................................     --         --           (157)
    Deferred income taxes.........................................................       (146)       (73)       102
    Provision for uncollectibles..................................................         95         65         55
  Changes in operating assets and liabilities:
    Restructuring payments........................................................         (3)       (16)       (19)
    Accounts and notes receivable.................................................       (189)      (101)      (103)
    Deferred directory costs, prepaid and other...................................        (60)         4        (28)
    Accounts payable and accrued liabilities......................................        218        112         36
  Other adjustments--net..........................................................        101         36        157
                                                                                    ---------  ---------  ---------
  Cash provided by operating activities...........................................      1,318        724        640
                                                                                    ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment..................................     (1,551)      (652)      (363)
  Payment to Continental Cablevision shareowners..................................     (1,150)    --         --
  Investments in international ventures...........................................       (325)      (243)      (681)
  Investment in PCS...............................................................       (213)      (132)      (286)
  Proceeds from sales of investments..............................................      1,827         28        127
  Cash from net investment in assets held for sale................................        231        213     --
  Other--net......................................................................        (61)       (32)       (35)
                                                                                    ---------  ---------  ---------
  Cash (used for) investing activities............................................     (1,242)      (818)    (1,238)
                                                                                    ---------  ---------  ---------
FINANCING ACTIVITIES
  Net proceeds from (repayments of) short-term debt...............................     (3,685)     3,891       (449)
  Proceeds from issuance of long-term debt........................................      4,123        360      1,085
  Repayments of long-term debt....................................................       (379)    (4,217)      (724)
  Proceeds from issuance of Preferred Securities--net.............................     --            465        581
  Proceeds from issuance of common stock..........................................         31          2         57
  Purchase of treasury stock......................................................        (53)      (297)    --
  Dividends paid on preferred stock...............................................        (50)        (9)        (3)
  Other--net......................................................................     --         --            (22)
                                                                                    ---------  ---------  ---------
  Cash (used for) provided by financing activities................................        (13)       195        525
                                                                                    ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase (decrease).............................................................         63        101        (73)
  Beginning balance...............................................................        121         20         93
                                                                                    ---------  ---------  ---------
  Ending balance..................................................................  $     184  $     121  $      20
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
                                      111
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                          QUARTERLY FINANCIAL DATA
                                                                             --------------------------------------------------
                                                                                FIRST       SECOND        THIRD       FOURTH
                                                                               QUARTER      QUARTER      QUARTER      QUARTER
                                                                             -----------  -----------  -----------  -----------
<S>                                                                          <C>          <C>          <C>          <C>
1997
Sales and other revenues...................................................   $   3,766    $   3,787    $   3,918    $   3,764
Income before income taxes and extraordinary item..........................         400          415          333           74
Income before extraordinary item...........................................         230          235          198           37
Net income.................................................................         230          238          192           37
COMMUNICATIONS GROUP:
  Basic earnings per common share before extraordinary item................        0.70         0.69         0.70         0.35
  Basic earnings per common share..........................................        0.70         0.69         0.69         0.35
  Diluted earnings per common share before extraordinary item..............        0.70         0.68         0.69         0.35
  Diluted earnings per common share........................................        0.70         0.68         0.69         0.35
MEDIA GROUP:
  Basic and diluted loss per common share before extraordinary item........       (0.20)       (0.17)       (0.26)       (0.24)
  Basic and diluted loss per common share..................................       (0.20)       (0.17)       (0.26)       (0.24)
 
1996
Sales and other revenues...................................................   $   3,050    $   3,124    $   3,179    $   3,558
Income before income taxes and cumulative effect of change in accounting
  principle................................................................         489          519          494          338
Income before cumulative effect of change in accounting principle..........         297          313          304          230
Net income.................................................................         331          313          304          230
COMMUNICATIONS GROUP:
  Basic earnings per common share before cumulative effect of change in
    accounting principle...................................................        0.62         0.68         0.60         0.65
  Basic earnings per common share..........................................        0.69         0.68         0.60         0.65
  Diluted earnings per common share before cumulative effect of change in
    accounting principle...................................................        0.61         0.67         0.59         0.64
  Diluted earnings per common share........................................        0.68         0.67         0.59         0.64
MEDIA GROUP:
  Basic and diluted earnings (loss) per common share.......................      --            (0.03)        0.04        (0.16)
</TABLE>
 
