<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K
 
<TABLE>
<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, 1995
                                                    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
</TABLE>
 
                                 U S WEST, INC.
 
<TABLE>
<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
</TABLE>
 
                            ------------------------
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<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 Pacific
($0.01 per share, par value)                                                         Stock Exchange
Liquid Yield Option Notes, due 2011                                                  New York Stock Exchange
(convertible to common stock under certain circumstances)
Trust Originated Preferred Securities ("TOPrS") [Service Mark]                       New York Stock Exchange
</TABLE>
 
          Securities registered pursuant to Section 12(g) of the Act:
                                      None
 
    At  January 31,  1996, 474,269,030 shares  of U S  WEST Communications Group
common stock and 472,654,874 shares  of U S WEST  Media Group common stock  were
outstanding.
 
    At   January  31,  1996,  the  aggregate  market  value  of  the  U  S  WEST
Communications Group  voting  stock  held by  non-affiliates  was  approximately
$16,439,488,720,  and the  aggregate market  value of the  U S  WEST Media Group
voting stock held by non-affiliates was approximately $9,917,108,166.
 
    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  1995  Annual  Report  to  Shareowners   are
incorporated by reference into Parts I, II and IV.
 
    Portions  of  the Registrant's  definitive Proxy  Statement dated  March 16,
1995, to be issued in connection with the 1996 Annual Meeting of Shareowners 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
 
<TABLE>
<CAPTION>
   ITEM                                                                                                               PAGE
   -----                                                                                                              -----
<C>          <S>                                                                                                   <C>
        1.   Business............................................................................................           1
        2.   Properties..........................................................................................           7
        3.   Legal Proceedings...................................................................................           8
        4.   Submission of Matters to a Vote of Security Holders.................................................           8
 
                                                           PART II
 
        5.   Market for the Registrant's Common Equity and Related Stockholder Matters...........................           9
        6.   Selected Financial Data.............................................................................           9
        7.   Management's Discussion and Analysis of Financial Condition and Results of Operations...............           9
        8.   Consolidated Financial Statements and Supplementary Data............................................
        9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................           9
 
                                                           PART III
 
       10.   Directors and Executive Officers of the Registrant..................................................           9
       11.   Executive Compensation..............................................................................          10
       12.   Security Ownership of Certain Beneficial Owners and Management......................................          10
       13.   Certain Relationships and Related Transactions......................................................          10
 
                                                           PART IV
 
       14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................          10
             Independent Accountants' Report.....................................................................          15
</TABLE>
 
                                       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 B-29.) U  S WEST and  its subsidiaries had 61,047
employees at December 31, 1995.
 
    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  "Communications   Group   Region").  U   S  WEST
Communications serves  approximately  80  percent of  the  Communications  Group
Region's population and approximately 40 percent of its geographic area.
 
    MEDIA   GROUP.     The  Media   Group  is   comprised  of:   (i)  cable  and
telecommunications network businesses outside of the Communications Group Region
and internationally,  (ii) domestic  and international  wireless  communications
network   businesses  and   (iii)  domestic  and   international  directory  and
information services businesses, including telephone directories.
 
RECENT DEVELOPMENTS
 
    AGREEMENT TO ACQUIRE CONTINENTAL CABLEVISION, INC.  On February 27, 1996,  U
S  WEST announced  a definitive  agreement under  which Continental Cablevision,
Inc. ("Continental") will be merged with and into the Company. Continental,  the
nation's third-largest cable operator, serves 4.2 million U.S. customers, passes
more  than seven million U.S. households and owns significant other domestic and
international assets. The Company will  purchase all of Continental's stock  for
approximately  $5.3  billion,  and  will  assume  Continental's  debt  and other
obligations, which amount  to approximately $5.5  billion. Consideration of  the
$5.3  billion in  equity will consist  of approximately  $1 billion in  U S WEST
preferred stock, convertible  to Media Stock;  $2.8 billion to  $3.3 billion  in
shares  of Media Stock; and,  at U S WEST's option,  between $1 billion and $1.5
billion in  cash. The  transaction, which  is expected  to close  in the  fourth
quarter,  is subject to  a number of conditions,  including regulatory and other
approvals such as that of Continental's shareholders. There can be no  assurance
that these conditions will be satisfied.
 
    RECAPITALIZATION  PLAN.  On October 31, 1995,  the shareholders of U S WEST,
Inc., a Colorado corporation ("U S  WEST Colorado") voted to approve a  proposal
(the "Recapitalization Plan") adopted by the Board of Directors to reincorporate
from  Colorado  to Delaware  and create  two  classes of  common stock  that are
intended to  reflect  separately  the  performance  of  the  communications  and
multimedia businesses. Under the Recapitalization Plan, shareholders approved an
Agreement and Plan of Merger between U S WEST Colorado and U S WEST, pursuant to
which  U S WEST continues  as the surviving corporation.  In connection with the
merger, the  Certificate of  Incorporation of  U  S WEST  has been  amended  and
restated  to, among other things,  designate two classes of  common stock of U S
WEST, one class of which is authorized  as U S WEST Communications Group  Common
Stock  ("Communications Stock"), and the  other class is authorized  as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado converted into one share of  Communications
Stock and one share of Media Stock.
 
                                       1
<PAGE>
    The   Communications  Stock  and   Media  Stock  are   designed  to  provide
shareholders with separate  securities that are  intended to reflect  separately
the  communications  businesses of  U S  WEST  Communications and  certain other
subsidiaries of the Communications Group,  and the multimedia businesses of  the
Media Group.
 
    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.  and U  S WEST  Business Resources,  Inc. U  S WEST
Communications comprised approximately 97 percent of the revenues and 98 percent
of the assets of the Communications Group in 1995.
 
    The Media Group is comprised of U S WEST Marketing Resources Group, Inc.,  a
publisher  of White and Yellow Pages telephone directories and other information
services including database marketing and  other interactive services, U S  WEST
NewVector  Group, Inc.,  which provides communications  and information products
and services over wireless networks,  U S WEST Multimedia Communications,  Inc.,
which  owns domestic cable  television operations and investments,  and U S WEST
International Holdings, Inc., which primarily owns investments in  international
cable  and telecommunications, wireless  communications and directory publishing
operations.
 
    Dividends paid to the holders  of Communications Stock are currently  $0.535
per share per quarter. Dividends on the Communications Stock will be paid at the
discretion  of the  Board of  Directors of  U S  WEST, based  primarily upon the
financial condition,  results of  operations and  business requirements  of  the
Communications Group and the Company as a whole. With regard to the Media Stock,
the  Board of Directors of U S WEST currently intends to retain future earnings,
if any,  for  the development  of  the Media  Group's  businesses and  does  not
anticipate paying dividends on the Media Stock in the foreseeable future.
 
    TELECOMMUNICATIONS  ACT  OF  1996.    On  February  1,  1996,  the  House of
Representatives and the Senate approved a final bill that is intended to promote
competition between local telephone companies, long-distance carriers and  cable
television  operators. This bill  was signed into  law on February  8, 1996, and
replaces the antitrust consent decree that  broke up the "Bell System" in  1984.
Major provisions of the legislation include the pre-emption of state regulations
that   prohibit  competition.   The  Act   allows  local   telephone  companies,
long-distance carriers  and cable  television companies  to enter  each  other's
lines of business. To participate in the interLATA long-distance business within
their regions, the Regional Bell Operating Companies must first open their local
networks  to  facilities-based  competition  by satisfying  a  detailed  list of
requirements, including interconnection and number portability. The  legislation
also  eliminates within three  years most regulation  of cable television rates.
The Act lifts the ban on cross-ownership between cable television and  telephone
companies,  permitting the Regional  Bell Operating Companies  to enter into the
cable business within their respective  service territories, but prohibits  them
from  doing so through the purchase of existing cable companies, except in rural
communities. The  legislation reaffirms  the concept  of universal  service  and
directs  the  Federal  Communications  Commission and  the  states  to determine
universal service  funding policy.  The  Federal Communications  Commission  and
state regulators have been given the responsibility to interpret and oversee the
implementation of this legislation.
 
COMMUNICATIONS GROUP
 
    OPERATIONS.   The principal types  of telecommunications services offered by
the Communications Group  are (i)  local service, (ii)  exchange access  service
(which connects customers to the facilities of interLATA service providers), and
(iii)  intraLATA long-distance network service. For  the year ended December 31,
1995, local service, exchange access service and intraLATA long distance network
service accounted for  46%, 33% and  13%, respectively, of  the sales and  other
revenues   of  the  Communications  Group.  At  December  31,  1995,  U  S  WEST
Communications had approximately  14,847,000 telephone network  access lines  in
service, a 3.6% increase over year end 1994. Excluding the effect of the sale of
approximately  95,000  rural telephone  access lines  during 1995,  access lines
increased 4.2% over  year end 1994.  In 1995, revenues  from a single  customer,
AT&T, accounted for approximately
 
                                       2
<PAGE>
11%  of the sales and other revenues of  the Communications Group, and 9% of the
sales and other  revenues of  U S WEST.  The Communications  Group expensed  $22
million, $31 million and $42 million for research and development costs in 1995,
1994 and 1993, respectively.
 
    U  S WEST Communications incurred capital expenditures of approximately $2.7
billion in 1995  and expects to  incur approximately $2.5  billion in 1996.  The
1995  capital expenditures of U S WEST Communications were substantially devoted
to the continued modernization of telephone plant, to improve customer  services
and to accommodate additional line capability in several states.
 
    DEVELOPMENT  OF BROADBAND NETWORK.   A market trial  for a broadband network
capable of providing voice,  data and video services  to customers commenced  in
the  Omaha area  in August,  1995. The Communications  Group does  not intend to
expand this service offering beyond the  Omaha area because of service cost  and
pricing  issues. The Communications  Group does plan to  continue to provide the
system that delivers basic, premium and pay-per-view video services in the Omaha
area. The Communications Group is  evaluating the relative costs of  alternative
video  technologies,  as  well  as  the  near-term  feasibility  of  interactive
services. To  satisfy  anticipated  demand  for  combined  video  and  telephony
services  on  a cost-effective  basis, the  Communications Group's  strategy may
include selective investments in wireless cable technologies.
 
    THE RESTRUCTURING  PLAN.    U  S  WEST announced  in  1993  that  U  S  WEST
Communications  would implement  a plan  (the "Restructuring  Plan") designed to
provide  faster,   more  responsive   customer  service   and  improved   repair
capabilities while reducing the cost of providing these services. As part of the
Restructuring  Plan,  the Communications  Group  is developing  new  systems and
enhanced system functionality that will enable it to monitor networks to  reduce
the  risk of service interuptions, activate telephone service on demand, rapidly
design and  engineer products  and services  for customers,  and centralize  its
service  centers.  The Communications  Group has  consolidated its  560 customer
service centers into 26  centers in ten  cities and plans  on reducing its  work
force  by approximately  10,000 employees  in connection  with the Restructuring
Plan. Work  force reductions  under  the Restructuring  Plan will  be  partially
offset  by the effects  of higher than  anticipated volumes of  business and the
achievement of customer service objectives. All service centers are  operational
and supported by new systems and system functionality. The Restructuring Plan is
expected  to be substantially  completed by the end  of 1997. Implementation has
been affected by growth in the business and related service issues, new business
opportunities, revisions to  system delivery schedules  and productivity  issues
caused  by  the major  rearrangement of  resources  due to  restructuring. These
issues will continue to  affect the timing of  employee separations. See  "Costs
and  Expenses"  and  "Restructuring Charge"  under  Management's  Discussion and
Analysis of Financial Condition and Results of Operations on p. B-9 and p. B-10.
 
    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
FCC  with respect to interstate access tariffs (that specify the charges for the
origination and termination of interstate communications) and other matters.
 
    U S WEST's interstate services have been subject to price-cap regulation  by
the  FCC since January  1991. Price caps  are an alternative  form of regulation
designed to limit prices rather than profits. However, the FCC's price cap  plan
includes sharing of earnings in excess of authorized levels. In March, 1995, the
FCC  issued an interim  order on price  cap regulation. The  price cap index for
most services  is  annually  adjusted  for  inflation,  productivity  level  and
exogenous costs, and has resulted in reduced access prices paid by interexchange
carriers to local telephone companies. The interim order also provides for three
productivity   options,  including  a  no-sharing   option,  and  for  increased
flexibility for adjusting prices downward  in response to competition. In  1995,
the Communications Group selected the lowest productivity option while, prior to
this   interim  order,  the   Communications  Group  used   an  optional  higher
productivity factor  in  determining prices.  Consequently,  the  Communications
Group expects the order to have no significant near-term impact.
 
                                       3
<PAGE>
    U  S WEST Communications is currently  working with state regulators to gain
approval  of  initiatives,  including  efforts  to  rebalance  prices,   advance
competitive  parity and implement simplified forms  of price and service quality
regulation. 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   "Competitive  and  Regulatory
Environment" under Management's Discussion  and Analysis of Financial  Condition
and Results of Operations on p. B-22.
 
    COMPETITION.    The  Communications  Group faces  competition  in  the local
exchange  business,  exchange  access   and  intraLATA  long-distance   markets,
primarily from competitive access providers ("CAPS") and interexchange carriers.
CAPs compete with the Communications Group by providing large business customers
with  high-capacity  network  services  that  connect  to  interexchange carrier
facilities or  other business  locations within  a serving  LATA.  Interexchange
carriers   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. Interexchange carriers are competing in this area by
offering lower prices and packaging these services on an intraLATA and interLATA
basis.
 
    Technological advancements and regulatory changes will increase  competition
in  the future. Current competitors,  including CAPs and interexchange carriers,
are positioning themselves  to offer  local exchange  services. New  competitors
that  are affiliates of cable television  companies and power companies also 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 plans  to offer,  including  video
programming  and interactive  multimedia services. Services  offered by cellular
and PCS operators also  will compete with  existing and future  services of U  S
WEST  Communications, including  future wireless services.  AT&T's entrance into
the wireless communications business through  its acquisition of McCaw  Cellular
Communications,  Inc. may create increased competition in local exchange as well
as wireless services. The loss of local exchange customers to competitors  would
affect multiple revenue streams of U S WEST Communications.
 
    The  adoption of the Telecommunications  Act of 1996 will  have an impact on
the competition faced by the  Communications Group. See "Recent Developments  --
Telecommunications  Act of  1996," and "Competitive  and Regulatory Environment"
under Management's Discussion and Analysis of Financial Condition and Results of
Operations on p. B-22.
 
MEDIA GROUP
 
    OPERATIONS.     The   Media   Group   is  comprised   of   (i)   cable   and
telecommunications network businesses outside of the Communications Group Region
and  internationally,  (ii) domestic  and international  wireless communications
network  businesses  and   (iii)  domestic  and   international  directory   and
information  services businesses. For the year ended December 31, 1995, domestic
and international directory  and information services  businesses accounted  for
10%  of the sales  and other revenues of  U S WEST. The  Media Group expensed $3
million, $6 million and $5 million  for research and development costs in  1995,
1994 and 1993, respectively.
 
    CABLE  AND  TELECOMMUNICATIONS.    The  Media  Group's  domestic  cable  and
telecommunications  operations  are  conducted  through  U  S  WEST   Multimedia
Communications,  Inc.  ("U S  WEST Multimedia")  and  consist of  domestic cable
properties and investments outside of the Communications Group Region, including
U S  WEST  Multimedia's ownership  of  cable  systems in  the  Atlanta,  Georgia
metropolitan  area (the  "Atlanta Systems")  and its  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.
 
    On  February 27, 1996,  U S WEST  announced a definitive  agreement to merge
with Continental Cablevision, Inc. for a combination of cash, U S WEST preferred
stock (convertible to Media Stock)
 
                                       4
<PAGE>
and shares of Media Stock valued at $5.3 billion. The transaction also  involves
an  assumption of  debt and  other obligations  amounting to  approximately $5.5
billion.  See  "Recent   Developments  --  Agreement   to  Acquire   Continental
Cablevision, Inc."
 
    The  Media Group's international cable and telecommunications operations are
conducted  through  U   S  WEST   International  Holdings,  Inc.   ("U  S   WEST
International")  and include  investments in  cable and  telecommunications that
focus  on  serving  mass  market  business  and  residential  customers  in  key
geographic  markets. To  decrease investment risk  and gain  access to technical
skills and capabilities,  U S  WEST International's  strategy has  been to  make
these  investments with other  major cable television  companies, including Time
Warner Inc. and Tele-Communications, Inc. In certain circumstances, foreign laws
require the participation of local partners in these ventures.
 
    U S WEST International, through  subsidiaries, owns a 26.8 percent  interest
in  TeleWest plc ("TeleWest"), the largest provider of combined cable television
and residential and business telecommunications services in the United  Kingdom.
In  1995, TeleWest Communications plc merged  its cable television and telephony
interests with  SBC CableComms  (UK) to  form TeleWest.  An affiliate  of  Tele-
Communications, Inc., ("TCI International") also owns a 26.8 percent interest in
TeleWest, with the remaining interests held by the public.
 
    WIRELESS  COMMUNICATIONS.   U  S  WEST NewVector  Group,  Inc. ("NewVector")
provides  cellular  services   to  customers  over   wireless  networks  in   26
metropolitan  service areas and 28 rural  service areas located primarily in the
Communications Group  Region. NewVector's  cellular services  provide  customers
with  high-quality and  readily available  two-way communications  services that
interconnect with local and long-distance telephone networks. As of December 31,
1995, NewVector had  approximately 1,463,000  cellular customers,  a 51  percent
increase from December 31, 1994.
 
    In  1994,  the Company  entered into  a  definitive agreement  with AirTouch
Communications to  combine their  domestic cellular  assets. AirTouch's  initial
equity  ownership of the joint venture will  be approximately 70 percent and the
Media Group's will be approximately 30 percent. The combination will take  place
in  two phases.  During Phase I,  which U  S WEST entered  effective November 1,
1995, the two companies  are operating their  cellular properties separately.  A
Wireless Management Company ("WMC") has been formed and is providing centralized
services  to both companies on  a contract basis. In Phase  II, AirTouch and U S
WEST will  contribute their  domestic cellular  assets to  the WMC.  The  recent
passage of the Telecommunications Act of 1996 has removed significant regulatory
barriers  to completion of Phase II of the business combination, and the Company
expects that Phase II closing  could take place by the  end of 1996 or in  early
1997.
 
    U  S  WEST has  entered into  a venture  with AirTouch  Communications, Bell
Atlantic and NYNEX Corporation to form a strategic national wireless alliance. U
S WEST has entered  into a separate  venture with the  same partners to  provide
personal  communications  services  ("PCS").  This  PCS  venture,  known  as PCS
PrimeCo, acquired rights to  11 licenses in 1995  in the Federal  Communications
Commission's  auction of  PCS radio spectrum.  The 11 licenses  cover 57 million
people in Chicago,  Dallas, Honolulu, Houston,  Jacksonville, Miami,  Milwaukee,
New Orleans, Richmond, San Antonio and Tampa.
 
    U  S WEST International owns interests in wireless communications systems or
investments in  several  countries,  including  the  United  Kingdom,  Malaysia,
Russia, Hungary, the Czech Republic, the Slovak Republic and Japan.
 
    U S WEST International, through subsidiaries, owns 50 percent of Mercury One
2  One, a 50-50 joint venture between subsidiaries of U S WEST International and
Cable & Wireless  plc. Mercury One  2 One operates  a PCS system  in the  United
Kingdom.  Mercury One 2  One's PCS is a  digital cellular communications service
designed to offer consumers higher  quality service, increased privacy and  more
features  at lower prices than existing cellular communications systems. To meet
growing customer demand, Mercury One 2 One has expanded its coverage to reach 30
percent of the United Kingdom's population.
 
                                       5
<PAGE>
    DIRECTORY AND  INFORMATION SERVICES.   The  Media Group,  through  Marketing
Resources,  provides  directory publishing  as  well as  database  marketing and
interactive  services.   Marketing  Resources   publishes,  prints   and   sells
advertising  in  more  than  300  White  and  Yellow  Pages  directories  in the
Communications Group Region. Marketing Resources' growth strategy is to increase
its advertiser base through  expanded marketing efforts,  the expansion of  core
products,  such  as  new  targeted  directories  for  specific  neighborhoods or
industries and development of  new directory features,  and the development  and
packaging  of  new  information  products,  such  as  local  audiotext services.
Marketing Resources'  yellow pages  directory advertising  business had  revenue
growth of approximately 6.4 percent in 1995.
 
    Marketing  Resources also  provides database marketing  services that enable
businesses to segment and target customers  and is developing the capability  to
provide  one-to-one marketing over interactive networks. In the future Marketing
Resources  plans  to  develop,   package,  market  and  distribute   integrated,
interactive  communications, entertainment, information and transaction services
over networks operated by the Media Group and others, including the networks  of
the Communications Group in the Communications Group Region.
 
    U  S WEST  International owns 100  percent of Thomson  Directories, which it
acquired in 1994. Thomson Directories annually publishes 156 directories in  the
United  Kingdom, reaching 46 million people, or 80 percent of all households, in
the United Kingdom. U S WEST International owns a 50 percent interest in Listel,
Brazil's largest telephone directory publisher, which  it acquired in 1994. U  S
WEST  International  also  owns  100  percent  of  Polska,  which  publishes  32
directories in Poland with a combined circulation of approximately 1.7 million.
 
    In June  1995, a  subsidiary of  U S  WEST International  purchased a  9.01%
interest  in  Flextech plc  ("Flextech"), one  of  the United  Kingdom's largest
providers of cable television and satellite programming. U S WEST  International
has the right to appoint one representative to Flextech's board of directors.
 
    REGULATION.   The products  and services of  the Media Group  are subject to
varying degrees of  regulation. Under  the Telecommunications Act  of 1996,  the
regulation  of cable television  rates will be  discontinued effective March 31,
1999, or earlier if competition exists. The same Act also (i) eliminates certain
cross-ownership   restrictions   among   cable   operators,   broadcasters   and
multichannel, multipoint distribution system operators, (ii) removes barriers to
competition  with local  exchange providers,  and (iii)  eliminates restrictions
that previously applied to the Media Group relating to long-distance services.
 
    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 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   and  wireline   and   wireless
communications systems are regulated by various governmental entities, including
the Department of Trade and Industry and the Department of National Heritage.
 
    COMPETITION.    U S  WEST  Multimedia's cable  television  systems generally
compete for  viewer  attention  with  programming from  a  variety  of  sources,
including  the direct reception of broadcast  television signals by the viewer's
own antenna,  subscription  and  low  power  television  stations,  multichannel
multipoint  distribution systems ("MMDS" or  "wireless cable"), satellite master
antenna  ("SMATV")  service,  direct   broadcast  satellite  ("DBS")   services,
telephone companies, including other RBOC's, and other cable companies within an
operating  area.  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 technologies.  Many  of these  competitive  technologies are
generally not subject to the same local government regulation that affects cable
television. Cable television
 
                                       6
<PAGE>
systems are also  in competition  for both  viewers and  advertising in  varying
degrees  with other communications and entertainment media, and such competition
may increase with  the development  and growth of  new technologies.  TeleWest's
cable  television  services  compete  with  broadcast  television  stations, DBS
services, SMATV systems and certain narrowband operators in the United Kingdom.
 
    U  S  WEST  Multimedia  will  be  offering  telecommunications  services  in
competition  with the dominant local exchange  carriers ("LECs"), CAPs and other
potential providers of telephone services  in local domestic markets,  including
the interexchange carriers such as AT&T, MCI Communications and Sprint Corp. 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. TeleWest's telecommunications services compete with
domestic  telephone  companies   in  the   United  Kingdom,   such  as   British
Telecommunications plc.
 
    New  Vector's wireless business  is subject to  FCC regulation and licensing
requirements. To  assure  competition,  the  FCC  has  awarded  two  competitive
cellular  licenses  in  each  market.  Many  competing  cellular  providers  are
substantial businesses  with  experience  in  broadcasting,  telecommunications,
cable  television and radio common carrier  services. In many markets, competing
cellular service is provided by businesses owned or controlled by a LEC, AT&T or
other major telephone companies. Competition is based upon the price of cellular
service, the quality of the service and the size of the geographic area  served.
The  development  of  PCS  services will  create  multiple  new  competitors for
NewVector's wireless  businesses.  Competition  for the  provision  of  wireless
services  is also  provided by  providers of  enhanced specialized  mobile radio
services. In the United Kingdom, Mercury One 2 One's operations compete with two
established cellular providers and one PCS provider. In addition, Mercury One  2
One  competes in  the consumer market  with telephone companies  such as British
Telecommunications plc.
 
    Marketing  Resources'  directory  publishing  businesses  continue  to  face
significant  competition from local  and national publishers  of directories, as
well as other advertising media such as newspapers, magazines, broadcast  media,
direct  mail and operator assisted services.  Directory listings are now offered
in electronic data bases through telephone company and third party networks.  As
such offerings expand and are enhanced through interactivity and other features,
the  Company will experience heightened  competition in its directory publishing
businesses. Marketing Resources will  continue to expand  its core products  and
develop  and  package new  information products  to  meet its  customers' needs.
Marketing  Resources'  database  marketing   services  also  continue  to   face
competition  from direct  mail list  providers, co-op  direct mail  programs and
coupon programs. Marketing Resources will also face emerging competition in  the
provision  of  interactive  services  from  cable  and  entertainment companies,
on-line services, advertising agencies  specializing in interactive  advertising
and  many small companies who are information providers. Many of these potential
competitors may also be joint venture partners, suppliers or distributors.
 
    The actions of public  policy makers play an  important role in  determining
how  increased competition affects  the Media Group. The  Media Group is working
with regulators and legislators to help ensure that public policies are fair and
in the best interests of customers.
 
    See "Competitive and Regulatory  Environment" under Management's  Discussion
and Analysis of Financial Condition and Results of Operation on p. B-22.
 
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, 1995, 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.
 
                                       7
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS.
 
    U S WEST and its subsidiaries are subject to claims and proceedings  arising
in  the ordinary course of business. While complete assurance cannot be given as
to the outcome of any  contingent liabilities, in the opinion  of U S WEST,  any
financial  impact to  which U  S WEST  and its  subsidiaries are  subject is not
expected to  be material  in  amount to  U S  WEST's  operating results  or  its
financial position.
 
    On  September 22, 1995, U S WEST  filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time  Warner and Turner Broadcasting. U S  WEST
has  alleged  breaches  of  contract  and fiduciary  duties  by  Time  Warner in
connection with this proposed merger. Time Warner filed a countersuit against  U
S  WEST on October 11, 1995,  alleging misrepresentation, breach of contract and
other misconduct on  the part of  U S  WEST. Time Warner's  countersuit seeks  a
reformation  of the  Time Warner  Entertainment partnership  agreement, an order
that enjoins U S WEST from  breaching the partnership agreement and  unspecified
compensatory  damages. U S WEST  has denied each of  the claims in Time Warner's
countersuit. Trial for this action concluded on March 22, 1996. A ruling by  the
Delaware Chancery Court is expected in June 1996.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    Not applicable.
 
                         EXECUTIVE OFFICERS OF U S WEST
 
    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                  Acting Executive Vice President & Chief Financial Officer          56         1984(1)
Charles M. Lillis                  Executive Vice President & President and Chief Executive           54         1987(2)
                                   Officer, U S WEST Media Group
Richard D. McCormick               Chairman of the Board, Chief Executive Officer &                   55         1986(3)
                                   President
Charles P. Russ, III               Executive Vice President-Law and Human Resources, General          51         1992
                                   Counsel & Secretary
James H. Stever                    Executive Vice President - Public Policy                           52         1993
Solomon D. Trujillo                Executive Vice President & President and Chief Executive           44         1995(4)
                                   Officer, U S WEST Communications, Inc.
</TABLE>
 
------------------------------
(1)
  Mr.  Anderson was elected Acting Executive  Vice President and Chief Financial
  Officer effective October 6,  1995; he has been  Vice President and  Treasurer
  since 1984.
 
(2)
  Mr.  Lillis was elected President and Chief  Executive Officer, U S WEST Media
  Group effective August 22, 1995.
 
(3)
  Mr. McCormick was appointed  Chief Executive Officer on  January 1, 1991,  and
  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, Inc. effective July 1, 1995, and Executive Vice President, U S
  WEST, Inc. effective October 6,  1995. Previously, Mr. Trujillo was  President
  and Chief Executive Officer of U S WEST Marketing Resources Group, Inc.
 
    Executive  Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
 
                                       8
<PAGE>
    Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST  since 1991, except for Mr. Russ. Mr. Russ  was
Vice  President, Secretary and General Counsel of NCR Corporation from February,
1984 to June, 1992.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
    The information required  by this  item is  included in  Note 21,  Quarterly
Financial  Data, on page B-63.  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
December  31,  1995, U  S WEST  Communications  Group common  stock was  held by
approximately 775,125 shareholders  of record and  U S WEST  Media Group  common
stock was held by approximately 770,346 shareholders of record.
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
    Reference is made to the information set forth on pages B-1 through B-2.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
    Reference is made to the information set forth on pages B-3 through B-26.
 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    Reference is made to the information set forth on pages B-29 through B-63.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
    Coopers  & Lybrand L.L.P.  has served as  the Company's independent auditor,
and Arthur  Andersen LLP  has served  as  the primary  auditing firm  for  major
subsidiaries  within U S WEST Media Group,  since 1984. In view of the Company's
new targeted stock structure, the Company determined, following a recommendation
of the Audit Committee,  that it will  be more efficient  and effective for  the
Company  to have  a single  firm perform  the auditing  function for  the entire
business.
 
    During the Company's two  most recent fiscal years  ended December 31,  1995
and  December 31, 1994, the reports of Coopers & Lybrand L.L.P. on the Company's
financial statements contained no adverse opinion or disclaimer of opinion,  nor
were  they qualified  or modified as  to uncertainty, audit  scope or accounting
principles. In  addition,  during such  fiscal  years and  the  interim  periods
thereafter:  (1) no disagreements with Coopers & Lybrand L.L.P. have occurred on
any  matter  of   accounting  principles  or   practices,  financial   statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to  the satisfaction of Coopers  & Lybrand L.L.P., would  have caused it to make
reference to  the subject  matter of  the disagreement  in connection  with  its
report on the Company's financial statements; (2) no reportable events involving
Coopers  & Lybrand L.L.P. have occurred  that must be disclosed under applicable
securities laws; and (3) the Company has not consulted with Arthur Andersen  LLP
on  items that concerned the application  of accounting principles to a specific
transaction, either completed or proposed, or on the type of audit opinion  that
might be rendered on the Company's financial statements.
 
                                    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  dated  April  8,  1996 ("Proxy
Statement")  under  "Election  of  Directors"  on  pages  4  through  6  and  is
incorporated herein by reference.
 
                                       9
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION.
 
    The  information required  by this item  is included in  the Proxy Statement
under "Executive  Compensation"  on pages  8  through 20  and  "Compensation  of
Directors" on pages 3 and 4 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 "Securities Owned by Management" on  page 4 and is incorporated herein  by
reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
    Not applicable.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
(a) Documents filed as part of this report:
 
<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                              NUMBER
                                                                                      ----------------------
<S>        <C>                                                                        <C>
(1) --     Report of Independent Accountants........................................           B-27
(2) --     Consolidated Financial Statements:
           Consolidated Statements of Operations -- for the years ended December 31,
            1995, 1994 and 1993.....................................................    B-29 through B-30
           Consolidated Balance Sheets as of December 31, 1995 and 1994.............           B-31
           Consolidated Statements of Cash Flows -- for the years ended December 31,
            1995, 1994 and 1993.....................................................           B-32
           Notes to Consolidated Financial Statements...............................    B-33 through B-63
(3) --     Consolidated Financial Statement Schedule:
           Report of Independent Accountants........................................            --
           II -- Valuation and Qualifying Accounts..................................           S-1
(4) --     U S WEST Communications Group Combined Financial Statements:.............
           Report of Independent Accountants........................................           C-16
           Combined Statements of Operations -- for the years ended December 31,
            1995, 1994 and 1993.....................................................           C-17
           Combined Balance Sheets as of December 31, 1995 and 1994.................           C-18
           Combined Statements of Cash Flows -- for the years ended December 31,
            1995, 1994 and 1993.....................................................           C-19
           Notes to the Combined Financial Statements...............................    C-20 through C-38
(5) --     U S WEST Media Group Combined Financial Statements:
           Report of Independent Accountants........................................           D-22
           Combined Statements of Operations -- for the years ended December 31,
            1995, 1994 and 1993.....................................................           D-23
           Combined Balance Sheets as of December 31, 1995 and 1994.................           D-24
           Combined Statements of Cash Flows -- for the years ended December 31,
            1995, 1994 and 1993.....................................................           D-25
           Notes to the Combined Financial Statements...............................    D-26 through D-55
</TABLE>
 
                                       10
<PAGE>
    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 1995:
 
        (i)  report dated October 6, 1995,  reporting the resignation of Richard
    B. Cheney  from the  U  S WEST  board  of directors  and  filing a  Form  of
    Underwriting  Agreement and a Form  of Note concerning the  6 3/4% Notes due
    October 1, 2005, issued by U S WEST Capital Funding, Inc.;
 
        (ii) report dated October  27, 1995, relating to  a release of  earnings
    for  the period ended September  30, 1995, reporting a  change in U S WEST's
    certifying accountant, and  filing a Form  of Note, a  Form of  Distribution
    Agreement,  a Form of Fixed-Rate Medium-Term Note, and Form of Floating Rate
    Medium-Term Note concerning the U S  WEST Capital Funding, Inc. 6.31%  Notes
    due  November 1, 2005, unconditionally guaranteed as to payment of principal
    and interest by U S WEST, Inc.; and
 
       (iii) report dated November 2, 1995,  filing a Form of Fixed Rate  Global
    Note and a Form of Floating Rate Global Note concerning the $500,000,000 U S
    WEST  Capital Funding, Inc.  Medium-Term Notes due nine  months or more from
    the date of issue,  unconditionally guaranteed as  to payment of  principal,
    premium, if any, and interest, by U S WEST, Inc.
 
    (c) Exhibits:
 
        Exhibits  identified in parentheses  below, on file  with the Securities
    and Exchange Commission  ("SEC"), are  incorporated herein  by reference  as
    exhibits hereto.
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER
-----------
<C>          <C>        <S>
        (3a)    --      Restated  Certificate of Incorporation of U S WEST,  Inc. (originally incorporated May 12, 1995 under
                        the same name) executed October 31, 1995 (Annex II to Registration Statement No. 33-59315).
         3b     --      Bylaws of U S WEST, Inc. as amended March 15, 1996.
        (4a)    --      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)
         4b     --      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.
       (10a)    --      Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone and
                        Telegraph  Company and its  affiliates, U S WEST,  Inc., The Mountain  States Telephone and Telegraph
                        Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and  NewVector
                        Communications, Inc. (Exhibit 10a to Form 10-K, date of report March 8, 1984, File No. 1-3501).
       (10b)    --      Shared  Network Facilities  Agreement dated  as of  January 1,  1984, between  American Telephone and
                        Telegraph Company,  AT&T Communications  of the  Midwest,  Inc., The  Mountain States  Telephone  and
                        Telegraph  Company, Northwestern Bell Telephone Company  and Pacific Northwest Bell Telephone Company
                        (Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501).
       (10c)    --      Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983, between
                        American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States
                        Telephone and Telegraph
</TABLE>
 
                                       11
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER
-----------
                        Company, Northwestern Bell Telephone  Company, Pacific Northwest Bell  Telephone Company and  Central
                        Services Organization (Exhibit 10d to Form 10-K, date of report March 8, 1984, File No, 1-3501).
<C>          <C>        <S>
       (10d)    --      Agreement  Concerning  Certain  Centrally Developed  Computer  Systems effective  December  31, 1983,
                        between American  Telephone  and  Telegraph  Company, Western  Electric  Company,  Incorporated,  The
                        Mountain  States  Telephone  and  Telegraph Company,  Northwestern  Bell  Telephone  Company, Pacific
                        Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date of
                        report March 8, 1984, File No. 1-3501).
       (10e)    --      Agreement Concerning  Patents, Technical  Information  and Copyrights  effective December  31,  1983,
                        between  American Telephone and Telegraph Company and U S  WEST, Inc. (Exhibit 10f to Form 10-K, date
                        of report March 8, 1984, File No. 1-3501).
       (10f)    --      AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph Company
                        and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28, 1984, File No.
                        1-8611).
       (10g)    --      Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements  dated
                        as  of  November 1,  1983, between  American Telephone  and Telegraph  Company, U  S WEST,  Inc., The
                        Mountain States  Telephone  and  Telegraph  Company, Northwestern  Bell  Telephone  Company,  Pacific
                        Northwest  Bell Telephone Company and NewVector Communications,  Inc. (Exhibit 10h to Form 10-K, date
                        of report March 8, 1984, File No. 1-3501).
       (10h)    --      Agreement Concerning Trademarks, Trade Names and  Service Marks effective December 31, 1983,  between
                        American  Telephone  and  Telegraph  Company,  American  Information  Technologies  Corporation, Bell
                        Atlantic Corporation,  BellSouth  Corporation,  Cincinnati Bell,  Inc.,  NYNEX  Corporation,  Pacific
                        Telesis  Group, The  Southern New England  Telephone Company,  Southwestern Bell Corporation  and U S
                        WEST, Inc. (Exhibit 10i to Form 10-K, date of report March 8, 1984, File No. 1-3501).
       (10i)    --      U S WEST, Inc. Short-Term  Incentive Plan (Exhibit 10i  to Form 10-K filed  March 19, 1993, File  No.
                        1-8611).
       (10j)    --      Financial  Counseling Program for Officers  of U S WEST (Exhibit  10-ee to Registration Statement No.
                        2-87861).
       (10k)    --      U S  WEST  Deferred Compensation  Plan  for Non-Employee  Directors  (Exhibit 10-ff  to  Registration
                        Statement No. 2-87861).
       (10l)    --      Description  of U  S WEST  Insurance Plan  of Non-Employee  Directors' Travel  and Accident Insurance
                        (Exhibit 10-gg to Registration Statement No. 2-87861).
       (10m)    --      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).
       (10n)    --      U S WEST Executive  Non-Qualified Pension Plan (Exhibit  10o to Form 10-K,  date of report March  29,
                        1989, File No. 1-8611).
       (10o)    --      Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315).
       (10p)    --      Description  of U S WEST  Directors' Retirement Benefit Plan  (Exhibit 10p to Form  SE filed March 5,
                        1992, File No. 1-8611).
       (10q)    --      Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315).
       (10r)    --      Shareholders' Agreement dated as  of January 1,  1988 among Ameritech  Services, Inc., Bell  Atlantic
                        Management Services, Inc., BellSouth Services Incorporated, NYNEX
</TABLE>
 
                                       12
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER
-----------
                        Service Company, Pacific Bell, Southwestern Bell Telephone Company, The Mountain States Telephone and
                        Telegraph  Company, Northwestern Bell Telephone Company  and Pacific Northwest Bell Telephone Company
                        (Exhibit 10r to Form SE filed March 5, 1992, File No. 1-8611).
<C>          <C>        <S>
       (10s)    --      U S  WEST Senior  Management Long  Term Disability  and Survivor  Protection Plan  (Exhibit 10-dd  to
                        Registration Statement No. 2-87861).
       (10t)    --      U  S WEST Mid-Career Pension Plan (Exhibit 10u to Form  10-K, date of report March 29, 1989, File No.
                        1-8611).
        10u     --      Form of U S WEST, Inc. Non-Qualified Stock Option Agreement.
        10v     --      Form of U S WEST, Inc. Restricted Stock Agreement.
       (10w)    --      Employment letter from Richard D. McCormick to Charles  P. Russ, III dated May 11, 1992 (Exhibit  10w
                        to Form 10-K, date of report March 7, 1995).
       (10x)    --      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).
        10y     --      Form of U S WEST, Inc. Executive Change of Control Agreement.
        10z     --      Form of Change of Control Agreement for Chief Executive Officer.
        10aa    --      Form of Group Executive Change of Control Agreement.
        10ab    --      Form of Executive Severance Agreement.
       (10ac)    --     U S WEST, Inc. Executive Long-Term Incentive Plan (Exhibit 10ad to Form 10-K, date of report March 7,
                        1995).
       (10ad)    --     U S WEST, Inc. Executive Short-Term Incentive Plan  (Exhibit 10ae to Form 10-K, date of report  March
                        7, 1995).
        10ae    --      Agreement  and Plan of Merger between U S WEST, Inc. and Continental Cablevision Inc., dated February
                        27, 1996.
        10af    --      Stockholders' Agreement among  certain stockholders of  Continental Cablevision, Inc.  and U S  WEST,
                        Inc. dated February 27, 1996.
        11      --      Statement Re Computation of Per Share Earnings.
        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,  1995,
                        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 28, 1996.
 
                                          U S WEST, Inc.
 
                                          By:        /s/ JAMES T. ANDERSON
 
                                             -----------------------------------
                                                      James T. Anderson
                                             ACTING EXECUTIVE VICE PRESIDENT AND
                                                   CHIEF FINANCIAL OFFICER
 
    Pursuant  to the requirements  of the Securities Exchange  Act of 1934, this
report has  been  signed  below  by  the following  persons  on  behalf  of  the
registrant and in the capacities and on the date indicated.
 