    1997 first-quarter net income includes a gain of $31 ($0.05 per share of
Media Stock) related to the sale of the Company's wireless interest in France
and $11 ($0.02 per share of Communications Stock) from gains on the sales of
certain rural telephone exchanges. 1997 second-quarter net income includes a
gain of $25 ($0.04 per share of Media Stock) related to the sales of TCG and
Time Warner shares, $18 ($0.04 per share of Communications Stock) from gains on
the sales of certain rural telephone exchanges, and a gain of $3 (no per share
Media Stock impact) on the early extinguishment of debt. 1997 third-quarter net
income includes $19 ($0.04 per share of Communications Stock) from gains on the
sales of certain rural telephone exchanges, a $6 charge ($0.01 per share of
Communications Stock and no per share Media Stock impact) for the early
extinguishment of debt, and a gain of $7 ($0.01 per share of Media Stock)
related to sales of TCG shares. 1997 fourth-quarter net income includes a $120
charge ($0.20 per share of Media Stock) related to Asian investments, and a $152
regulatory charge ($0.31 per share of Communications Stock) related primarily to
the 1997 Washington State Supreme Court ruling that upheld a WUTC 1996 rate
order. Also included is a gain of $89 ($0.15 per share of Media Stock) related
to the sale of TCG shares, a gain of $80 ($0.13 per share of Media Stock) on the
sale of Fintelco, a gain of $32 ($0.07 per share of Communications Stock) from
the sale of U S WEST Communications' investment in Bellcore, and a gain of $17
($0.03 per share of Media Stock) from the sale of U S WEST Polska.
 
                                      112
<PAGE>
                                 U S WEST, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
    1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per share of Communications Stock) and $5 ($0.01 per share of
Communications Stock), respectively, from adopting SFAS No. 121. 1996
second-quarter net income includes $30 ($0.06 per share of Communications Stock)
from gains on the sales of certain rural telephone exchanges, a charge of $19
($0.04 per share of Media Stock) related to the sale of the Company's cable
television interests in Norway, Sweden and Hungary and the current effects of $5
($0.01 per share of Communications Stock) from adopting SFAS No. 121. 1996
third-quarter net income includes $1 (no per share impact) from gains on the
sales of certain rural telephone exchanges and the current effects of $3 ($0.01
per share of Communications Stock) from adopting SFAS No. 121. 1996
fourth-quarter net income includes $5 ($0.01 per share of Communications Stock)
from gains on the sales of certain rural telephone exchanges, losses of $71 and
losses available for common stock of $77 ($0.15 per share of Media Stock)
related to the Continental Acquisition and the current effects of $2 ($0.01 per
share of Communications Stock) from adopting SFAS No. 121.
 
<TABLE>
<CAPTION>
                                                                               MARKET PRICE
                                                                    ----------------------------------
PER SHARE MARKET AND DIVIDEND DATA                                     HIGH        LOW        CLOSE      DIVIDENDS
------------------------------------------------------------------  ----------  ----------  ----------  -----------
                                                                             (WHOLE DOLLARS)
<S>                                                                 <C>         <C>         <C>         <C>
1997
COMMUNICATIONS STOCK
  First quarter...................................................  $  37.2500  $  31.7500  $  33.8750   $  0.5350
  Second quarter..................................................     38.5000     31.1250     37.6875      0.5350
  Third quarter...................................................     39.4375     35.6250     38.5000      0.5350
  Fourth quarter..................................................     46.9375     36.8750     45.1250      0.5350
MEDIA STOCK
  First quarter...................................................  $  20.6250  $  17.6250  $  18.5000   $  --
  Second quarter..................................................     22.3750     16.0000     20.2500      --
  Third quarter...................................................     24.2500     19.8125     22.3125      --
  Fourth quarter..................................................     29.1250     22.3125     28.8750      --
 
1996
COMMUNICATIONS STOCK
  First quarter...................................................  $  37.5000  $  30.2500  $  32.3750   $  0.5350
  Second quarter..................................................     34.6250     31.1250     32.0000      0.5350
  Third quarter...................................................     32.2500     27.2500     29.8750      0.5350
  Fourth quarter..................................................     33.6250     29.2500     32.2500      0.5350
MEDIA STOCK
  First quarter...................................................  $  23.0000  $  18.8750  $  20.6250   $  --
  Second quarter..................................................     21.0000     16.8750     18.2500      --
  Third quarter...................................................     18.8750     14.3750     16.8750      --
  Fourth quarter..................................................     19.8750     15.3750     18.3750      --
</TABLE>
 
                                      113
<PAGE>
                                 U S WEST, INC.
 
           SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
                             (DOLLARS IN MILLIONS)
 
U S WEST believes that proportionate financial data facilitates the
understanding and assessment of its Consolidated Financial Statements. The
following proportionate accounting table reflects the relative weight of U S
WEST's ownership interest in its domestic and international investments in cable
and broadband, wireless communications and directory and information services
operations. The financial information included below departs materially from
GAAP because it aggregates the revenues and operating income of entities not
controlled by U S WEST with those of the consolidated operations of U S WEST.
This table is not intended to replace the Consolidated Financial Statements
prepared in accordance with GAAP. U S WEST considers earnings before interest,
taxes, depreciation, amortization and other ("EBITDA") an important indicator of
the operating performance of its businesses. This calculation of EBITDA may not
be comparable to other similarly titled measures of other companies. EBITDA,
however, should not be considered as an alternative to operating or net income
as an indicator of performance, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
 
<TABLE>
<CAPTION>
                                                                COMMUNICATIONS     MEDIA
                                                                     GROUP         GROUP    ELIMINATIONS     TOTAL
                                                                ---------------  ---------  -------------  ---------
<S>                                                             <C>              <C>        <C>            <C>
1997
  Sales and other revenues....................................     $  10,319     $   9,107    $    (127)   $  19,299
  Operating expenses..........................................         5,983         6,486         (127)      12,342
                                                                     -------     ---------        -----    ---------
  EBITDA......................................................         4,336         2,621       --            6,957
  Depreciation and amortization...............................         2,126         2,136       --            4,262
                                                                     -------     ---------        -----    ---------
  Operating income............................................         2,210           485       --            2,695
  Income (loss) before extraordinary items....................         1,180          (480)      --              700
  Net income (loss)...........................................         1,177          (480)      --              697
--------------------------------------------------------------------------------------------------------------------
1996
  Sales and other revenues....................................     $  10,079     $   6,367    $    (123)   $  16,323
  Operating expenses..........................................         5,617         4,894         (123)      10,388
                                                                     -------     ---------        -----    ---------
  EBITDA......................................................         4,462         1,473       --            5,935
  Depreciation and amortization...............................         2,122         1,014       --            3,136
                                                                     -------     ---------        -----    ---------
  Operating income............................................         2,340           459       --            2,799
  Income (loss) before cumulative effect of change in
    accounting principle......................................         1,215           (71)      --            1,144
  Net income (loss)...........................................         1,249           (71)      --            1,178
--------------------------------------------------------------------------------------------------------------------
1995 (UNAUDITED)
  Sales and other revenues....................................     $   9,484     $   5,115    $    (112)   $  14,487
  Operating expenses..........................................         5,264         3,966         (112)       9,118
                                                                     -------     ---------        -----    ---------
  EBITDA......................................................         4,220         1,149       --            5,369
  Depreciation and amortization...............................         2,042           673       --            2,715
                                                                     -------     ---------        -----    ---------
  Operating income............................................         2,178           476       --            2,654
  Income before extraordinary item............................         1,184           145       --            1,329
  Net income..................................................         1,176           141       --            1,317
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                      114