<TABLE>
<S>                                           <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Richard D. McCormick*                     Chairman of the Board, President and Chief
                                               Executive Officer
 
PRINCIPAL FINANCIAL OFFICER:
/s/ James T. Anderson                         Acting Executive Vice President and Chief
                                               Financial Officer
 
DIRECTORS:
/s/ Remedios Diaz-Oliver*
/s/ Grant A. Dove*
/s/ Allan D. Gilmour*
/s/ Pierson M. Grieve*
/s/ Shirley M. Hufstedler*
/s/ Allen F. Jacobson*
/s/ Richard D. McCormick*
/s/ Marilyn C. Nelson*
/s/ Frank Popoff*
/s/ Jerry O. Williams*
 
*By       /s/ JAMES T. ANDERSON
      --------------------------------------
             James T. Anderson
   (FOR HIMSELF AND AS ATTORNEY-IN-FACT)
</TABLE>
 
Dated March 28, 1996
 
                                       14
<PAGE>
                        INDEPENDENT ACCOUNTANTS' REPORT
 
    Our report on the consolidated financial statements of U S WEST, Inc., which
includes an explanatory paragraph regarding the discontinuance of accounting for
the  operations of U S WEST Communications, Inc. in accordance with Statement of
Financial Accounting Standard  No. 71,  "Accounting for the  Effects of  Certain
Types  of Regulation," in 1993,  is included on page B-45  of this Form 10-K. In
connection with our audits  of such consolidated  financial statements, we  have
also audited the related consolidated financial statement schedule listed in the
index  on page S-1 of this Form 10-K for the years ended December 31, 1995, 1994
and 1993.
 
    In our opinion, the consolidated  financial statement schedules referred  to
above,  when considered in relation to the basic financial statements taken as a
whole, present 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   CHARGED TO                  BALANCE AT
                                                              BEGINNING      TO         OTHER                      END OF
                                                              OF PERIOD    EXPENSE    ACCOUNTS     DEDUCTIONS      PERIOD
                                                             -----------  ---------  -----------  -------------  -----------
<S>                                                          <C>          <C>        <C>          <C>            <C>
ALLOWANCE FOR CREDIT LOSSES
    Year 1995..............................................   $      62   $     122(a)  $      13   $     109(b)  $      88
    Year 1994..............................................          54          91(a)          3          86(b)         62
    Year 1993..............................................          59          83(a)          1          89(b)         54
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING, INCLUDING
 FORCE AND FACILITY CONSOLIDATION
    Year 1995..............................................         702      --          --               334           368
    Year 1994..............................................         935      --          --               233           702
    Year 1993..............................................      --           1,000      --                65           935
RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING, INCLUDING
 FORCE REDUCTIONS AND THE WRITE OFF OF CERTAIN INTANGIBLE
 ASSETS
    Year 1995..............................................      --          --          --            --            --
    Year 1994..............................................          95      --          --                95        --
    Year 1993..............................................         215      --          --               120            95
CAPITAL ASSETS SEGMENT:
  REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
   LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT
    Year 1995..............................................         119      --          --                49            70
    Year 1994..............................................         336      --          --               217           119
    Year 1993..............................................         402         120(c)     --             186           336
</TABLE>
 
------------------------------
 
Note: Certain reclassifications within the schedule have been made to conform to
      the current year presentation.
 
(a)    Does not include amounts  charged directly to expense. These amounts were
    $6, $10 and $10 for 1995, 1994 and 1993, respectively.
 
(b)   Represents credit losses written off during the period, less collection of
    amounts previously written off.
 
(c)   Provision for estimated loss on disposal of the capital assets segment  of
    $100  and an additional provision of $20 to reflect the cumulative effect on
    deferred taxes of the 1993 federally mandated increase in income tax rates.
 
                                      S-1
<PAGE>
                                 U S WEST, INC.
                              FINANCIAL HIGHLIGHTS
 
<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------------
                                                               1995       1994       1993       1992       1991
                                                             ---------  ---------  ---------  ---------  ---------
                                                                DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S>                                                          <C>        <C>        <C>        <C>        <C>
Sales and other revenues...................................  $  11,746  $  10,953  $  10,294  $   9,823  $   9,528
Income from continuing operations (1)......................      1,329      1,426        476       1076        840
Net income (loss) (2)......................................      1,317      1,426     (2,806)      (614)       553
Total assets...............................................     25,071     23,204     20,680     23,461     23,375
Total debt (3).............................................      8,855      7,938      7,199      5,430      5,969
Company-obligated mandatorily redeemable preferred
 securities of subsidiary trust holding solely
 Company-guaranteed debentures.............................        600     --         --         --         --
Preferred stock subject to mandatory redemption............         51         51     --         --         --
Shareowners' equity........................................      7,948      7,382      5,861      8,268      9,587
Earnings per common share (continuing
 operations) (1,4).........................................     --           3.14       1.13       2.61       2.09
Earnings (loss) per common share (1,4).....................     --           3.14      (6.69)     (1.49)      1.38
Weighted average common shares outstanding (thousands)
 (4).......................................................     --        453,316    419,365    412,518    401,332
Dividends per common share (4).............................     --      $    2.14  $    2.14  $    2.12  $    2.08
Number of common shareowners (4)...........................     --        816,099    836,328    867,773    899,092
Return on common shareowners' equity (5)...................      17.2%      21.6%     --          14.4%       5.7%
Percentage of debt to total capital (3)....................      50.7%      51.6%      55.1%      39.6%      38.4%
Capital expenditures (3)...................................  $   3,140  $   2,820  $   2,441  $   2,554  $   2,425
Employees..................................................     61,047     61,505     60,778     63,707     65,829
PRO FORMA INFORMATION -- COMMUNICATIONS GROUP: (4)
  Earnings per common share................................  $    2.50
  Dividends per common share...............................       2.14
  Average common shares outstanding (thousands)............    470,716
  Number of common shareowners.............................    775,125*
PRO FORMA INFORMATION --
 MEDIA GROUP: (4)
  Earnings per common share................................  $    0.29
  Average common shares outstanding (thousands)............    470,549
  Number of common shareowners.............................    770,346*
</TABLE>
 
------------------------------
* Actual
 
(1)
  1995 income from continuing operations includes a gain of $95 ($0.20 per Media
  share)  from the merger of  U S WEST's joint  venture interest in TeleWest plc
  with SBC CableComms (UK),  a gain of $85  ($0.18 per Communications share)  on
  the   sales  of  certain   rural  telephone  exchanges   and  $17  ($0.01  per
  Communications share and $0.02 per  Media share) for expenses associated  with
  the  November 1, 1995 recapitalization. 1994 income from continuing operations
  includes a gain of $105  ($0.23 per share) on the  partial sale of U S  WEST's
  joint venture interest in TeleWest plc, a gain of $41 ($0.09 per share) on the
  sale of the Company's paging operations and a gain of $51 ($0.11 per share) on
  the  sales of certain  rural telephone exchanges.  1993 income from continuing
  operations 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. 1991 income from
  continuing operations was reduced by a restructuring charge of $230 ($0.57 per
  share).
 
(2)
  1995 net  income  was  reduced  by  extraordinary  items  of  $12  ($0.02  per
  Communications  share and $0.01 per Media  share) 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  Statement  of  Financial  Accounting
  Standards   ("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
 
                                      B-1
<PAGE>
  capital assets segment. 1992 net income includes a charge of $1,793 ($4.35 per
  share)  for  the  cumulative  effect  of  change  in  accounting   principles.
  Discontinued  operations provided net income (loss)  of $38 ($0.09 per share),
  $103 ($0.25 per share) and  $(287) ($0.71 per share)  in 1993, 1992 and  1991,
  respectively.
 
(3)
  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.
 
(4)
  Effective  November 1,  1995, each share  of U  S WEST, Inc.  common stock was
  converted into one share  each of U S  WEST Communications Group common  stock
  and  U S WEST  Media Group common  stock. Earnings per  common share 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, Inc.
 
(5)
  1995  return on  shareowners' equity is  based on  income before extraordinary
  items. 1993  return  on  shareowners'  equity  is  not  presented.  Return  on
  shareowners'  equity for fourth-quarter 1993 was  19.9 percent based on income
  from continuing operations.  1992 return  on shareowners' equity  is based  on
  income before the cumulative effect of change in accounting principles.
 
                                      B-2
<PAGE>
                                  U S WEST, INC.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
THE RECAPITALIZATION PLAN
 
    On  October  31,  1995, the  shareholders  of  U S  WEST,  Inc.,  a Colorado
corporation  ("U  S  WEST   Colorado"),  voted  to   approve  a  proposal   (the
"Recapitalization  Plan") adopted by the Board  of Directors to reincorporate in
Delaware and  create two  classes of  common stock.  Under the  Recapitalization
Plan,  shareholders approved an  Agreement and Plan  of Merger between  U S WEST
Colorado and  U  S  WEST, Inc.,  a  Delaware  corporation ("U  S  WEST"  or  the
"Company"),  pursuant to which U S  WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST  has
been  amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as  U S WEST Communications Group Common  Stock
("Communications  Stock") and the  other class which  is authorized as  U S WEST
Media Group Common Stock ("Media Stock").
 
    The Communications  Stock  and Media  Stock  provide shareholders  with  two
distinct  securities that are intended  to reflect separately the communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses  of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
 
THE COMMUNICATIONS GROUP
 
    The  Communications  Group   primarily  provides  regulated   communications
services  to  more than  25 million  residential and  business customers  in the
Communications Group 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. Services offered  by
the  Communications  Group  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  Local  Access  and  Transport   Areas  ("LATAs")  in  the  Region.   The
Communications  Group  provides other  products  and services,  including custom
calling  features,  voice  messaging,  caller  identification,  high-speed  data
applications, customer premises equipment and certain communications services to
business customers and governmental agencies both inside and outside the Region.
The  Telecommunications Act of 1996, enacted into  law on February 8, 1996, will
dramatically alter the competitive landscape of the telecommunications  industry
and  will further  change the nature  of services the  Communications Group will
offer. These future service  offerings include interLATA long-distance  service,
wireless  services, cable  television and  interconnection services  provided to
competing providers of local services.
 
THE MEDIA GROUP
 
    The Media Group is  comprised of: (i)  cable and telecommunications  network
businesses  outside of the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and  (iii)
domestic and international directory and information services businesses.
 
    The Media Group's cable and telecommunications businesses include U S WEST's
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, its cable systems in the Atlanta, Georgia metropolitan area ("the
Atlanta Systems"), and international  cable and telecommunications  investments,
including TeleWest plc ("TeleWest"). In 1995, TeleWest Communications plc merged
its  cable television and  telephony interests with SBC  CableComms (UK) to form
TeleWest, the largest provider of combined cable and telecommunications services
in the  United Kingdom.  The Media  Group also  owns interests  in cable  and/or
telecommunications properties in the Netherlands, Sweden, Norway, Hungary, Czech
Republic, Malaysia and Indonesia.
 
    The   Media  Group  provides   domestic  wireless  communications  services,
including cellular services, in  13 western and midwestern  states to a  rapidly
growing customer base. The Media Group also provides
 
                                      B-3
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
wireless  communications services internationally through  its Mercury One 2 One
("One 2 One") joint venture,  the world's first personal communications  service
located  in the United Kingdom. The Media  Group also owns interests in wireless
properties in Hungary, the Czech  and Slovak Republics, Russia, Malaysia,  India
and Poland.
 
    The  Media Group's directory and information services businesses develop and
package content  and  information  services,  including  telephone  directories,
database  marketing and other interactive services in domestic and international
markets. The  Media  Group  publishes  more than  300  White  and  Yellow  Pages
directories  in 14 western  and midwestern states and  nearly 200 directories in
the United Kingdom and Poland. The Media Group also has a 50 percent interest in
Listel, Brazil's largest telephone directory publisher.
 
AIRTOUCH MERGER
 
    During  1994,  U  S  WEST  signed  a  definitive  agreement  with   AirTouch
Communications  to combine  their domestic  cellular assets.  The initial equity
ownership of  this  cellular joint  venture  will be  approximately  70  percent
AirTouch  and approximately 30 percent U S WEST. The combination will take place
in two phases.  During Phase I,  which U  S WEST entered  effective November  1,
1995,  the two companies  are operating their  cellular properties separately. A
Wireless Management  Company  (the  "WMC")  has been  formed  and  is  providing
centralized  services  to  both companies  on  a  contract basis.  In  Phase II,
AirTouch and U S WEST will contribute their domestic cellular assets to the WMC.
In this phase,  the Company  will reflect its  share of  the combined  operating
results  of the WMC using the equity method of accounting. The recent passage of
the Telecommunications Act of 1996  has removed significant regulatory  barriers
to  completion of Phase  II of the  business combination. U  S WEST expects that
Phase II closing could take place by the end of 1996 or early 1997.
 
PERSONAL COMMUNICATIONS SERVICES
 
    U S WEST partnered with AirTouch Communications, Bell Atlantic and NYNEX  to
form  a strategic  national wireless  alliance and  formed a  venture to provide
personal communications services ("PCS").  This venture, PCS PrimeCo,  purchased
11  licenses in the Federal Communication  Commission's (the "FCC") PCS auction,
covering 57 million people in Chicago, Dallas, Honolulu, Houston,  Jacksonville,
Miami, Milwaukee, New Orleans, Richmond, San Antonio and Tampa.
 
SUBSEQUENT EVENT
 
    On  February 27, 1996, the Company announced a definitive agreement to merge
with Continental Cablevision,  Inc. ("Continental").  Continental, the  nation's
third-largest cable operator, serves 4.2 million domestic customers, passes more
than  seven  million domestic  homes and  holds  significant other  domestic and
international properties. U S WEST will purchase all of Continental's stock  for
approximately  $5.3  billion  and  will  assume  Continental's  debt  and  other
obligations, which amount to approximately  $5.5 billion. Consideration for  the
$5.3  billion in  equity will consist  of approximately  $1 billion in  U S WEST
preferred stock, convertible to Media Stock; and, at U S WEST's option,  between
$1  billion and $1.5 billion in cash, and $2.8 billion to $3.3 billion in shares
of Media  Stock. The  transaction, which  is  expected to  close in  the  fourth
quarter  of 1996, is subject to a  number of conditions and approvals, including
approvals from  Continental shareholders  and local  franchising and  government
authorities.
 
    Continental's  4.2 million domestic  customers are highly  clustered in five
large markets -- New England,  California, Chicago, Michigan, Ohio and  Florida.
Upon  closing, U S WEST will  own or share management of  cable systems in 60 of
the top  100  American  markets  and  serve nearly  one  of  every  three  cable
households.  In  addition,  Continental  has interests  in  cable  properties in
Australia, Argentina and Singapore; a 10 percent interest in PRIMESTAR (a direct
broadcast  satellite  service);  telephone  access  businesses  in  Florida  and
Virginia;  and interests in programming that include Turner Broadcasting System,
E! Entertainment Television, the Golf Channel, and the Food Channel.
 
                                      B-4
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
 
    Comparative details of income from  continuing operations for 1995 and  1994
follow:
 
<TABLE>
<CAPTION>
                                                                                                        INCREASE (DECREASE)
                                                                      PERCENT                           --------------------
                                                                     OWNERSHIP      1995       1994         $          %
                                                                   -------------  ---------  ---------  ---------  ---------
<S>                                                                <C>            <C>        <C>        <C>        <C>
Communications Group: (1)
  U S WEST Communications, Inc...................................          100    $   1,219  $   1,175  $      44        3.7
  Other operations...............................................          100          (35)       (25)       (10)     (40.0)
                                                                                  ---------  ---------  ---------  ---------
    Total Communications Group...................................                     1,184      1,150         34        3.0
Media Group: (2)
  Consolidated:
    Directory and information services...........................          100          240        247         (7)      (2.8)
    Wireless communications......................................          100           62         67         (5)      (7.5)
    Cable and telecommunications.................................          100           (7)        (2)        (5)    --
  Unconsolidated equity investments:
    Time Warner Entertainment (3)................................         25.5          (32)       (30)        (2)      (6.7)
    TeleWest.....................................................         26.8           53         76        (23)     (30.3)
    One 2 One....................................................         50.0          (81)       (58)       (23)     (40.0)
  Other (4)......................................................                       (90)       (24)       (66)    --
                                                                                  ---------  ---------  ---------  ---------
    Total Media Group............................................                       145        276       (131)     (47.5)
                                                                                  ---------  ---------  ---------  ---------
Income from continuing operations................................                 $   1,329  $   1,426  $     (97)      (6.8)
                                                                                  ---------  ---------  ---------  ---------
                                                                                  ---------  ---------  ---------  ---------
Pro forma earnings per common share from continuing operations:
 (5)
  Communications Stock...........................................                 $    2.52     --
  Media Stock....................................................                      0.30     --
Earnings per common U S WEST share (5)...........................                    --      $    3.14
</TABLE>
 
------------------------------
(1)
  1995 Communications Group income from continuing operations includes a gain of
  $85  ($0.18 per Communications share) on  the sales of certain rural telephone
  exchanges and $8 ($0.01  per Communications share)  for costs associated  with
  the  Recapitalization Plan.  1994 Communications Group  income from continuing
  operations includes a gain of $51 ($0.11 per  U S WEST share) on the sales  of
  certain rural telephone exchanges.
 
(2)
  1995  Media Group  income from  continuing operations  includes a  gain of $95
  ($0.20 per Media share) from the  merger of TeleWest with SBC CableComms  (UK)
  and  $9 ($0.02 per Media share) for costs associated with the Recapitalization
  Plan. 1994 Media Group  income from continuing operations  includes a gain  of
  $105  ($0.23 per U S WEST share) from  the partial sale of the Company's joint
  venture interest in TeleWest and a gain of $41 ($0.09 per U S WEST share) from
  the sale of the Company's paging operations.
 
(3)
  Percent ownership  represents pro-rata  priority capital  and residual  equity
  interests.
 
(4)
  Primarily  includes interest  expense and divisional  expenses associated with
  equity investments.
 
(5)
  Earnings per common share from continuing operations 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  recapitalization,
  the  average common shares outstanding are assumed  to be equal to the average
  common shares outstanding for U S WEST, Inc.
 
COMMUNICATIONS GROUP
 
    The Communications Group's 1995 income from continuing operations, excluding
the effects  of one-time  items described  in Note  1 to  the table  above,  was
$1,107,  an increase of $8,  or 0.7 percent, compared  with $1,099 in 1994, also
excluding the effects of one-time items. Total revenue growth of 3.4 percent was
largely offset  by  significantly  higher costs  incurred  to  improve  customer
service and meet greater than
 
                                      B-5
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
expected  business growth. Net income growth will  also be limited in 1996 while
the Communications  Group  continues to  commit  significant resources  to  meet
customer  service  objectives  and  broaden its  range  of  product  and service
offerings.
 
    Excluding the effects  of one-time items  described in Note  1 to the  table
above,  pro forma earnings per Communications Group common share from continuing
operations were $2.35 in 1995.
 
    During 1995, the  Communications Group  refinanced $145  of long-term  debt.
Expenses  associated with the refinancings  resulted in extraordinary charges of
$8, net of tax benefits of $5.
 
MEDIA GROUP
 
    During 1995, income from continuing operations declined 55 percent, to  $59,
excluding  the effects of  the one-time items  described in Note  2 to the table
above. The  decline  is  due  primarily  to  higher  equity  losses  related  to
international   growth  initiatives  and  increased  amortization  and  interest
expense. Interest expense increases relate to debt issued in connection with the
Atlanta Systems  acquisition and  expansion  of international  investments.  The
declines  were  partially offset  by improvement  in  the domestic  cellular and
Yellow Pages operations.
 
    Excluding the effects  of one-time items  described in Note  2 to the  table
above,  pro  forma  earnings  per  Media  Group  common  share  from  continuing
operations were $0.12 in 1995.
 
    During 1995, the Media Group incurred an extraordinary loss of $4, net of  a
tax benefit of $2, related to the early retirement of debt by TWE.
 
SALES AND OTHER REVENUES
 
    An  analysis  of the  change  in U  S  WEST's consolidated  sales  and other
revenues follows:
 
<TABLE>
<CAPTION>
                                                                                                INCREASE
                                                                                          --------------------
                                                                      1995       1994         $          %
                                                                    ---------  ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>        <C>
Communications Group..............................................  $   9,484  $   9,176  $     308        3.4
Media Group.......................................................      2,374      1,908        466       24.4
Intergroup eliminations...........................................       (112)      (131)        19       14.5
                                                                    ---------  ---------  ---------  ---------
    Total.........................................................  $  11,746  $  10,953  $     793        7.2
                                                                    ---------  ---------  ---------  ---------
                                                                    ---------  ---------  ---------  ---------
</TABLE>
 
COMMUNICATIONS GROUP OPERATING REVENUES
 
    An analysis of changes in Communications Group operating revenues follows:
<TABLE>
<CAPTION>
                                                                                                                       INCREASE
                                                                                   LOWER                               (DECREASE)
                                                                      PRICE      (HIGHER)                              ---------
                                               1995       1994       CHANGES      REFUNDS      DEMAND        OTHER         $
                                             ---------  ---------  -----------  -----------  -----------  -----------  ---------
<S>                                          <C>        <C>        <C>          <C>          <C>          <C>          <C>
Local service..............................  $   4,344  $   4,067   $      35    $     (10)   $     273    $     (21)  $     277
Interstate access..........................      2,378      2,269         (66)          (2)         191          (14)        109
Intrastate access..........................        747        729         (31)           8           36            5          18
Long-distance network......................      1,189      1,329         (23)          (1)         (54)         (62)       (140)
Other services.............................        826        782      --           --           --               44          44
                                             ---------  ---------         ---          ---        -----          ---   ---------
Total Communications Group.................  $   9,484  $   9,176   $     (85)   $      (5)   $     446    $     (48)  $     308
                                             ---------  ---------         ---          ---        -----          ---   ---------
                                             ---------  ---------         ---          ---        -----          ---   ---------
 
<CAPTION>
 
                                                 %
                                             ---------
<S>                                          <C>
Local service..............................        6.8
Interstate access..........................        4.8
Intrastate access..........................        2.5
Long-distance network......................      (10.5)
Other services.............................        5.6
                                             ---------
Total Communications Group.................        3.4
                                             ---------
                                             ---------
</TABLE>
 
    Approximately 97 percent  of the  revenues of the  Communications Group  are
attributable  to the  operations of  U S  WEST Communications,  Inc. ("U  S WEST
Communications"), of which approximately 59 percent are derived from the  states
of  Arizona, Colorado, Minnesota and Washington. Approximately 29 percent of the
access lines in service are devoted to providing services to business customers.
The access
 
                                      B-6
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1995, business  access lines  grew 5.4 percent  while residential  access
lines increased 2.8 percent.
 
    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.  During 1995, revenues  from new  product and service
offerings were  $534,  an increase  of  58  percent compared  with  1994.  These
revenues  primarily  consist  of caller  identification,  voice  messaging, call
waiting and high-speed data network transmission services.
 
    Local service revenues include local telephone exchange, local private  line
and  public  telephone  services.  In  1995,  local  service  revenues increased
principally as a  result of  higher demand for  new and  existing services,  and
demand for second lines. Local service revenues from new services increased $92,
or  78  percent,  compared  with 1994.  Reported  total  access  lines increased
511,000, or  3.6  percent, of  which  161,000  were second  lines.  Second  line
installations  increased 25.5 percent compared with 1994. Access line growth was
4.2 percent adjusted for the sale of approximately 95,000 rural telephone access
lines during the last 12 months.
 
    Access charges are collected primarily from interexchange carriers for their
use of the local exchange network. For interstate access services there is  also
a  fee collected directly from telephone  customers. Approximately 33 percent of
access revenues and  11 percent  of total  revenues are  derived from  providing
access services to AT&T.
 
    Higher  revenues from interstate access services  were driven by an increase
of 9.2  percent  in interstate  billed  access  minutes of  use.  The  increased
business  volume more than  offset the effects of  price reductions and refunds.
The Communications Group reduced prices  for interstate access services in  both
1995  and 1994 as  a result of Federal  Communications Commission ("FCC") orders
and competitive pressures. Intrastate access revenues increased primarily due to
the impact  of  increased  business  volume and  multiple  toll  carrier  plans,
partially offset by the impact of rate changes.
 
    Long-distance   revenues  are  derived  from  calls  made  within  the  LATA
boundaries of  the Region.  During 1995  and 1994,  long-distance revenues  were
impacted  by  the implementation  of multiple  toll  carrier plans  ("MTCPs") in
Oregon and Washington in May and July 1994, respectively. The MTCPs  essentially
allow  independent telephone companies to act  as toll carriers. The 1995 impact
of the  MTCPs was  long-distance  revenue losses  of  $62, partially  offset  by
increases  in intrastate access revenues of $12 and decreases in other operating
expenses (i.e.  access expense)  of  $42 compared  with 1994.  These  regulatory
arrangements  have  decreased annual  net income  by approximately  $10. Similar
changes in other states could occur, though the impact on 1996 net income  would
not be material.
 
    Excluding  the effects of the MTCPs, long-distance revenues decreased by 5.9
percent  in  1995,  primarily  due  to  the  effects  of  competition  and  rate
reductions.  Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
these services on both an intraLATA  and interLATA basis. A portion of  revenues
lost  to competition, however,  is recovered through access  charges paid by the
interexchange carriers. Erosion  in long-distance revenue  will continue due  to
the loss of 1+ dialing in Minnesota, effective in February 1996, and in Arizona,
effective  in April 1996. Annual  long-distance revenue losses could approximate
$30 as  a  result  of  these changes.  The  Communications  Group  is  partially
mitigating   competitive  losses   through  competitive   pricing  of  intraLATA
long-distance services.
 
    Revenues from other  services primarily  consist of  billing and  collection
services   provided  to   interexchange  carriers,   voice  messaging  services,
high-speed data transmission  services, sales of  service agreements related  to
inside wiring and the provision of customer premises equipment.
 
                                      B-7
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    During  1995, revenues  from other  services increased  $44, primarily  as a
result of continued market penetration in voice messaging services and sales  of
high-speed  data transmission  services. Revenue  growth from  other services is
also attributable to maintenance contracts for inside wire services and a  large
contract  related to a wire installation project. These increases were partially
offset by a decrease  of $20 in revenues  from billing and collection  services.
The  decline in  billing and collection  revenues is primarily  related to lower
contract prices and a decrease in the volume of services provided to AT&T.
 
MEDIA GROUP SALES AND OTHER REVENUES
 
    An analysis of the Media Group's sales and other revenues follows:
 
<TABLE>
<CAPTION>
                                                                                            INCREASE (DECREASE)
                                                                                            --------------------
                                                                        1995       1994         $          %
                                                                      ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>
Directory and information services:
  Domestic..........................................................  $   1,058  $     997  $      61        6.1
  International.....................................................        122         78         44       56.4
                                                                      ---------  ---------  ---------  ---------
                                                                          1,180      1,075        105        9.8
Wireless communications:
  Cellular service..................................................        845        633        212       33.5
  Cellular equipment................................................         96        120        (24)     (20.0)
  Paging sales and service (1)......................................     --             28        (28)    --
                                                                      ---------  ---------  ---------  ---------
                                                                            941        781        160       20.5
Cable and telecommunications........................................        215         18        197     --
Other...............................................................         38         34          4       11.8
                                                                      ---------  ---------  ---------  ---------
Total Media Group...................................................  $   2,374  $   1,908  $     466       24.4
                                                                      ---------  ---------  ---------  ---------
                                                                      ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  The  Company's  paging  business  was  sold  in  June  1994.  Results  reflect
  operations for the six months ending June 30, 1994.
 
    Media  Group sales  and other  revenues increased  15 percent,  to $2,374 in
1995, excluding the effects of the  1994 Atlanta Systems acquisition and  paging
sale.  The  increase was  primarily  due to  strong  growth in  cellular service
revenue.
 
    DIRECTORY AND  INFORMATION  SERVICES    Revenues  related  to  Yellow  Pages
directory  advertising increased  6.4 percent  to $1,026  in 1995,  due to price
increases of  4.5 percent,  higher revenue  per advertiser  and an  increase  in
Yellow Pages advertising volume.
 
    International directory publishing revenues increased $44 in 1995, primarily
due  to  U S  WEST's  May 1994  purchase of  Thomson  Directories in  the United
Kingdom. The remaining increase is due to an increase in advertisers and revenue
per advertiser.
 
    WIRELESS COMMUNICATIONS  Cellular service revenues increased 34 percent,  to
$845 in 1995, due to a 51 percent increase in subscribers during the last twelve
months  (with  20 percent  of the  additions  occurring in  December), partially
offset by a  13 percent drop  in average  revenue per subscriber  to $60.00  per
month.  The increase  in subscribers relates  to continued growth  in demand for
wireless  services.  The  Media  Group  anticipates  continued  growth  in   its
subscriber base, although at slightly decreased rates.
 
    New distribution programs are being developed which increase availability of
cellular  products and simplify  the cellular service  activation process. These
programs have contributed to the shift  in the customer base from businesses  to
consumers.  This  shift, combined  with competitive  pressures on  pricing, will
cause the average revenue per subscriber to continue to decline.
 
                                      B-8
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Cellular equipment  revenues decreased  20 percent,  to $96  in 1995,  as  a
result  of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers. The Media Group expects this  trend
to  continue  in 1996  as  the cost  of equipment  continues  to decline  and as
penetration into the consumer market increases.
 
    Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
 
    CABLE AND TELECOMMUNICATIONS  Domestic cable and telecommunications revenues
increased $197 in  1995, due  to the December  1994 acquisition  of the  Atlanta
Systems.
 
COSTS AND EXPENSES
 
<TABLE>
<CAPTION>
                                                                                            INCREASE (DECREASE)
                                                                                            --------------------
                                                                        1995       1994         $          %
                                                                      ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>
Employee-related expenses...........................................  $   4,071  $   3,779  $     292        7.7
Other operating expenses............................................      2,323      2,203        120        5.4
Taxes other than income taxes.......................................        416        412          4        1.0
Depreciation and amortization.......................................      2,291      2,052        239       11.6
Interest expense....................................................        527        442         85       19.2
Equity losses in unconsolidated ventures............................        207        121         86       71.1
Other income (expense) -- net.......................................        (36)        25        (61)    --
</TABLE>
 
EMPLOYEE-RELATED EXPENSES
 
    Employee-related  expenses  include  basic  salaries  and  wages,  overtime,
benefits (including pension and health care), payroll taxes and contract  labor.
During  1995, improving  customer service  was the  Communications Group's first
priority. Overtime payments and contract labor expense associated with  customer
service initiatives at the Communications Group increased employee-related costs
by  approximately $168 compared  with 1994. Expenses related  to the addition of
approximately 1,700  employees  in 1995  and  1,000  employees in  1994  at  the
Communications  Group also increased employee-related costs. These expenses were
incurred to handle the  higher than anticipated volume  of business and to  meet
new  business  opportunities. Partially  offsetting  these increases  was  a $34
reduction in the accrual for postretirement  benefits, a $22 decrease in  travel
expense and reduced expenses related to employee separations under reengineering
and  streamlining  initiatives. The  Communications Group  will continue  to add
employees to address customer  service issues and growth  in the core  business.
Costs  related to these work-force additions  will partially offset the benefits
of employee  separations  achieved through  restructuring.  (See  "Restructuring
Charge.")
 
    Employee-related  expenses also increased  due to the  1994 purchases of the
Atlanta Systems and Thomson Directories, and growth initiatives in the directory
and information services segment.
 
OTHER OPERATING EXPENSES
 
    Other operating expenses include access charges (incurred for the routing of
long-distance traffic through the facilities of independent companies),  network
software  expenses, wireless  marketing and  operating costs,  and marketing and
related costs  associated  with publishing  activities.  The increase  in  other
operating  expenses is primarily attributed to  the Media Group's 1994 purchases
of the Atlanta  Systems and Thomson  Directories and expansion  of the  cellular
customer base.
 
    During  1995, other operating expenses decreased at the Communications Group
primarily due to the effects of the multiple toll carrier plans and a  reduction
in  expenses related  to project funding  at Bell  Communications Research, Inc.
("Bellcore"), of  which U  S  WEST Communications  has a  one-seventh  ownership
interest.  These decreases in other operating  expenses were partially offset by
increases in costs  associated with  increased sales of  products and  services,
including bad debt expense.
 
                                      B-9
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
TAXES OTHER THAN INCOME TAXES
 
    Taxes  other than income  taxes, which consist  primarily of property taxes,
were relatively flat  compared with  1994. Increased taxes  associated with  the
domestic  cellular operations were  offset by lower  taxes at the Communications
Group. Lower taxes at the Communications  Group were primarily due to  favorable
property  tax valuations and mill  levies as compared with  1994. As a result of
these  valuations  and  mill  levies,   1995  fourth-quarter  accruals  at   the
Communications Group decreased by $20 compared with fourth-quarter 1994.
 
DEPRECIATION AND AMORTIZATION
 
    Increased  depreciation  and amortization  expense  was attributable  to the
effects of  a  higher  depreciable  asset  base  at  the  Communications  Group,
expansion of the Media Group's domestic cellular network and the purchase of the
Atlanta  Systems. These  increases were partially  offset by the  effects of the
sales of certain rural telephone exchanges at U S WEST Communications.
 
INTEREST EXPENSE AND OTHER
 
    Interest expense increased primarily as a result of increased debt financing
at the  Communications  Group, the  December  1994 acquisition  of  the  Atlanta
Systems,  new domestic and  international investments and  a reclassification of
debt from net investment in assets held for sale. The average borrowing cost was
6.7 percent in  1995, compared  with 6.6 percent  in 1994.  (See "Liquidity  and
Capital Resources.")
 
    Equity  losses increased $86 in 1995, primarily  due to costs related to the
expansion of  the  network  and  additional  financing  costs  at  TeleWest  and
additional  costs associated with the significant increase in customers at One 2
One. Start-up  and  other costs  associated  with new  international  cable  and
telecommunications  investments  primarily  located in  the  Czech  Republic and
Malaysia contributed  to the  increase. These  increased losses  were  partially
offset  by  earnings  in the  European  wireless operations.  Losses  related to
domestic investments in  TWE and  PCS PrimeCo  also increased.  The Media  Group
expects  the PCS  partnership to  experience several  years of  operating losses
associated with the start-up phase of the PCS business.
 
    The decrease  in  other income  is  largely  attributable to  $17  of  costs
associated  with the Recapitalization Plan  in 1995, increased minority interest
expense associated with domestic cellular operations and a 1994 gain on sale  of
nonstrategic operations.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                                       (DECREASE)
                                                                                                  --------------------
                                                                              1995       1994         $          %
                                                                            ---------  ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>        <C>
Provision for income taxes................................................  $     825  $     857  $     (32)      (3.7)
Effective tax rate........................................................       38.3       37.5     --         --
</TABLE>
 
    The  increase in  the effective  tax rate  reflects the  impacts of goodwill
amortization related to the acquisition of the Atlanta Systems, higher state and
foreign income taxes,  and expenses associated  with the Recapitalization  Plan.
Additionally,  a tax benefit was recorded in 1994, related to the sale of paging
assets, which  contributed to  the increase  in the  effective tax  rate.  These
impacts  were  partially offset  by lower  pretax  income and  the effects  of a
research and experimentation credit, and adjustments for prior periods.
 
RESTRUCTURING CHARGE
 
    U S  WEST's  1993  results  reflected  a  $1  billion  restructuring  charge
(pretax).  The related restructuring plan (the "Restructuring Plan") is designed
to provide faster, more responsive customer services while reducing the costs of
providing these services.  As part  of the  Restructuring Plan,  the Company  is
developing  new systems and enhanced system functionality that will enable it to
monitor networks to reduce the risk of service interruptions, activate telephone
service   on    demand,   rapidly    design    and   engineer    products    and
 
                                      B-10
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
services  for customers,  and centralize  its service  centers. The  Company has
consolidated its 560 customer service centers at U S WEST Communications into 26
centers in  10 cities  and plans  on reducing  its work  force by  approximately
10,000  employees.  All service  centers are  operational  and supported  by new
systems and enhanced system functionality.
 
    The Restructuring Plan is expected to  be substantially complete by the  end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the  business and related service  issues, new business opportunities, revisions
to system  delivery  schedules  and  productivity issues  caused  by  the  major
rearrangement  of resources due to restructuring.  These issues will continue to
affect the timing of employee separations.
 
    The Company estimates  that full  implementation of  the 1993  Restructuring
Plan  will reduce employee-related expenses by  approximately $400 per year. The
savings related  to work-force  reductions  will be  offset  by the  effects  of
inflation and a variety of other factors. These factors include costs related to
the achievement of customer service objectives and increased demand for existing
services. (See "Employee-Related Expenses.")
 
    Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
                                                                                                     1996         1997
                                                           1993 ACTUAL  1994 ACTUAL  1995 ACTUAL   ESTIMATE     ESTIMATE
                                                           -----------  -----------  -----------  -----------  -----------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Cash expenditures:
  Employee separation (1)................................   $  --        $      19    $      76    $      36    $     129
  Systems development....................................      --              127          145          128       --
  Real estate............................................      --               50           66           14       --
  Relocation.............................................      --               21           24           20           15
  Retraining and other...................................      --               16           23           22            4
                                                                -----        -----        -----        -----        -----
Total cash expenditures..................................      --              233          334          220          148
Asset write-down.........................................          65       --           --           --           --
                                                                -----        -----        -----        -----        -----
Total 1993 Restructuring Plan............................          65          233          334          220          148
Remaining 1991 plan employee costs (1)...................      --               56       --           --           --
                                                                -----        -----        -----        -----        -----
Total....................................................   $      65    $     289    $     334    $     220    $     148
                                                                -----        -----        -----        -----        -----
                                                                -----        -----        -----        -----        -----
 
<CAPTION>
 
                                                             TOTAL
                                                           ---------
<S>                                                        <C>
Cash expenditures:
  Employee separation (1)................................  $     260
  Systems development....................................        400
  Real estate............................................        130
  Relocation.............................................         80
  Retraining and other...................................         65
                                                           ---------
Total cash expenditures..................................        935
Asset write-down.........................................         65
                                                           ---------
Total 1993 Restructuring Plan............................      1,000
Remaining 1991 plan employee costs (1)...................         56
                                                           ---------
Total....................................................  $   1,056
                                                           ---------
                                                           ---------
</TABLE>
 
------------------------------
(1)
  Employee  separation  costs, including  the  balance of  a  1991 restructuring
  reserve at December 31, 1993, aggregate $316.
 
    Employee separation costs include  severance payments, health-care  coverage
and  postemployment education  benefits. Systems  development costs  include new
systems and  the  application  of enhanced  system  functionality  to  existing,
single-purpose  systems to provide integrated, end-to-end customer service. Real
estate costs  include  preparation  costs  for  the  new  service  centers.  The
relocation  and  retraining costs  are related  to moving  employees to  the new
service centers and retraining employees on the methods and systems required  in
the new, restructured mode of operation.
 
    EMPLOYEE  SEPARATION  Under the  Restructuring Plan, the Company anticipates
the separation  of 10,000  employees. Approximately  1,000 employees  that  were
originally  expected to relocate have chosen separation or other job assignments
and have been  replaced. This increased  the number of  employee separations  to
10,000  from  9,000,  and  increased  the  estimated  total  cost  for  employee
separations to $316 from $286, as  compared with the original estimate. The  $30
cost associated with these additional employee separations was reclassified from
relocation to the reserve for employee separations during 1995.
 
                                      B-11
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Annual  employee  separations  and  employee-separation  amounts  under  the
Restructuring Plan follow:
<TABLE>
<CAPTION>
                                                   1994                    1995
                                          ----------------------  ----------------------     1996         1997
                                           ESTIMATE    ACTUAL(1)   ESTIMATE     ACTUAL    ESTIMATE(2)  ESTIMATE(2)    TOTAL
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
<S>                                       <C>          <C>        <C>          <C>        <C>          <C>          <C>
Employee separations:
  Managerial............................       1,061         497         612         682         202        1,357       2,738
  Occupational..........................       1,887       1,683       1,638       1,643         798        3,138       7,262
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
Total...................................       2,948       2,180       2,250       2,325       1,000        4,495      10,000
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
 
<CAPTION>
 
                                                   1994                    1995
                                          ----------------------  ----------------------     1996         1997
                                           ESTIMATE    ACTUAL(1)   ESTIMATE     ACTUAL    ESTIMATE(2)  ESTIMATE(2)    TOTAL
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
<S>                                       <C>          <C>        <C>          <C>        <C>          <C>          <C>
Employee separation amounts:
  Managerial............................   $      25   $       5   $      22   $      30   $      12    $      56   $     103
  Occupational..........................          15          14          54          46          24           73         157
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
  Total.................................          40          19          76          76          36          129         260
  Remaining 1991 reserve................          56          56      --          --          --           --              56
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
Total...................................   $      96   $      75   $      76   $      76   $      36    $     129   $     316
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
                                          -----------  ---------  -----------  ---------  -----------  -----------  ---------
</TABLE>
 
------------------------------
(1)
  Includes the remaining  employees and the  separation amounts associated  with
  the balance of a 1991 restructuring reserve at December 31, 1993.
 
(2)
  A  significant number of the employee reductions originally scheduled for 1996
  will be  delayed while  the  Company focuses  on overtime  and  contract-labor
  expenses.  The Restructuring Plan is expected  to be substantially complete by
  the end of 1997.
 
    Compared with  the original  estimates,  employee reduction  and  separation
amounts  shown above have been  reduced by 1,600 employees  and $51 in 1996, and
increased by 4,495 employees and $129 in 1997.
 
    SYSTEMS DEVELOPMENT    The  existing  information  management  systems  were
largely  developed  to  support  a  monopoly  environment.  These  systems  were
inadequate due to the effects of increased competition, new forms of  regulation
and  changing  technology  that have  driven  consumer demand  for  products and
services that can be delivered  quickly, reliably and economically. The  Company
believes  that  improved  customer  service, delivered  at  lower  cost,  can be
achieved by a combination  of new systems and  introducing new functionality  to
existing  systems. This is a change from  the initial strategy which placed more
emphasis on the development of new systems.
 
    The systems development  program involves  new systems  and enhanced  system
functionality for systems that support the following core processes:
 
        SERVICE  DELIVERY -- to  support service on demand  for all products and
    services. These new  systems and enhanced  system functionality will  permit
    customer  calls to be directed to those service representatives who can meet
    their requirements. This  process will provide  enhanced information to  the
    service  representatives regarding the customer  requests and the ability of
    the Communications Group to fulfill them.
 
        SERVICE ASSURANCE --  for performance monitoring  from one location  and
    remote   testing  in  the  new  environment,  including  identification  and
    resolution of faults prior to customer impact.
 
        CAPACITY PROVISIONING  --  for  integrated planning  of  future  network
    capacity,  including  the  installation  of  software  controllable  service
    components.
 
                                      B-12
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Certain of  the new  systems  and enhanced  system functionality  have  been
implemented  in  the service  centers  and have  simplified  the labor-intensive
interfaces between systems  processes in  existence prior  to the  Restructuring
Plan.  Enhanced  system functionality  introduced  under the  Restructuring Plan
since its inception includes the following:
 
    - The ability to  determine facilities' availability  while the customer  is
      placing an order;
 
    - Automated  engineering of central office facilities and automated updating
      of central office facilities' records;
 
    - The ability to track  the status of complex  network design jobs from  the
      customer's perspective; and
 
    - Systems  that  accurately  diagnose network  problems  and  prepare repair
      packages to correct the problems identified.
 
    The direct, incremental and nonrecurring costs of providing new systems  and
enhanced system functionality follow:
<TABLE>
<CAPTION>
                                                                     1994                      1995
                                                           ------------------------  ------------------------     1996
                                                            ESTIMATE      ACTUAL      ESTIMATE      ACTUAL      ESTIMATE
                                                           -----------  -----------  -----------  -----------  -----------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Service delivery.........................................   $      35    $      21    $      21    $      19    $      44
Service assurance........................................          45           12           24           22           26
Capacity provisioning....................................          17           57           92           85           42
All other................................................          28           37           24           19           16
                                                                -----        -----        -----        -----        -----
Total....................................................   $     125    $     127    $     161    $     145    $     128
                                                                -----        -----        -----        -----        -----
                                                                -----        -----        -----        -----        -----
 
<CAPTION>
 
                                                             TOTAL
                                                           ---------
<S>                                                        <C>
Service delivery.........................................  $      84
Service assurance........................................         60
Capacity provisioning....................................        184
All other................................................         72
                                                           ---------
Total....................................................  $     400
                                                           ---------
                                                           ---------
</TABLE>
 
    Systems  expenses charged to current  operations consist of costs associated
with  the  information  management  function,  including  planning,  developing,
testing  and maintaining databases for general purpose computers, in addition to
systems costs related  to maintenance of  telephone network applications.  Other
systems  expenses are  for administrative  (i.e. general  purpose) systems which
include customer service, order entry, billing and collection, accounts payable,
payroll, human resources and property records. Ongoing systems costs at U S WEST
Communications comprised approximately six  percent of total operating  expenses
in  1995, 1994 and  1993. The Company  expects systems costs  charged to current
operations as a percent of total  operating expenses to approximate the  current
level  throughout 1996. Systems costs could increase relative to other operating
costs as the business becomes more technology dependent.
 
                                      B-13
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
PROGRESS UNDER THE RESTRUCTURING PLAN
 
    Following is  a  reconciliation  of  restructuring  reserve  activity  since
December 1993:
<TABLE>
<CAPTION>
                                                         RESERVE                   RESERVE
                                                         BALANCE       1994        BALANCE       1995        CHANGE IN
                                                        12/31/93     ACTIVITY     12/31/94     ACTIVITY      ESTIMATE
                                                       -----------  -----------  -----------  -----------  -------------
<S>                                                    <C>          <C>          <C>          <C>          <C>
Employee separation:
  Managerial.........................................   $      80    $       5    $      75    $      30     $      23
  Occupational.......................................         150           14          136           46             7
                                                            -----        -----        -----        -----         -----
Total employee separation............................         230           19          211           76            30
Systems development:
  Service delivery...................................          73           21           52           19            11
  Service assurance..................................          64           12           52           22            (4)
  Capacity provisioning..............................         179           57          122           85             5
  All other..........................................          84           37           47           19           (12)
                                                            -----        -----        -----        -----         -----
Total systems development............................         400          127          273          145        --
Real estate..........................................         130           50           80           66        --
Relocation...........................................         110           21           89           24           (30)
Retraining and other.................................          65           16           49           23        --
                                                            -----        -----        -----        -----         -----
Total 1993 Restructuring Plan........................         935          233          702          334        --
Remaining 1991 plan expenditures.....................          56           56       --           --            --
                                                            -----        -----        -----        -----         -----
Total................................................   $     991    $     289    $     702    $     334     $  --
                                                            -----        -----        -----        -----         -----
                                                            -----        -----        -----        -----         -----
 
<CAPTION>
                                                         RESERVE
                                                         BALANCE
                                                        12/31/95
                                                       -----------
<S>                                                    <C>
Employee separation:
  Managerial.........................................   $      68
  Occupational.......................................          97
                                                            -----
Total employee separation............................         165
Systems development:
  Service delivery...................................          44
  Service assurance..................................          26
  Capacity provisioning..............................          42
  All other..........................................          16
                                                            -----
Total systems development............................         128
Real estate..........................................          14
Relocation...........................................          35
Retraining and other.................................          26
                                                            -----
Total 1993 Restructuring Plan........................         368
Remaining 1991 plan expenditures.....................      --
                                                            -----
Total................................................   $     368
                                                            -----
                                                            -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                     CUMULATIVE
                                                                                                   SEPARATIONS AT
                                                          1994 SEPARATIONS   1995 SEPARATIONS     DECEMBER 31, 1995
                                                          -----------------  -----------------  ---------------------
<S>                                                       <C>                <C>                <C>
Employee separations:
  Managerial............................................            497                682                1,179
  Occupational..........................................          1,683              1,643                3,326
                                                                  -----              -----                -----
Total...................................................          2,180              2,325                4,505
                                                                  -----              -----                -----
                                                                  -----              -----                -----
</TABLE>
 
                                      B-14
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
 
    Comparative  details of income from continuing  operations for 1994 and 1993
follow:
 
<TABLE>
<CAPTION>
                                                                                                               INCREASE
                                                                            PERCENT                           (DECREASE)
                                                                           OWNERSHIP      1994       1993          $
                                                                         -------------  ---------  ---------  -----------
<S>                                                                      <C>            <C>        <C>        <C>
Communications Group: (1)
  U S WEST Communications, Inc.........................................          100    $   1,175  $     435   $     740
  Other operations.....................................................          100          (25)       (44)         19
                                                                                        ---------  ---------       -----
    Total Communications Group.........................................                     1,150        391         759
Media Group: (2)
  Consolidated:
    Directory and information services.................................          100          247        220          27
    Wireless communications............................................          100           67        (43)        110
    Cable and telecommunications.......................................          100           (2)    --              (2)
  Unconsolidated equity investments:
    Time Warner Entertainment (3)......................................         25.5          (30)       (19)        (11)
    TeleWest...........................................................         37.8           76        (21)         97
    One 2 One..........................................................         50.0          (58)       (22)        (36)
  Other (4)............................................................                       (24)       (30)          6
                                                                                        ---------  ---------       -----
    Total Media Group..................................................                       276         85         191
                                                                                        ---------  ---------       -----
Income from continuing operations......................................                 $   1,426  $     476   $     950
                                                                                        ---------  ---------       -----
                                                                                        ---------  ---------       -----
Earnings per common U S WEST share from continuing operations..........                 $    3.14  $    1.13   $    2.01
</TABLE>
 
------------------------------
(1)
  1994 income  from continuing  operations includes  a gain  of $51  ($0.11  per
  share)  on the  sales of certain  rural telephone exchanges.  1993 income from
  continuing  operations  was  reduced   by  $534  ($1.28   per  share)  for   a
  restructuring  charge and $54  ($0.13 per share) for  the cumulative effect on
  deferred taxes of the 1993 federally mandated increase in income tax rates.
 
(2)
  1994 income from  continuing operations  includes a  gain of  $105 ($0.23  per
  share)  on the partial sale of U  S WEST's joint venture interest in TeleWest,
  and a gain  of $41  ($0.09 per  share) for the  sale of  the Company's  paging
  operations.  1993 income from continuing operations  was reduced by $76 ($0.18
  per share) for a restructuring charge.
 
(3)
  Percent ownership  represents pro-rata  priority capital  and residual  equity
  interests.
 
(4)
  Primarily  includes interest  expense and divisional  expenses associated with
  equity investments.
 
COMMUNICATIONS GROUP
 
    The Communications  Group's  1994  income  from  continuing  operations  was
$1,099,  an increase of $120, or 12.3 percent, over 1993, excluding the one-time
effects described  in Note  1 to  the table  above. The  increase was  primarily
attributable to increased demand for telecommunications services.
 
    In  1993, U  S WEST  Communications incurred  extraordinary charges  for the
discontinuance of Statement of Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation," and the early extinguishment of
debt. An extraordinary, noncash charge of $3.1 billion (after tax) was  incurred
in conjunction with the decision to discontinue accounting for the operations of
U  S WEST Communications in  accordance with SFAS No.  71. SFAS No. 71 generally
applies to  regulated  companies that  meet  certain requirements,  including  a
requirement   that  a  company  be  able   to  recover  its  costs,  competition
notwithstanding,  by  charging  its  customers  at  prices  established  by  its
regulators.  This decision  to discontinue  the application  of SFAS  No. 71 was
based on  the  belief  that competition,  market  conditions  and  technological
advances,  more than prices established by regulators, will determine the future
cost recovery  by U  S WEST  Communications. As  a result  of this  change,  the
remaining asset lives of U S WEST
 
                                      B-15
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Communications'  telephone  plant were  shortened  to more  closely  reflect the
useful (economic) lives of such plant.  U S WEST Communications' accounting  and
reporting for regulatory purposes were not affected by the change.
 
    During  1993,  U  S  WEST Communications  refinanced  long-term  debt issues
aggregating $2.7 billion  in principal  amount. These refinancings  allowed U  S
WEST Communications to take advantage of favorable interest rates. Extraordinary
costs associated with the redemptions reduced 1993 income by $77 (after tax).
 
MEDIA GROUP
 
    During  1994,  income from  continuing operations  decreased 19  percent, to
$130, excluding the effects  of the one-time  items described in  Note 2 to  the
table  above. The decline in income is  primarily a result of increased start-up
losses associated  with international  businesses,  partially offset  by  income
growth  in domestic wireless operations attributable to rapid growth in customer
demand.
 
    During 1993, the  Board approved  a plan to  dispose of  the capital  assets
segment,  which  includes activities  related  to financial  services, financial
guarantee insurance  operations and  real  estate. Until  January 1,  1995,  the
capital   assets  segment  was  accounted  for  as  discontinued  operations  in
accordance with Accounting Principles Board  Opinion No. 30, which provides  for
the  reporting of  the operating  results of  discontinued operations separately
from continuing operations. The Company recorded a provision of $100 (after tax)
for the  estimated  loss on  disposal  of  the discontinued  operations  and  an
additional  provision of $20 to reflect  the cumulative effect on deferred taxes
of the  1993  federally mandated  increase  in  income tax  rates.  Income  from
discontinued  operations prior to  June 1, 1993,  was $38, net  of $15 in income
taxes. Income from discontinued operations subsequent to June 1, 1993, is  being
deferred  and was  included within  the provision  for loss  on disposal  of the
capital assets segment.
 
SALES AND OTHER REVENUES
 
    An analysis  of  the change  in  U S  WEST's  consolidated sales  and  other
revenues follows:
 
<TABLE>
<CAPTION>
                                                                                           INCREASE (DECREASE)
                                                                                           --------------------
                                                                       1994       1993         $          %
                                                                     ---------  ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>        <C>
Communications Group...............................................  $   9,176  $   8,870  $     306        3.4
Media Group........................................................      1,908      1,549        359       23.2
Intergroup eliminations............................................       (131)      (125)        (6)      (4.8)
                                                                     ---------  ---------  ---------        ---
Total..............................................................  $  10,953  $  10,294  $     659        6.4
                                                                     ---------  ---------  ---------        ---
                                                                     ---------  ---------  ---------        ---
</TABLE>
 
COMMUNICATIONS GROUP OPERATING REVENUES
 
    An analysis of changes in the Communications Group's revenues follows:
<TABLE>
<CAPTION>
                                                                                                                          INCREASE
                                                                                     LOWER                                (DECREASE)
                                                                       PRICE       (HIGHER)                               ---------
                                                1994       1993       CHANGES       REFUNDS       DEMAND        OTHER         $
                                              ---------  ---------  -----------  -------------  -----------  -----------  ---------
<S>                                           <C>        <C>        <C>          <C>            <C>          <C>          <C>
Local service...............................  $   4,067  $   3,829   $     (12)    $      30     $     216    $       4   $     238
Interstate access...........................      2,269      2,147         (15)           (6)          148           (5)        122
Intrastate access...........................        729        682         (10)           (4)           51           10          47
Long-distance network.......................      1,329      1,442          (8)            1           (43)         (63)       (113)
Other services..............................        782        770      --            --            --               12          12
                                              ---------  ---------         ---           ---         -----          ---   ---------
Total Communications Group..................  $   9,176  $   8,870   $     (45)    $      21     $     372    $     (42)  $     306
                                              ---------  ---------         ---           ---         -----          ---   ---------
                                              ---------  ---------         ---           ---         -----          ---   ---------
 
<CAPTION>
 
                                                  %
                                                 ---
<S>                                           <C>
Local service...............................        6.2
Interstate access...........................        5.7
Intrastate access...........................        6.9
Long-distance network.......................       (7.8)
Other services..............................        1.6
                                                    ---
Total Communications Group..................        3.4
                                                    ---
                                                    ---
</TABLE>
 
    In  1994, local service revenues increased principally as a result of higher
demand for services. Reported access  lines increased by 3.6 percent.  Excluding
the  sale  of approximately  60,000 rural  telephone  access lines  during 1994,
access line growth was 4.0 percent.
 
                                      B-16
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Higher revenues from interstate access services were primarily  attributable
to  an increase of 7.8 percent in interstate billed access minutes of use, which
more than  offset the  effects  of price  decreases. Intrastate  access  charges
increased  primarily as a result of  higher demand, including demand for private
line services.
 
    Long-distance revenues decreased principally due to the effects of the MTCPs
implemented in Oregon  and Washington.  The 1994  impact was  a loss  of $68  in
long-distance revenues, partially offset by a decrease of $48 in other operating
expenses  and an increase of $10  in intrastate access revenue. These regulatory
arrangements decreased net income by approximately $6 in 1994.
 
    During 1994, revenues from  other services increased  due to higher  revenue
from  billing and  collection services and  increased market  penetration of new
service offerings. Partially offsetting the increase in other services  revenues
was  the 1993 sale of telephone equipment distribution operations, completion of
large telephone network installation contracts  and lower revenue from  customer
premises equipment installations.
 
MEDIA GROUP SALES AND OTHER REVENUES
 
    An analysis of the Media Group's sales and other revenues follows:
 
<TABLE>
<CAPTION>
                                                                                            INCREASE (DECREASE)
                                                                                            --------------------
                                                                        1994       1993         $          %
                                                                      ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>
Directory and information services:
  Domestic..........................................................  $     997  $     949  $      48        5.1
  International.....................................................         78          7         71     --
                                                                      ---------  ---------  ---------  ---------
                                                                          1,075        956        119       12.4
Wireless communications:
  Cellular service..................................................        633        443        190       42.9
  Cellular equipment................................................        120         63         57       90.5
  Paging sales and service (1)......................................         28         55        (27)     (49.1)
                                                                      ---------  ---------  ---------  ---------
                                                                            781        561        220       39.2
Cable and telecommunications........................................         18     --             18     --
Other...............................................................         34         32          2        6.2
                                                                      ---------  ---------  ---------  ---------
Total Media Group...................................................  $   1,908  $   1,549  $     359       23.2
                                                                      ---------  ---------  ---------  ---------
                                                                      ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  The  Company's  paging  business  was  sold  in  June  1994.  Results  reflect
  operations for the six months ending June 30, 1994.
 
    During 1994, Media Group  sales and other revenues  increased 25 percent  to
$1,862,  excluding the effect of the 1994 Atlanta Systems acquisition and paging
sale. The  increase was  primarily  due to  strong  growth in  cellular  service
revenue.
 
    DIRECTORY  AND  INFORMATION  SERVICES    Revenues  related  to  Yellow Pages
directory advertising increased approximately $59, or 6.5 percent, due primarily
to pricing. Product enhancements and  the effect of improved marketing  programs
on  business volume  also contributed  to the  increase in  revenues. Non-Yellow
Pages revenues increased $11,  including $7 related  to new products.  Partially
offsetting  these  increases  was the  absence  of revenues  related  to certain
publishing, software development and marketing operations that were sold,  which
reduced revenues by $22.
 
    The  increase in international directory  publishing revenue is attributable
to U S WEST's May 1994 purchase of Thomson Directories.
 
                                      B-17
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    WIRELESS COMMUNICATIONS  Cellular service revenues increased 43 percent,  to
$633  in 1994, due to  a 61 percent increase in  subscribers (with 24 percent of
the additions occurring in December), partially  offset by an 8 percent drop  in
average revenue per subscriber to $70.00 per month.
 
    Cellular equipment revenues increased 90 percent, to $120 in 1994, primarily
due  to  an 83  percent  increase in  gross  customer additions,  with  a higher
percentage of those customers purchasing  equipment than in 1993. This  increase
was  partially offset by  a 13 percent  decline in the  average selling price of
wireless phones.
 
    CABLE AND TELECOMMUNICATIONS  Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
 
COSTS AND EXPENSES
 
<TABLE>
<CAPTION>
                                                                                          INCREASE (DECREASE)
                                                                                          --------------------
                                                                      1994       1993         $          %
                                                                    ---------  ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>        <C>
Employee-related expenses.........................................  $   3,779  $   3,584  $     195        5.4
Other operating expenses..........................................      2,203      2,065        138        6.7
Taxes other than income taxes.....................................        412        417         (5)      (1.2)
Depreciation and amortization.....................................      2,052      1,955         97        5.0
Restructuring charge..............................................     --          1,000     (1,000)    --
Interest expense..................................................        442        439          3        0.7
Equity losses in unconsolidated ventures..........................        121         74         47       63.5
Other income (expense) -- net.....................................         25        (15)        40     --
</TABLE>
 
    A reduction in the  pension credit of approximately  $80 contributed to  the
increase  in  employee-related  expenses. Actuarial  assumptions,  which include
decreases in the discount rate and the expected long-term rate of return on plan
assets, contributed  to the  pension credit  reduction. Approximately  $150  for
overtime  payments, contract labor and basic  salaries and wages, all related to
the implementation of the  Restructuring Plan at U  S WEST Communications,  also
contributed  to  the increase.  Additionally,  employee-related expenses  at the
Company's  publishing  operations  increased  in  connection  with  new  product
initiatives.  Partially offsetting these increases were the effects of employees
leaving the  Company under  the Restructuring  Plan, lower  health-care  benefit
costs,  including a  reduction in the  accrual for  postretirement benefits, and
lower incentive compensation payments to employees.
 
    Selling and  other  operating  costs  related  to  growth  in  the  cellular
subscriber  base  increased other  operating expenses  by approximately  $166 in
1994. Partially offsetting this  increase was a $48  decrease in access  expense
related to the effects of the multiple toll carrier plan arrangements.
 
    The increase in depreciation and amortization expense was primarily a result
of  a higher depreciable asset  base and increased rates  of depreciation at U S
WEST Communications.
 
    Interest expense in  1994 was essentially  unchanged from 1993.  Incremental
financing costs associated with the September 1993 TWE investment were offset by
the   effects  of  refinancing  debt  at  lower  rates  in  1993  at  U  S  WEST
Communications, and a  reclassification of capitalized  interest in 1994.  Since
the  discontinuance  of SFAS  No.  71, interest  capitalized  as a  component of
telephone plant construction is recorded  as an offset against interest  expense
rather  than  to  other income  (expense).  U  S WEST's  average  borrowing cost
decreased to 6.6 percent in 1994, from 6.7 percent in 1993.
 
    Equity losses in unconsolidated ventures increased over 1993, primarily  due
to  start-up costs  related to  the build  out of  TeleWest's network  and costs
related to the expansion of the customer base at One 2 One.
 
                                      B-18
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Other income  increased  over 1993  primarily  due  to an  increase  in  the
management  fee associated with the  Company's TWE investment and  a gain on the
sale of certain publishing operations, partially offset by the  reclassification
of capitalized interest to interest expense.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                  1994       1993      INCREASE
                                                                                ---------  ---------  -----------
<S>                                                                             <C>        <C>        <C>
Provision for income taxes....................................................  $     857  $     269   $     588
Effective tax rate............................................................       37.5%      36.1%     --
</TABLE>
 
    The  increase in the effective tax  rate resulted primarily from the effects
of discontinuing SFAS No. 71, an increase in 1994 income before income taxes and
the 1993  restructuring charge,  partially offset  by the  cumulative effect  on
deferred  income taxes  of the  1993 federally  mandated increase  in income tax
rates.
 
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1995
 
OPERATING ACTIVITIES
 
    Cash provided by operations increased $173  in 1995. Business growth in  the
Communications  Group  and the  cellular business,  and  the acquisition  of the
Atlanta Systems contributed to the increase in cash provided by operations. This
increase was partially  offset by increases  in Restructuring Plan  expenditures
and higher income tax and interest payments, including approximately $60 related
to the partial sale of the Company's joint venture interest in TeleWest.
 
    Cash  from operations in  1994 remained relatively  flat compared with 1993.
Business growth and a decrease in  the cash funding for postretirement  benefits
was offset by increased Restructuring Plan payments.
 
INVESTING ACTIVITIES
 
    Total capital expenditures were $3,140 in 1995, $2,820 in 1994 and $2,441 in
1993. The 1995 capital expenditures exceeded the 1994 and 1993 levels due to the
Communications Group's efforts to improve customer service (including reductions
in held orders) and to accommodate additional line capability in several states,
and  the enhancement  and expansion  of the  cellular network.  In 1996, capital
expenditures are  expected to  approximate $3.1  billion. Included  in the  1996
capital  expenditures estimate are  costs to enter new  markets as allowed under
the Telecommunications Act of 1996, upgrade  the Atlanta Systems and expand  the
cellular network.
 
    The  Company  received cash  proceeds  of $214  and  $93 in  1995  and 1994,
respectively,  for  the  sales  of  certain  rural  telephone  exchanges.  Since
implementing  its rural telephone  exchange sales program,  the Company has sold
approximately 155,000 access lines.  Planned sales of  rural exchanges for  1996
and beyond aggregate approximately 180,000 lines.
 
    Investing  activities  of the  Company  also include  equity  investments in
international ventures.  In 1995,  the Company  invested $681  in  international
ventures, primarily investments in Malaysia, the Netherlands, the Czech Republic
and  the United Kingdom.  The Company invested  approximately $444 in developing
international  businesses  in  1994,   including  the  acquisition  of   Thomson
Directories.  The Company anticipates that investments in international ventures
will approximate $400 in  1996. This includes  investments for recently  awarded
licenses  to  provide cellular  service using  digital  technology in  India and
Poland. At December 31, 1995, U S  WEST guaranteed debt in the principal  amount
of approximately $140 related to international ventures.
 
    In  March 1995,  PCS PrimeCo  was awarded  PCS licenses  in 11  markets. The
Company's share of the cost of the licenses was approximately $268, all of which
was funded in 1995. Under the PCS PrimeCo partnership
 
                                      B-19
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
agreement, U  S  WEST  is required  to  fund  approximately 24  percent  of  PCS
PrimeCo's  operating  and capital  costs, including  licensing  costs. U  S WEST
anticipates that its total  funding obligations to PCS  PrimeCo during the  next
three years will be approximately $400.
 
    In  1994, the Company  received cash proceeds  of $143 from  the sale of its
paging operations. In 1993, cash proceeds of $30 were received from the sale  of
certain  nonstrategic lines of  business. The Company did  not receive cash from
the 1994 partial sale of its joint venture interest in TeleWest or from the 1995
merger. All proceeds from the 1994 sale  have been used by TeleWest for  general
business  purposes, including  financing both  construction and  operations, and
repaying debt.
 
    On February 27,  1996, U S  West announced a  definitive agreement to  merge
with Continental. Continental, the nation's third-largest cable operator, serves
4.2  million domestic customers,  passes more than  seven million domestic homes
and holds significant other domestic and international properties. U S WEST will
purchase all  of Continental's  stock for  approximately $5.3  billion and  will
assume  Continental's debt and other  obligations, which amount to approximately
$5.5 billion.  Consideration for  the $5.3  billion in  equity will  consist  of
approximately  $1  billion in  U S  WEST preferred  stock, convertible  to Media
Stock; and, at U S WEST's option,  between $1 billion and $1.5 billion in  cash,
and  $2.8 billion  to $3.3  billion in shares  of Media  Stock. The transaction,
which is expected to close in the fourth quarter of 1996, is subject to a number
of conditions and approvals,  including approvals from Continental  shareholders
and local franchising and government authorities.
 
FINANCING ACTIVITIES
 
    During  1995, debt increased  $917 primarily due to  the increase in capital
expenditures, new investments in international ventures, cash funding of the PCS
licenses and a reclassification of debt  from net investment in assets held  for
sale.
 
    During  fourth-quarter 1995, U S WEST  issued $130 of exchangeable notes, or
Debt Exchangeable  for  Common  Stock  ("DECS"), due  December  15,  1998.  Upon
maturity,  each DECS  will be mandatorily  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 31.5 percent of the outstanding Enhance common stock.
 
    These increases in debt were partially offset by reductions of debt  related
to  the  investment in  TWE and  a  refinancing of  commercial paper  by issuing
Company-obligated mandatorily redeemable  preferred securities  of a  subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities"). U S
WEST  issued $600 of Preferred  Securities in 1995. The  payment of interest and
redemption amounts to holders  of the securities  are fully and  unconditionally
guaranteed by U S WEST.
 
    During  1995, 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. In 1993, U S
WEST  Communications  refinanced  $2.7  billion  of  long-term  debt.   Expenses
associated  with  the refinancing  of long-term  debt resulted  in extraordinary
after-tax charges to income of $8 and $77, net of tax benefits of $5 and $48  in
1995 and 1993, respectively.
 
    Debt  increased $739 in 1994, primarily due to the December 1994 acquisition
of the Atlanta Systems,  partially offset by reductions  in debt related to  the
investment in TWE. The cash investment related to the acquisition of the Atlanta
Systems was $745, obtained through short-term borrowing.
 
    Excluding  debt associated  with the  capital assets  segment, the Company's
percentage of  debt to  total capital  at December  31, 1995,  was 50.7  percent
compared with 51.6 percent at December 31, 1994 and 55.1 percent at December 31,
1993.  Including  debt associated  with  the capital  assets  segment, Preferred
Securities and other preferred stock, the Company's percentage of debt to  total
capital was 56.4 percent at
 
                                      B-20
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
December  31,  1995, 55.7  percent  at December  31,  1994 and  59.7  percent at
December 31, 1993. The decrease in the 1994 percentage of debt to total  capital
is primarily attributable to higher net income and the effects of an increase in
common shares outstanding.
 
    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 $1.9 billion,  all of which  was available at  December 31,  1995.
Under  registration statements filed with the SEC,  as of December 31, 1995, U S
WEST is  permitted  to  issue up  to  approximately  $1.5 billion  of  new  debt
securities.
 
    Debt  related to discontinued operations decreased  $487 in 1995 and $213 in
1994. Cash to the capital assets segment of $101 in 1994 primarily reflects  the
payment  of debt, net of $154 in proceeds from the sale of 8.1 million shares of
Financial Security  Assurance  Holdings,  Ltd. ("FSA"),  an  investment  of  the
capital  assets segment.  For financial reporting  purposes debt  of the capital
assets segment is netted against the related assets. See Consolidated  Financial
Statements -- Note 20: Net Investment in Assets Held for Sale.
 
    In  connection with U S  WEST's February 27, 1996  announcement of a planned
merger with Continental,  U S WEST,  Inc.'s credit rating  is being reviewed  by
credit  rating agencies, which may result in a downgrading. The credit rating of
U S  WEST  Communications was  not  placed under  review  by Moody's,  has  been
reaffirmed  by Duff  and Phelps,  and is  under review  by Fitch  and Standard &
Poors.
 
    Subsequent to the  acquisition of  the Atlanta Systems  (See Note  4 to  the
Consolidated  Financial  Statements)  the  Company  announced  its  intention to
purchase U S  WEST common shares  in the open  market up to  an amount equal  to
those  issued in conjunction with the acquisition, subject to market conditions.
In first-quarter 1995, the Company purchased 1,704,700 shares of U S WEST common
stock at an average  price per share  of $37.02. In  December 1994, the  Company
purchased  550,400 shares of U S WEST common stock at an average price per share
of $36.30.
 
RISK MANAGEMENT
 
    The Company is  exposed to  market risks  arising from  changes in  interest
rates  and foreign exchange rates. Derivative  financial instruments are used to
manage these risks. U S WEST  does not use derivative financial instruments  for
trading purposes.
 
INTEREST RATE RISK MANAGEMENT
 
    The  objective of the  interest rate risk management  program is to minimize
the total cost  of debt. Interest  rate swaps are  used to adjust  the ratio  of
fixed-  to variable-rate debt. The market value of the debt portfolio, including
the interest rate swaps, is monitored and compared with predetermined benchmarks
to evaluate the effectiveness of the risk management program.
 
    Notional amounts of  interest rate  swaps outstanding were  $1.6 billion  at
December  31,  1995 and  1994, with  various maturities  extending to  2004. The
estimated effect  of interest  rate derivative  transactions was  to adjust  the
level  of  fixed-rate debt  from  88 percent  to 94  percent  of the  total debt
portfolio at December 31, 1995, and from  73 percent to 82 percent of the  total
debt  portfolio at December 31, 1994 (including debt associated with the capital
assets segment).
 
    In conjunction with the 1993 debt refinancing, the Company executed  forward
contracts  to  sell U.S.  Treasury  bonds to  lock in  the  U. S.  Treasury rate
component of  $1.5 billion  of the  future  debt issue.  At December  31,  1995,
deferred  credits of $8 and deferred charges  of $51 on closed forward contracts
are included as part of the carrying value of the underlying debt. The  deferred
credits  and charges are being recognized as a yield adjustment over the life of
the debt, which matures at various  dates through 2043. The net deferred  charge
is directly offset by the lower coupon rate achieved on the new debt.
 
                                      B-21
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
FOREIGN EXCHANGE RISK MANAGEMENT
 
    U  S WEST has entered into forward and option contracts to manage the market
risks associated with fluctuations in foreign exchange rates after consideration
of offsetting  foreign  exposures among  international  operations. The  use  of
forward  and option  contracts allow U  S WEST  to fix or  cap the  cost of firm
foreign investment commitments in countries with freely convertible  currencies.
The  market  values of  the foreign  exchange  positions, including  the hedging
instruments, are continuously monitored  and compared with predetermined  levels
of acceptable risk.
 
    Notional   amounts  of   foreign  exchange  forward   and  option  contracts
outstanding were $456 and $170 as  of December 31, 1995 and 1994,  respectively,
with  maturities of  one year  or less. These  contracts were  primarily for the
purchase of Dutch  guilders and  British pounds in  1995 and  British pounds  in
1994.
 
    The   Company   had  foreign   exchange  risks   associated  with   a  Dutch
guilder-denominated payable  in  the  translated principal  amount  of  $216  at
December  31, 1995, and British  pound-denominated receivables in the translated
principal amounts of $139 and $48  at December 31, 1995 and 1994,  respectively,
of  which  $63 and  $48 of  these respective  balances are  with a  wholly owned
subsidiary. These positions were hedged in 1995.
 
DISPOSITION OF THE CAPITAL ASSETS SEGMENT
 
    U S WEST announced a  plan of disposition of  the capital assets segment  in
June  1993. See the Consolidated Financial Statements -- Note 20: Net Investment
in Assets Held for Sale. In December 1993, U S WEST sold $2.0 billion of finance
receivables and the business of U S WEST Financial Services, Inc. to NationsBank
Corporation. Proceeds from the sale of  $2.1 billion were used to repay  related
debt.
 
    During 1994, U S WEST reduced its ownership interest in FSA, a member of the
capital  assets segment, to 60.9 percent and its voting interest to 49.8 percent
through a  series of  transactions. In  May and  June 1994,  U S  WEST sold  8.1
million  shares of FSA common  stock and received $154  in net proceeds from the
public offering. In December 1995, FSA merged with Capital Guaranty  Corporation
for  shares of FSA and cash of  $51. The transaction was valued at approximately
$203 and reduced U S  WEST's ownership interest in FSA  to 50.3 percent and  its
voting  interest to 41.7  percent. U S  WEST expects to  monetize and ultimately
reduce its ownership in FSA through the issuance of Debt Exchangeable for Common
Stock ("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged  by
U  S WEST  for FSA  common stock  held by  U S  WEST or,  at U  S WEST's option,
redeemed at the cash equivalent.
 
    On September 2, 1994, U S WEST issued to Fund American Enterprises  Holdings
Inc.  ("FFC") 50,000 shares of cumulative redeemable preferred stock for a total
of $50. The shares are mandatorily redeemable in year ten and, at the option  of
FFC, the preferred stock also can be redeemed for common shares of FSA.
 
    U  S WEST Real Estate, Inc. has  sold various properties totaling $120, $327
and $66 in 1995, 1994  and 1993, respectively. The  sales proceeds were in  line
with  estimates.  Proceeds  from building  sales  were primarily  used  to repay
related debt. U S WEST has  completed construction of existing buildings in  the
commercial   real  estate  portfolio  and   expects  to  substantially  complete
liquidation of this portfolio by 1998.  The remaining balance of assets  subject
to sale is approximately $490, net of reserves, as of December 31, 1995.
 
COMPETITIVE AND REGULATORY ENVIRONMENT
 
THE TELECOMMUNICATIONS ACT OF 1996
 
    On  February 1, 1996,  the House and  Senate approved the Telecommunications
Act of 1996 (the  "1996 Act") which is  intended to promote competition  between
local   telephone  companies,   long-distance  carriers   and  cable  television
operators. The 1996 Act was  signed into law on  February 8, 1996, and  replaces
the  antitrust consent decree that  broke up the "Bell  System" in 1984. A major
provision of the legislation includes  the preemption of state regulations  that
govern competition by allowing local telephone companies,
 
                                      B-22
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
long-distance  carriers  and cable  television companies  to enter  each other's
lines of business. Consequently, the Regional Bell Operating Companies ("RBOCs")
are immediately permitted to offer wireline interLATA toll services out of their
regions. However, to  participate in the  interLATA long-distance market  within
their   regions,   the  RBOCs   must  first   open   their  local   networks  to
facilities-based competition by satisfying a detailed checklist of requirements,
including requirements related to interconnection and number portability.
 
    Other key provisions of the 1996  Act: (1) eliminate most of the  regulation
of  cable  television  rates  within  three  years  and  eliminate  the  ban  on
cross-ownership between  cable  television  and  telephone  companies  in  small
communities;  (2) permit  the RBOCs  to develop  new, competitive  cable systems
within their regions and to acquire or build wireless cable systems; (3) provide
partial relief from the  ban against manufacturing telecommunications  equipment
by  the  RBOCs; and  (4)  permit wireless  operators  to provide  interLATA toll
service in and out of region without a separate subsidiary and to jointly market
or resell cellular service.
 
    The FCC and state  regulators have been given  latitude in interpreting  and
overseeing   the  implementation  of   this  legislation,  including  developing
universal service funding policy. The  extent and timing of future  competition,
including  the  Communications  Group's  ability  to  offer  in-region interLATA
long-distance services, will  depend in  part on  the implementation  guidelines
determined  by the FCC and state  regulators, and how quickly the Communications
Group can  satisfy  requirements  of the  checklist.  The  Communications  Group
estimates  that fulfillment  of the  checklist requirements  could occur  in the
majority of its states within 12 to 18 months.
 
THE COMMUNICATIONS GROUP
 
    Markets served by  the Communications  Group, including  markets for  local,
access and long-distance services, are being impacted by the rapid technological
and regulatory changes occurring within the telecommunications industry. Current
and  potential  competitors  include  local  telephone  companies, interexchange
carriers, competitive access providers ("CAPs"), cable television companies  and
providers of personal communications services ("PCS").
 
    The  Communications Group  believes that  competitors will  initially target
high-volume business customers in densely  populated urban areas. The  resulting
loss  of local service customers will  affect multiple revenue streams and could
have a material, adverse  effect on the  Communications Group's operations.  The
resulting  revenue losses,  however, could be  at least partially  offset by the
Communications Group's  ability  to  bundle local,  long-distance  and  wireless
services, and provide interconnection services.
 
    The  Communications Group's strategy is  to offer integrated communications,
entertainment, information and transaction services over both wired and wireless
networks to its customers  primarily within its Region.  The key initiatives  to
support this strategy include five key elements:
 
    - Providing superior customer service
 
    - Building customer loyalty
 
    - Enhancing network capability and capacity
 
    - Expanding the product and service portfolio
 
    - Ensuring a fair competitive environment
 
    Strategic initiatives to attract and retain customers include: (1) enhancing
existing  services with products such as caller identification, call waiting and
voice messaging;  (2)  aggressive  expansion  of  data  services;  (3)  pursuing
opportunities  to offer paging, wireless and  cable television services; and (4)
rapid entry into the interLATA long-distance market.
 
                                      B-23
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    A market trial for a broadband network capable of providing voice, data  and
video  services to  customers commenced  in the Omaha  area in  August 1995. The
Communications Group does not intend to expand this service offering beyond  the
Omaha  area because of service cost and pricing issues. The Communications Group
does plan to  continue to provide  the system that  delivers basic, premium  and
pay-per-view  video  services in  the Omaha  area.  The Communications  Group is
evaluating the relative costs of alternative video technologies, as well as  the
near-term feasibility of interactive services. To satisfy anticipated demand for
combined   video  and  telephony   services  on  a   cost-effective  basis,  the
Communications Group's strategy  may include selective  investments in  wireless
cable technologies.
 
    The  Communications Group is subject to varying degrees of federal and state
regulation. The Communications Group's regulatory strategy includes working to:
 
    - Achieve accelerated capital recovery;
 
    - Reprice local services to cover costs and ensure these services are
      subsidy free, while lowering toll and access rates to meet competition;
      and
 
    - Ensure that the new rules associated with the Telecommunications Act of
      1996 concerning the unbundling of interconnection, resale of services and
      universal service do not advantage one competitor over another.
 
    The Communications Group is currently working with state regulators to  gain
approval of these initiatives.
 
THE MEDIA GROUP
 
    The  Media Group's  strategy is based  on the belief  that communication and
commerce are migrating  from other  mediums to electronic  networks. Over  time,
this   global  phenomenon   will  result   in  networks   replacing  traditional
distribution channels. To meet the needs of this growing market, the Media Group
provides local connections and then integrates market-based service offerings to
meet the needs  of end  users. The Media  Group executes  this strategy  through
three  lines of business -- cable and telecommunications, wireless and directory
and information services -- in selected high-growth markets worldwide.
 
    CABLE AND TELECOMMUNICATIONS   The 1996 Act will  enable the Media Group  to
provide  "one-stop shopping" for voice, video and data services, a key objective
of the Media Group. The Media Group  is currently in the process of  negotiating
reasonable   and  nondiscriminatory  local   interconnection  rates,  terms  and
conditions with BellSouth and is planning on entering the local exchange market,
through the Atlanta Systems, on a competitive basis by the end of 1996.
 
    The Atlanta Systems generally compete for viewer attention with  programming
from  a  variety  of  sources,  including  the  direct  reception  of  broadcast
television signals by the viewer's own antenna, satellite master antenna service
and direct broadcast satellite  services. Cable television  systems are also  in
competition  for  both viewers  and advertising  in  varying degrees  with other
communications and entertainment media. Such  competition may increase with  the
development and growth of new technologies.
 
    The  1996 Act has  amended certain aspects of  the Cable Television Consumer
Protection and Competition Act  of 1992 ("the 1992  Cable Act"). Under the  1996
Act,  cable  rates  are deregulated  effective  March  31, 1999,  or  earlier if
competition exists. In  addition, the provisions  of the 1996  Act simplify  the
process   of  filing  rate  complaints,  relax  uniform  rate  requirements  and
subscriber notice provisions, expand the definition of effective competition and
eliminate certain restrictions  on the  sale of cable  systems. Current  program
access  restrictions applying to cable operators are extended to common carriers
by  the  1996  Act.  The  1996  Act  also  eliminates  certain   cross-ownership
restrictions  between cable operators, broadcasters and multichannel, multipoint
distribution system operators.
 
                                      B-24
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    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.
 
    In 1995,  the Georgia  legislature removed  the legal  prohibition on  local
telephone  competition by  authorizing competition  in local  telephone exchange
service. The  Media Group  has received  certification from  the Georgia  Public
Service  Commission to provide local  switched and nonswitched telephone service
in Georgia  and,  with  the  passage of  the  1996  Act,  certain  long-distance
services.
 
    WIRELESS COMMUNICATIONS  There are two competitive cellular licenses in each
market.  Competition is based on  the price of cellular  service, the quality of
the service and the size of the  geographic area served. The development of  PCS
services  will increase the number of  competitors and the level of competition.
The Media Group  is unable to  estimate the  impact of the  availability of  PCS
services on its cellular operations, though it could be significant.
 
    The  wireless operations are subject to regulation by federal and some state
and local authorities. The construction and transfer of cellular systems in  the
United  States are regulated  by the FCC  pursuant to the  Communications Act of
1934. The  FCC regulates  construction  and operation  of cellular  systems  and
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.
 
    The passage of the 1996 Act eliminates long-distance restrictions imposed by
the Modified Final Judgment ("MFJ"). As a result, the Media Group, including its
wireless partners,  are now  able to  offer integrated  local and  long-distance
services to its wireless customers. The 1996 Act also permits the Media Group to
enter   into  activities  related  to   the  manufacture  of  telecommunications
equipment.
 
    DIRECTORY AND  INFORMATION  SERVICES   The  Media Group  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 beginning to be offered via electronic databases through
telephone company and  third party networks.  As such offerings  expand and  are
enhanced   through  interactivity  and  other  features,  the  Media  Group  may
experience heightened competition in  its directory publishing businesses.  With
the  passage of the  1996 Act, the Media  Group will be  able to provide certain
information services across LATA  boundaries. The Media  Group will continue  to
expand  its core  products and develop  and package new  information products to
meet its customers' needs.
 
OTHER ISSUES
 
    The Communications Group'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.  However, the  FCC's
price  cap plan includes sharing of earnings  in excess of authorized levels. In
March 1995, the FCC issued an interim  order on price cap regulation. The  price
cap  index for  most services is  annually adjusted  for inflation, productivity
level and exogenous  costs, and has  resulted in reduced  access prices paid  by
interexchange  carriers  to local  telephone companies.  The interim  order also
provides for three productivity options, including a no-sharing option, and  for
increased  flexibility for adjusting prices downward in response to competition.
In 1995, the Communications Group selected the lowest productivity option, while
prior to this interim  order, the Communications Group  used an optional  higher
productivity  factor in determining its prices. Consequently, the Communications
Group expects the order to have no significant near-term impact.
 
    There are pending regulatory actions in local regulatory jurisdictions  that
call  for  price decreases,  refunds or  both.  In one  such instance,  the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the
PSC  for   reconsideration,  thereby   establishing   two  exceptions   to   the
 
                                      B-25
<PAGE>
                                 U S WEST, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and
2)   misconduct.  The  PSC's   initial  order  denied   a  refund  request  from
interexchange carriers and other parties related to the Tax Reform Act of  1986.
This  action is still  in the discovery process.  If a formal  filing -- made in
accordance with the remand from the Supreme Court -- alleges that the exceptions
apply, the range of possible risk is $0 to $150.
 
    On September 22, 1995, U S WEST  filed a lawsuit in Delaware Chancery  Court
to  enjoin the proposed merger of Time  Warner and Turner Broadcasting. U S WEST
has alleged  breaches  of  contract  and fiduciary  duties  by  Time  Warner  in
connection  with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995,  alleging misrepresentation, breach of contract  and
other  misconduct on  the part of  U S  WEST. Time Warner's  countersuit seeks a
reformation of the  Time Warner  Entertainment partnership  agreement, an  order
that  enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST  has denied each of  the claims in Time  Warner's
countersuit.  The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
 
    On October 2, 1995, union members approved a new three-year contract with  U
S  WEST. The contract provides  for salary increases of  10.6 percent over three
years effective January  1 of each  year. The contract  also provides  employees
with  a lump sum payment of $1,500  in lieu of wage increases becoming effective
in August of each year. This lump sum payment is being recognized over the  life
of  the  contract.  The  agreement  covers  approximately  30,000 Communications
Workers of America ("CWA") members who work for the Communications Group.
 
    On October  15, 1995,  U  S WEST  Direct and  the  CWA reached  a  tentative
agreement on their contract, subject to ratification by the CWA membership. This
contract would provide for salary increases of 10.5 percent over three years and
provides employees with a lump sum payment of $850.
 
                                      B-26
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We  have audited  the Consolidated Balance  Sheets of  U S WEST,  Inc. as of
December  31,  1995  and  1994,  and  the  related  Consolidated  Statements  of
Operations  and  Cash Flows  for each  of the  three years  in the  period 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 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.
as of December 31, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December  31,
1995, in conformity with generally accepted accounting principles.
 
    As discussed in Note 8 to the Consolidated Financial Statements, the Company
discontinued  accounting for the operations of  U S WEST Communications, Inc. in
accordance with Statement of Financial Accounting Standards No. 71,  "Accounting
for the Effects of Certain Types of Regulation," in 1993.
 
COOPERS & LYBRAND L.L.P.
 
Denver, Colorado
February 12, 1996, except for Note 4, paragraph 3, as to which
 the date is February 27, 1996
 
                                      B-27
<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  a 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  assess  objectively   the
effectiveness of internal controls and recommend improvements therein.
 
    Limitations exist in any system of internal accounting controls based on the
recognition  that the cost of the system should not exceed the benefits derived.
U S WEST believes that the  Company's system provides 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  report  is  included
herein,  are  engaged  to  express  an  opinion  on  our  Consolidated Financial
Statements. Their opinion is  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
 
James T. Anderson
ACTING EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
 
February 12, 1996
 
                                      B-28
<PAGE>
                                 U S WEST, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1995       1994       1993
                                                                                   ---------  ---------  ---------
                                                                                         DOLLARS IN MILLIONS
<S>                                                                                <C>        <C>        <C>
Sales and other revenues.........................................................  $  11,746  $  10,953  $  10,294
 
Operating expenses:
  Employee-related expenses......................................................      4,071      3,779      3,584
  Other operating expenses.......................................................      2,323      2,203      2,065
  Taxes other than income taxes..................................................        416        412        417
  Depreciation and amortization..................................................      2,291      2,052      1,955
  Restructuring charge...........................................................     --         --          1,000
                                                                                   ---------  ---------  ---------
    Total operating expenses.....................................................      9,101      8,446      9,021
                                                                                   ---------  ---------  ---------
Income from operations...........................................................      2,645      2,507      1,273
 
Interest expense.................................................................        527        442        439
Equity losses in unconsolidated ventures.........................................        207        121         74
Gains on asset sales:
  Merger and partial sale of joint venture interest..............................        157        164     --
  Rural telephone exchanges......................................................        136         82     --
  Paging assets..................................................................     --             68     --
Guaranteed minority interest expense.............................................         14     --         --
Other income (expense) -- net....................................................        (36)        25        (15)
                                                                                   ---------  ---------  ---------
Income from continuing operations before income taxes and extraordinary items....      2,154      2,283        745
Provision for income taxes.......................................................        825        857        269
                                                                                   ---------  ---------  ---------
Income from continuing operations before extraordinary items.....................      1,329      1,426        476
Discontinued operations:
  Estimated loss from June 1, 1993 through disposal, net of tax..................     --         --           (100)
  Income tax rate change.........................................................     --         --            (20)
  Income, net of tax (to June 1, 1993)...........................................     --         --             38
                                                                                   ---------  ---------  ---------
Income before extraordinary items................................................      1,329      1,426        394
Extraordinary items:
  Discontinuance of SFAS No. 71, net of tax......................................     --         --         (3,123)
  Early extinguishment of debt, net of tax.......................................        (12)    --            (77)
                                                                                   ---------  ---------  ---------
NET INCOME (LOSS)................................................................  $   1,317  $   1,426  $  (2,806)
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Dividends on preferred stock.....................................................          3     --         --
                                                                                   ---------  ---------  ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK.......................................  $   1,314  $   1,426  $  (2,806)
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
                                      B-29
<PAGE>
                                 U S WEST, INC.
               CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                               ----------------------------------
                                                                                  1995        1994        1993
                                                                               ----------  ----------  ----------
                                                                                 IN THOUSANDS (EXCEPT PER SHARE
                                                                                            AMOUNTS)
<S>                                                                            <C>         <C>         <C>
PRO FORMA COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE:
  Income before extraordinary item...........................................  $     2.52
  Extraordinary item -- early extinguishment of debt.........................       (0.02)
                                                                               ----------
PRO FORMA COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE.....................  $     2.50
                                                                               ----------
                                                                               ----------
PRO FORMA COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING.............     470,716
                                                                               ----------
                                                                               ----------
PRO FORMA MEDIA GROUP EARNINGS PER COMMON SHARE:
  Income before extraordinary item...........................................  $     0.30
  Extraordinary item -- early extinguishment of debt.........................       (0.01)
                                                                               ----------
PRO FORMA MEDIA GROUP EARNINGS PER COMMON SHARE..............................  $     0.29
                                                                               ----------
                                                                               ----------
PRO FORMA MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING......................     470,549
                                                                               ----------
                                                                               ----------
U S WEST, INC. EARNINGS (LOSS) PER COMMON SHARE:
  Continuing operations available for common stock...........................      --      $     3.14  $     1.13
  Discontinued operations:
    Estimated loss from June 1, 1993 through disposal........................      --          --           (0.24)
    Income tax rate change...................................................      --          --           (0.04)
    Income (to June 1, 1993).................................................      --          --            0.09
  Extraordinary items:
    Discontinuance of SFAS No. 71............................................      --          --           (7.45)
    Early extinguishment of debt.............................................      --          --           (0.18)
                                                                               ----------  ----------  ----------
U S WEST, INC. EARNINGS (LOSS) PER COMMON SHARE..............................      --      $     3.14  $    (6.69)
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
U S WEST, INC. AVERAGE COMMON SHARES OUTSTANDING.............................      --         453,316     419,365
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                      B-30
<PAGE>
                                 U S WEST, INC.
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 1995       1994
                                                                                               ---------  ---------
                                                                                               DOLLARS IN MILLIONS
<S>                                                                                            <C>        <C>
Current assets:
  Cash and cash equivalents..................................................................  $     192  $     209
  Accounts and notes receivable, less allowance for
   credit losses of $88 and $62, respectively................................................      1,886      1,693
  Inventories and supplies...................................................................        227        189
  Deferred tax asset.........................................................................        282        352
  Prepaid and other..........................................................................        322        323
                                                                                               ---------  ---------
Total current assets.........................................................................      2,909      2,766
                                                                                               ---------  ---------
Property, plant and equipment -- net.........................................................     14,677     13,997
Investment in Time Warner Entertainment......................................................      2,483      2,522
Intangible assets -- net.....................................................................      1,798      1,858
Investments in international ventures........................................................      1,511        881
Net investment in assets held for sale.......................................................        429        302
Other assets.................................................................................      1,264        878
                                                                                               ---------  ---------
Total assets.................................................................................  $  25,071  $  23,204
                                                                                               ---------  ---------
                                                                                               ---------  ---------
 
                                        LIABILITIES AND SHAREOWNERS' EQUITY
 
Current liabilities:
  Short-term debt............................................................................  $   1,901  $   2,837
  Accounts payable...........................................................................        975        944
  Employee compensation......................................................................        385        367
  Dividends payable..........................................................................        254        251
  Current portion of restructuring charge....................................................        282        337
  Other......................................................................................      1,255      1,278
                                                                                               ---------  ---------
Total current liabilities....................................................................      5,052      6,014
                                                                                               ---------  ---------
Long-term debt...............................................................................      6,954      5,101
Postretirement and other postemployment benefit obligations..................................      2,433      2,502
Deferred income taxes........................................................................      1,071        890
Unamortized investment tax credits...........................................................        199        231
Deferred credits and other...................................................................        763      1,033
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
 solely Company-guaranteed debentures........................................................        600     --
Preferred stock subject to mandatory redemption..............................................         51         51
Common shareowners' equity:
  Common shares -- At 12/31/95-Communications Stock- $0.01 per share par value, 2,000,000,000
   authorized, 482,877,097 issued and 473,635,025 outstanding. Media Stock -- $0.01 per share
   par value, 2,000,000,000 authorized, 481,556,451 issued and 472,314,379 outstanding. At
   12/31/94-U S WEST, Inc. no par, 2,000,000,000 authorized, 476,880,420 issued and
   469,343,048 outstanding...................................................................      8,228      8,056
  Cumulative deficit.........................................................................       (115)      (458)
  LESOP guarantee............................................................................       (127)      (187)
  Foreign currency translation adjustments...................................................        (38)       (29)
                                                                                               ---------  ---------
Total common shareowners' equity.............................................................      7,948      7,382
                                                                                               ---------  ---------
Total liabilities and shareowners' equity....................................................  $  25,071  $  23,204
                                                                                               ---------  ---------
                                                                                               ---------  ---------
Contigencies (See Note 19 to the Consolidated Financial Statements)
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                      B-31
<PAGE>
                                 U S WEST, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1995       1994       1993
                                                                                       ---------  ---------  ---------
                                                                                             DOLLARS IN MILLIONS
<S>                                                                                    <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income (loss)..................................................................  $   1,317  $   1,426  $  (2,806)
  Adjustments to net income (loss):
    Discontinuance of SFAS No. 71....................................................     --         --          3,123
    Restructuring charge.............................................................     --         --          1,000
    Depreciation and amortization....................................................      2,291      2,052      1,955
    Gains on asset sales:
      Merger and partial sale of joint venture interest..............................       (157)      (164)    --
      Rural telephone exchanges......................................................       (136)       (82)    --
      Paging assets..................................................................     --            (68)    --
    Equity losses in unconsolidated ventures.........................................        207        121         74
    Discontinued operations..........................................................     --         --             82
    Deferred income taxes and amortization of investment tax credits.................        274        373       (225)
  Changes in operating assets and liabilities:
    Restructuring payments...........................................................       (334)      (289)      (120)
    Postretirement medical and life costs, net of cash fundings......................        (24)        (5)      (122)
    Accounts and notes receivable....................................................       (169)      (104)       (90)
    Inventories, supplies and other..................................................        (79)       (81)       (56)
    Accounts payable and accrued liabilities.........................................         45         (4)       216
  Other -- net.......................................................................        185         72        169
                                                                                       ---------  ---------  ---------
  Cash provided by operating activities..............................................      3,420      3,247      3,200
                                                                                       ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment.....................................     (2,825)    (2,603)    (2,427)
  Investment in Time Warner Entertainment............................................     --         --         (1,557)
  Investment in Atlanta Systems......................................................     --           (745)    --
  Investments in international ventures..............................................       (681)      (350)      (230)
  Proceeds from disposals of property, plant and equipment...........................        201         96         45
  Proceeds from sale of paging assets................................................     --            143     --
  Other -- net.......................................................................       (201)      (119)       (10)
                                                                                       ---------  ---------  ---------
  Cash (used for) investing activities...............................................     (3,506)    (3,578)    (4,179)
                                                                                       ---------  ---------  ---------
FINANCING ACTIVITIES
  Net (repayments of) proceeds from issuance of short-term debt......................     (1,281)     1,280        687
  Proceeds from issuance of long-term debt...........................................      2,732        251      2,282
  Repayments of long-term debt.......................................................     (1,058)      (526)    (2,969)
  Proceeds from issuance of trust originated preferred securities -- net.............        581     --         --
  Dividends paid on common stock.....................................................       (929)      (886)      (812)
  Proceeds from issuance of common stock.............................................         87        364      1,150
  Proceeds from issuance of preferred stock..........................................     --             50     --
  Purchases of treasury stock........................................................        (63)       (20)    --
                                                                                       ---------  ---------  ---------
  Cash provided by financing activities..............................................         69        513        338
                                                                                       ---------  ---------  ---------
  Cash (used for) provided by continuing operations..................................        (17)       182       (641)
  Cash (to) from discontinued operations.............................................     --           (101)       610
                                                                                       ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase (decrease)................................................................        (17)        81        (31)
  Beginning balance..................................................................        209        128        159
                                                                                       ---------  ---------  ---------
  Ending balance.....................................................................  $     192  $     209  $     128
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
 
                                      B-32
<PAGE>
                                 U S WEST, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE 1: RECAPITALIZATION PLAN
    On  October  31,  1995, the  shareholders  of  U S  WEST,  Inc.,  a Colorado
corporation  ("U  S  WEST   Colorado"),  voted  to   approve  a  proposal   (the
"Recapitalization  Plan") adopted by  the Board of  Directors of U  S WEST, Inc.
(the "Board") to  reincorporate in  Delaware and  create two  classes of  common
stock   that  are  intended  to  reflect   separately  the  performance  of  the
communications and  multimedia  businesses.  Under  the  Recapitalization  Plan,
shareholders  approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware  corporation ("U S WEST" or "Company"),  pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger,  the  Certificate of  Incorporation of  U  S WEST  has been  amended and
restated to designate  two classes of  common stock of  U S WEST,  one class  of
which   is  authorized   as  U   S  WEST   Communications  Group   Common  Stock
("Communications Stock"), and the  other class which is  authorized as U S  WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of  common stock  of U  S WEST  Colorado was  converted into  one share  each of
Communications Stock and Media Stock.
 
    The Communications  Stock  and Media  Stock  provide shareholders  with  two
distinct  securities that are intended  to reflect separately the communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses  of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
 
    The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST  Federal
Services,  Inc., U  S WEST  Advanced Technologies,  Inc. and  U S  WEST Business
Resources,  Inc.   The  Communications   Group  primarily   provides   regulated
communications  services  to  more  than  25  million  residential  and business
customers within a 14 state region.
 
    The Media Group is  comprised of U S  WEST Marketing Resources Group,  Inc.,
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, U S WEST  Multimedia Communications, Inc.,  which owns domestic  cable
television  operations  and investments,  and U  S WEST  International Holdings,
Inc.,  which   primarily   owns   investments   in   international   cable   and
telecommunications, wireless communications and directory publishing operations.
 
    Dividends  to be paid on Communications Stock are initially $0.535 per share
per quarter.  Dividends  on  the  Communications  Stock  will  be  paid  at  the
discretion  of the Board, based primarily on the financial condition, results of
operations and business requirements of the Communications Group and the Company
as a whole.  With regard  to the  Media Stock,  the Board  currently intends  to
retain  future  earnings,  if any,  for  the  development of  the  Media Group's
businesses and does not  anticipate paying dividends on  the Media Stock in  the
foreseeable future.
 
NOTE 2: 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 accounted for using the equity method.
 
    Certain  reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
 
                                      B-33
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    In third-quarter 1993, U  S WEST discontinued  accounting for its  regulated
telephone  operations,  U S  WEST Communications,  under Statement  of Financial
Accounting Standards ("SFAS")  No. 71,  "Accounting for the  Effects of  Certain
Types of Regulation." (See Note 8 to the Consolidated Financial Statements.)
 
    INDUSTRY  SEGMENTS  U  S WEST consists  of two Groups  -- the Communications
Group and the  Media Group. The  Communications Group operates  in one  industry
segment  (communications and related  services) and the  Media Group operates in
four  industry   segments   (directory  and   information   services,   wireless
communications,  cable and  telecommunications, and the  capital assets segment,
which is held  for sale) as  defined in  SFAS No. 14,  "Financial Reporting  for
Segments of a Business Enterprise."
 
    Prior  to January 1, 1995,  the capital assets segment  was accounted for as
discontinued operations. Effective January 1,  1995, the capital assets  segment
has been accounted for as a net investment in assets held for sale, as discussed
in Note 20 to the Consolidated Financial Statements.
 
    USE OF ESTIMATES  The preparation of financial statements in conformity with
generally  accepted accounting principles requires  management to make estimates
and assumptions that affect the 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.
 
    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' provision for  depreciation of property, plant and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industry-wide studies. Prior to discontinuing SFAS No.
71,  depreciation  was  based  on  lives  specified  by  regulators.  When   the
depreciable  property, plant and equipment of U S WEST Communications is retired
or sold, the original cost  less the net salvage  value is generally charged  to
accumulated depreciation.
 
    The  other  subsidiaries of  U  S WEST  provide  for depreciation  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.
 
    Depreciation  expense was $2,215, $2,029 and  $1,941 in 1995, 1994 and 1993,
respectively.
 
    Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. At U S WEST Communications, prior to discontinuing SFAS No.
71, capitalized interest  was included as  an element of  other income.  Amounts
capitalized  by  U  S  WEST were  $72,  $44  and  $20 in  1995,  1994  and 1993,
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    the
 
                                      B-34
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
straight-line method over periods ranging from five to forty years. These assets
are evaluated, with other related assets, for impairment using a discounted cash
flow  methodology. Amortization expense was  $76, $23 and $14  in 1995, 1994 and
1993, respectively.
 
    FOREIGN CURRENCY  TRANSLATION    Assets  and  liabilities  of  international
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.
 
    REVENUE RECOGNITION   Local  telephone service,  cellular access  and  cable
television  revenues are generally billed monthly,  in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
other telephone services, including exchange access, long-distance and  cellular
airtime usage, are billed and recorded monthly as services are provided.
 
    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. For
international operations, directory advertising  revenues and related  directory
costs  are deferred  and recognized  upon publication.  The balance  of deferred
directory costs included in prepaid and other  is $247 and $234 at December  31,
1995 and 1994, respectively.
 
    FINANCIAL  INSTRUMENTS  Net interest received or paid on interest rate swaps
is recognized over the life of the  swaps as an adjustment to interest  expense.
Foreign  exchange  contracts  designated  as hedges  of  firm  equity investment
commitments are  carried at  market value,  with gains  and losses  recorded  in
equity  until sale of the investment.  Forward contracts designated as hedges of
foreign denominated loans are  recorded at market value,  with gains and  losses
recorded in income.
 
    INVESTMENTS  IN DEBT SECURITIES  Debt securities are classified as available
for sale and are carried at fair  market value with unrealized gains and  losses
included in equity.
 
    COMPUTER  SOFTWARE   The  cost of  computer  software, whether  purchased or
developed internally,  is  charged  to  expense  with  two  exceptions.  Initial
operating  systems software  is capitalized and  amortized over the  life of the
related hardware, and initial network  applications software is capitalized  and
amortized  over  three years.  Subsequent upgrades  to capitalized  software are
expensed. Capitalized computer software  of $190 and $146  at December 31,  1995
and  1994,  respectively,  is recorded  in  property, plant  and  equipment. The
Company amortized capitalized  computer software costs  of $70, $62  and $37  in
1995, 1994 and 1993, 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
in accordance with SFAS No. 109. U S WEST implemented SFAS No. 109,  "Accounting
for Income Taxes," in 1993. Adoption of the new standard did not have a material
effect  on the financial position or results of operations, primarily because of
the Company's earlier adoption of SFAS No. 96.
 
    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  (LOSS) PER COMMON SHARE   For 1995, earnings  per common share for
Communications Stock  and Media  Stock are  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. For 1994  and 1993, earnings (loss) per  common share are computed on
the basis of  the weighted average  number of shares  of U S  WEST common  stock
outstanding during each year.
 
                                      B-35
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    NEW  ACCOUNTING  STANDARDS   In  1996, U  S WEST  will  adopt SFAS  No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."  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. U S WEST expects that the adoption
of SFAS No. 121  will not have  a material effect on  its financial position  or
results of operations.
 
    In  1996, U  S WEST  will adopt  SFAS No.  123, "Accounting  for Stock-Based
Compensation." This standard establishes a fair value method for accounting  for
stock-based  compensation plans  either through  recognition or  disclosure. U S
WEST  will  adopt   this  standard  through   compliance  with  the   disclosure
requirements  set forth in SFAS  No. 123. Adoption of  the standard will have no
impact on the financial position or results of operations of U S WEST.
 
NOTE 3: INDUSTRY SEGMENTS
    Industry segment data is  presented for the consolidated  operations of U  S
WEST.  The Company's equity  method investments and  the capital assets segment,
which is held for sale, are included in "Corporate and other."
 
    The businesses  comprising  the Communications  Group  operate in  a  single
industry  segment  -- communications  and  related services.  The Communications
Group primarily  provides  regulated communications  services  to more  than  25
million  residential and business  customers in the  Communications Group 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.  Services offered  by the  Communications
Group  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  Local  Access  and
Transport Areas ("LATAs") in the Region. The Communications Group provides other
products  and  services,  including  custom  calling,  voice  messaging,  caller
identification,  high-speed data  applications, customer  premises equipment and
certain communications services to business customers and governmental  agencies
both inside and outside the Region.
 
    Approximately  97 percent  of the revenues  of the  Communications Group are
attributable  to  the  operations   of  U  S   WEST  Communications,  of   which
approximately  59  percent are  derived from  the  states of  Arizona, Colorado,
Minnesota and Washington.
 
    The Media Group operates  in four industry  segments, including the  capital
assets  segment, which is held for  sale. The directory and information services
segment  consists  of  the  publishing  of  White  and  Yellow  Pages  telephone
directories,  database marketing  services and interactive  services in domestic
and  international  markets.  The   wireless  communications  segment   provides
information  products  and services  over wireless  networks  in 13  western and
midwestern states. The cable and telecommunications segment was created with the
December 6,  1994  acquisition  of  cable  television  systems  in  the  Atlanta
Metropolitan area. (See Note 4 to the Consolidated Financial Statements.)
 
                                      B-36
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
    Industry segment financial information follows:
<TABLE>
<CAPTION>
                                         COMMUNI-      DIRECTORY
                                        CATIONS AND       AND        WIRELESS      CABLE AND     CORPORATE
                                          RELATED     INFORMATION    COMMUNI-    TELECOMMUNI-       AND       INTERSEGMENT
                                         SERVICES     SERVICES(1)     CATIONS     CATIONS(2)     OTHER(3)     ELIMINATIONS
                                        -----------  -------------  -----------  -------------  -----------  ---------------
<S>                                     <C>          <C>            <C>          <C>            <C>          <C>
1995
Sales and other revenues..............   $   9,484     $   1,180     $     941     $     215     $      38      $    (112)
Operating income (loss)...............       2,178           398           147            23          (101)        --
Identifiable assets...................      16,585           583         1,439         1,466         5,127           (129)
Depreciation and amortization.........       2,042            36           121            77            15         --
Capital expenditures..................       2,739            37           277            64            23         --
1994
Sales and other revenues..............       9,176         1,075           781            18            34           (131)
Operating income (loss) from
 continuing operations................       2,118           396            88        --               (95)        --
Identifiable assets...................      15,944           613         1,286         1,459         4,036           (134)
Depreciation and amortization.........       1,908            30           102             6             6         --
Capital expenditures..................       2,477            42           274             2            25         --
1993
Sales and other revenues..............       8,870           956           561        --                32           (125)
Operating income (loss) from
 continuing operations (4)............       1,035           356           (29)       --               (89)        --
Identifiable assets...................      15,423           450         1,175        --             3,821           (189)
Depreciation and amortization.........       1,828            16           104        --                 7         --
Capital expenditures..................       2,226            32           175        --                 8         --
 
<CAPTION>
 
                                        CONSOLIDATED
                                        -------------
<S>                                     <C>
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
1994
Sales and other revenues..............       10,953
Operating income (loss) from
 continuing operations................        2,507
Identifiable assets...................       23,204
Depreciation and amortization.........        2,052
Capital expenditures..................        2,820
1993
Sales and other revenues..............       10,294
Operating income (loss) from
 continuing operations (4)............        1,273
Identifiable assets...................       20,680
Depreciation and amortization.........        1,955
Capital expenditures..................        2,441
</TABLE>
 
----------------------------------
(1)
  Includes  revenue from directory publishing activities  in Europe of $122, $78
  and $7, and identifiable assets of $133, $124 and $4 for 1995, 1994 and  1993,
  respectively.
 
(2)
  Results  of operations have been included since the date of acquisition of the
  Atlanta Systems.
 
(3)
  Includes U S WEST's equity method investments and the capital assets  segment,
  which has been discontinued and is held for sale.
 
(4)
  Includes   pretax  restructuring  charges  of  $880,   $50  and  $70  for  the
  communications and related  services, directory and  information services  and
  wireless communications segments, respectively.
 
    Operating   income  represents  sales  and  other  revenues  less  operating
expenses,  and  excludes  interest  expense,  equity  losses  in  unconsolidated
ventures, other income (expense) and income taxes. Identifiable assets are those
assets  used in  each segment's operations.  Corporate and  other assets consist
primarily of cash, debt securities,  investments in international ventures,  the
investment  in Time Warner Entertainment, the  net investment in assets held for
sale and  other assets.  Corporate and  other operating  losses include  general
corporate  expenses and administrative costs primarily associated with the Media
Group equity investments.
 
    SIGNIFICANT CONCENTRATIONS  The largest volume of the Communications Group's
services are provided to AT&T. During  1995, 1994 and 1993, revenues related  to
those  services provided to  AT&T were $1,085,  $1,130 and $1,159, respectively.
Related accounts receivable at December 31, 1995 and 1994, totaled $91 and  $98,
respectively.  As of December 31, 1995, the Communications Group is not aware of
any other significant  concentration of  business transacted  with a  particular
customer, supplier or lender that could, if suddenly eliminated, severely impact
operations.
 
    To  ensure consistency  and quality  of service,  the wireless  segment uses
Motorola as its primary vendor for infrastructure equipment and cellular  mobile
telephone  equipment  and accessories.  In  addition, Motorola  provides ongoing
technological support for  the infrastructure equipment.  The infrastructure  of
approximately  75  percent  of  the  Media  Group's  major  cellular  markets is
comprised of Motorola equipment.
 
    WIRELESS COMMUNICATIONS SEGMENT  During 1994,  U S WEST signed a  definitive
agreement  with  AirTouch  Communications  to  combine  their  domestic cellular
assets. The initial  equity ownership  of this  cellular joint  venture will  be
approximately  70  percent  AirTouch  and approximately  30  percent  U  S WEST.
 
                                      B-37
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
The combination will take place  in two phases. During Phase  I, which U S  WEST
entered  effective  November  1, 1995,  the  two companies  are  operating their
cellular properties separately.  A Wireless Management  Company (the "WMC")  has
been  formed  and  is providing  centralized  services  to both  companies  on a
contract basis.  In  Phase II,  AirTouch  and U  S  WEST will  contribute  their
domestic cellular assets to the WMC. In this phase, the Company will reflect its
share  of the combined operating  results of the WMC  using the equity method of
accounting. The recent passage of the Telecommunications Act of 1996 has removed
significant regulatory  barriers  to completion  of  Phase II  of  the  business
combination.  U S WEST expects that Phase II closing could take place by the end
of 1996 or early 1997.
 
NOTE 4: ACQUISITION OF CABLE SYSTEMS
 
    ATLANTA SYSTEMS  On December 6, 1994, U S WEST acquired the stock of Wometco
Cable Corp.  and subsidiaries,  and the  assets of  Georgia Cable  Partners  and
Atlanta  Cable  Partners L.P.  (the  "Atlanta Systems"),  for  cash of  $745 and
12,779,206 U S WEST common shares valued at $459, for a total purchase price  of
approximately $1.2 billion. The Atlanta Systems' results of operations have been
included in the consolidated results of operations of the Company since the date
of  acquisition.  Had  the  acquisition  occurred as  of  January  1,  1994, the
Company's revenue, net income and earnings per common share for 1994 would  have
been $11,143, $1,415 and $3.04, respectively.
 
    The  acquisition was accounted  for using the  purchase method. Accordingly,
the purchase  price  was  allocated to  assets  acquired  (primarily  identified
intangibles)  based on their  estimated fair values.  The identified intangibles
and goodwill are being amortized on a straight-line basis over 25 years.
 
    CONTINENTAL CABLEVISION, INC. (SUBSEQUENT EVENT)  On February 27, 1996,  the
Company  announced a definitive agreement to merge with Continental Cablevision,
Inc. ("Continental"). Continental,  the nation's  third-largest cable  operator,
serves  4.2 million domestic customers, passes  more than seven million domestic
homes and holds  significant other  domestic and international  properties. U  S
WEST will purchase all of Continental's stock for approximately $5.3 billion and
will   assume  Continental's  debt  and   other  obligations,  which  amount  to
approximately $5.5 billion. Consideration  for the $5.3  billion in equity  will
consist  of approximately $1 billion in U S WEST preferred stock, convertible to
Media Stock; and, at U S WEST's  option, between $1 billion and $1.5 billion  in
cash,  and  $2.8  billion  to  $3.3  billion  in  shares  of  Media  Stock.  The
transaction, which  is expected  to close  in  the fourth  quarter of  1996,  is
subject  to  a  number of  conditions  and approvals,  including  approvals from
Continental shareholders and local franchising and government authorities.
 
NOTE 5: 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 Company  L.P.  ("TWE"  or  "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 Inc.  ("Time
Warner"),  consisting primarily of its filmed entertainment, programming-HBO and
cable businesses.
 
    Upon  U  S  WEST's  admission  to  the  partnership,  certain  wholly  owned
subsidiaries  of Time  Warner ("General  Partners") and  subsidiaries of Toshiba
Corporation and ITOCHU Corporation held  pro-rata priority capital and  residual
equity  interests of 63.27,  5.61 and 5.61 percent,  respectively. In 1995, Time
Warner  acquired   the  limited   partnership  interests   previously  held   by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
 
    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
 
                                      B-38
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
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.
 
    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); pro-rata priority  capital (A preferred  -- held pro
rata by the general and limited partners); junior priority capital (B  preferred
-- held by the General Partners); and common (residual equity interests 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 capital  and $895  represents
common  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' common  capital 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>
                                                                                     TIME WARNER     LIMITED PARTNERS
                    PRIORITY OF                      CONTRIBUTED                       GENERAL    ----------------------
                CONTRIBUTED CAPITAL                  CAPITAL(A)                       PARTNERS    TIME WARNER  U S WEST
---------------------------------------------------  -----------                     -----------  -----------  ---------
                                                                  PRIORITY CAPITAL
                                                                      RATES OF
                                                                      RETURN(B)
                                                                  -----------------
                                                                    (% PER ANNUM
                                                                     COMPOUNDED
                                                                     QUARTERLY)                 (OWNERSHIP %)
<S>                                                  <C>          <C>                <C>          <C>          <C>
Senior preferred...................................   $   1,400(c)          8.00%        100.00%      --          --
Pro-rata priority capital..........................       5,600           13.00%(d)       63.27%       11.22%      25.51%
Junior priority capital............................       2,900(e)         13.25%(f)     100.00%      --          --
Residual equity capital............................       3,300          --               63.27%       11.22%      25.51%
</TABLE>
 
----------------------------------
(a)
  Estimated fair value of net assets contributed excluding partnership income or
  loss allocated thereto.
 
(b)
  Income allocations related to  priority capital rates of  return are based  on
  partnership income after any special tax allocations.
 
(c)
  The   senior  preferred  is  scheduled  to  be  distributed  in  three  annual
  installments beginning July 1, 1997.
 
(d)
  11.00 percent to the extent concurrently distributed.
 
(e)
  Includes $300  for  the  September 1995  reacquisition  of  assets  previously
  excluded from the partnership (the Time Warner service partnership assets) for
  regulatory reasons.
 
(f)
  11.25 percent to the extent concurrently distributed.
 
    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  were previously subject to
restrictions until July  1995, and are  now 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.
 
                                      B-39
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    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.
The  Company'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, the  Company's
recorded  pretax share  of TWE operating  results before  extraordinary item was
$(31), $(18) and $(20)  in 1995, 1994 and  1993, respectively. In addition,  TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. The
Company's  share of this extraordinary loss was $4, net of an income tax benefit
of $2.
 
    As consideration for its expertise and participation in the cable operations
of TWE, the Company  earns a management  fee of $130 over  five years, which  is
payable  over a four-year period beginning in  1995. Management fees of $26, $26
and $8  were recorded  to other  income in  1995, 1994  and 1993,  respectively.
Included  in the U S WEST Consolidated Balance Sheet is a note payable to TWE of
$169 and $771 and management fee receivables of $50 and $34 at December 31, 1995
and 1994, respectively.
 
    Summarized financial information for TWE is presented below:
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
SUMMARIZED OPERATING RESULTS                                                             1995       1994       1993
-------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Revenues.............................................................................  $   9,517  $   8,460  $   7,946
Operating expenses (1)...............................................................      8,557      7,612      7,063
Interest and other expense, net (2)..................................................        777        647        611
                                                                                       ---------  ---------  ---------
Income before income taxes and extraordinary item....................................  $     183  $     201  $     272
Income before extraordinary item.....................................................         97        161        208
                                                                                       ---------  ---------  ---------
Net income...........................................................................  $      73  $     161  $     198
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
----------------------------------
(1)
  Includes depreciation and amortization of $1,039, $943 and $902 in 1995,  1994
  and 1993, respectively.
 
(2)
  Includes  corporate  services of  $64, $60  and  $60 in  1995, 1994  and 1993,
  respectively.
 
<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER
                                                                                                      31,
                                                                                              --------------------
SUMMARIZED FINANCIAL POSITION                                                                   1995       1994
--------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                           <C>        <C>
Current assets (3)..........................................................................  $   2,909  $   3,573
Noncurrent assets (4).......................................................................     15,996     15,089
Current liabilities.........................................................................      3,214      2,857
Noncurrent liabilities, including minority interest.........................................      7,787      7,909
Senior preferred capital....................................................................      1,426      1,663
Partners' capital (5,6).....................................................................      6,478      6,233
</TABLE>
 
----------------------------------
(3)
  Includes cash of $209 and $1,071 at December 31, 1995 and 1994, respectively.
 
(4)
  Includes a loan receivable from Time Warner  of $400 at December 31, 1995  and
  1994.
 
(5)
  Net  of a note receivable from U S WEST  of $169 and $771 at December 31, 1995
  and 1994, respectively.
 
(6)
  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 partner's capital as reflected  in
  the  Summarized Financial Position,  which is based on  the historical cost of
  the contributed net assets.
 
                                      B-40
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    In early 1995, Time Warner announced its intention to simplify its corporate
structure by establishing an enterprise that will be responsible for the overall
management and financing  of the  cable and  telecommunications properties.  Any
change  in the structure of TWE would require U S WEST's approval in addition to
certain creditors' and regulatory  approvals. (See Note  19 to the  Consolidated
Financial Statements for disclosure related to litigation with Time Warner.)
 
NOTE 6: RESTRUCTURING CHARGE
    The  Company's  1993  results  reflect  a  $1  billion  restructuring charge
(pretax). The related restructuring plan (the "Restructuring Plan") is  designed
to  provide faster, more responsive customer  services, while reducing the costs
of providing these services. As part  of the Restructuring Plan, the Company  is
developing  new systems and enhanced system functionality that will enable it to
monitor networks to reduce the risk of service interruptions, activate telephone
service on demand, rapidly  design and engineer new  services for customers  and
centralize  its service centers.  The Company has  consolidated its 560 customer
service centers into 26 centers in 10  cities and reducing its total work  force
by  approximately  10,000  employees.  This  increased  the  number  of employee
separations to 10,000  from 9,000, and  increased the estimated  total cost  for
employee  separations  to $316,  compared with  $286  in the  original estimate.
Approximately 1,000 employees  that were  originally expected  to relocate  have
chosen  separation or other job assignments and have been replaced. The $30 cost
associated with  these additional  employee  separations was  reclassified  from
relocation to the reserve for employee separations during 1995.
 
    Following  is a  schedule of  the costs  included in  the 1993 restructuring
charge:
 
<TABLE>
<CAPTION>
                                                                               1993
                                                                           RESTRUCTURING    CHANGE IN    DECEMBER 31,
                                                                              CHARGE        ESTIMATE     1995 ESTIMATE
                                                                           -------------  -------------  -------------
<S>                                                                        <C>            <C>            <C>
Employee separation(1)...................................................    $     230      $      30      $     260
Systems development......................................................          400         --                400
Real estate..............................................................          130         --                130
Relocation...............................................................          110            (30)            80
Retraining and other.....................................................           65         --                 65
Asset write-down.........................................................           65         --                 65
                                                                                ------            ---         ------
  Total..................................................................    $   1,000      $  --          $   1,000
                                                                                ------            ---         ------
                                                                                ------            ---         ------
</TABLE>
 
----------------------------------
(1)Employee-separation costs,  including the  balance  of a  1991  restructuring
reserve at December 31, 1993, aggregate $316.
 
    Employee  separation costs include  severance payments, health-care coverage
and postemployment  education benefits.  System  development costs  include  new
systems  and  the  application  of  enhanced  system  functionality  to existing
single-purpose systems to provide  integrated end-to-end customer service.  Real
estate  costs  include  preparation  costs  for  the  new  service  centers. The
relocation and  retraining costs  are related  to moving  employees to  the  new
service  centers and retraining employees on the methods and systems required in
the new, restructured mode of operation.
 
                                      B-41
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: RESTRUCTURING CHARGE (CONTINUED)
    The following table shows amounts charged to the restructuring reserve:
 
<TABLE>
<CAPTION>
                                                              1993
                                                          RESTRUCTURING      1994         1995       CHANGE IN    DECEMBER 31,
                                                             RESERVE       ACTIVITY     ACTIVITY     ESTIMATE     1995 BALANCE
                                                         ---------------  -----------  -----------  -----------  ---------------
<S>                                                      <C>              <C>          <C>          <C>          <C>
Employee separation (1)................................     $     286      $      75    $      76    $      30      $     165
Systems development....................................           400            127          145       --                128
Real estate............................................           130             50           66       --                 14
Relocation.............................................           110             21           24          (30)            35
Retraining and other...................................            65             16           23       --                 26
                                                                -----          -----        -----          ---          -----
  Total................................................     $     991      $     289    $     334    $  --          $     368
                                                                -----          -----        -----          ---          -----
                                                                -----          -----        -----          ---          -----
</TABLE>
 
----------------------------------
(1)
  Includes $56 associated with work-force reductions under a 1991  restructuring
  plan.
 
    Employee  separations under the Restructuring Plan  in 1995 and 1994 were as
follows:
 
<TABLE>
<CAPTION>
                                                                                                          CUMULATIVE
                                                                                                        SEPARATIONS AT
                                                                              1994           1995        DECEMBER 31,
                                                                           SEPARATIONS    SEPARATIONS        1995
                                                                          -------------  -------------  ---------------
<S>                                                                       <C>            <C>            <C>
Employee separations:
  Managerial............................................................          497            682           1,179
  Occupational..........................................................        1,683          1,643           3,326
                                                                                -----          -----           -----
    Total...............................................................        2,180          2,325           4,505
                                                                                -----          -----           -----
                                                                                -----          -----           -----
</TABLE>
 
    The Restructuring Plan is expected to be substantially completed by the  end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the  business and related service  issues, new business opportunities, revisions
to system  delivery  schedules  and  productivity issues  caused  by  the  major
rearrangement  of resources due to restructuring.  These issues will continue to
affect the timing of employee separations.
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES
    The significant investments in international ventures follows:
 
<TABLE>
<CAPTION>
                                                                                                      NET INVESTMENT AT
                                                                                                         DECEMBER 31,
                                                                            LINE OF     OWNERSHIP    --------------------
VENTURE                                                    LOCATION        BUSINESS    PERCENTAGE      1995       1994
----------------------------------------------------  -------------------  ---------  -------------  ---------  ---------
<S>                                                   <C>                  <C>        <C>            <C>        <C>
TeleWest............................................  United Kingdom          C&T            26.8    $     540  $     456
Binariang Sdn Bhd...................................  Malaysia                C&T          20              224         50
A2000 (KTA).........................................  Netherlands             C&T          50              218     --
One 2 One...........................................  United Kingdom           W           50               73        123
All other...........................................                                                       456        252
                                                                                                     ---------  ---------
  Total.............................................                                                 $   1,511  $     881
                                                                                                     ---------  ---------
                                                                                                     ---------  ---------
</TABLE>
 
----------------------------------
(C&T)
   Cable and Telecommunications
 
(W)Wireless
 
                                      B-42
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
    The following table shows summarized combined financial information for  the
Company's significant equity method investments in international ventures:
 
<TABLE>
<CAPTION>
                                                                                             YEAR ENDED DECEMBER 31,
                                                                                         -------------------------------
COMBINED OPERATIONS                                                                        1995       1994       1993
---------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                      <C>        <C>        <C>
Revenue................................................................................  $   1,163  $     580  $     296
Operating expenses.....................................................................      1,264        684        354
Depreciation and amortization..........................................................        272        140         60
                                                                                         ---------  ---------  ---------
  Operating loss.......................................................................       (373)      (244)      (118)
Interest and other, net................................................................       (141)       (75)       (40)
                                                                                         ---------  ---------  ---------
  Loss before extraordinary item.......................................................       (514)      (319)      (158)
Extraordinary gain -- interest rate swaps..............................................     --             11     --
                                                                                         ---------  ---------  ---------
  Net loss.............................................................................  $    (514) $    (308) $    (158)
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER
                                                                                               31,
                                                                                       --------------------
COMBINED FINANCIAL POSITION                                                              1995       1994
-------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                    <C>        <C>
Current assets.......................................................................  $   1,469  $     714
Property, plant and equipment -- net.................................................      3,545      1,462
Other assets.........................................................................      1,644        343
                                                                                       ---------  ---------
Total assets.........................................................................  $   6,658  $   2,519
                                                                                       ---------  ---------
                                                                                       ---------  ---------
Current liabilities..................................................................  $   1,260  $     344
Long-term debt.......................................................................      2,065        463
Other liabilities....................................................................         58         71
Owners' equity.......................................................................      3,275      1,641
                                                                                       ---------  ---------
Total liabilities and equity.........................................................  $   6,658  $   2,519
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    In  November 1994, TeleWest plc ("TeleWest") made an initial public offering
of its ordinary shares. Following the offering,  in which U S WEST sold part  of
its 50 percent joint venture interest, U S WEST owned approximately 37.8 percent
of TeleWest. Net proceeds of approximately $650 were used by TeleWest to finance
construction and operating costs, invest in affiliated companies and repay debt.
It  is U S WEST's policy  to recognize as income any  gains or losses related to
the sale of stock to the public. The Company recognized a gain of $105 in  1994,
net of $59 in deferred taxes, for the partial sale of its joint venture interest
in TeleWest.
 
    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  telecommunications  services  in  the  United
Kingdom.  Following completion of the merger,  U S WEST and Tele-Communications,
Inc., the major shareholders, each own 26.8 percent of the combined company. The
Company recognized a gain of $95 in  1995, net of $62 in deferred income  taxes,
in conjunction with the merger.
 
    TeleWest,  which is  the only  equity method  investment for  which a quoted
market price is available, had a market value of $914 at December 31, 1995,  and
$1,004 at December 31, 1994.
 
    FOREIGN  CURRENCY TRANSACTIONS   U S WEST enters  into forward and zero-cost
combination option contracts to  manage foreign currency  risk. Under a  forward
contract,  U S WEST agrees with another party to exchange a foreign currency and
U.S.  dollars  at  a  specified  price  at  a  future  date.  Under  combination
 
                                      B-43
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
options, U S WEST combines purchased options to cap the foreign exchange rate to
be  paid at  a future date  with written options  to finance the  premium of the
purchased options. The  commitments, forward contracts  and combination  options
are for periods up to one year.
 
    Forward  exchange contracts are carried at  market value. Gains or losses on
the portion of  the contracts  designated as  hedges of  firm equity  investment
commitments  are deferred as a component of  equity and are recognized in income
upon sale of the  investment. Gains or  losses on the  portion of the  contracts
designated to offset translation of investee net income are recorded in income.
 
    Forward  contracts are also  used to hedge  foreign denominated loans. These
contracts are carried at market value with gains or losses recorded in income.
 
    Foreign exchange contracts outstanding follow:
 
<TABLE>
<CAPTION>
                                                                                                $U.S. EQUIVALENT
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                     TYPE       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Forwards:
  Dutch Guilders.................................................................  Buy        $     225  $  --
  British pounds.................................................................  Buy              130        135
  British pounds.................................................................  Sell              37     --
  Japanese yen...................................................................  Buy               25     --
  French francs..................................................................  Buy               19     --
Combination options:
  British pounds.................................................................     --      $  --      $      35
  French francs..................................................................     --             20     --
</TABLE>
 
    Cumulative deferred gains on foreign  exchange contracts of $9 and  deferred
losses   of  $25,  including   deferred  taxes  (benefits)   of  $4  and  ($10),
respectively, are included in equity  at December 31, 1995. Cumulative  deferred
gains  on foreign exchange contracts of $7 and deferred losses of $25, including
deferred taxes (benefits) of $3 and ($10), respectively, are included in  equity
at December 31, 1994.
 
    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.
 
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
    The composition of property, plant and equipment follows:
 
<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                    --------------------
                                                                                      1995       1994
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Land and buildings................................................................  $   2,627  $   2,604
Telephone network equipment.......................................................     12,019     11,622
Telephone outside plant...........................................................     12,353     11,897
Cellular systems..................................................................        733        585
Cable distribution systems........................................................        167        148
General purpose computers and other...............................................      4,051      3,425
Construction in progress..........................................................        934        733
                                                                                    ---------  ---------
                                                                                       32,884     31,014
Less accumulated depreciation.....................................................     18,207     17,017
                                                                                    ---------  ---------
Property, plant and equipment -- net..............................................  $  14,677  $  13,997
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
                                      B-44
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 8: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
    In 1995, U S WEST Communications sold certain rural telephone exchanges with
a cost basis  of $258. U  S WEST Communications  received consideration for  the
sales  of $388, including  $214 in cash.  In 1994, U  S WEST Communications sold
certain rural  telephone  exchanges with  a  cost  basis of  $122  and  received
consideration of $204, including $93 in cash.
 
    The  Media Group  businesses depreciate  buildings between  15 to  35 years,
cellular and  cable distribution  systems between  5 to  15 years,  and  general
purpose  computers and other between 3 to  20 years. See "Discontinuance of SFAS
No. 71" for depreciation rates used by the Communications Group.
 
DISCONTINUANCE OF SFAS NO. 71
 
    U S WEST  Communications incurred  a noncash, extraordinary  charge of  $3.1
billion,  net of an income tax benefit  of $2.3 billion, in conjunction with its
decision to discontinue accounting for the operations of U S WEST Communications
in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types  of
Regulation,"  as  of  September  30,  1993. SFAS  No.  71  generally  applies to
regulated companies that meet certain requirements, including a requirement that
a company be able to recover its costs, notwithstanding competition, by charging
its customers at prices established by its regulators. U S WEST  Communications'
decision  to discontinue application of SFAS No. 71 was based on the belief that
competition, market  conditions and  technological  advances, more  than  prices
established  by regulators, will determine the future  cost recovery by U S WEST
Communications. As a result  of this change,  the remaining asset  lives of U  S
WEST  Communications' plant  were shortened to  more closely  reflect the useful
(economic) lives of such plant.
 
    Following is a list of the major categories of telephone property, plant and
equipment and  the  manner in  which  depreciable  lives were  affected  by  the
discontinuance of SFAS No. 71:
 
<TABLE>
<CAPTION>
                                                                                AVERAGE LIFE (YEARS)
                                                                          --------------------------------
                                                                              BEFORE            AFTER
CATEGORY                                                                  DISCONTINUANCE   DISCONTINUANCE
------------------------------------------------------------------------  ---------------  ---------------
<S>                                                                       <C>              <C>
Digital switch..........................................................       17-18             10
Digital circuit.........................................................       11-13             10
Aerial copper cable.....................................................       18-28             15
Underground copper cable................................................       25-30             15
Buried copper cable.....................................................       25-28             20
Fiber cable.............................................................        30               20
Buildings...............................................................       27-49            27-49
General purpose computers...............................................         6                6
</TABLE>
 
    U  S WEST Communications employed two methods to determine the amount of the
extraordinary charge. The "economic life" method  assumed that a portion of  the
plant-related   effect  is   a  regulatory  asset   that  was   created  by  the
under-depreciation  of  plant   under  regulation.  This   method  yielded   the
plant-related  adjustment that was confirmed by  the second method, a discounted
cash flows analysis.
 
    Following is a schedule  of the nature and  amounts of the after-tax  charge
recognized  as a result of  U S WEST Communications'  discontinuance of SFAS No.
71:
 
<TABLE>
<S>                                                                           <C>
Plant related...............................................................  $   3,124
Tax-related regulatory assets and liabilities...............................       (208)
Other regulatory assets and liabilities.....................................        207
                                                                              ---------
Total.......................................................................  $   3,123
                                                                              ---------
                                                                              ---------
</TABLE>
 
                                      B-45
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 9: INTANGIBLE ASSETS
 
    The composition of intangible assets follows:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Identified intangibles, primarily franchise value....................................  $   1,183  $   1,166
Goodwill.............................................................................        743        762
                                                                                       ---------  ---------
Total................................................................................      1,926      1,928
Less accumulated amortization........................................................        128         70
                                                                                       ---------  ---------
Total intangible assets -- net.......................................................  $   1,798  $   1,858
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
NOTE 10: DEBT
 
SHORT-TERM DEBT
 
    The components of short-term debt follow:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Notes payable:
  Commercial paper...................................................................  $     807  $   2,305
  Bank loan..........................................................................        216     --
Current portion of long-term debt....................................................      1,029        732
Allocated to the capital assets segment -- net.......................................       (151)      (200)
                                                                                       ---------  ---------
Total................................................................................  $   1,901  $   2,837
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    The weighted average interest rate on commercial paper was 5.79 percent  and
5.97 percent at December 31, 1995 and 1994, respectively.
 
    The bank loan, in the translated principal amount of $216, is denominated in
Dutch  guilders.  The  loan was  entered  into  in connection  with  U  S WEST's
investment in a cable  television venture in the  Netherlands and was repaid  in
February 1996.
 
    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 $1.9 billion under
lines of credit, all of which was available at December 31, 1995.
 
                                      B-46
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
LONG-TERM DEBT
 
    Interest rates and maturities of long-term debt at December 31 follow:
 
<TABLE>
<CAPTION>
                                                               MATURITIES
                                         -------------------------------------------------------    TOTAL      TOTAL
INTEREST RATES                             1997       1998       1999       2000     THEREAFTER     1995       1994
---------------------------------------  ---------  ---------  ---------  ---------  -----------  ---------  ---------
<S>                                      <C>        <C>        <C>        <C>        <C>          <C>        <C>
Up to 5%...............................  $  --      $      35  $  --      $      90   $     150   $     275  $     546
Above 5% to 6%.........................     --            430     --         --             261         691        574
Above 6% to 7%.........................     --         --            126        363       2,773       3,262      1,361
Above 7% to 8%.........................         16     --         --         --           3,214       3,230      3,193
Above 8% to 9%.........................     --         --            107     --             290         397        444
Above 9% to 10%........................         29     --             15        200          10         254        399
Above 10%..............................          1          1     --         --          --               2     --
Variable rate debt (indexed to two- and
 ten-year constant maturity Treasury
 rates)................................         25     --            155     --          --             180        180
                                         ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                         $      71  $     466  $     403  $     653   $   6,698       8,291      6,697
                                         ---------  ---------  ---------  ---------  -----------
                                         ---------  ---------  ---------  ---------  -----------
Capital lease obligations and other....                                                                 197        153
Unamortized discount -- net............                                                              (1,178)    (1,239)
Allocated to the capital assets
 segment -- net........................                                                                (356)      (510)
                                                                                                  ---------  ---------
Total..................................                                                           $   6,954  $   5,101
                                                                                                  ---------  ---------
                                                                                                  ---------  ---------
</TABLE>
 
    Long-term debt consists principally  of debentures, medium-term notes,  debt
associated   with  the  Company's  Leveraged   Employee  Stock  Ownership  Plans
("LESOP"), and zero coupon subordinated notes convertible at any time into equal
shares of Communications  Stock and Media  Stock. The zero  coupon notes have  a
yield  to  maturity of  approximately  7.3 percent.  The  zero coupon  notes are
recorded at a discounted value of $521  and $498 at December 31, 1995 and  1994,
respectively.
 
    In  1995,  U  S WEST  issued  $130  of Debt  Exchangeable  for  Common Stock
("DECS"), due December 15, 1998, in the principal amount of $24.00 per note. The
notes bear interest at 7.625 percent,  of which 1.775 percent has been  included
in  the  assets  held  for  sale  reserve.  Upon  maturity,  each  DECS  will be
mandatorily redeemed by U S WEST for shares of Enhance Financial Services Group,
Inc. ("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 value is greater than $28.32  per share, .8475 shares are delivered.
The capital  assets segment  currently owns  approximately 31.5  percent of  the
outstanding Enhance common stock.
 
    During  1995, 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 refinanced $145 of long-term debt. Expenses associated with the
refinancing of long-term debt resulted in extraordinary charges to income of $8,
net of an income tax benefit of $5.
 
    During 1993,  U S  WEST refinanced  long-term debt  issues aggregating  $2.7
billion  in principal amount. Expenses  associated with the refinancing resulted
in an extraordinary charge to income of $77, net of a tax benefit of $48.
 
    At December 31, 1995, U  S WEST guaranteed debt  in the principal amount  of
approximately $140, primarily related to international ventures.
 
                                      B-47
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: DEBT (CONTINUED)
    Interest  payments, net of amounts capitalized,  were $518, $523 and $670 in
1995, 1994 and 1993,  respectively, of which $87,  $134 and $272,  respectively,
relate to the capital assets segment.
 
INTEREST RATE RISK MANAGEMENT
 
    Interest  rate  swap agreements  are primarily  used to  effectively convert
existing commercial paper to  fixed-rate debt. This allows  U S WEST to  achieve
interest savings over issuing fixed-rate debt directly.
 
    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. The net interest received or paid as
part of the interest  rate swap is  accounted for as  an adjustment to  interest
expense.
 
    During 1995 and 1994, U S WEST Communications entered into currency swaps to
convert  Swiss franc-denominated debt to 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. Variable rates are indexed to
two- and ten-year constant maturity Treasury and 30-day commercial paper rates.
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                  --------------------------------------------------------------------------------------------------
                                                        1995                                              1994
                                  ------------------------------------------------  ------------------------------------------------
                                                            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...............   $     635     1996-2004        5.72        6.80   $     785     1995-2004        6.14        6.47
Fixed to variable...............      --           --           --          --               5      1995            6.61        5.87
Currency........................         204     1999-2001      --            6.55          71      1999          --            6.53
</TABLE>
 
    In 1993, U  S WEST Communications  executed forward contracts  to sell  U.S.
Treasury  bonds to lock in  the U.S. Treasury rate  component of the future debt
issue. At December 31, 1995, deferred credits of $8 and deferred charges of  $51
on  closed forward contracts are  included as part of  the carrying value of the
underlying debt. The  deferred credits  and charges  are being  recognized as  a
yield  adjustment over  the life  of the  debt, which  matures at  various dates
through 2043. The  net deferred charge  is directly offset  by the lower  coupon
rate  achieved on the  debt issuance. At  December 31, 1995,  there were no open
forward contracts.
 
    The counterparties  to these  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 fair  values of  mandatorily redeemable  preferred stock  and  long-term
receivables,  based on discounting  future cash flows,  approximate the carrying
values. The fair value of foreign exchange contracts, based on estimated amounts
U S WEST  would receive  or pay to  terminate such  agreements, approximate  the
carrying  values. It is not practicable to  estimate the fair value of financial
guarantees associated with international operations because there are no  quoted
market prices for similar transactions.
 
                                      B-48
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
    The  fair values of interest rate swaps, including swaps associated with the
capital assets segment, 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, 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,
                                                                          ----------------------------------------------
                                                                                   1995                    1994
                                                                          ----------------------  ----------------------
                                                                           CARRYING      FAIR      CARRYING      FAIR
                                                                             VALUE       VALUE       VALUE       VALUE
                                                                          -----------  ---------  -----------  ---------
<S>                                                                       <C>          <C>        <C>          <C>
Debt (includes short-term portion)......................................   $   9,651   $  10,050   $   9,221   $   8,700
Interest rate swap agreements -- assets.................................      --             (32)     --             (15)
Interest rate swap agreements -- liabilities............................      --              51      --              20
                                                                          -----------  ---------  -----------  ---------
Debt -- net.............................................................   $   9,651   $  10,069   $   9,221   $   8,705
                                                                          -----------  ---------  -----------  ---------
                                                                          -----------  ---------  -----------  ---------
Preferred Securities....................................................   $     600   $     636   $  --       $  --
Preferred stock.........................................................          51          55          51          51
                                                                          -----------  ---------  -----------  ---------
                                                                          -----------  ---------  -----------  ---------
</TABLE>
 
    Investments in debt securities are classified as available for sale and  are
carried  at market value.  These securities have  various maturity dates through
the year 2001. 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.
 
    The amortized cost and estimated market value of debt securities follow:
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                 -----------------------------------------------------------------------------------------
                                                        1995                                         1994
                                 --------------------------------------------------  -------------------------------------
                                                 GROSS        GROSS                                  GROSS        GROSS
                                              UNREALIZED   UNREALIZED                             UNREALIZED   UNREALIZED
DEBT SECURITIES                     COST         GAINS       LOSSES     FAIR VALUE      COST         GAINS       LOSSES
-------------------------------      ---      -----------  -----------     -----         ---      -----------  -----------
<S>                              <C>          <C>          <C>          <C>          <C>          <C>          <C>
Corporate debt.................   $      20    $  --        $  --        $      20    $      19    $  --        $  --
Securitized loan...............          55       --               (5)          50       --           --           --
                                        ---        -----        -----          ---          ---        -----        -----
Total..........................   $      75    $  --        $      (5)   $      70    $      19    $  --        $  --
                                        ---        -----        -----          ---          ---        -----        -----
                                        ---        -----        -----          ---          ---        -----        -----
 
<CAPTION>
 
DEBT SECURITIES                  FAIR VALUE
-------------------------------     -----
<S>                              <C>
Corporate debt.................   $      19
Securitized loan...............      --
                                        ---
Total..........................   $      19
                                        ---
                                        ---
</TABLE>
 
    The  1995 net unrealized losses of $3 (net  of a deferred tax benefit of $2)
are included in equity.
 
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 $263, $288 and $275 in
1995, 1994 and 1993, respectively. Minimum future lease payments as of  December
31, 1994, under noncancelable operating leases, follow:
 
<TABLE>
<CAPTION>
YEAR
-------------------------------------------------------------------------------------
<S>                                                                                    <C>
1996.................................................................................  $     159
1997.................................................................................        152
1998.................................................................................        145
1999.................................................................................        127
2000.................................................................................        117
Thereafter...........................................................................        777
                                                                                       ---------
Total................................................................................  $   1,477
                                                                                       ---------
                                                                                       ---------
</TABLE>
 
                                      B-49
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 13: PREFERRED STOCK
    U  S WEST has  200,000,000 authorized shares  of preferred stock, 10,000,000
shares of  which are  designated  as Series  A Junior  Participating  Cumulative
Preferred  Stock,  par value  $1.00 per  share, 10,000,000  shares of  which are
designated as  Series B  Junior Participating  Cumulative Preferred  Stock,  par
value  $1.00 per share,  and 50,000 shares  of which are  designated as Series C
Preferred Stock, par value $1.00 per share.
 
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
 
    On September  2,  1994, the  Company  issued to  Fund  American  Enterprises
Holdings  Inc. ("FFC") 50,000 shares of 7 percent Series C Cumulative Redeemable
Preferred Stock for a total of $50.  (See Note 20 to the Consolidated  Financial
Statements.)  Upon issuance,  the preferred  stock was  recorded at  fair market
value of $51. U S  WEST has the right, commencing  five years from September  2,
1994,  to  redeem the  shares for  one  thousand dollars  per share  plus unpaid
dividends and a  redemption premium.  The shares are  mandatorily redeemable  in
year  ten  at  face value  plus  unpaid dividends.  At  the option  of  FFC, the
preferred stock also  can be redeemed  for common shares  of Financial  Security
Assurance, an investment held by the capital assets segment. The market value of
the  option was $20 and  $22 (based on the  Black-Scholes Model) at December 31,
1995 and 1994, with no carrying value.
 
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
         SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
    On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of  U
S  WEST ("Financing  I"), issued $600  million of 7.96  percent Trust Originated
Preferred Securities (the "Preferred Securities") and $19 of common  securities.
U  S  WEST  holds all  of  the  outstanding common  securities  of  Financing I.
Financing I used  the proceeds  from such  issuance to  purchase from  U S  WEST
Capital  Funding,  Inc.,  a  wholly  owned  subsidiary  of  U  S  WEST ("Capital
Funding"), $619 principal amount of Capital Funding's 7.96 percent  Subordinated
Deferrable  Interest Notes  due 2025  (the "Subordinated  Debt Securities"), the
obligations under which  are fully and  unconditionally guaranteed by  U S  WEST
(the  "Debt Guarantee").  The sole  assets of  Financing I  are and  will be the
Subordinated Debt Securities and the Debt Guarantee.
 
    In addition, U S WEST has guaranteed the payment of interest and  redemption
amounts  to holders of Preferred Securities when Financing I has funds available
for such  payments  (the  "Payment  Guarantee") as  well  as  Capital  Funding's
undertaking  to pay all  of Financing I'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'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. The 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,  1995, 24,000,000
Preferred Securities were outstanding.
 
                                      B-50
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
                                             COMMUNICATIONS      MEDIA
                                                  STOCK          STOCK        U S WEST STOCK                      FOREIGN
                                            -----------------  ---------  ----------------------  CUMULATIVE     CURRENCY
                                                 SHARES         SHARES     SHARES      AMOUNT       DEFICIT     TRANSLATION
                                            -----------------  ---------  ---------  -----------  -----------  -------------
<S>                                         <C>                <C>        <C>        <C>          <C>          <C>
Balance December 31, 1992.................                                  414,462   $   5,770    $   2,826     $     (34)
  Issuance of common stock................                                   26,516       1,224
  Issuance of treasury stock..............                                      162           6
  Net income..............................                                                            (2,806)
  Common dividends declared ($2.12 per
   share).................................                                                              (905)
  Market value adjustment for debt
   securities.............................                                                                35
  Foreign currency translation............                                                                              (1)
  Other...................................                                                   (4)          (7)
                                                  -------      ---------  ---------  -----------  -----------        -----
Balance December 31, 1993.................                                  441,140       6,996         (857)          (35)
  Issuance of common stock................                                   18,647         694
  Settlement of litigation................                                    5,506         210
  Benefit trust contribution (OPEB).......                                    4,600         185
  Purchase of treasury stock..............                                     (550)        (20)
  Net income..............................                                                             1,426
  Common dividends declared ($2.14 per
   share).................................                                                              (980)
  Market value adjustment for debt
   securities.............................                                                               (64)
  Foreign currency translation............                                                                               6
  Other...................................                                                   (9)          17
                                                  -------      ---------  ---------  -----------  -----------        -----
Balance December 31, 1994.................                                  469,343       8,056         (458)          (29)
  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 common stock................          1,712            392                     59
  Net income..............................                                                             1,317
  Common dividends declared ($2.14 per
   share).................................                                                            (1,010)
  Preferred dividends.....................                                                                (3)
  Market value adjustment for debt
   securities.............................                                                                36
  Foreign currency translation............                                                                              (9)
  Other...................................                                                   (5)           3
                                                  -------      ---------  ---------  -----------  -----------        -----
Balance December 31, 1995.................        473,635        472,314     --       $   8,228    $    (115)    $     (38)
                                                  -------      ---------  ---------  -----------  -----------        -----
                                                  -------      ---------  ---------  -----------  -----------        -----
 
<CAPTION>
 
                                                LESOP
                                              GUARANTEE
                                            -------------
<S>                                         <C>
Balance December 31, 1992.................    $    (294)
  Issuance of common stock................
  Issuance of treasury stock..............
  Net income..............................
  Common dividends declared ($2.12 per
   share).................................
  Market value adjustment for debt
   securities.............................
  Foreign currency translation............
  Other...................................           51
                                                  -----
Balance December 31, 1993.................         (243)
  Issuance of common stock................
  Settlement of litigation................
  Benefit trust contribution (OPEB).......
  Purchase of treasury stock..............
  Net income..............................
  Common dividends declared ($2.14 per
   share).................................
  Market value adjustment for debt
   securities.............................
  Foreign currency translation............
  Other...................................           56
                                                  -----
Balance December 31, 1994.................         (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 common stock................
  Net income..............................
  Common dividends declared ($2.14 per
   share).................................
  Preferred dividends.....................
  Market value adjustment for debt
   securities.............................
  Foreign currency translation............
  Other...................................           60
                                                  -----
Balance December 31, 1995.................    $    (127)
                                                  -----
                                                  -----
</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.
 
     COMMON  STOCK  On  December 6, 1994,  12,779,206 shares of  U S WEST common
stock were issued to, or in the name  of, the holders of Wometco Cable Corp.  in
accordance  with a merger  agreement. (See Note 4  to the Consolidated Financial
Statements.)  In  connection  with  the  settlement  of  shareowner   litigation
("Rosenbaum  v. U S  WEST, Inc. et  al."), the Company  issued approximately 5.5
million shares of U S WEST common stock in March 1994 to class members connected
with  this  litigation.   U  S   WEST  issued,  to   certified  class   members,
nontransferable  rights to  purchase shares  of common  stock directly  from U S
WEST, on a commission-free basis,  at a 3 percent  discount from the average  of
the  high and low trading prices of such stock on the New York Stock Exchange on
February  23,  1994,  the  pricing  date  designated  in  accordance  with   the
settlement. U S WEST received net proceeds of $210 from the offering.
 
                                      B-51
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
    During  fourth-quarter 1993, the Company issued 22 million additional shares
of U S WEST common stock for net  cash proceeds of $1,020. The Company used  the
net  proceeds to reduce short-term indebtedness, including indebtedness incurred
from the TWE investment, and for general corporate purposes.
 
    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. The Company matches a certain  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. At December 31, 1995, 10,145,485
shares  each of Communications Stock and Media Stock has been allocated from the
LESOP, while  2,839,435 shares  each  of Communications  Stock and  Media  Stock
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 common
shareowners' equity.  Contributions from  the Company  as well  as dividends  on
unallocated  shares held by the  LESOP ($8, $11 and $14  in 1995, 1994 and 1993,
respectively) are used  for 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.
 
    U S WEST recognizes expense based on the cash payments method. Total Company
contributions  to the plan (excluding dividends) were  $86, $80 and $75 in 1995,
1994 and 1993, respectively, of which $15, $19 and $24, 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.
 
    SHARE REPURCHASE  Subsequent to the acquisition of the Atlanta Systems  (See
Note  4  to the  Consolidated Financial  Statements)  the Company  announced its
intention to purchase U S WEST common shares in the open market up to an  amount
equal  to those  issued in conjunction  with the acquisition,  subject to market
conditions. In first-quarter 1995, the Company purchased 1,704,700 shares of U S
WEST common stock at an average price per share of $37.02. In December 1994, the
Company purchased 550,400 shares of  U S WEST common  stock at an average  price
per share of $36.30.
 
NOTE 16: STOCK INCENTIVE PLANS
    U  S WEST maintains stock incentive  plans for executives and key employees,
and nonemployees.  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, Inc. 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.
 
    During  calendar year 1995,  up to 2,200,000  shares of Communications Stock
and 1,485,000  shares of  Media  Stock were  available  for grant.  The  maximum
aggregate  number of shares of Communications Stock  and Media Stock that may be
granted in any  other 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 the Company'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
 
                                      B-52
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
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 may be exercised no later than 10 years after
the date on which the option was granted.
 
    Data for outstanding options under the Plan is summarized as follows:
 
<TABLE>
<CAPTION>
                                                       COMMUNICATIONS GROUP
                                                                                     MEDIA GROUP              U S WEST, INC.
                                                     ------------------------  ------------------------  ------------------------
                                                                    AVERAGE                   AVERAGE                   AVERAGE
                                                       NUMBER       OPTION       NUMBER       OPTION       NUMBER       OPTION
                                                      OF SHARES      PRICE      OF SHARES      PRICE     OF SHARES*      PRICE
                                                     -----------  -----------  -----------  -----------  -----------  -----------
<S>                                                  <C>          <C>          <C>          <C>          <C>          <C>
Outstanding January 1, 1993........................                                                       4,450,150    $   35.81
                                                                                                         -----------  -----------
  Granted..........................................                                                       1,486,106        48.83
  Exercised........................................                                                        (412,444)       31.73
  Canceled or expired..............................                                                        (222,273)       36.87
                                                                                                         -----------  -----------
Outstanding December 31, 1993......................                                                       5,301,539    $   39.76
                                                                                                         -----------  -----------
  Granted..........................................                                                       2,438,409        36.15
  Exercised........................................                                                        (139,762)       33.72
  Canceled or expired..............................                                                        (214,149)       40.71
                                                                                                         -----------  -----------
Outstanding December 31, 1994......................                                                       7,386,037    $   38.66
                                                                                                         -----------  -----------
  Granted..........................................                                                       3,062,920        43.63
  Exercised........................................                                                        (430,631)       34.03
  Canceled or expired..............................                                                        (175,147)       39.76
                                                                                                         -----------  -----------
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       --           --
                                                     -----------  -----------  -----------  -----------  -----------  -----------
                                                     -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>
 
------------------------------
 
* Includes options granted in tandem with SARs.
 
    Options to purchase 2,672,666 shares  of Communications Stock and  3,021,166
shares of Media Stock were exercisable at December 31, 1995. Options to purchase
2,374,394  shares of  U S WEST  stock were  exercisable at December  31, 1994. A
total of 2,050,466 shares of Communications Stock and 1,419,795 shares of  Media
Stock were available for grant under the plans in effect at December 31, 1995. A
total  of 914,816 shares of U S WEST common stock were available for grant under
the plans  in effect  at December  31, 1994.  A total  of 11,484,792  shares  of
Communications  Stock and  11,121,186 shares  of Media  Stock were  reserved for
issuance under the Plan at December 31, 1995.
 
NOTE 17: EMPLOYEE BENEFITS
 
PENSION PLAN
 
    U S WEST sponsers a defined benefit pension plan covering substantially  all
management  and occupational employees  of the Company.  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.  The Company's  policy  is to  fund  amounts
required  under the  Employee Retirement Security  Act of 1974  ("ERISA") and no
funding was required in 1995, 1994 or 1993.
 
                                      B-53
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
    The composition of the net pension cost and the actuarial assumptions of the
plan follow:
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                            -------------------------------
                                                                              1995       1994       1993
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Details of pension cost:
  Service cost -- benefits earned during the period.......................  $     173  $     197  $     148
  Interest cost on projected benefit obligation...........................        558        561        514
  Actual return on plan assets............................................     (1,918)       188     (1,320)
  Net amortization and deferral...........................................      1,185       (946)       578
                                                                            ---------  ---------  ---------
Net pension cost..........................................................  $      (2) $       0  $     (80)
                                                                            ---------  ---------  ---------
                                                                            ---------  ---------  ---------
</TABLE>
 
    The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1995,  8.50 percent for 1994 and 9.00  percent
for 1993.
 
    The funded status of the plan follows:
 
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                     --------------------
                                                                                       1995       1994
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044,
 respectively......................................................................  $   6,617  $   5,616
                                                                                     ---------  ---------
                                                                                     ---------  ---------
Plan assets at fair value, primarily stocks and bonds..............................  $   9,874  $   8,388
Less: Projected benefit obligation.................................................      8,450      7,149
                                                                                     ---------  ---------
Plan assets in excess of projected benefit obligation..............................      1,424      1,239
Unrecognized net (gain) loss.......................................................       (101)       161
Prior service cost not yet recognized in net periodic pension cost.................        (62)       (67)
Balance of unrecognized net asset at January 1, 1987...............................       (705)      (785)
                                                                                     ---------  ---------
Prepaid pension cost...............................................................  $     556  $     548
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
    The actuarial assumptions used to calculate the projected benefit obligation
follow:
 
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                     --------------------
                                                                                       1995       1994
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Discount rate......................................................................      7.00%      8.00%
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 the Company's 1992
adoption of SFAS  No. 106,  "Employers' Accounting  for Postretirement  Benefits
Other  Than Pensions," U S WEST elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees. However,  the
Federal   Communications  Commission  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.
 
                                      B-54
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
    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  postretirement  benefit  costs  and  actuarial  assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                      --------------------------------------------------------------------------------------------
                                                    1995                               1994                          1993
                                      ---------------------------------  ---------------------------------  ----------------------
                                        MEDICAL      LIFE       TOTAL      MEDICAL      LIFE       TOTAL      MEDICAL      LIFE
                                      -----------  ---------  ---------  -----------  ---------  ---------  -----------  ---------
<S>                                   <C>          <C>        <C>        <C>          <C>        <C>        <C>          <C>
Service cost -- benefits earned
 during the period..................   $      59   $       6  $      65   $      62   $      13  $      75   $      60   $      11
Interest on accumulated benefit
 obligation.........................         235          32        267         221          39        260         235          36
Actual return on plan assets........        (319)        (96)      (415)          3           1          4         (73)        (52)
Net amortization and deferral.......         228          58        286         (68)        (31)       (99)         27          22
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
Net postretirement benefit costs....   $     203   $       0  $     203   $     218   $      22  $     240   $     249   $      17
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
 
<CAPTION>
 
                                        TOTAL
                                      ---------
<S>                                   <C>
Service cost -- benefits earned
 during the period..................  $      71
Interest on accumulated benefit
 obligation.........................        271
Actual return on plan assets........       (125)
Net amortization and deferral.......         49
                                      ---------
Net postretirement benefit costs....  $     266
                                      ---------
                                      ---------
</TABLE>
 
    The  expected long-term  rate of return  on plan assets  used in determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
 
    The funded status of the plans follows:
 
<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                        ------------------------------------------------------------------
                                                                     1995                              1994
                                                        -------------------------------  ---------------------------------
                                                         MEDICAL     LIFE       TOTAL      MEDICAL      LIFE       TOTAL
                                                        ---------  ---------  ---------  -----------  ---------  ---------
<S>                                                     <C>        <C>        <C>        <C>          <C>        <C>
Accumulated postretirement benefit obligation
 attributable to:
  Retirees............................................  $   1,866  $     271  $   2,137   $   1,733   $     248  $   1,981
  Fully eligible plan participants....................        293         34        327         264          38        302
  Other active plan participants......................      1,059        165      1,224         940         135      1,075
                                                        ---------  ---------  ---------  -----------  ---------  ---------
Total accumulated postretirement benefit obligation...      3,218        470      3,688       2,937         421      3,358
Unrecognized net gain.................................        378        161        539         243          90        333
Unamortized prior service cost........................     --            (34)       (34)     --          --         --
Fair value of plan assets, primarily stocks, bonds and
 life insurance (1)...................................     (1,385)      (460)    (1,845)       (894)       (374)    (1,268)
                                                        ---------  ---------  ---------  -----------  ---------  ---------
Accrued postretirement benefit obligation.............  $   2,211  $     137  $   2,348   $   2,286   $     137  $   2,423
                                                        ---------  ---------  ---------  -----------  ---------  ---------
                                                        ---------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  Medical plan assets include  Communications Stock of $210  and Media Stock  of
  $112 in 1995, and U S WEST common stock of $164 in 1994.
 
    The  actuarial assumptions used to  calculate the accumulated postretirement
benefit obligation follow:
 
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                     --------------------
                                                                                       1995       1994
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Discount rate......................................................................      7.00%      8.00%
Medical trend*.....................................................................      9.00%      9.70%
</TABLE>
 
------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5 percent in
  2011.
 
                                      B-55
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
    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  1995 net  postretirement benefit  cost by  approximately $40  and
increased   the   1995   accumulated   postretirement   benefit   obligation  by
approximately $350.
 
    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.
 
NOTE 18: INCOME TAXES
    The components of the provision for income taxes follow:
 
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                  -------------------------------
                                                                                    1995       1994       1993
                                                                                  ---------  ---------  ---------
<S>                                                                               <C>        <C>        <C>
Federal:
  Current.......................................................................  $     481  $     418  $     422
  Deferred......................................................................        225        337       (147)
  Investment tax credits -- net.................................................        (38)       (47)       (56)
                                                                                  ---------  ---------  ---------
                                                                                        668        708        219
State and local:
  Current.......................................................................         64         52         71
  Deferred......................................................................         54         83        (23)
                                                                                  ---------  ---------  ---------
                                                                                        118        135         48
Foreign:
  Current.......................................................................          6     --         --
  Deferred......................................................................         33         14          2
                                                                                  ---------  ---------  ---------
                                                                                         39         14          2
                                                                                  ---------  ---------  ---------
Provision for income taxes......................................................  $     825  $     857  $     269
                                                                                  ---------  ---------  ---------
                                                                                  ---------  ---------  ---------
</TABLE>
 
    The  unamortized balance of investment tax  credits at December 31, 1995 and
1994, was $199 and $231, respectively.
 
    Amounts paid for income  taxes were $566,  $313 and $391  in 1995, 1994  and
1993, 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,
                                                                                    -------------------------------
                                                                                      1995       1994       1993
                                                                                    ---------  ---------  ---------
                                                                                              IN PERCENT
<S>                                                                                 <C>        <C>        <C>
Federal statutory tax rate........................................................       35.0       35.0       35.0
Investment tax credit amortization................................................       (1.2)      (1.3)      (3.0)
State income taxes -- net of federal effect.......................................        3.5        3.9        4.0
Foreign taxes -- net of federal effect............................................        1.2        0.4     --
Rate differential on reversing temporary differences..............................     --         --           (2.2)
Depreciation on capitalized overheads -- net......................................     --         --            1.4
Tax law change -- catch-up adjustment.............................................     --         --            3.1
Restructuring charge..............................................................     --         --           (1.5)
Other.............................................................................       (0.2)      (0.5)      (0.7)
                                                                                          ---        ---        ---
Effective tax rate................................................................       38.3       37.5       36.1
                                                                                          ---        ---        ---
                                                                                          ---        ---        ---
</TABLE>
 
                                      B-56
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: INCOME TAXES (CONTINUED)
    The components of the net deferred tax liability follow:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Property, plant and equipment........................................................  $   1,540  $   1,504
Leases...............................................................................        668        690
State deferred taxes -- net of federal effect........................................        358        395
Intangible assets....................................................................        112        164
Investments in partnerships..........................................................        213        142
Other................................................................................         74         84
                                                                                       ---------  ---------
Deferred tax liabilities.............................................................      2,965      2,979
                                                                                       ---------  ---------
Postemployment benefits, including pension...........................................        697        718
Restructuring, assets held for sale and other........................................        329        417
Unamortized investment tax credit....................................................         70         79
State deferred taxes -- net of federal effect........................................        166        232
Other................................................................................        229        317
                                                                                       ---------  ---------
Deferred tax assets..................................................................      1,491      1,763
                                                                                       ---------  ---------
Net deferred tax liability...........................................................  $   1,474  $   1,216
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    The  current portion of the deferred tax asset was $282 and $352 at December
31, 1995 and 1994, respectively, resulting primarily from restructuring  charges
and compensation-related items.
 
    On  August 10,  1993, federal  legislation was  enacted which  increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $74, including $20 for the capital assets segment.
 
    The net  deferred tax  liability includes  $686  in 1995  and $678  in  1994
related to the capital assets segment.
 
NOTE 19: CONTINGENCIES
    At  U S  WEST Communications there  are pending regulatory  actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In  one
such  instance,  the  Utah Supreme  Court  has  remanded a  Utah  Public Service
Commission ("PSC") order  to the PSC  for reconsideration, thereby  establishing
two  exceptions to  the rule against  retroactive ratemaking:  1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax  Reform
Act  of 1986. This action is still in  the discovery process. If a formal filing
-- made in accordance with the remand from the Supreme Court -- alleges that the
exceptions apply, the range of possible risk to U S WEST Communications is $0 to
$150.
 
    On September 22, 1995, U S WEST  filed a lawsuit in Delaware Chancery  Court
to  enjoin the proposed merger of Time  Warner and Turner Broadcasting. U S WEST
has alleged  breaches  of  contract  and fiduciary  duties  by  Time  Warner  in
connection  with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995,  alleging misrepresentation, breach of contract  and
other  misconduct on  the part of  U S  WEST. Time Warner's  countersuit seeks a
reformation of the  Time Warner  Entertainment partnership  agreement, an  order
that  enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST  has denied each of  the claims in Time  Warner's
countersuit.  The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
 
                                      B-57
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
    The Consolidated Financial Statements include the discontinued operations of
the capital assets  segment. During the  second quarter  of 1993, the  U S  WEST
Board  of Directors  approved a  plan to dispose  of the  capital assets segment
through the  sale of  segment assets  and businesses.  Accordingly, the  Company
recorded  an after-tax charge of $100 for  the estimated loss on disposition. An
additional provision of $20  is related to  the effect of  the 1993 increase  in
federal income tax rates. 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 and a $500  valuation allowance was established to cover  both
carrying costs and losses on disposal of related properties.
 
    Effective January 1, 1995, the capital assets segment has been accounted for
in  accordance with Staff  Accounting Bulletin No. 93,  issued by the Securities
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  reevaluated  on  an  ongoing  basis with
adjustments to the existing reserve,  if any, charged to continuing  operations.
No  such adjustment was required  in 1995. Prior to  January 1, 1995, the entire
capital  assets  segment  was  accounted  for  as  discontinued  operations   in
accordance with Accounting Principles Board Opinion No. 30.
 
    During  1994, U S WEST reduced  its ownership interest in Financial Security
Assurance Holdings, Ltd.  ("FSA"), a member  of the capital  assets segment,  to
60.9  percent,  and its  voting interest  to  49.8 percent  through a  series of
transactions. In May and  June 1994, U  S WEST sold 8.1  million shares of  FSA,
including  2  million shares  sold to  Fund  American Enterprises  Holdings Inc.
("FFC"), in an initial public  offering of FSA common  stock. U S WEST  received
$154  in net proceeds from the offering.  The Media Group retained certain risks
in asset-backed obligations related to the commercial real estate portfolio.  On
September 2, 1994, U S WEST issued to FFC 50,000 shares of cumulative redeemable
preferred  stock for a total of $50.  (See Note 13 to the Consolidated Financial
Statements.) In December 1995, FSA merged with Capital Guaranty Corporation  for
shares  of FSA and cash of $51. The transaction was valued at approximately $203
and reduced U S WEST's ownership interest in FSA to 50.3 percent and its  voting
interest to 41.7 percent. U S WEST expects to monetize and ultimately reduce its
ownership  in FSA  through the  issuance of  Debt Exchangeable  for Common Stock
("DECS") in 1996. At maturity,  each DECS will be  mandatorily exchanged by U  S
WEST  for shares of FSA common stock held by  U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
 
    U S WEST  entered into  a transaction to  reduce its  investment in  Enhance
Financial  Services Group, Inc. ("Enhance") during fourth-quarter 1995. U S WEST
issued DECS due December 15, 1998. Upon maturity, each DECS will be  mandatorily
exchanged  by U  S WEST for  shares of  Enhance common stock  or, at  U S WEST's
option, redeemed at the  cash equivalent. The  capital assets segment  currently
owns  approximately 31.5 percent  of the outstanding  Enhance common stock. (See
Note 10 to the Consolidated Financial Statements.)
 
    U S WEST Real Estate, Inc.  has sold various properties totaling $120,  $327
and  $66 in each of  the three years ended  December 31, 1995, respectively. The
sales proceeds were in  line with estimates. Proceeds  from building sales  were
primarily  used to repay  related debt. U  S WEST has  completed construction of
existing buildings  in  the commercial  real  estate portfolio  and  expects  to
substantially  complete the liquidation of this portfolio by 1998. The remaining
balance of assets subject to sale is approximately $490, net of reserves, as  of
December 31, 1995.
 
    In  December 1993, U S WEST sold $2.0 billion of finance receivables and the
business of U S WEST Financial Services, Inc. to NationsBank Corporation.  Sales
proceeds  of $2.1 billion were used primarily  to repay related debt. The pretax
gain on the sale  of approximately $100,  net of selling  expenses, was in  line
 
                                      B-58
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
with  management's  estimate  and  was included  in  the  Company's  estimate of
provision for loss on disposal. The management team that previously operated the
entire capital assets segment transferred to NationsBank.
 
    Building sales and  operating revenues  of the capital  assets segment  were
$237,  $553  and  $710  in  1995,  1994  and  1993,  respectively.  Income  from
discontinued operations for 1993 (to June 1) totaled $38. Income (loss) from the
capital assets  segment subsequent  to June  1, 1993  is being  deferred and  is
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.
 
    The components of net investment in assets held for sale follow:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
                                                                                       DOLLARS IN MILLIONS
<S>                                                                                    <C>        <C>
ASSETS
Cash and cash equivalents............................................................  $      38  $       7
Finance receivables -- net...........................................................        953      1,073
Investment in real estate -- net of valuation allowance..............................        368        465
Bonds, at market value...............................................................        149        155
Investment in FSA....................................................................        384        329
Other assets.........................................................................        177        347
                                                                                       ---------  ---------
Total assets.........................................................................  $   2,069  $   2,376
                                                                                       ---------  ---------
                                                                                       ---------  ---------
LIABILITIES
Debt.................................................................................  $     796  $   1,283
Deferred income taxes................................................................        686        678
Accounts payable, accrued liabilities and other......................................        148        103
Minority interests...................................................................         10         10
                                                                                       ---------  ---------
Total liabilities....................................................................      1,640      2,074
                                                                                       ---------  ---------
Net investment in assets held for sale...............................................  $     429  $     302
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</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,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Receivables..........................................................................  $     921  $   1,095
Unguaranteed estimated residual values...............................................        447        467
                                                                                       ---------  ---------
                                                                                           1,368      1,562
Less: Unearned income................................................................        390        459
     Credit loss and other allowances................................................         25         30
                                                                                       ---------  ---------
Finance receivables -- net...........................................................  $     953  $   1,073
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</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.
 
                                      B-59
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
    The  amortized  cost  and  estimated market  value  of  investments  in debt
securities are as follows:
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                 ----------------------------------------------------------------------------
                                                                        1995                                   1994
                                                 --------------------------------------------------  ------------------------
                                                                GROSS          GROSS                                GROSS
                                                             UNREALIZED     UNREALIZED      FAIR                 UNREALIZED
DEBT SECURITIES                                    COST         GAINS         LOSSES        VALUE      COST         GAINS
-----------------------------------------------  ---------  -------------  -------------  ---------  ---------  -------------
<S>                                              <C>        <C>            <C>            <C>        <C>        <C>
Municipal......................................  $      91    $       1      $       1    $      91  $     113    $  --
Other..........................................         58       --             --               58         65       --
                                                 ---------        -----          -----    ---------  ---------        -----
Total..........................................  $     149    $       1      $       1    $     149  $     178    $  --
                                                 ---------        -----          -----    ---------  ---------        -----
                                                 ---------        -----          -----    ---------  ---------        -----
 
<CAPTION>
 
                                                     GROSS
                                                  UNREALIZED      FAIR
DEBT SECURITIES                                     LOSSES        VALUE
-----------------------------------------------  -------------  ---------
<S>                                              <C>            <C>
Municipal......................................    $      13    $     100
Other..........................................           10           55
                                                         ---    ---------
Total..........................................    $      23    $     155
                                                         ---    ---------
                                                         ---    ---------
</TABLE>
 
Note: Also included in equity are unrealized gains and losses on debt securities
      associated with  U  S  WEST's  equity investment  in  FSA.  1995  includes
      unrealized  gains of $24, net of deferred  taxes of $13, and 1994 includes
      unrealized losses of $49, net of deferred tax benefits of $26.
 
    The 1995 net unrealized gains of $39 (net of deferred taxes of $21) and  the
1994  net unrealized losses  of $64 (net  of deferred tax  benefits of $34), are
included in equity.
 
DEBT
 
    Interest rates and  maturities of  debt associated with  the capital  assets
segment at December 31 follow:
 
<TABLE>
<CAPTION>
                                                                                   MATURITIES
                                                                   ------------------------------------------    TOTAL      TOTAL
INTEREST RATES                                                       1997       1998       1999       2000       1995       1994
-----------------------------------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>        <C>        <C>        <C>
Up to 5%.........................................................  $  --      $  --      $  --      $  --      $  --      $      55
Above 5% to 6%...................................................         10     --         --         --             10         15
Above 6% to 7%...................................................         54     --         --         --             54        154
Above 7% to 8%...................................................          5     --         --         --              5         17
Above 8% to 9%...................................................     --         --            134          4        138        189
Above 9% to 10%..................................................         48          5     --         --             53        114
Above 10% to 11%.................................................     --             29     --         --             29         29
                                                                   ---------  ---------  ---------  ---------  ---------  ---------
                                                                   $     117  $      34  $     134  $       4        289        573
                                                                   ---------  ---------  ---------  ---------
                                                                   ---------  ---------  ---------  ---------
Allocated to the capital assets segment -- net...................                                                    507        710
                                                                                                               ---------  ---------
Total............................................................                                              $     796  $   1,283
                                                                                                               ---------  ---------
                                                                                                               ---------  ---------
</TABLE>
 
    Debt  of  $71 and  $119 at  December  31, 1995  and 1994,  respectively, was
collateralized by first deeds of trust on associated real estate and  assignment
of rents from leases.
 
    The  following table summarizes  terms of swaps  associated with the capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
 
<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1995 AND 1994
                                                           --------------------------------------------------------------------
                                                                                       WEIGHTED AVERAGE    WEIGHTED AVERAGE PAY
                                                                                         RECEIVE RATE              RATE
                                                            NOTIONAL                 --------------------  --------------------
                                                             AMOUNT     MATURITIES     1995       1994       1995       1994
                                                           -----------  -----------  ---------  ---------  ---------  ---------
<S>                                                        <C>          <C>          <C>        <C>        <C>        <C>
Variable to fixed (1)....................................   $     380    1996-1997        5.96       5.69       9.03       9.03
Fixed to variable (1)....................................         380    1996-1997        7.29       7.29       5.87       5.80
Variable rate basis adjustment (2).......................          10      1997           5.92       5.89       5.85       7.04
</TABLE>
 
------------------------------
(1)
  The fixed to variable swaps have the same terms as the variable to fixed swaps
  and were entered into to terminate the  variable to fixed swaps. The net  loss
  on  the swaps is deferred  and amortized over the  remaining life of the swaps
  and is included in the reserve for assets held for sale.
 
(2)
  Variable rate debt based  on Treasuries is swapped  to a LIBOR-based  interest
  rate.
 
                                      B-60
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
 
    The  Company 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 TO MATURITY                                                                        1995       1994
-------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                    <C>        <C>
0 to 5 Years.........................................................................  $     639  $     540
5 to 10 Years........................................................................        450        537
10 to 15 Years.......................................................................         10        391
                                                                                       ---------  ---------
Total................................................................................  $   1,099  $   1,468
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    Concentrations   of   collateral   associated   with   insured  asset-backed
obligations follow:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
TYPE OF COLLATERAL                                                                       1995       1994
-------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                    <C>        <C>
Commercial mortgages:
  Commercial real estate.............................................................  $     442  $     530
  Corporate secured..................................................................        657        888
Other asset-backed...................................................................     --             50
                                                                                       ---------  ---------
Total................................................................................  $   1,099  $   1,468
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
ADDITIONAL FINANCIAL INFORMATION
 
    Information for U S WEST Financial  Services, Inc., a member of the  capital
assets segment, follows:
 
<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                             -------------------------------
SUMMARIZED FINANCIAL INFORMATION                                               1995       1994       1993
---------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>
Revenue....................................................................  $      44  $      54  $     410
Net finance receivables....................................................        931        981      1,020
Total assets...............................................................      1,085      1,331      1,797
Total debt.................................................................        274        533        957
Total liabilities..........................................................      1,024      1,282      1,748
Equity.....................................................................         61         49         49
</TABLE>
 
                                      B-61
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                          QUARTERLY FINANCIAL DATA
                                                                             --------------------------------------------------
                                                                                FIRST       SECOND        THIRD       FOURTH
                                                                               QUARTER      QUARTER      QUARTER      QUARTER
                                                                             -----------  -----------  -----------  -----------
<S>                                                                          <C>          <C>          <C>          <C>
1995
  Sales and other revenues.................................................   $   2,828    $   2,894    $   2,964    $   3,060
  Income before income taxes and extraordinary items.......................         538          514          538          564
  Income before extraordinary items........................................         330          318          325          356
  Net income...............................................................         330          318          316          353
  Pro forma earnings per common share:
    Communications Group earnings per common share before extraordinary
     item..................................................................        0.67         0.62         0.62         0.60
    Communications Group earnings per common share.........................        0.67         0.62         0.61         0.59
    Media Group earnings per common share before extraordinary item........        0.03         0.05         0.07         0.15
    Media Group earnings per common share..................................        0.03         0.05         0.06         0.15
1994
  Sales and other revenues.................................................   $   2,641    $   2,708    $   2,765    $   2,839
  Income from continuing operations before income taxes....................         522          609          514          638
  Income from continuing operations and net income.........................         324          375          318          409
  Earnings per common share................................................        0.73         0.83         0.70         0.89
</TABLE>
 
------------------------------
 
    Effective  November 1, 1995, each  share of U S  WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock.  Earnings
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 recapitalization, the average common shares outstanding
for  the two  classes of  stock are assumed  to be  equal to  the average common
shares outstanding for U S WEST, Inc.
 
    1995 first-quarter net income includes $39 ($0.08 per Communications  share)
from   a  gain  on  the  sales   of  certain  rural  telephone  exchanges.  1995
second-quarter net income includes $10  ($0.02 per Communications share) from  a
gain  on the sales of certain  rural telephone exchanges. 1995 third-quarter net
income includes $21 ($0.04 per Communications share) from a gain on the sales of
certain rural telephone exchanges  and $10 ($0.01  per Communications share  and
$0.01  per Media share) for expenses  associated with the Recapitalization Plan.
1995  third-quarter  net  income  also   includes  charges  of  $9  ($0.01   per
Communications  share and $0.01 per Media share) for the early extinguishment of
debt. 1995  fourth-quarter net  income includes  $15 ($0.03  per  Communications
share)  from a gain  on the sales  of certain rural  telephone exchanges and $95
($0.20 per Media share) from the merger of U S WEST's joint venture interest  in
TeleWest.  1995 fourth-quarter  net income  also includes  other charges  of $10
($0.01 per Communications  share and $0.01  per Media share),  including $7  for
expenses  associated with the Recapitalization  Plan and an extraordinary charge
of $3 for the early extinguishment of debt.
 
    1994 first-quarter net income includes $15  ($.03 per share) from a gain  on
the  sales of certain rural telephone  exchanges. 1994 second-quarter net income
includes gains of $16 ($.04 per share) and $41 ($.09 per share) on the sales  of
certain  rural  telephone exchanges  and  paging operations,  respectively. 1994
fourth-quarter net  income includes  gains  of $105  ($.23  per share)  for  the
partial sale of a joint venture interest in TeleWest and $20 ($.04 per share) on
the sales of certain rural telephone exchanges.
 
                                      B-62
<PAGE>
                                 U S WEST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       MARKET PRICE
                                                                       --------------------------------------------
PER SHARE MARKET AND DIVIDEND DATA                                       HIGH        LOW       CLOSE     DIVIDENDS
---------------------------------------------------------------------  ---------  ---------  ---------  -----------
                                                                                     (WHOLE DOLLARS)
<S>                                                                    <C>        <C>        <C>        <C>
1995
U S WEST Stock
  First..............................................................  $  41.375  $  35.125  $  40.125   $   0.535
  Second.............................................................     42.875     39.125     41.625       0.535
  Third..............................................................     48.375     40.875     47.125       0.535
  Fourth (through October 31, 1995)..................................     48.375     45.625     47.875      --
Communications Stock
  Fourth (November 1, 1995 through December 31, 1995)................  $  36.375  $  28.375  $  35.625   $   0.535
Media Stock..........................................................
  Fourth (November 1, 1995 through December 31, 1995)................  $  20.000  $  17.375  $  19.000   $  --
1994
  First..............................................................  $  46.250  $  38.500  $  40.750   $   0.535
  Second.............................................................     43.750     38.250     41.875       0.535
  Third..............................................................     43.125     38.250     38.750       0.535
  Fourth.............................................................     38.875     34.625     35.625       0.535
</TABLE>
 
                                      B-63
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                              FINANCIAL HIGHLIGHTS
 
<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------------
                                                               1995       1994       1993       1992       1991
                                                             ---------  ---------  ---------  ---------  ---------
                                                                DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S>                                                          <C>        <C>        <C>        <C>        <C>
Operating revenues.........................................  $   9,484  $   9,176  $   8,870  $   8,530  $   8,345
Net income (loss) 1........................................      1,176      1,150    (2,809)      (815)        771
Pro forma earnings per common share 2......................       2.50       2.53     --         --         --
Pro forma dividends per common share 2.....................       2.14       2.14     --         --         --
EBITDA 3...................................................      4,220      4,026      3,743      3,553      3,547
EBITDA margin 3............................................      44.5%      43.9%      42.2%      41.7%      42.5%
Total assets...............................................  $  16,585  $  15,944  $  15,423  $  20,655  $  20,244
Total debt.................................................      6,754      6,124      5,673      5,181      5,287
Communications Group equity 4..............................      3,476      3,179      2,722      6,003      7,530
Return on Communications Group equity 4, 5.................      35.6%      39.0%      22.5%      13.7%      12.8%
Percentage of debt to total capital 4......................      66.0%      65.8%      67.6%      46.3%      41.3%
Capital expenditures.......................................  $   2,739  $   2,477  $   2,226  $   2,385  $   2,194
Telephone network access lines in service (thousands)......     14,847     14,336     13,843     13,345     12,935
Billed access minutes of use -- interstate (millions)......     47,801     43,768     40,594     37,413     35,144
Billed access minutes of use -- intrastate (millions)......      9,504      8,507      7,529      6,956      6,557
Communications Group employees.............................     50,825     51,402     52,598     55,352     57,725
Telephone company employees................................     47,934     47,493     49,668     52,423     54,923
Telephone company employees per ten thousand access
 lines.....................................................       32.3       33.1       35.9       39.3       42.5
Pro forma average common shares outstanding
 (thousands) 2.............................................    470,716    453,316
Pro forma common shares outstanding (thousands) 2..........    473,635*   469,343
</TABLE>
 
------------------------------
* Actual
 
(1)
  1995  net income  includes a  gain of $85  ($0.18 per  share) on  the sales of
  certain rural telephone exchanges and other charges of $16 ($0.03 per  share),
  including  an extraordinary charge of $8  for the early extinguishment of debt
  and $8 for costs associated with  the November 1, 1995 recapitalization.  1994
  net  income includes a gain  of $51 ($0.11 per share)  on the sales of certain
  rural telephone exchanges. 1993 net income was reduced by a $534 restructuring
  charge and  $54  for the  cumulative  effect on  deferred  taxes of  the  1993
  federally  mandated increase  in income  tax rates.  1993 net  income was also
  reduced by extraordinary charges of $3,123 for the discontinuance of Statement
  of Financial  Accounting Standards  ("SFAS")  No. 71  and  $77 for  the  early
  extinguishment  of  debt.  1992  net  income was  reduced  by  $1,745  for the
  cumulative effect  of change  in accounting  principles. 1991  net income  was
  reduced by a $173 restructuring charge.
 
(2)
  Effective  November 1,  1995, each share  of U  S WEST, Inc.  common stock was
  converted into one share  each of U S  WEST Communications Group common  stock
  and  U S WEST  Media Group common  stock. Earnings per  common share have been
  presented on a pro forma basis to reflect the two classes of stock as if  they
  had  been  outstanding  since  January  1,  1994.  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, Inc.
 
(3)
  Earnings   before  interest,  taxes,   depreciation,  amortization  and  other
  ("EBITDA"). EBITDA  also  excludes  the  gain  on  sales  of  rural  telephone
  exchanges and restructuring charges. The Communications Group considers EBITDA
  an  important indicator  of the  operational strength  and performance  of its
  businesses. EBITDA, however,  should not  be considered as  an alternative  to
  operating   or  net  income  as  an   indicator  of  the  performance  of  the
  Communications Group's  businesses or  as an  alternative to  cash flows  from
  operating  activities as  a measure of  liquidity, in each  case determined in
  accordance with generally accepted accounting principles.
 
(4)
  The increases  in  the percentage  of  debt to  total  capital and  return  on
  Communications  Group equity, and the  decrease in Communications Group equity
  since 1992, are primarily due to the  effects of discontinuing SFAS No. 71  in
  1993 and the cumulative effect of change in accounting principles in 1992.
 
(5)
  1995  return  on  Communications  Group  equity  is  based  on  income  before
  extraordinary items. For 1994, there are no adjustments to net income for this
  calculation. 1993 return  on Communications  Group equity is  based on  income
  excluding  extraordinary  items,  a restructuring  charge  and  the cumulative
  effect on deferred taxes of the 1993 federally mandated increase in income tax
  rates. 1992 return on  Communications Group equity is  based on income  before
  cumulative   effect  of  change  in  accounting  principles.  1991  return  on
  Communications Group equity  is based  on income  excluding the  effects of  a
  restructuring charge.
 
                                      C-1
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THE RECAPITALIZATION PLAN
 
    On  October  31,  1995, the  shareholders  of  U S  WEST,  Inc.,  a Colorado
corporation  ("U  S  WEST   Colorado"),  voted  to   approve  a  proposal   (the
"Recapitalization  Plan") adopted by the Board  of Directors to reincorporate in
Delaware and  create two  classes of  common stock.  Under the  Recapitalization
Plan,  shareholders approved an  Agreement and Plan  of Merger between  U S WEST
Colorado and  U  S  WEST, Inc.,  a  Delaware  corporation ("U  S  WEST"  or  the
"Company"),  pursuant to which U S  WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST  has
been  amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as  U S WEST Communications Group Common  Stock
("Communications  Stock") and the  other class which  is authorized as  U S WEST
Media Group Common Stock ("Media Stock").
 
    The Communications  Stock  and Media  Stock  provide shareholders  with  two
distinct  securities that are intended  to reflect separately the communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses  of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
 
THE COMMUNICATIONS GROUP
 
    The  Communications  Group   primarily  provides  regulated   communications
services  to  more than  25 million  residential and  business customers  in the
Communications Group 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. Services offered  by
the  Communications  Group  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  Local  Access  and  Transport   Areas  ("LATAs")  in  the  Region.   The
Communications  Group  provides other  products  and services,  including custom
calling  features,  voice  messaging,  caller  identification,  high-speed  data
applications, customer premises equipment and certain communications services to
business customers and governmental agencies both inside and outside the Region.
The  Telecommunications Act of 1996, enacted into  law on February 8, 1996, will
dramatically alter the competitive landscape of the telecommunications  industry
and  will further  change the nature  of services the  Communications Group will
offer. These future service  offerings include interLATA long-distance  service,
wireless  services, cable TV and  interconnection services provided to competing
providers of local services.
 
    The Combined Financial Statements of  the Communications Group include:  (i)
the  combined historical balance sheets, results of operations and cash flows of
the businesses that comprise the Communications Group; (ii) corporate assets and
liabilities  and  related  transactions  of   U  S  WEST  identified  with   the
Communications  Group; and (iii) an allocated  portion of the corporate expenses
of U  S  WEST. All  significant  intra-group financial  transactions  have  been
eliminated.  Transactions between the  Communications Group and  the Media Group
have not been eliminated. For a more complete discussion of U S WEST's corporate
allocation policies, see the  U S WEST  Communications Group Combined  Financial
Statements -- Note 2: Summary of Significant Accounting Policies.
 
    The  following  discussion is  based on  the U  S WEST  Communications Group
Combined Financial  Statements prepared  in accordance  with generally  accepted
accounting  principles ("GAAP").  The discussion  should be  read in conjunction
with the U S WEST, Inc. Consolidated Financial Statements.
 
                                      C-2
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
 
    Comparative details of income before  extraordinary items for 1995 and  1994
follow:
 
<TABLE>
<CAPTION>
                                                                                                     INCREASE (DECREASE)
                                                                                                     --------------------
                                                                                 19951      19942        $          %
                                                                               ---------  ---------  ---------  ---------
<S>                                                                            <C>        <C>        <C>        <C>
U S WEST Communications, Inc.................................................  $   1,219  $   1,175  $      44        3.7
Other operations.............................................................        (35)       (25)       (10)     (40.0)
                                                                               ---------  ---------  ---------  ---------
Income before extraordinary items............................................  $   1,184  $   1,150  $      34        3.0
                                                                               ---------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------  ---------
Pro forma earnings per common share before extraordinary items 3.............  $    2.52  $    2.53  $   (0.01)      (0.4)
                                                                               ---------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------  ---------
</TABLE>
 
------------------------------
1 1995  income  before extraordinary  items includes  a gain  of $85  ($0.18 per
  share) on the  sales of certain  rural telephone exchanges  and $8 ($0.01  per
  share) for costs associated with the Recapitalization Plan.
 
2 1994  income  before extraordinary  items includes  a gain  of $51  ($0.11 per
  share) on the sales of certain rural telephone exchanges.
 
3 Earnings per common share have been presented  on a pro forma basis as if  the
  Communications  Stock had been outstanding since  January 1, 1994. 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.
 
    The Communications Group's 1995 income before extraordinary items, excluding
the  effects  of one-time  items described  in Note  1 to  the table  above, was
$1,107, an increase of $8,  or 0.7 percent, compared  with $1,099 in 1994,  also
excluding the effects of one-time items. Total revenue growth of 3.4 percent was
largely  offset  by  significantly  higher costs  incurred  to  improve customer
service and meet greater than expected  business growth. Net income growth  will
also  be  limited in  1996 while  the Communications  Group continues  to commit
significant resources to meet customer service objectives and broaden its  range
of product and service offerings.
 
    Excluding  the effects of  one-time items described  in Note 1  to the table
above, pro forma earnings per common share before extraordinary items ("earnings
per share") were $2.35 in  1995, a decrease of  $0.07, or 2.9 percent,  compared
with  $2.42  in 1994,  similarly adjusted.  Earnings per  share in  1995 reflect
approximately 17 million additional average common shares outstanding, of  which
12.8 million were issued in December 1994.
 
    During  1995, the  Communications Group  refinanced $145  of long-term debt.
Expenses associated with the refinancings  resulted in extraordinary charges  of
$8, net of tax benefits of $5.
 
    Increased  demand  for  services  resulted  in  growth  in  earnings  before
interest, taxes, depreciation, amortization and other ("EBITDA") of 4.8  percent
in  1995. The Communications Group believes  EBITDA is an important indicator of
the operational  strength of  its  businesses. 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 generally
accepted accounting principles ("GAAP").
 
                                      C-3
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
OPERATING REVENUES
 
    An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
                                                                                                                        INCREASE
                                                                                    LOWER                               (DECREASE)
                                                                       PRICE      (HIGHER)                              ---------
                                                1995       1994       CHANGES      REFUNDS      DEMAND        OTHER         $
                                              ---------  ---------  -----------  -----------  -----------  -----------  ---------
<S>                                           <C>        <C>        <C>          <C>          <C>          <C>          <C>
Local service...............................  $   4,344  $   4,067   $      35    $     (10)   $     273    $     (21)  $     277
Interstate access...........................      2,378      2,269         (66)          (2)         191          (14)        109
Intrastate access...........................        747        729         (31)           8           36            5          18
Long-distance network.......................      1,189      1,329         (23)          (1)         (54)         (62)       (140)
Other services..............................        826        782      --           --           --               44          44
                                              ---------  ---------       -----        -----        -----        -----   ---------
Total.......................................  $   9,484  $   9,176   $     (85)   $      (5)   $     446    $     (48)  $     308
                                              ---------  ---------       -----        -----        -----        -----   ---------
                                              ---------  ---------       -----        -----        -----        -----   ---------
 
<CAPTION>
 
                                                  %
                                              ---------
<S>                                           <C>
Local service...............................        6.8
Interstate access...........................        4.8
Intrastate access...........................        2.5
Long-distance network.......................      (10.5)
Other services..............................        5.6
                                              ---------
Total.......................................        3.4
                                              ---------
                                              ---------
</TABLE>
 
    Approximately 97 percent  of the  revenues of the  Communications Group  are
attributable  to the  operations of  U S  WEST Communications,  Inc. ("U  S WEST
Communications"), of which approximately 59 percent are derived from the  states
of  Arizona, Colorado, Minnesota and Washington. Approximately 29 percent of the
access lines in service 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 1995, business access lines grew 5.4 percent while residential
access lines increased 2.8 percent.
 
    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.  During 1995, revenues  from new  product and service
offerings were  $534,  an increase  of  58  percent compared  with  1994.  These
revenues  primarily  consist  of caller  identification,  voice  messaging, call
waiting and high-speed data network transmission services.
 
    Local service revenues include local telephone exchange, local private  line
and  public  telephone  services.  In  1995,  local  service  revenues increased
principally as a  result of  higher demand for  new and  existing services,  and
demand for second lines. Local service revenues from new services increased $92,
or  78  percent,  compared  with 1994.  Reported  total  access  lines increased
511,000, or  3.6  percent, of  which  161,000  were second  lines.  Second  line
installations  increased 25.5 percent compared with 1994. Access line growth was
4.2 percent adjusted for the sale of approximately 95,000 rural telephone access
lines during the last 12 months.
 
    Access charges are collected primarily from interexchange carriers for their
use of the local exchange network. For interstate access services there is  also
a  fee collected directly from telephone  customers. Approximately 33 percent of
access revenues and  11 percent  of total  revenues are  derived from  providing
access services to AT&T.
 
    Higher  revenues from interstate access services  were driven by an increase
of 9.2  percent  in interstate  billed  access  minutes of  use.  The  increased
business  volume more than  offset the effects of  price reductions and refunds.
The Communications Group reduced prices  for interstate access services in  both
1995  and 1994 as  a result of Federal  Communications Commission ("FCC") orders
and competitive pressures. Intrastate access revenues increased primarily due to
the impact  of  increased  business  volume and  multiple  toll  carrier  plans,
partially offset by the impact of rate changes.
 
    Long-distance   revenues  are  derived  from  calls  made  within  the  LATA
boundaries of  the Region.  During 1995  and 1994,  long-distance revenues  were
impacted  by  the implementation  of multiple  toll  carrier plans  ("MTCPs") in
Oregon and Washington in May and July 1994, respectively. The MTCPs  essentially
allow  independent telephone companies to act  as toll carriers. The 1995 impact
of the  MTCPs was  long-distance  revenue losses  of  $62, partially  offset  by
increases   in  intrastate  access  revenues  of  $12  and  decreases  in  other
 
                                      C-4
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
operating expenses  (i.e.  access expense)  of  $42 compared  with  1994.  These
regulatory  arrangements have decreased annual  net income by approximately $10.
Similar changes  in other  states could  occur, though  the impact  on 1996  net
income would not be material.
 
    Excluding  the effects of the MTCPs, long-distance revenues decreased by 5.9
percent  in  1995,  primarily  due  to  the  effects  of  competition  and  rate
reductions.  Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
these services on both an intraLATA  and interLATA basis. A portion of  revenues
lost  to competition, however,  is recovered through access  charges paid by the
interexchange carriers. Erosion  in long-distance revenue  will continue due  to
the loss of 1+ dialing in Minnesota, effective in February 1996, and in Arizona,
effective  in April 1996. Annual  long-distance revenue losses could approximate
$30 as  a  result  of  these changes.  The  Communications  Group  is  partially
mitigating   competitive  losses   through  competitive   pricing  of  intraLATA
long-distance services.
 
    Revenues from other  services primarily  consist of  billing and  collection
services   provided  to   interexchange  carriers,   voice  messaging  services,
high-speed data transmission  services, sales of  service agreements related  to
inside  wiring and the  provision of customer  premises equipment. Revenues from
other services  also include  directory listings,  customer lists,  billing  and
collection  and other services  provided to the Media  Group. These services are
sold at  market  price.  However,  the  Communications  Group's  accounting  and
reporting for regulatory purposes is in accordance with regulatory requirements.
Revenues for services provided to Media Group were $20 in 1995 and $29 in 1994.
 
    During  1995, revenues  from other  services increased  $44, primarily  as a
result of continued market penetration in voice messaging services and sales  of
high-speed  data transmission  services. Revenue  growth from  other services is
also attributable to maintenance contracts for inside wire services and a  large
contract  related to a wire installation project. These increases were partially
offset by a decrease  of $20 in revenues  from billing and collection  services.
The  decline in  billing and collection  revenues is primarily  related to lower
contract prices and a decrease in the volume of services provided to AT&T.
 
COSTS AND EXPENSES
 
<TABLE>
<CAPTION>
                                                                                             INCREASE (DECREASE)
                                                                                             --------------------
                                                                         1995       1994         $          %
                                                                       ---------  ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>        <C>
Employee-related expenses............................................  $   3,341  $   3,215  $     126        3.9
Other operating expenses.............................................      1,543      1,547         (4)      (0.3)
Taxes other than income taxes........................................        380        388         (8)      (2.1)
Depreciation and amortization........................................      2,042      1,908        134        7.0
Interest expense.....................................................        427        376         51       13.6
Other expense -- net.................................................         41         21         20       95.2
</TABLE>
 
    Employee-related  expenses  include  basic  salaries  and  wages,  overtime,
benefits  (including pension and health care), payroll taxes and contract labor.
During 1995, improving  customer service  was the  Communications Group's  first
priority.  Overtime payments and contract labor expense associated with customer
service initiatives  increased  employee-related  costs  by  approximately  $168
compared  with 1994.  Expenses related  to the  addition of  approximately 1,700
employees in 1995 and  1,000 employees in  1994 also increased  employee-related
costs. These expenses were incurred to handle the higher than anticipated volume
of  business and to meet new  business opportunities. Partially offsetting these
increases was a $34 reduction in the accrual for postretirement benefits, a  $22
decrease  in travel expense and reduced expenses related to employee separations
under reengineering and streamlining initiatives. The Communications Group  will
continue  to add employees to address customer  service issues and growth in the
core business. Costs related to these work-force additions will partially offset
the benefits  of  employee  separations  achieved  through  restructuring.  (See
"Restructuring Charge.")
 
                                      C-5
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Other operating expenses include access charges (incurred for the routing of
long-distance  traffic through the facilities of independent companies), network
software  expenses  and  other  general  and  administrative  costs,   including
allocated  costs from U S WEST.  During 1995, other operating expenses decreased
primarily due to the effects of the multiple toll carrier plans and a  reduction
in  expenses related  to project funding  at Bell  Communications Research, Inc.
("Bellcore"), of  which U  S  WEST Communications  has a  one-seventh  ownership
interest.  These decreases in other operating  expenses were partially offset by
increases in costs associated with increased sales, including bad debt  expense.
Allocated costs from U S WEST were $116 and $110 in 1995 and 1994, respectively.
 
    Taxes  other than income  taxes, which consist  primarily of property taxes,
decreased  2.1  percent  in  1995,  primarily  due  to  favorable  property  tax
valuations  and  mill  levies  as  compared with  1994.  As  a  result  of these
valuations and  mill  levies,  1995 fourth-quarter  accruals  decreased  by  $20
compared with fourth-quarter 1994.
 
    Increased  depreciation  and amortization  expense  was attributable  to the
effects of a higher depreciable asset  base, partially offset by the effects  of
the sales of certain rural telephone exchanges.
 
    Interest expense increased primarily as a result of an increased use of debt
financing. The average borrowing cost was 6.9 percent in 1995, compared with 6.8
percent  in 1994. (See "Liquidity and Capital Resources.") The increase in other
expense  is  largely   attributable  to   $8  of  costs   associated  with   the
Recapitalization Plan in 1995.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                                     INCREASE
                                                                                               --------------------
                                                                        1995         1994          $          %
                                                                     -----------  -----------  ---------  ---------
<S>                                                                  <C>          <C>          <C>        <C>
Provision for income taxes.........................................  $     662    $     653    $       9        1.4
Effective tax rate.................................................       35.9%        36.2%      --         --
</TABLE>
 
    The  decrease in the effective tax  rate resulted primarily from the effects
of a research and experimentation credit and adjustments for prior periods.
 
RESTRUCTURING CHARGE
 
    The Communications  Group's 1993  results  reflected an  $880  restructuring
charge  (pretax). The related  restructuring plan (the  "Restructuring Plan") is
designed to provide faster, more responsive customer services while reducing the
costs of  providing these  services.  As part  of  the Restructuring  Plan,  the
Communications Group is developing new systems and enhanced system functionality
that  will  enable  it  to  monitor  networks  to  reduce  the  risk  of service
interruptions, activate telephone service on demand, rapidly design and engineer
products and services  for customers,  and centralize its  service centers.  The
Communications  Group has consolidated its 560  customer service centers into 26
centers in  10 cities  and plans  on reducing  its work  force by  approximately
10,000  employees.  All service  centers are  operational  and supported  by new
systems and enhanced system functionality.
 
    The Restructuring Plan is expected to  be substantially complete by the  end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the  business and related service  issues, new business opportunities, revisions
to system  delivery  schedules  and  productivity issues  caused  by  the  major
rearrangement  of resources due to restructuring.  These issues will continue to
affect the timing of employee separations.
 
    The Communications  Group estimates  that full  implementation of  the  1993
Restructuring  Plan will reduce employee-related  expenses by approximately $400
per year. The  savings related to  work-force reductions will  be offset by  the
effects of inflation and a variety of other factors. These factors include costs
related  to the achievement of customer  service objectives and increased demand
for existing services. (See "Costs and Expenses.")
 
                                      C-6
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Following is a schedule of the costs included in the Restructuring Plan:
 
<TABLE>
<CAPTION>
                                                                         1994         1995         1996         1997
                                                                        ACTUAL       ACTUAL      ESTIMATE     ESTIMATE      TOTAL
                                                                      -----------  -----------  -----------  -----------  ---------
<S>                                                                   <C>          <C>          <C>          <C>          <C>
Employee separation 1...............................................   $      19    $      76    $      33    $     127   $     255
Systems development.................................................         118          129          113       --             360
Real estate.........................................................          50           66           14       --             130
Relocation..........................................................          21           21           20           13          75
Retraining and other................................................           8           23           22            7          60
                                                                           -----        -----        -----        -----   ---------
Total 1993 Restructuring Plan.......................................         216          315          202          147         880
Remaining 1991 plan employee costs 1................................          56       --           --           --              56
                                                                           -----        -----        -----        -----   ---------
Total...............................................................   $     272    $     315    $     202    $     147   $     936
                                                                           -----        -----        -----        -----   ---------
                                                                           -----        -----        -----        -----   ---------
</TABLE>
 
------------------------------
1 Employee separation  costs,  including the  balance  of a  1991  restructuring
  reserve at December 31, 1993, aggregate $311.
 
    Employee  separation costs include  severance payments, health-care coverage
and postemployment  education benefits.  Systems development  costs include  new
systems  and  the  application  of enhanced  system  functionality  to existing,
single-purpose systems to provide integrated, end-to-end customer service.  Real
estate  costs  include  preparation  costs  for  the  new  service  centers. The
relocation and  retraining costs  are related  to moving  employees to  the  new
service  centers and retraining employees on the methods and systems required in
the new, restructured mode of operation.
 
    EMPLOYEE SEPARATION.  Under the Restructuring Plan, the Communications Group
anticipates the separation  of 10,000 employees.  Approximately 1,000  employees
that  were originally expected  to relocate have chosen  separation or other job
assignments and  have  been replaced.  This  increased the  number  of  employee
separations  to 10,000  from 9,000, and  increased the estimated  total cost for
employee separations to $311 from $281, as compared with the original  estimate.
The   $30  cost  associated  with  these  additional  employee  separations  was
reclassified from  relocation to  the reserve  for employee  separations  during
1995.
 
    Annual  employee  separations  and  employee-separation  amounts  under  the
Restructuring Plan follow:
<TABLE>
<CAPTION>
                                                     19941                    1995              1996         1997
                                             ----------------------  ----------------------  -----------  -----------
                                              ESTIMATE     ACTUAL     ESTIMATE     ACTUAL     ESTIMATE2    ESTIMATE2     TOTAL
                                             -----------  ---------  -----------  ---------  -----------  -----------  ---------
<S>                                          <C>          <C>        <C>          <C>        <C>          <C>          <C>
Employee separation:
  Managerial...............................       1,061         497         612         682         202        1,357       2,738
  Occupational.............................       1,887       1,683       1,638       1,643         798        3,138       7,262
                                                  -----   ---------       -----   ---------       -----        -----   ---------
  Total....................................       2,948       2,180       2,250       2,325       1,000        4,495      10,000
                                                  -----   ---------       -----   ---------       -----        -----   ---------
                                                  -----   ---------       -----   ---------       -----        -----   ---------
 
<CAPTION>
 
                                                     19941                    1995              1996         1997
                                             ----------------------  ----------------------  -----------  -----------
                                              ESTIMATE     ACTUAL     ESTIMATE     ACTUAL     ESTIMATE2    ESTIMATE2     TOTAL
                                             -----------  ---------  -----------  ---------  -----------  -----------  ---------
<S>                                          <C>          <C>        <C>          <C>        <C>          <C>          <C>
Employee-separation amounts:
  Managerial...............................   $      22   $       5   $      21   $      30   $       9    $      54   $      98
  Occupational.............................          15          14          54          46          24           73         157
                                                  -----   ---------       -----   ---------       -----        -----   ---------
  Total....................................          37          19          75          76          33          127         255
  Remaining 1991 reserve...................          56          56      --          --          --           --              56
                                                  -----   ---------       -----   ---------       -----        -----   ---------
  Total....................................   $      93   $      75   $      75   $      76   $      33    $     127   $     311
                                                  -----   ---------       -----   ---------       -----        -----   ---------
                                                  -----   ---------       -----   ---------       -----        -----   ---------
</TABLE>
 
------------------------------
(1)
  Includes the remaining  employees and the  separation amounts associated  with
  the balance of a 1991 restructuring reserve at December 31, 1993.
 
(2)
  A  significant number of the employee reductions originally scheduled for 1996
  will be  delayed  while  the  Communications Group  focuses  on  overtime  and
  contract-labor   expenses.   The  Restructuring   Plan   is  expected   to  be
  substantially complete by the end of 1997.
 
                                      C-7
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Compared with  the original  estimates, employee  reductions and  separation
amounts  shown above have been reduced by 1,600 employees and $53, respectively,
in 1996, and increased by 4,495 employees and $127, respectively, in 1997.
 
    SYSTEMS DEVELOPMENT.    The  existing information  management  systems  were
largely  developed  to  support  a  monopoly  environment.  These  systems  were
inadequate due to the effects of increased competition, new forms of  regulation
and  changing  technology  that have  driven  consumer demand  for  products and
services  that  can  be  delivered  quickly,  reliably  and  economically.   The
Communications Group believes that improved customer service, delivered at lower
cost,  can  be achieved  by a  combination  of new  systems and  introducing new
functionality to existing systems.  This is a change  from the initial  strategy
which placed more emphasis on the development of new systems.
 
    The  systems development  program involves  new systems  and enhanced system
functionality for systems that support the following core processes:
 
        SERVICE DELIVERY -- to  support service on demand  for all products  and
    services.  These new systems  and enhanced system  functionality will permit
    customer calls to be directed to those service representatives who can  meet
    their  requirements. This process  will provide enhanced  information to the
    service representatives regarding the customer  requests and the ability  of
    the Communications Group to fulfill them.
 
        SERVICE  ASSURANCE -- for  performance monitoring from  one location and
    remote  testing  in  the  new  environment,  including  identification   and
    resolution of faults prior to customer impact.
 
        CAPACITY  PROVISIONING  --  for integrated  planning  of  future network
    capacity,  including  the  installation  of  software  controllable  service
    components.
 
    Certain  of  the new  systems and  enhanced  system functionality  have been
implemented in  the  service centers  and  have simplified  the  labor-intensive
interfaces  between systems  processes in  existence prior  to the Restructuring
Plan. Enhanced  system functionality  introduced  under the  Restructuring  Plan
since its inception includes the following:
 
    - The  ability to determine  facilities' availability while  the customer is
      placing an order;
 
    - Automated engineering of central office facilities and automated  updating
      of central office facilities' records;
 
    - The  ability to track the  status of complex network  design jobs from the
      customer's perspective; and
 
    - Systems that  accurately  diagnose  network problems  and  prepare  repair
      packages to correct the problems identified.
 
    The  direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
                                                                     1994                      1995               1996
                                                           ------------------------  ------------------------  -----------
                                                            ESTIMATE      ACTUAL      ESTIMATE      ACTUAL      ESTIMATE
                                                           -----------  -----------  -----------  -----------  -----------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Service delivery.........................................   $      35    $      21    $      21    $      19    $      44
Service assurance........................................          45           12           24           22           26
Capacity provisioning....................................          17           57           92           85           42
All other................................................           8           28            8            3            1
                                                                -----        -----        -----        -----        -----
Total....................................................   $     105    $     118    $     145    $     129    $     113
                                                                -----        -----        -----        -----        -----
                                                                -----        -----        -----        -----        -----
 
<CAPTION>
 
                                                             TOTAL
                                                           ---------
<S>                                                        <C>
Service delivery.........................................  $      84
Service assurance........................................         60
Capacity provisioning....................................        184
All other................................................         32
                                                           ---------
Total....................................................  $     360
                                                           ---------
                                                           ---------
</TABLE>
 
    Systems expenses charged to current  operations consist of costs  associated
with  the  information  management  function,  including  planning,  developing,
testing and maintaining databases for general purpose
 
                                      C-8
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
computers, in  addition to  systems costs  related to  maintenance of  telephone
network  applications.  Other  systems  expenses  are  for  administrative (i.e.
general purpose) systems  which include customer  service, order entry,  billing
and collection, accounts payable, payroll, human resources and property records.
Ongoing  systems costs  comprised approximately  six percent  of total operating
expenses in 1995, 1994 and 1993. The Communications Group expects systems  costs
charged  to  current operations  as  a percent  of  total operating  expenses to
approximate the  current level  throughout 1996.  Systems costs  could  increase
relative  to  other  operating costs  as  the business  becomes  more technology
dependent.
 
PROGRESS UNDER THE RESTRUCTURING PLAN
 
    Following is  a  reconciliation  of  restructuring  reserve  activity  since
December 1993:
 
<TABLE>
<CAPTION>
                                                          RESERVE                   RESERVE                                RESERVE
                                                          BALANCE       1994        BALANCE       1995       CHANGE IN     BALANCE
                                                         12/31/93     ACTIVITY     12/31/94     ACTIVITY     ESTIMATE     12/31/95
                                                        -----------  -----------  -----------  -----------  -----------  -----------
<S>                                                     <C>          <C>          <C>          <C>          <C>          <C>
Employee separation:
  Managerial..........................................   $      75    $       5    $      70    $      30    $      23    $      63
  Occupational........................................         150           14          136           46            7           97
                                                             -----        -----        -----        -----          ---        -----
Total employee separation.............................         225           19          206           76           30          160
Systems development:
  Service delivery....................................          73           21           52           19           11           44
  Service assurance...................................          64           12           52           22           (4)          26
  Capacity provisioning...............................         179           57          122           85            5           42
  All other...........................................          44           28           16            3          (12)           1
                                                             -----        -----        -----        -----          ---        -----
Total systems development.............................         360          118          242          129       --              113
Real estate...........................................         130           50           80           66       --               14
Relocation............................................         105           21           84           21          (30)          33
Retraining and other..................................          60            8           52           23       --               29
                                                             -----        -----        -----        -----          ---        -----
Total 1993 Restructuring Plan.........................         880          216          664          315       --              349
Remaining 1991 plan expenditures......................          56           56       --           --           --           --
                                                             -----        -----        -----        -----          ---        -----
Total.................................................   $     936    $     272    $     664    $     315    $  --        $     349
                                                             -----        -----        -----        -----          ---        -----
                                                             -----        -----        -----        -----          ---        -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                       CUMULATIVE
                                                                        1994           1995          SEPARATIONS AT
                                                                     SEPARATIONS    SEPARATIONS     DECEMBER 31, 1995
                                                                    -------------  -------------  ---------------------
<S>                                                                 <C>            <C>            <C>
Employee separations:
  Managerial......................................................          497            682              1,179
  Occupational....................................................        1,683          1,643              3,326
                                                                          -----          -----              -----
Total.............................................................        2,180          2,325              4,505
                                                                          -----          -----              -----
                                                                          -----          -----              -----
</TABLE>
 
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
 
    Comparative  details of income before extraordinary  items for 1994 and 1993
follow:
 
<TABLE>
<CAPTION>
                                                                                        19941      19932     INCREASE
                                                                                      ---------  ---------  -----------
<S>                                                                                   <C>        <C>        <C>
U S WEST Communications, Inc........................................................  $   1,175  $     435   $     740
Other operations....................................................................        (25)       (44)         19
                                                                                      ---------  ---------       -----
Income before extraordinary items...................................................  $   1,150  $     391   $     759
                                                                                      ---------  ---------       -----
                                                                                      ---------  ---------       -----
</TABLE>
 
------------------------------
(1)
  1994 income before extraordinary items includes a gain of $51 on the sales  of
  certain rural telephone exchanges.
 
(2)
  1993 income before extraordinary items was reduced by $534 for a restructuring
  charge  and  $54 for  the  cumulative effect  on  deferred taxes  of  the 1993
  federally mandated increase in income tax rates.
 
                                      C-9
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    The Communications  Group's  1994  income  before  extraordinary  items  was
$1,099,  an increase of $120, or 12.3 percent, over 1993, excluding the one-time
effects described  in  Notes 1  and  2 to  the  table above.  The  increase  was
primarily attributable to increased demand for telecommunications services.
 
    In  1993, U  S WEST  Communications incurred  extraordinary charges  for the
discontinuance of Statement of Financial  Accounting Standards ("SFAS") No.  71,
"Accounting  for  the Effects  of Certain  Types of  Regulation," and  the early
extinguishment of debt. An extraordinary, noncash charge of $3.1 billion  (after
tax) was incurred in conjunction with the decision to discontinue accounting for
the  operations of U S WEST Communications  in accordance with SFAS No. 71. SFAS
No. 71 generally applies to regulated companies that meet certain  requirements,
including a requirement that a company be able to recover its costs, competition
notwithstanding,  by  charging  its  customers  at  prices  established  by  its
regulators. This decision  to discontinue  the application  of SFAS  No. 71  was
based  on  the  belief  that competition,  market  conditions  and technological
advances, more than prices established by regulators, will determine the  future
cost  recovery  by U  S WEST  Communications. As  a result  of this  change, the
remaining asset lives of U S WEST Communications' telephone plant were shortened
to more closely  reflect the useful  (economic) lives  of such plant.  U S  WEST
Communications'  accounting  and  reporting  for  regulatory  purposes  were not
affected by the change.
 
    During 1993,  U  S  WEST Communications  refinanced  long-term  debt  issues
aggregating  $2.7 billion  in principal amount.  These refinancings  allowed U S
WEST Communications to take advantage of favorable interest rates. Extraordinary
costs associated with the redemptions reduced 1993 income by $77 (after tax).
 
    Revenue growth, partially  offset by higher  operating expenses, provided  a
7.6 percent increase in EBITDA.
 
OPERATING REVENUES
    An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
                                                                                                                          INCREASE
                                                                                     LOWER                                (DECREASE)
                                                                       PRICE       (HIGHER)                               ---------
                                                1994       1993       CHANGES       REFUNDS       DEMAND        OTHER         $
                                              ---------  ---------  -----------  -------------  -----------  -----------  ---------
<S>                                           <C>        <C>        <C>          <C>            <C>          <C>          <C>
Local service...............................  $   4,067  $   3,829   $     (12)    $      30     $     216    $       4   $     238
Interstate access...........................      2,269      2,147         (15)           (6)          148           (5)        122
Intrastate access...........................        729        682         (10)           (4)           51           10          47
Long-distance network.......................      1,329      1,442          (8)            1           (43)         (63)       (113)
Other services..............................        782        770      --            --            --               12          12
                                              ---------  ---------         ---           ---         -----          ---   ---------
Total.......................................  $   9,176  $   8,870   $     (45)    $      21     $     372    $     (42)  $     306
                                              ---------  ---------         ---           ---         -----          ---   ---------
                                              ---------  ---------         ---           ---         -----          ---   ---------
 
<CAPTION>
 
                                                  %
                                              ---------
<S>                                           <C>
Local service...............................        6.2
Interstate access...........................        5.7
Intrastate access...........................        6.9
Long-distance network.......................       (7.8)
Other services..............................        1.6
                                              ---------
Total.......................................        3.4
                                              ---------
                                              ---------
</TABLE>
 
    In  1994, local service revenues increased principally as a result of higher
demand for services. Reported access  lines increased by 3.6 percent.  Excluding
the  sale  of approximately  60,000 rural  telephone  access lines  during 1994,
access line growth was 4.0 percent.
 
    Higher revenues from interstate access services were primarily  attributable
to  an increase of 7.8 percent in interstate billed access minutes of use, which
more than  offset the  effects  of price  decreases. Intrastate  access  charges
increased  primarily as a result of  higher demand, including demand for private
line services.
 
    Long-distance revenues decreased principally due to the effects of the MTCPs
implemented in Oregon  and Washington.  The 1994  impact was  a loss  of $68  in
long-distance revenues, partially offset by a decrease of $48 in other operating
expenses  and an increase of $10  in intrastate access revenue. These regulatory
arrangements decreased net income by approximately $6 in 1994.
 
    During 1994, revenues from  other services increased  due to higher  revenue
from  billing and  collection services and  increased market  penetration of new
service offerings. Partially offsetting the increase in other services  revenues
was  the 1993 sale of telephone equipment distribution operations, completion of
large telephone network installation contracts  and lower revenue from  customer
premises  equipment installations. Revenues  for services provided  to the Media
Group were $29 in 1994 and $26 in 1993.
 
                                      C-10
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
COSTS AND EXPENSES
 
<TABLE>
<CAPTION>
                                                                                                 INCREASE
                                                                                                (DECREASE)
                                                                                           --------------------
                                                                       1994       1993         $          %
                                                                     ---------  ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>        <C>
Employee-related expenses..........................................  $   3,215  $   3,068  $     147        4.8
Other operating expenses...........................................      1,547      1,671       (124)      (7.4)
Taxes other than income taxes......................................        388        388     --         --
Depreciation and amortization......................................      1,908      1,828         80        4.4
Restructuring charge...............................................     --            880       (880)    --
Interest expense...................................................        376        412        (36)      (8.7)
Other expense -- net...............................................         21         24         (3)     (12.5)
</TABLE>
 
    In 1994, overtime payments, contract labor and basic salaries and wages, all
related  to  the  implementation  of  major  customer  service  and streamlining
initiatives, increased by $150. A $71 reduction in the amount of pension  credit
allocated  to  the  Communications Group  also  contributed to  the  increase in
employee-related expenses. Actuarial assumptions, which include decreases in the
discount rate  and  the  expected  long-term rate  of  return  on  plan  assets,
contributed   to  the  pension  credit  reduction.  Partially  offsetting  these
increases were the effects  of employees leaving  under the Restructuring  Plan,
lower  health-care  benefit  costs, including  a  reduction in  the  accrual for
postretirement benefits, and lower incentive compensation payments to employees.
 
    Other operating expenses decreased primarily due to the effect of the MTCPs.
Lower customer premises equipment installations  and lower expenses at  Bellcore
also  contributed to the decrease. Allocated costs assigned from U S WEST to the
Communications Group totaled $110 and $117  in 1994 and 1993, respectively.  The
increase  in depreciation and amortization expense was primarily the result of a
higher depreciable asset base and increased rates of depreciation.
 
    Interest expense decreased due to the  effects of refinancing debt at  lower
rates  in 1993 at U S WEST Communications, and a reclassification of capitalized
interest in 1994. Since the discontinuance of SFAS No. 71, interest  capitalized
as  a component of telephone plant construction is recorded as an offset against
interest expense  rather  than  to other  expense.  The  Communications  Group's
average  borrowing cost  was 6.8  percent in 1994  compared with  6.9 percent in
1993.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                             1994         1993       INCREASE
                                                                          -----------  -----------  -----------
<S>                                                                       <C>          <C>          <C>
Provision for income taxes..............................................  $     653    $     208     $     445
Effective tax rate......................................................       36.2%        34.7%       --
</TABLE>
 
    The increase in the effective tax  rate resulted primarily from the  effects
of discontinuing SFAS No. 71, an increase in 1994 income before income taxes and
the  1993 restructuring  charge, partially  offset by  the cumulative  effect on
deferred income taxes  of the  1993 federally  mandated increase  in income  tax
rates.
 
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1995
 
OPERATING ACTIVITIES
 
    Cash from operations increased $210 in 1995 primarily due to the increase in
EBITDA and a decrease in the cash funding for postretirement benefits, partially
offset  by higher payments for restructuring charges. Cash provided by operating
activities decreased by  $168 in 1994  compared with 1993,  largely due to  cash
payments  for restructuring  activities of $279  in 1994, compared  with $120 in
1993. Further details of cash provided  by operating activities are provided  in
the Combined Statements of Cash Flows.
 
                                      C-11
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    The  future cash needs of the Communications  Group may increase as a result
of new  business opportunities,  including wireless  services, and  requirements
related to the recently enacted Telecommunications Act of 1996.
 
INVESTING ACTIVITIES
 
    Total capital expenditures were $2,739 in 1995, $2,477 in 1994 and $2,226 in
1993. The 1995 capital expenditures exceeded the 1994 and 1993 levels due to the
Communications Group's efforts to improve customer service (including reductions
in held orders) and to accommodate additional line capability in several states.
Capital  expenditures related to the  Restructuring Plan were approximately $190
in 1995 as compared to $265 in 1994. In 1996, capital expenditures are  expected
to  approximate $2.5 billion. Included in the 1996 capital expenditures estimate
are costs to enter  new markets as allowed  under the Telecommunications Act  of
1996.
 
    The  Communications Group received cash proceeds of $214 and $93 in 1995 and
1994, respectively, for the  sales of certain  rural telephone exchanges.  Since
implementing  its  rural telephone  exchange  sales program,  the Communications
Group has  sold  approximately 155,000  access  lines. Planned  sales  of  rural
exchanges for 1996 and beyond aggregate approximately 180,000 lines.
 
FINANCING ACTIVITIES
 
    Debt  increased by $630  in 1995, primarily  due to the  increase in capital
expenditures. The percentage of debt to total capital at year-end 1995 was 66.0.
During 1994, debt increased $451, though the percentage of debt to total capital
declined to 65.8 at year-end  1994 from 67.6 at  year-end 1993. The decrease  in
the  percentage of debt to  total capital in 1994  was primarily attributable to
higher net income and issuances of equity.
 
    During 1995, U S WEST  Communications refinanced $1.5 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.
In 1993, U  S WEST  Communications refinanced  $2.7 billion  of long-term  debt.
Expenses   associated  with  the  refinancing  of  long-term  debt  resulted  in
extraordinary after-tax charges to income of $8 and $77, net of tax benefits  of
$5 and $48, in 1995 and 1993, respectively.
 
    U  S WEST and U S WEST  Communications maintain commercial paper programs 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 Communications is permitted to
borrow  up to $600 under short-term lines  of credit, all of which was available
at December 31, 1995. Additional lines of credit aggregating approximately  $1.3
billion  are available to both the Media Group and the nonregulated subsidiaries
in the  Communications Group  in accordance  with their  borrowing needs.  Under
registration  statements  filed  with  the  Securities  and  Exchange Commission
("SEC"), as of December 31, 1995, U S WEST Communications is permitted to  issue
up  to $320 of new debt securities.  An additional $1.2 billion in securities is
permitted to  be issued  under registration  statements filed  with the  SEC  to
support the requirements of the Media Group and the nonregulated subsidiaries in
the Communications Group.
 
    In  connection with U S  WEST's February 27, 1996  announcement of a planned
merger with Continental  Cablevision, U S  WEST, Inc.'s credit  rating is  being
reviewed  by  credit rating  agencies, which  may result  in a  downgrading. The
credit rating of U S WEST Communications was not placed under review by Moody's,
has been reaffirmed by Duff and Phelps and is under review by Fitch and Standard
& Poors.
 
    Financing activities for  the nonregulated  Communications Group  businesses
and  the  Media  Group,  including the  issuance,  repayment  and  repurchase of
short-term and  long-term debt,  and the  issuance and  repurchase of  preferred
securities, are managed by U S WEST on a centralized basis. Notwithstanding such
centralized  management, financing  activities for  U S  WEST Communications are
separately identified and  accounted for  in U  S WEST's  records and  U S  WEST
Communications continues to conduct its own
 
                                      C-12
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
borrowing  activities. Debt incurred  and investments made  by U S  WEST and its
subsidiaries on behalf of the  nonregulated Communications Group businesses  and
all  debt  incurred  and  investments  made  by  U  S  WEST  Communications  are
specifically  allocated  and  reflected  on  the  financial  statements  of  the
Communications  Group. All other debt incurred and  investments made by U S WEST
and its subsidiaries on behalf of the Media Group are specifically allocated  to
and reflected on the financial statements of the Media Group. Debt incurred by U
S  WEST or a  subsidiary on behalf  of a Group  is charged to  such Group at the
borrowing rate of U S WEST or such subsidiary.
 
INTEREST RATE RISK MANAGEMENT
 
    The Communications Group is exposed to market risks arising from changes  in
interest  rates. Derivative financial instruments are  used to manage this risk.
The Communications  Group  does not  use  derivative financial  instruments  for
trading purposes.
 
    The  objective of the  interest rate risk management  program is to minimize
the total cost  of debt. Interest  rate swaps are  used to adjust  the ratio  of
fixed-to  variable-rate debt. The  market value of  the debt portfolio including
the interest rate swaps is monitored and compared with predetermined  benchmarks
to evaluate the effectiveness of the risk management program.
 
    Notional  amounts of interest  rate swaps outstanding were  $784 and $781 at
December 31, 1995 and 1994,  respectively, with various maturities extending  to
2001.  The estimated effect of U S WEST Communications' interest rate derivative
transactions was to adjust the  level of fixed-rate debt  from 88 percent to  97
percent of the total debt portfolio at December 31, 1995, and from 76 percent to
86 percent of the total debt portfolio at December 31, 1994.
 
    In  conjunction  with the  1993 debt  refinancing, the  Communications Group
executed forward  contracts to  sell U.S.  Treasury bonds  to lock  in the  U.S.
Treasury  rate component of $1.5  billion of the future  debt issue. At December
31, 1995, deferred credits of $8 and  deferred charges of $51 on closed  forward
contracts are included as part of the carrying value of the underlying debt. The
deferred credits and charges are being recognized as a yield adjustment over the
life  of the debt, which matures at various dates through 2043. The net deferred
charge is directly offset by the lower coupon rate achieved on the new debt.
 
COMPETITIVE AND REGULATORY ENVIRONMENT
 
    Markets served by  the Communications  Group, including  markets for  local,
access and long-distance services, are being impacted by the rapid technological
and regulatory changes occurring within the telecommunications industry. Current
and  potential  competitors  include  local  telephone  companies, interexchange
carriers, competitive access providers ("CAPs"), cable television companies  and
providers of personal communications services ("PCS").
 
    On  February 1, 1996,  the House and  Senate approved the Telecommunications
Act of 1996 (the  "1996 Act") which is  intended to promote competition  between
local   telephone  companies,   long-distance  carriers   and  cable  television
operators. The 1996 Act was  signed into law on  February 8, 1996, and  replaces
the  antitrust consent decree that  broke up the "Bell  System" in 1984. A major
provision of the legislation includes  the preemption of state regulations  that
govern competition by allowing local telephone companies, long-distance carriers
and  cable  television  companies  to  enter  each  other's  lines  of business.
Consequently, the Regional  Bell Operating Companies  ("RBOCs") are  immediately
permitted  to  offer  wireline interLATA  toll  services out  of  their regions.
However, to  participate  in the  interLATA  long-distance market  within  their
regions,  the RBOCs  must first  open their  local networks  to facilities-based
competition by  satisfying  a  detailed  checklist  of  requirements,  including
requirements related to interconnection and number portability.
 
    Other  key provisions of the 1996 Act:  (1) eliminate most of the regulation
of  cable  television  rates  within  three  years  and  eliminate  the  ban  on
cross-ownership between cable television and telephone
 
                                      C-13
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
companies in small communities; (2) permit the RBOCs to develop new, competitive
cable  systems  within their  regions  and to  acquire  or build  wireless cable
systems;  (3)  provide  partial  relief  from  the  ban  against   manufacturing
telecommunications  equipment by the RBOCs; and (4) permit wireless operators to
provide interLATA  toll  service  in  and  out  of  region  without  a  separate
subsidiary and to jointly market or resell cellular service.
 
    The  FCC and state  regulators have been given  latitude in interpreting and
overseeing  the  implementation  of   this  legislation,  including   developing
universal  service funding policy. The extent  and timing of future competition,
including the  Communications  Group's  ability  to  offer  in-region  interLATA
long-distance  services, will  depend in  part on  the implementation guidelines
determined by the FCC and state  regulators, and how quickly the  Communications
Group  can  satisfy  requirements  of the  checklist.  The  Communications Group
estimates that  fulfillment of  the checklist  requirements could  occur in  the
majority of its states within 12 to 18 months.
 
    The  Communications Group  believes that  competitors will  initially target
high-volume business customers in densely  populated urban areas. The  resulting
loss  of local service customers will  affect multiple revenue streams and could
have a material, adverse  effect on the  Communications Group's operations.  The
resulting  revenue losses,  however, could be  at least partially  offset by the
Communications Group's  ability  to  bundle local,  long-distance  and  wireless
services, and provide interconnection services.
 
    The  Communications Group's strategy is  to offer integrated communications,
entertainment, information and transaction services over both wired and wireless
networks to its customers  primarily within its Region.  The key initiatives  to
support this strategy include five key elements:
 
    - Providing superior customer service
 
    - Building customer loyalty
 
    - Enhancing network capability and capacity
 
    - Expanding the product and service portfolio
 
    - Ensuring a fair competitive environment
 
    Strategic initiatives to attract and retain customers include: (1) enhancing
existing  services with products such as caller identification, call waiting and
voice messaging;  (2)  aggressive  expansion  of  data  services;  (3)  pursuing
opportunities  to offer paging, wireless and  cable television services; and (4)
rapid entry into the interLATA long-distance market.
 
    A market trial for a broadband network capable of providing voice, data  and
video  services to  customers commenced  in the Omaha  area in  August 1995. The
Communications Group does not intend to expand this service offering beyond  the
Omaha  area because of service cost and pricing issues. The Communications Group
does plan to  continue to provide  the system that  delivers basic, premium  and
pay-per-view  video  services in  the Omaha  area.  The Communications  Group is
evaluating the relative costs of alternative video technologies, as well as  the
near-term feasibility of interactive services. To satisfy anticipated demand for
combined   video  and  telephony   services  on  a   cost-effective  basis,  the
Communications Group's strategy  may include selective  investments in  wireless
cable technologies.
 
    The  Communications Group is subject to varying degrees of federal and state
regulation. The Communications Group's regulatory strategy includes working to:
 
    - Achieve accelerated capital recovery;
 
    - Reprice local  services  to cover  costs  and ensure  these  services  are
      subsidy  free, while lowering  toll and access  rates to meet competition;
      and
 
                                      C-14
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    - Ensure that the new  rules associated with  the Telecommunications Act  of
      1996  concerning the unbundling of interconnection, resale of services and
      universal service do not advantage one competitor over another.
 
    The Communications Group is currently working with state regulators to  gain
approval of these initiatives.
 
OTHER REGULATORY ISSUES
 
    The  Communications Group'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. However,  the FCC's
price cap plan includes sharing of  earnings in excess of authorized levels.  In
March  1995, the FCC issued an interim  order on price cap regulation. The price
cap index for  most services  is annually adjusted  for inflation,  productivity
level  and exogenous costs,  and has resulted  in reduced access  prices paid by
interexchange carriers  to local  telephone companies.  The interim  order  also
provides  for three productivity options, including a no-sharing option, and for
increased flexibility for adjusting prices downward in response to  competition.
In 1995, the Communications Group selected the lowest productivity option while,
prior  to this interim  order, the Communications Group  used an optional higher
productivity factor in determining its prices. Consequently, the  Communications
Group expects the order to have no significant near-term impact.
 
    There  are pending regulatory actions in local regulatory jurisdictions that
call for  price decreases,  refunds or  both.  In one  such instance,  the  Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the
PSC for reconsideration, thereby establishing two exceptions to the rule against
retroactive   ratemaking:  1)  unforeseen  and   extraordinary  events,  and  2)
misconduct. The PSC's initial order  denied a refund request from  interexchange
carriers and other parties related to the Tax Reform Act of 1986. This action is
still  in the discovery process.  If a formal filing  -- made in accordance with
the remand from  the Supreme  Court -- alleges  that the  exceptions apply,  the
range of possible risk is $0 to $150.
 
UNION CONTRACT
 
    On  October 2, 1995, union members approved a new three-year contract with U
S WEST. The contract  provides for salary increases  of 10.6 percent over  three
years  effective January  1 of each  year. The contract  also provides employees
with a lump sum payment of $1,500  in lieu of wage increases becoming  effective
in  August of each year. This lump sum payment is being recognized over the life
of the  contract.  The  agreement  covers  approximately  30,000  Communications
Workers of America members who work for the Communications Group.
 
                                      C-15
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We have audited the Combined Balance Sheets of U S WEST Communications Group
(as described in Note 2 to the Combined Financial Statements) as of December 31,
1995  and 1994, and the related Combined Statements of Operations and Cash Flows
for each  of the  three  years in  the period  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 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  combined  financial  position  of  U  S  WEST
Communications  Group as of December 31, 1995 and 1994, and the combined results
of its operations and its cash flows for  each of the three years in the  period
ended  December  31,  1995,  in conformity  with  generally  accepted accounting
principles.
 
    As more fully discussed in Note 2, the Combined Financial Statements of U  S
WEST  Communications  Group  should  be  read  in  connection  with  the audited
Consolidated Financial Statements of U S WEST, Inc.
 
    As discussed  in Note  5 to  the  Combined Financial  Statements, U  S  WEST
Communications  Group discontinued  accounting for  the operations  of U  S WEST
Communications, Inc.  in  accordance  with  Statement  of  Financial  Accounting
Standards  No. 71, "Accounting for the  Effects of Certain Types of Regulation,"
in 1993.
 
COOPERS & LYBRAND L.L.P.
 
Denver, Colorado
February 12, 1996
 
                                      C-16
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                 ---------------------------------
                                                                                    1995        1994       1993
                                                                                 ----------  ----------  ---------
                                                                                        DOLLARS IN MILLIONS
                                                                                    (EXCEPT PER SHARE AMOUNTS)
<S>                                                                              <C>         <C>         <C>
Operating revenues:
  Local service................................................................  $    4,344  $    4,067  $   3,829
  Interstate access service....................................................       2,378       2,269      2,147
  Intrastate access service....................................................         747         729        682
  Long-distance network services...............................................       1,189       1,329      1,442
  Other services...............................................................         826         782        770
                                                                                 ----------  ----------  ---------
    Total operating revenues...................................................       9,484       9,176      8,870
 
Operating expenses:
  Employee-related expenses....................................................       3,341       3,215      3,068
  Other operating expenses.....................................................       1,543       1,547      1,671
  Taxes other than income taxes................................................         380         388        388
  Depreciation and amortization................................................       2,042       1,908      1,828
  Restructuring charge.........................................................      --          --            880
                                                                                 ----------  ----------  ---------
    Total operating expenses...................................................       7,306       7,058      7,835
                                                                                 ----------  ----------  ---------
Income from operations.........................................................       2,178       2,118      1,035
Interest expense...............................................................         427         376        412
Gains on sales of rural telephone exchanges....................................         136          82     --
Other expense -- net...........................................................          41          21         24
                                                                                 ----------  ----------  ---------
Income before income taxes and extraordinary items.............................       1,846       1,803        599
Provision for income taxes.....................................................         662         653        208
                                                                                 ----------  ----------  ---------
Income before extraordinary items..............................................       1,184       1,150        391
Extraordinary items:
  Discontinuance of SFAS No. 71, net of tax....................................      --          --         (3,123)
  Early extinguishment of debt, net of tax.....................................          (8)     --            (77)
                                                                                 ----------  ----------  ---------
NET INCOME (LOSS)..............................................................  $    1,176  $    1,150  $  (2,809)
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
Pro forma earnings per common share:
  Income before extraordinary items............................................  $     2.52  $     2.53
  Extraordinary items -- early extinguishment of debt..........................       (0.02)     --
                                                                                 ----------  ----------
PRO FORMA EARNINGS PER COMMON SHARE............................................  $     2.50  $     2.53
                                                                                 ----------  ----------
                                                                                 ----------  ----------
PRO FORMA AVERAGE COMMON SHARES OUTSTANDING (thousands)........................     470,716     453,316
                                                                                 ----------  ----------
                                                                                 ----------  ----------
</TABLE>
 
     The accompanying notes are an integral part of the Combined Financial
                                  Statements.
 
                                      C-17
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                            COMBINED BALANCE SHEETS
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1995       1994
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................................................  $     172  $     116
  Accounts and notes receivable, less allowance for credit losses of $30 and $29,
   respectively.............................................................................      1,617      1,500
  Inventories and supplies..................................................................        193        166
  Deferred tax asset........................................................................        259        300
  Prepaid and other.........................................................................         51         56
                                                                                              ---------  ---------
Total current assets........................................................................      2,292      2,138
                                                                                              ---------  ---------
Property, plant and equipment -- net........................................................     13,529     13,041
Other assets................................................................................        764        765
                                                                                              ---------  ---------
Total assets................................................................................  $  16,585  $  15,944
                                                                                              ---------  ---------
                                                                                              ---------  ---------
                                              LIABILITIES AND EQUITY
Current liabilities:........................................................................
  Short-term debt...........................................................................  $   1,065  $   1,608
  Accounts payable..........................................................................        851        888
  Employee compensation.....................................................................        316        313
  Dividends payable.........................................................................        254        250
  Current portion of restructuring charge...................................................        270        318
  Advanced billing and customer deposits....................................................        223        211
  Other.....................................................................................        628        620
                                                                                              ---------  ---------
Total current liabilities...................................................................      3,607      4,208
                                                                                              ---------  ---------
Long-term debt..............................................................................      5,689      4,516
Postretirement and other postemployment benefit obligations.................................      2,351      2,427
Deferred income taxes.......................................................................        689        547
Unamortized investment tax credits..........................................................        199        231
Deferred credits and other..................................................................        574        836
 
Communications Group equity.................................................................      3,476      3,179
                                                                                              ---------  ---------
Total liabilities and equity................................................................  $  16,585  $  15,944
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Contingencies (see Note 13 to the Combined Financial Statements)
</TABLE>
 
     The accompanying notes are an integral part of the Combined Financial
                                  Statements.
 
                                      C-18
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                      1995       1994       1993
                                                                                    ---------  ---------  ---------
                                                                                          DOLLARS IN MILLIONS
<S>                                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income (loss)...............................................................  $   1,176  $   1,150  $  (2,809)
  Adjustments to net income (loss):
    Discontinuance of SFAS No. 71. ...............................................     --         --          3,123
    Restructuring charge..........................................................     --         --            880
    Depreciation and amortization.................................................      2,042      1,908      1,828
    Gains on sales of rural telephone exchanges...................................       (136)       (82)    --
  Deferred income taxes and amortization of investment tax credits................        172        226       (191)
  Changes in operating assets and liabilities:
    Restructuring payments........................................................       (315)      (279)      (120)
    Postretirement medical and life costs, net of cash fundings...................        (90)      (197)      (135)
    Accounts receivable...........................................................       (117)       (64)       (78)
    Inventories, supplies and other...............................................        (51)       (29)       (23)
    Accounts payable and accrued liabilities......................................          7       (147)       153
  Other -- net....................................................................         31         23         49
                                                                                    ---------  ---------  ---------
Cash provided by operating activities.............................................      2,719      2,509      2,677
                                                                                    ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment..................................     (2,462)    (2,254)    (2,234)
  Proceeds from (payments on) disposals of property, plant and equipment..........        (18)         3         42
  Proceeds from sales of rural telephone exchanges................................        214         93     --
  Other -- net....................................................................         (2)         2     --
                                                                                    ---------  ---------  ---------
  Cash (used for) investing activities............................................     (2,268)    (2,156)    (2,192)
                                                                                    ---------  ---------  ---------
FINANCING ACTIVITIES
  Net (repayments of) proceeds from issuance of short-term debt...................       (832)       344        687
  Proceeds from issuance of long-term debt........................................      1,647        326      2,408
  Repayments of long-term debt....................................................       (334)      (285)    (2,952)
  Dividends paid on common stock..................................................       (926)      (886)      (812)
  Proceeds from issuance of equity................................................         50        208        356
  Advance from/(repayment to) Media Group.........................................     --         --           (153)
                                                                                    ---------  ---------  ---------
  Cash (used for) financing activities............................................       (395)      (293)      (466)
                                                                                    ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase........................................................................         56         60         19
  Beginning balance...............................................................        116         56         37
                                                                                    ---------  ---------  ---------
  Ending balance..................................................................  $     172  $     116  $      56
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
     The accompanying notes are an integral part of the Combined Financial
                                  Statements.
 
                                      C-19
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
                     NOTES TO COMBINED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE 1: RECAPITALIZATION PLAN
    On  October  31,  1995, the  shareholders  of  U S  WEST,  Inc.,  a Colorado
corporation  ("U  S  WEST   Colorado"),  voted  to   approve  a  proposal   (the
"Recapitalization  Plan") adopted by  the Board of  Directors of U  S WEST, Inc.
(the "Board") to  reincorporate in  Delaware and  create two  classes of  common
stock   that  are  intended  to  reflect   separately  the  performance  of  the
communications and  multimedia  businesses.  Under  the  Recapitalization  Plan,
shareholders  approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware  corporation ("U S WEST" or "Company"),  pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger,  the  Certificate of  Incorporation of  U  S WEST  has been  amended and
restated to designate  two classes of  common stock of  U S WEST,  one class  of
which   is  authorized   as  U   S  WEST   Communications  Group   Common  Stock
("Communications Stock"), and the  other class which is  authorized as U S  WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of  common stock  of U  S WEST  Colorado was  converted into  one share  each of
Communications Stock and Media Stock.
 
    The Communications  Stock  and Media  Stock  provide shareholders  with  two
distinct  securities that are intended  to reflect separately the communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses  of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
 
    The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST  Federal
Services,  Inc., U  S WEST  Advanced Technologies,  Inc. and  U S  WEST Business
Resources,  Inc.   The  Communications   Group  primarily   provides   regulated
communications  services  to  more  than  25  million  residential  and business
customers within a 14 state region.
 
    The Media Group is  comprised of U S  WEST Marketing Resources Group,  Inc.,
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, U S WEST  Multimedia Communications, Inc.,  which owns domestic  cable
television  operations  and investments,  and U  S WEST  International Holdings,
Inc.,  which   primarily   owns   investments   in   international   cable   and
telecommunications, wireless communications and directory publishing operations.
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    BASIS  OF  PRESENTATION   The Combined  Financial  Statements of  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 Group
Combined Financial  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 Combined Financial 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  Combined Financial 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.
 
    Notwithstanding   the  allocation  of   assets  and  liabilities  (including
contingent liabilities)  and  stockholders' equity  between  the  Communications
Group  and the Media Group for the purpose of preparing the respective financial
statements of such Group,  holders 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. Such  allocation of  assets  and
liabilities   and   change  in   the  equity   structure  of   U  S   WEST  does
 
                                      C-20
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not result  in a  distribution or  spin-off  to shareholders  of any  assets  or
liabilities  of  U  S  WEST  or any  of  its  subsidiaries  or  otherwise affect
responsibility for  the liabilities  of U  S  WEST or  such subsidiaries.  As  a
result,  the rights of the holders of U  S WEST or any of its subsidiaries' debt
are not affected. 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, the
Communications Group Combined Financial Statements should be read in conjunction
with U S WEST's Consolidated Financial  Statements and the Media Group  Combined
Financial Statements.
 
    The  accounting policies described  herein applicable to  the preparation of
the Combined Financial Statements of the Communications Group may be modified or
rescinded  at  the  sole  discretion  of  the  Board  without  approval  of  the
stockholders,  although there is  no present intention  to do so.  The Board may
also adopt additional policies depending on the circumstances. Any determination
of the Board to modify or rescind such policies, or to add additional  policies,
including  any  decision  that  would have  disparate  impacts  upon  holders of
Communications Stock and Media Stock, would be  made by the Board in good  faith
and  in the honest belief that such decision is in the best interests of all U S
WEST stockholders, including the holders of Communications Stock and the holders
of Media  Stock. In  making  such determination,  the  Board may  also  consider
regulatory requirements imposed on U S WEST Communications by the public utility
commissions  of  various states  and the  Federal Communications  Commission. In
addition, generally accepted  accounting principles require  that any change  in
accounting  policy be  preferable (in  accordance with  such principles)  to the
policy previously established.
 
    Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
 
    ALLOCATION OF SHARED SERVICES  Certain costs relating to U S WEST's  general
and administrative services (including certain executive management, legal, tax,
accounting   and  auditing,  treasury,  strategic  planning  and  public  policy
services) are  directly assigned  by U  S WEST  to each  Group based  on  actual
utilization or are allocated based on each Group's operating expenses, number of
employees,  external revenues, average  capital and/or average  equity. U S WEST
charges each Group for such services at fully distributed cost. These direct and
indirect  allocations  were  $116,  $110  and  $117  in  1995,  1994  and  1993,
respectively. In 1995, the direct allocations comprised approximately 37 percent
of the total shared corporate services allocated to the Communications Group. It
is not practicable to provide a detailed estimate of the expenses which would be
recognized if the Communications Group was a separate legal entity. However, U S
WEST  believes that  under the Recapitalization  Plan, each  Group benefits from
synergies with the other, including having  lower operating costs than might  be
incurred if each Group was a separate legal entity.
 
    ALLOCATION OF INCOME TAXES  Federal, state and local income taxes, which are
determined  on a consolidated or combined basis,  are allocated to each Group in
accordance with tax sharing agreements between U S WEST and the entities  within
the  Groups. The  allocations will  generally reflect  each Group's contribution
(positive or  negative)  to consolidated  taxable  income and  consolidated  tax
credits.  A Group will  be compensated only at  such time as,  and to the extent
that, its tax attributes are utilized by U S WEST in a combined or  consolidated
income tax filing. Federal and state tax refunds and carryforwards or carrybacks
of  tax attributes will  generally be allocated  to the group  to which such tax
attributes relate.
 
    GROUP FINANCING   Financing activities for  the nonregulated  Communications
Group  businesses and  the Media  Group, including  the issuance,  repayment and
repurchase of short-term and long-term debt, and the issuance and repurchase  of
preferred  securities are managed by U S  WEST on a centralized basis. Financing
 
                                      C-21
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
activities for U S WEST  Communications are separately identified and  accounted
for in U S WEST's records and U S WEST Communications conducts its own borrowing
activities.  Debt incurred and investments made by U S WEST and its subsidiaries
on behalf  of the  nonregulated  Communications Group  businesses and  all  debt
incurred  and  investments  made by  U  S WEST  Communications  are specifically
allocated to and  reflected on  the financial statements  of the  Communications
Group.  All debt incurred and investments made  by U S WEST and its subsidiaries
on behalf of the Media Group are specifically allocated to and reflected on  the
financial  statements  of  the Media  Group.  Debt incurred  by  U S  WEST  or a
subsidiary on behalf of a Group is  charged to such Group at the borrowing  rate
of U S WEST or such subsidiary.
 
    As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST  does not intend to  transfer funds between the  Groups, except for certain
short-term, ordinary course advances of funds at market rates associated with  U
S  WEST's centralized cash  management program for  the nonregulated businesses.
Such short-term transfers  of funds will  be accounted for  as short-term  loans
between  the  Groups bearing  interest at  the market  rate at  which management
determines the borrowing Group could obtain funds on a short-term basis. If  the
Board,  in its sole discretion, determines that  a transfer of funds between the
Groups should be accounted  for as a long-term  loan, the Board would  establish
the  terms  on which  such  loan would  be  made, including  the  interest rate,
amortization schedule, maturity and redemption terms. Such terms would generally
reflect the then prevailing  terms upon which  management determines such  Group
could  borrow funds on a similar basis.  The financial statements of the lending
Group will be credited, and the financial statements of the borrowing Group will
be charged, with the amount of any such loan, as well as with periodic  interest
accruing  thereon. The  Board may  determine that a  transfer of  funds from the
Communications Group to  the Media Group  should be accounted  for as an  equity
contribution,  in which  case an inter-group  interest (determined  by the Board
based on the then current market value of shares of Media Stock) will either  be
created  or  increased, as  applicable.  Similarly, if  an  inter-group interest
exists, the Board may determine that a transfer of funds from the Media Group to
the Communications  Group  should  be  accounted  for  as  a  reduction  in  the
inter-group interest.
 
    DIVIDENDS    Dividends  on the  Communications  Stock  will be  paid  at the
discretion of the Board based primarily upon the financial condition, results of
operations and business requirements of the Communications Group and U S WEST as
a whole. Dividends will  be payable out of  the lesser of: 1)  the funds of U  S
WEST  legally available for the payment  of dividends; and 2) the Communications
Group Available Dividend Amount.
 
    The Communications Group Available Dividend  Amount on any date, shall  mean
the  excess, if any,  of: 1) the  amount equal to  the fair market  value of the
total assets attributed to the Communications Group less the total amount of the
liabilities attributed  to the  Communications  Group (provided  that  preferred
stock  shall not be  treated as a liability),  in each case as  of such date and
determined  on  a  basis  consistent  with  that  applied  in  determining   the
Communications Group net earnings (loss) over; 2) the aggregate par value of, or
any  greater  amount determined  to be  capital in  respect of,  all outstanding
shares of  Communications Stock  and each  class or  series of  preferred  stock
attributed to the Communications Group.
 
    EARNINGS  PER COMMON SHARE  Earnings per common share for 1995 and 1994 have
been presented on a pro forma basis to reflect the Communications Stock as if it
had  been  outstanding  since  January  1,  1994.  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.
 
    INDUSTRY SEGMENT  The businesses comprising the Communications Group operate
in a single  industry segment as  defined in Statement  of Financial  Accounting
Standards  ("SFAS")  No. 14,  "Financial Reporting  for  Segments of  a Business
Enterprise."   The   Communications    Group   primarily   provides    regulated
communications  services  to  more  than  25  million  residential  and business
customers in the Communications Group region (the "Region"). The Region includes
the states of Arizona, Colorado, Idaho, Iowa, Minnesota,
 
                                      C-22
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Montana, Nebraska,  New  Mexico,  North  Dakota,  Oregon,  South  Dakota,  Utah,
Washington  and Wyoming.  Services offered  by the  Communications Group 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  Local Access and Transport  Areas
("LATAs")  in the Region.  The Communications Group  provides other products and
services, including  custom  calling, voice  messaging,  caller  identification,
high-speed   data   applications,  customer   premises  equipment   and  certain
communications services  to business  customers and  governmental agencies  both
inside and outside the Region.
 
    Approximately  97 percent  of the revenues  of the  Communications Group are
attributable  to  the  operations   of  U  S   WEST  Communications,  of   which
approximately  59  percent are  derived from  the  states of  Arizona, Colorado,
Minnesota and Washington.
 
    SIGNIFICANT CONCENTRATIONS  The largest volume of the Communications Group's
services are provided to AT&T. During  1995, 1994 and 1993, revenues related  to
those  services provided to  AT&T were $1,085,  $1,130 and $1,159, respectively.
Related accounts receivable at December 31, 1995 and 1994, totaled $91 and  $98,
respectively.  As of December 31, 1995, the Communications Group is not aware of
any other significant  concentration of  business transacted  with a  particular
customer, supplier or lender that could, if suddenly eliminated, severely impact
operations.
 
    USE OF ESTIMATES  The preparation of financial statements in conformity with
generally  accepted accounting principles requires  management to make estimates
and assumptions that affect the 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.
 
    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  the  Communications  Group's
nontelephone  operations  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' provision  for depreciation of property, plant  and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industry-wide studies. In third quarter 1993, U S WEST
Communications  discontinued accounting  for its  regulated telephone operations
under SFAS No. 71, "Accounting for the Effects of Certain Types of  Regulation."
(See  Note 5 to the Combined  Financial Statements.) Prior to discontinuing SFAS
No. 71, depreciation was based on lives specified by regulators.
 
    When  the  depreciable   property,  plant   and  equipment  of   U  S   WEST
Communications  is retired or sold, the original cost less the net salvage value
is generally charged to accumulated depreciation. The nontelephone operations of
the Communications  Group  provide  for  depreciation  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.
 
                                      C-23
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Interest related  to qualifying  construction  projects is  capitalized  and
reflected  as a reduction of interest expense. At U S WEST Communications, prior
to discontinuing SFAS No. 71, capitalized interest was included as an element of
other income. Amounts capitalized by the Communications Group were $39, $36  and
$15 in 1995, 1994 and 1993, respectively.
 
    REVENUE  RECOGNITION  Local telephone  service revenues are generally billed
monthly, in  advance,  and revenues  are  recognized the  following  month  when
services  are provided. Revenues derived  from exchange access and long-distance
services are billed and recorded monthly as services are provided.
 
    FINANCIAL INSTRUMENTS  Net interest received or paid on interest rate  swaps
is  recognized over the life of the  swaps as an adjustment to interest expense.
Gains and  losses  on  forward  contracts are  deferred  and  recognized  as  an
adjustment  to interest expense  over the life of  the underlying debt. Currency
swaps entered  into  to convert  foreign  debt to  dollar-denominated  debt  are
combined  with the  foreign currency  debt and  accounted for  as if fixed-rate,
dollar-denominated debt were issued directly.
 
    COMPUTER SOFTWARE   The  cost  of computer  software, whether  purchased  or
developed  internally,  is  charged  to  expense  with  two  exceptions. Initial
operating systems software  is capitalized and  amortized over the  life of  the
related  hardware, and initial network  applications software is capitalized and
amortized over  three years.  Subsequent upgrades  to capitalized  software  are
expensed.  Capitalized computer software  of $183 and $146  at December 31, 1995
and  1994,  respectively,  is  recorded   in  property,  plant  and   equipment.
Amortization  of capitalized computer software costs totaled $69, $61 and $37 in
1995, 1994 and 1993, 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
in  accordance with SFAS No. 109.  The Communications Group implemented SFAS No.
109, "Accounting for Income  Taxes," in 1993. Adoption  of the new standard  did
not  have a material effect on the  financial position or results of operations,
primarily because of U S WEST's earlier adoption of SFAS No. 96.
 
    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.
 
    NEW  ACCOUNTING  STANDARDS   In  1996, U  S WEST  will  adopt SFAS  No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."  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. U S WEST expects that the adoption
of SFAS No. 121  will not have  a material effect on  its financial position  or
results of operations.
 
    In  1996, U  S WEST  will adopt  SFAS No.  123, "Accounting  for Stock-Based
Compensation." This standard establishes a fair value method for accounting  for
stock-based  compensation plans  either through  recognition or  disclosure. U S
WEST  will  adopt   this  standard  through   compliance  with  the   disclosure
requirements  set forth in SFAS  No. 123. Adoption of  the standard will have no
impact on the financial position or results of operations of U S WEST.
 
                                      C-24
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3: RELATED PARTY TRANSACTIONS
 
    CUSTOMER LISTS, BILLING  AND COLLECTION SERVICES,  AND OTHER SERVICES   U  S
WEST  Communications sells customer lists,  billing and collection services, and
other services to the domestic publishing  operations of the Media Group.  These
data  and  services  are  sold  at market  price.  However,  the  accounting and
reporting for regulatory purposes is in accordance with regulatory requirements.
U S WEST Communications  charged $20, $29  and $26 for  these services in  1995,
1994 and 1993, respectively.
 
    TELECOMMUNICATIONS    SERVICES       U    S   WEST    Communications   sells
telecommunications network access and usage to the domestic cellular  operations
of  the Media Group. U  S WEST Communications charged $40,  $30 and $24 in 1995,
1994 and 1993, respectively, for these services.
 
    BELL  COMMUNICATIONS  RESEARCH,  INC.  ("BELLCORE")    Charges  relating  to
research,  development  and maintenance  of  existing technologies  performed by
Bellcore, of which U S WEST Communications has a one-seventh ownership interest,
were $84, $111 and $113 in 1995, 1994 and 1993, respectively.
 
NOTE 4: RESTRUCTURING CHARGE
    The Communications  Group's 1993  results  reflected an  $880  restructuring
charge  (pretax). The related  restructuring plan (the  "Restructuring Plan") is
designed to provide faster, more responsive customer services while reducing the
costs of  providing these  services.  As part  of  the Restructuring  Plan,  the
Communications Group is developing new systems and enhanced system functionality
that  will  enable  it  to  monitor  networks  to  reduce  the  risk  of service
interruptions, activate telephone service on demand, rapidly design and engineer
new products and services for customers, and centralize its service centers. The
Communications Group has consolidated its  560 customer service centers into  26
centers  in 10  cities and  plans on  reducing its  work force  by approximately
10,000 employees. Approximately 1,000 employees that were originally expected to
relocate have chosen separation or other job assignments and have been replaced.
This increased the  number of  employee separations  to 10,000  from 9,000,  and
increased  the estimated total  cost for employee  separations to $311, compared
with $281  in  the  original  estimate.  The  $30  cost  associated  with  these
additional  employee separations was reclassified from relocation to the reserve
for employee separations during 1995.
 
    Following is a  schedule of  the costs  included in  the 1993  restructuring
charge:
 
<TABLE>
<CAPTION>
                                                                       1993
                                                                   RESTRUCTURING    CHANGE IN    DECEMBER 31,
                                                                      CHARGE        ESTIMATE     1995 ESTIMATE
                                                                  ---------------  -----------  ---------------
<S>                                                               <C>              <C>          <C>
Employee separation 1...........................................     $     225      $      30      $     255
Systems development.............................................           360         --                360
Real estate.....................................................           130         --                130
Relocation......................................................           105            (30)            75
Retraining and other............................................            60         --                 60
                                                                         -----            ---          -----
  Total.........................................................     $     880         --          $     880
                                                                         -----            ---          -----
                                                                         -----            ---          -----
</TABLE>
 
------------------------------
1 Employee-separation  costs,  including  the balance  of  a  1991 restructuring
  reserve at December 31, 1993, aggregate $311.
 
    Employee separation costs include  severance payments, health-care  coverage
and  postemployment education  benefits. Systems  development costs  include new
systems and the application of enhanced system functionality to existing  single
purpose  systems to provide integrated  end-to-end customer service. Real estate
costs include preparation costs for the new service centers. The relocation  and
retraining  costs are related to moving employees to the new service centers and
retraining  employees  on  the  methods   and  systems  required  in  the   new,
restructured mode of operation.
 
                                      C-25
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4: RESTRUCTURING CHARGE (CONTINUED)
    The following table shows amounts charged to the restructuring reserve:
 
<TABLE>
<CAPTION>
                                                    1993
                                                RESTRUCTURING      1994         1995       CHANGE IN    DECEMBER 31,
                                                   RESERVE       ACTIVITY     ACTIVITY     ESTIMATE     1995 BALANCE
                                               ---------------  -----------  -----------  -----------  ---------------
<S>                                            <C>              <C>          <C>          <C>          <C>
Employee separation (1)......................     $     281      $      75    $      76    $      30      $     160
Systems development..........................           360            118          129       --                113
Real estate..................................           130             50           66       --                 14
Relocation...................................           105             21           21          (30)            33
Retraining and other.........................            60              8           23       --                 29
                                                      -----          -----        -----          ---          -----
  Total......................................     $     936      $     272    $     315    $  --          $     349
                                                      -----          -----        -----          ---          -----
                                                      -----          -----        -----          ---          -----
</TABLE>
 
------------------------------
(1)
  Includes  $56 associated with work-force reductions under a 1991 restructuring
  plan.
 
    Employee separations under the Restructuring Plan  in 1995 and 1994 were  as
follows:
 
<TABLE>
<CAPTION>
                                                                                                CUMULATIVE
                                                                   1994           1995        SEPARATIONS AT
                                                                SEPARATIONS    SEPARATIONS   DECEMBER 31, 1995
                                                               -------------  -------------  -----------------
<S>                                                            <C>            <C>            <C>
Employee separations:
  Managerial.................................................          497            682            1,179
  Occupational...............................................        1,683          1,643            3,326
                                                                     -----          -----            -----
    Total....................................................        2,180          2,325            4,505
                                                                     -----          -----            -----
                                                                     -----          -----            -----
</TABLE>
 
    The  Restructuring Plan is expected to be substantially completed by the end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the business and related service  issues, new business opportunities,  revisions
to  system  delivery  schedules  and productivity  issues  caused  by  the major
rearrangement of resources due to  restructuring. These issues will continue  to
affect the timing of employee separations.
 
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
    The composition of property, plant and equipment follows:
 
<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                    --------------------
                                                                                      1995       1994
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Land and buildings................................................................  $   2,459  $   2,453
Telephone network equipment.......................................................     12,019     11,622
Telephone outside plant...........................................................     12,353     11,897
General purpose computers and other...............................................      3,580      3,013
Construction in progress..........................................................        767        593
                                                                                    ---------  ---------
                                                                                       31,178     29,578
                                                                                    ---------  ---------
Less accumulated depreciation
  Buildings.......................................................................        686        657
  Telephone network equipment.....................................................      7,221      6,733
  Telephone outside plant.........................................................      7,851      7,442
  General purpose computers and other.............................................      1,891      1,705
                                                                                    ---------  ---------
                                                                                       17,649     16,537
                                                                                    ---------  ---------
Property, plant and equipment -- net..............................................  $  13,529  $  13,041
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
                                      C-26
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
    In 1995, U S WEST Communications sold certain rural telephone exchanges with
a  cost basis of  $258. U S  WEST Communications received  consideration for the
sales of $388, including  $214 in cash.  In 1994, U  S WEST Communications  sold
certain  rural  telephone  exchanges with  a  cost  basis of  $122  and received
consideration of $204, including $93 in cash.
 
DISCONTINUANCE OF SFAS NO. 71
 
    U S WEST  Communications incurred  a noncash, extraordinary  charge of  $3.1
billion,  net of an income tax benefit  of $2.3 billion, in conjunction with its
decision to discontinue accounting for the operations of U S WEST Communications
in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types  of
Regulation,"  as  of  September  30,  1993. SFAS  No.  71  generally  applies to
regulated companies that meet certain requirements, including a requirement that
a company be able to recover its costs, notwithstanding competition, by charging
its customers at prices established by its regulators. U S WEST  Communications'
decision  to discontinue application of SFAS No. 71 was based on the belief that
competition, market  conditions and  technological  advances, more  than  prices
established  by regulators, will determine the future  cost recovery by U S WEST
Communications. As a result  of this change,  the remaining asset  lives of U  S
WEST  Communications' plant  were shortened to  more closely  reflect the useful
(economic) lives of such plant.
 
    Following is a list of the major categories of telephone property, plant and
equipment and  the  manner in  which  depreciable  lives were  affected  by  the
discontinuance of SFAS No. 71:
 
<TABLE>
<CAPTION>
                                                                                AVERAGE LIFE (YEARS)
                                                                          --------------------------------
                                                                              BEFORE            AFTER
CATEGORY                                                                  DISCONTINUANCE   DISCONTINUANCE
------------------------------------------------------------------------  ---------------  ---------------
<S>                                                                       <C>              <C>
Digital switch..........................................................       17-18             10
Digital circuit.........................................................       11-13             10
Aerial copper cable.....................................................       18-28             15
Underground copper cable................................................       25-30             15
Buried copper cable.....................................................       25-28             20
Fiber cable.............................................................        30               20
Buildings...............................................................       27-49            27-49
General purpose computers...............................................         6                6
</TABLE>
 
    U  S WEST Communications employed two methods to determine the amount of the
extraordinary charge. The "economic life" method  assumed that a portion of  the
plant-related   effect  is   a  regulatory  asset   that  was   created  by  the
under-depreciation  of  plant   under  regulation.  This   method  yielded   the
plant-related  adjustment that was confirmed by  the second method, a discounted
cash flows analysis.
 
    Following is a schedule  of the nature and  amounts of the after-tax  charge
recognized  as a result of  U S WEST Communications'  discontinuance of SFAS No.
71:
 
<TABLE>
<S>                                                                           <C>
Plant related...............................................................  $   3,124
Tax-related regulatory assets and liabilities...............................       (208)
Other regulatory assets and liabilities.....................................        207
                                                                              ---------
  Total.....................................................................  $   3,123
                                                                              ---------
                                                                              ---------
</TABLE>
 
                                      C-27
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: DEBT
 
SHORT-TERM DEBT
 
    The components of short-term debt follow:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                       --------------------
                                                                                         1995       1994
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Notes payable:
  Commercial paper...................................................................  $     542  $   1,321
  Other..............................................................................         62        116
Current portion of long-term debt....................................................        461        171
                                                                                       ---------  ---------
Total................................................................................  $   1,065  $   1,608
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    The weighted average interest rate on commercial paper was 5.79 percent  and
5.92 percent at December 31, 1995 and 1994, respectively.
 
    U  S WEST and U S WEST  Communications maintain commercial paper programs 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 Communications, which conducts
its own borrowing activities, is permitted to borrow up to $600 under short-term
lines  of credit, all  of which was  available at December  31, 1995. Additional
lines of credit aggregating approximately $1.3 billion are available to both the
Media Group and  the nonregulated  subsidiaries of the  Communications Group  in
accordance with their borrowing needs.
 
LONG-TERM DEBT
 
    Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
                                                                                 MATURITIES
                                                           -------------------------------------------------------    TOTAL
INTEREST RATES                                               1997       1998       1999       2000     THEREAFTER     1995
---------------------------------------------------------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                                                        <C>        <C>        <C>        <C>        <C>          <C>
Up to 5%.................................................  $  --      $      35  $  --      $      90   $     150   $     275
Above 5% to 6%...........................................     --            300     --         --             261         561
Above 6% to 7%...........................................     --         --             71        257       1,916       2,244
Above 7% to 8%...........................................         16     --         --         --           2,477       2,493
Above 8% to 9%...........................................     --         --         --         --             250         250
Above 9% to 10%..........................................     --         --         --            175      --             175
Variable rate debt indexed to two- and ten-year constant
 maturity Treasury rates.................................         25     --            155     --          --             180
                                                           ---------  ---------  ---------  ---------  -----------  ---------
                                                           $      41  $     335  $     226  $     522   $   5,054       6,178
                                                           ---------  ---------  ---------  ---------  -----------
                                                           ---------  ---------  ---------  ---------  -----------
Capital lease obligations and other......................                                                                 195
Unamortized discount -- net..............................                                                                (684)
                                                                                                                    ---------
Total....................................................                                                           $   5,689
                                                                                                                    ---------
                                                                                                                    ---------
 
<CAPTION>
 
                                                             TOTAL
INTEREST RATES                                               1994
---------------------------------------------------------  ---------
<S>                                                        <C>
Up to 5%.................................................  $     275
Above 5% to 6%...........................................        561
Above 6% to 7%...........................................      1,361
Above 7% to 8%...........................................      2,136
Above 8% to 9%...........................................        250
Above 9% to 10%..........................................        320
Variable rate debt indexed to two- and ten-year constant
 maturity Treasury rates.................................        180
                                                           ---------
                                                               5,083
 
Capital lease obligations and other......................        148
Unamortized discount -- net..............................       (715)
                                                           ---------
Total....................................................  $   4,516
                                                           ---------
                                                           ---------
</TABLE>
 
    Long-term  debt consists  principally of  debentures, medium-term  notes and
zero coupon subordinated  notes convertible  at any  time into  equal shares  of
Communications  Stock and  Media Stock.  The zero coupon  notes have  a yield to
maturity of approximately 7.3 percent. The  zero coupon notes are recorded at  a
discounted value of $276 and $264 at December 31, 1995 and 1994, respectively.
 
    During  1995, U S WEST Communications  refinanced $1.5 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.
Expenses   associated  with  the  refinancing  of  long-term  debt  resulted  in
extraordinary charges to income of $8, net of tax benefits of $5.
 
    During 1993,  U  S  WEST Communications  refinanced  long-term  debt  issues
aggregating  $2.7  billion in  principal  amount. Expenses  associated  with the
refinancing resulted in an extraordinary charge to  income of $77, net of a  tax
benefit of $48.
 
                                      C-28
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: DEBT (CONTINUED)
    Interest  payments by the Communications  Group, net of amounts capitalized,
were $378, $356 and $398 in 1995, 1994 and 1993, respectively.
 
INTEREST RATE RISK MANAGEMENT
 
    U S  WEST  Communications  enters  into interest  rate  swap  agreements  to
effectively  convert existing commercial paper to fixed-rate debt. This allows U
S WEST Communications to achieve  interest savings over issuing fixed-rate  debt
directly.
 
    Under  an interest  rate swap, U  S WEST Communications  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.  The net  interest
received  or paid  as part  of the  interest rate  swap is  accounted for  as an
adjustment to interest expense.
 
    During 1995 and 1994, U S WEST Communications entered into currency swaps to
convert Swiss franc-denominated debt to 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  pertaining to  U  S WEST
Communications as of December 31, 1995  and 1994. Variable rates are indexed  to
two- and ten-year constant maturity Treasury and 30-day commercial paper rates.
<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31, 1994
                                                      DECEMBER 31, 1995                 ------------------------------------
                                       -----------------------------------------------                            WEIGHTED
                                                                WEIGHTED AVERAGE RATE                              AVERAGE
                                                                                                                    RATE
                                        NOTIONAL                ----------------------   NOTIONAL                -----------
                                         AMOUNT     MATURITIES    RECEIVE       PAY       AMOUNT     MATURITIES    RECEIVE
                                       -----------  ----------  -----------     ---     -----------  ----------  -----------
<S>                                    <C>          <C>         <C>          <C>        <C>          <C>         <C>
Variable to fixed....................   $     580   1996-1999         5.70        6.56   $     710   1995-1999         6.14
Currency.............................         204   1999-2001       --            6.55          71      1999         --
 
<CAPTION>
 
                                          PAY
                                          ---
<S>                                    <C>
Variable to fixed....................       6.19
Currency.............................       6.53
</TABLE>
 
    In  1993, U  S WEST Communications  executed forward contracts  to sell U.S.
Treasury bonds to lock in  the U.S. Treasury rate  component of the future  debt
issue.  At December 31, 1995, deferred credits of $8 and deferred charges of $51
on closed forward contracts are  included as part of  the carrying value of  the
underlying  debt. The  deferred credits  and charges  are being  recognized as a
yield adjustment  over the  life of  the debt,  which matures  at various  dates
through  2043. The net  deferred charge is  directly offset by  the lower coupon
rate achieved on the  debt issuance. At  December 31, 1995,  there were no  open
forward contracts.
 
    The  counterparties  to these  interest rate  contracts are  major financial
institutions. U S WEST Communications 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 Communications does  not have significant exposure to  an
individual   counterparty  and   does  not  anticipate   nonperformance  by  any
counterparty.
 
NOTE 7: 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  fair values of interest  rate swaps are based  on estimated amounts U S
WEST Communications would  receive or  pay to terminate  such agreements  taking
into account current interest rates and creditworthiness of the counterparties.
 
                                      C-29
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
 
NOTE 7: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
    The  fair values of long-term  debt 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,
                                                                           ----------------------------------------------
                                                                                    1995                    1994
                                                                           ----------------------  ----------------------
                                                                            CARRYING      FAIR      CARRYING      FAIR
                                                                              VALUE       VALUE       VALUE       VALUE
                                                                           -----------  ---------  -----------  ---------
<S>                                                                        <C>          <C>        <C>          <C>
Debt (includes short-term portion).......................................   $   6,754   $   7,050   $   6,124   $   5,600
Interest rate swap agreements -- assets..................................      --             (19)     --             (15)
Interest rate swap agreements -- liabilities.............................      --              17      --          --
                                                                           -----------  ---------  -----------  ---------
Debt -- net..............................................................   $   6,754   $   7,048   $   6,124   $   5,585
                                                                           -----------  ---------  -----------  ---------
                                                                           -----------  ---------  -----------  ---------
</TABLE>
 
NOTE 8: LEASING ARRANGEMENTS
    Certain subsidiaries  within  the  Communications Group  have  entered  into
operating  leases for office facilities, equipment and real estate. Rent expense
under operating  leases  was  $210,  $235  and $228  in  1995,  1994  and  1993,
respectively.  Minimum  future lease  payments as  of  December 31,  1995, under
noncancelable operating leases, follow:
 
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------------------------
<S>                                                                          <C>
1996.......................................................................  $     113
1997.......................................................................        112
1998.......................................................................        110
1999.......................................................................        102
2000.......................................................................        101
Thereafter.................................................................        728
                                                                             ---------
Total......................................................................  $   1,266
                                                                             ---------
                                                                             ---------
</TABLE>
 
NOTE 9: COMMUNICATIONS GROUP EQUITY
    Following are changes  in the  Communications Group equity  for the  periods
presented:
 
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                     -------------------------------
                                                                                       1995       1994       1993
                                                                                     ---------  ---------  ---------
<S>                                                                                  <C>        <C>        <C>
Balance at beginning of period.....................................................  $   3,179  $   2,722  $   6,003
Net income (loss)..................................................................      1,176      1,150     (2,809)
Dividends..........................................................................     (1,010)      (980)      (905)
Equity issuances prior to Recapitalization Plan....................................         79        287        433
Communications Stock issuances.....................................................         52     --         --
                                                                                     ---------  ---------  ---------
Balance at end of period...........................................................  $   3,476  $   3,179  $   2,722
                                                                                     ---------  ---------  ---------
                                                                                     ---------  ---------  ---------
</TABLE>
 
    U  S WEST has  issued 1.7 million  shares of Communications  Stock since the
November 1,  1995 recapitalization  and has  473,635,025 shares  outstanding  at
December 31, 1995.
 
    LEVERAGED  EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP")  The Communications Group
and the  Media  Group  participate  in the  defined  contribution  savings  plan
sponsored  by U S WEST. Substantially  all employees of the Communications Group
are covered by  the plan. 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
 
                                      C-30
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 9: COMMUNICATIONS GROUP EQUITY (CONTINUED)
interest are paid on the debt. At  December 31, 1995, 10,145,485 shares each  of
Communications  Stock and Media  Stock had been allocated  from the LESOP, while
2,839,435  shares  each  of  Communications  Stock  and  Media  Stock   remained
unallocated.
 
    The   borrowings  associated  with  the  LESOP,  which  are  unconditionally
guaranteed by U  S WEST,  are reflected in  the Media  Group Combined  Financial
Statements.  Contributions from the Communications Group and the Media Group, as
well as dividends on unallocated  shares held by the LESOP  ($8, $11 and $14  in
1995,  1994 and 1993,  respectively), are used for  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. Tax benefits related to dividend  payments on eligible shares in the
savings plan have  been allocated to  the Communications Group,  which paid  the
dividends.
 
    U S WEST recognizes expense based on the cash payments method. Contributions
to  the plan related to the Communications Group, excluding dividends, were $70,
$68 and $68 in  1995, 1994 and  1993, respectively, of which  $12, $16 and  $20,
respectively, have been classified as interest expense.
 
NOTE 10: STOCK INCENTIVE PLANS
    U  S WEST maintains stock incentive  plans for executives and key employees,
and nonemployees.  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, Inc. 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.
 
    During  calendar year 1995,  up to 2,200,000  shares of Communications Stock
were  available  for  grant.   The  maximum  aggregate   number  of  shares   of
Communications  Stock that  may be  granted in any  other calendar  year for all
purposes under the  Plan is  nine-tenths of one  percent (0.90  percent) of  the
shares  of  such  class  outstanding (excluding  shares  held  in  the Company'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  may be exercised  no later than  10 years after  the date  on
which the option was granted.
 
                                      C-31
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 10: STOCK INCENTIVE PLANS (CONTINUED)
    Data for outstanding options under the Plan is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                     COMMUNICATIONS GROUP
                                                                                                U S WEST, INC.
                                                                     ---------------------  ----------------------
                                                                                  AVERAGE                 AVERAGE
                                                                     NUMBER OF    OPTION     NUMBER OF    OPTION
                                                                       SHARES      PRICE      SHARES*      PRICE
                                                                     ----------  ---------  -----------  ---------
<S>                                                                  <C>         <C>        <C>          <C>
Outstanding January 1, 1993........................................                           4,450,150  $   35.81
                                                                                            -----------  ---------
  Granted..........................................................                           1,486,106      48.83
  Exercised........................................................                            (412,444)     31.73
  Canceled or expired..............................................                            (222,273)     36.87
                                                                                            -----------  ---------
Outstanding December 31, 1993......................................                           5,301,539  $   39.76
                                                                                            -----------  ---------
  Granted..........................................................                           2,438,409      36.15
  Exercised........................................................                            (139,762)     33.72
  Canceled or expired..............................................                            (214,149)     40.71
                                                                                            -----------  ---------
Outstanding December 31, 1994......................................                           7,386,037  $   38.66
                                                                                            -----------  ---------
  Granted..........................................................                           3,062,920      43.63
  Exercised........................................................                            (430,631)     34.03
  Canceled or expired..............................................                            (175,147)     39.76
                                                                                            -----------  ---------
Outstanding October 31, 1995.......................................                           9,843,179  $   40.39
                                                                                            -----------  ---------
Recapitalization Plan..............................................   9,843,179  $   24.11   (9,843,179) $  (40.39)
                                                                     ----------  ---------
  Granted..........................................................     138,309      32.16
  Exercised........................................................    (543,037)     21.23
  Canceled or expired..............................................     (15,350)     24.91
                                                                     ----------  ---------  -----------  ---------
Outstanding December 31, 1995......................................   9,423,101  $   24.39      --          --
                                                                     ----------  ---------  -----------  ---------
                                                                     ----------  ---------  -----------  ---------
</TABLE>
 
------------------------------
* Includes options granted in tandem with SARs.
 
    Options   to  purchase   2,672,666  shares  of   Communications  Stock  were
exercisable at December 31,  1995. Options to purchase  2,374,394 shares of U  S
WEST stock were exercisable at December 31, 1994. A total of 2,050,466 shares of
Communications  Stock  were available  for grant  under the  plans in  effect at
December 31, 1995.  A total  of 914,816  shares of U  S WEST  common stock  were
available  for grant under the plans in effect  at December 31, 1994. A total of
11,484,792 shares of Communications Stock were reserved for issuance at December
31, 1995.
 
NOTE 11: EMPLOYEE BENEFITS
 
PENSION PLAN
 
    The Communications  Group and  the Media  Group participate  in the  defined
benefit  pension plan  sponsored by U  S WEST. Substantially  all management and
occupational employees  of the  Communications Group  are covered  by the  plan.
Since  plan assets  are not segregated  into separate accounts  or restricted to
providing benefits to employees of the Communications Group, assets of the  plan
may  be used to provide  benefits to employees of  both the Communications Group
and the Media Group. In the event the single employer pension plan sponsored  by
U  S WEST would be separated into two  or more plans, guidelines in the Internal
Revenue Code dictate how assets of the plan must be allocated to the new  plans.
U S WEST currently has no intention to split the plan. Because of these factors,
U  S WEST believes there is no reasonable  basis to attribute plan assets to the
Communications  Group  as  if  they  had  funded  separately  their  actuarially
determined obligation.
 
                                      C-32
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
    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 ("ERISA") and no funding was required in 1995, 1994 or 1993. Should funding
be   required  in  the  future,  funding  amounts  would  be  allocated  to  the
Communications Group based upon the ratio of service cost of the  Communications
Group to total service cost of plan participants.
 
    The composition of the net pension cost and the actuarial assumptions of the
plan follow:
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1995       1994       1993
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Details of pension cost:
  Service cost -- benefits earned during the period..................................  $     173  $     197  $     148
  Interest cost on projected benefit obligation......................................        558        561        514
  Actual return on plan assets.......................................................     (1,918)       188     (1,320)
  Net amortization and deferral......................................................      1,185       (946)       578
                                                                                       ---------  ---------  ---------
Net pension cost.....................................................................  $      (2) $       0  $     (80)
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
    The expected long-term rate of return on plan assets used in determining net
pension  cost was 8.50 percent for 1995,  8.50 percent for 1994 and 9.00 percent
for 1993.
 
    The funded status of the U S WEST plan follows:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1995       1994
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044, respectively...  $   6,617  $   5,616
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
Plan assets at fair value, primarily stocks and bonds..........................................  $   9,874  $   8,388
Less: Projected benefit obligation.............................................................      8,450      7,149
                                                                                                 ---------  ---------
Plan assets in excess of projected benefit obligation..........................................      1,424      1,239
Unrecognized net (gain) loss...................................................................       (101)       161
Prior service cost not yet recognized in net periodic pension cost.............................        (62)       (67)
Balance of unrecognized net asset at January 1, 1987...........................................       (705)      (785)
                                                                                                 ---------  ---------
Prepaid pension cost...........................................................................  $     556  $     548
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    The actuarial assumptions used to calculate the projected benefit obligation
follow:
 
<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                                 ------------------------
                                                                                                    1995         1994
                                                                                                 -----------  -----------
<S>                                                                                              <C>          <C>
Discount rate..................................................................................       7.00%        8.00%
Weighted average rate of compensation increase.................................................       5.50%        5.50%
</TABLE>
 
    Anticipated  future  benefit  changes  have  been  reflected  in  the  above
calculations.
 
    ALLOCATION  OF PENSION COSTS  U S  WEST's allocation policy is to: 1) offset
the Company-wide service cost, interest cost  and amortization by the return  on
plan   assets;  and  2)   allocate  the  remaining  net   pension  cost  to  the
Communications Group based on the  ratio of actuarially determined service  cost
of the Communications Group to total service cost of plan participants. U S WEST
believes  allocating net pension cost based  on service cost is reasonable since
service  cost   is  a   primary  factor   in  determining   pension  cost.   Net
 
                                      C-33
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
pension  costs allocated to the Communications Group  were $(2), $0 and $(71) in
1995, 1994 and 1993, respectively. The  service and interest costs for 1995  and
the  projected  benefit  obligation  at  December  31,  1995  attributed  to the
Communications Group were $149, $529 and $8,021, respectively.
 
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
    The Communications Group and the Media Group participate in plans  sponsored
by  U S WEST  which provide certain  health care and  life insurance benefits to
retired employees. In conjunction with the  Company's 1992 adoption of SFAS  No.
106,  "Employers' Accounting for Postretirement Benefits Other Than Pensions," U
S WEST elected to immediately  recognize the accumulated postretirement  benefit
obligation  for current and future retirees. However, the Federal Communications
Commission 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  postretirement  benefit  costs  and  actuarial  assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------------------------------------
                                                       1995                                1994                     1993
                                         ---------------------------------  -----------------------------------  -----------
                                           MEDICAL      LIFE       TOTAL      MEDICAL      LIFE        TOTAL       MEDICAL
                                         -----------     ---     ---------  -----------     ---        -----     -----------
<S>                                      <C>          <C>        <C>        <C>          <C>        <C>          <C>
Service cost -- benefits earned during
 the period............................   $      59   $       6  $      65   $      62   $      13   $      75    $      60
Interest on accumulated benefit
 obligation............................         235          32        267         221          39         260          235
Actual return on plan assets...........        (319)        (96)      (415)          3           1           4          (73)
Net amortization and deferral..........         228          58        286         (68)        (31)        (99)          27
                                              -----         ---  ---------       -----         ---       -----        -----
Net postretirement benefit costs.......   $     203   $       0  $     203   $     218   $      22   $     240    $     249
                                              -----         ---  ---------       -----         ---       -----        -----
                                              -----         ---  ---------       -----         ---       -----        -----
 
<CAPTION>
 
                                           LIFE       TOTAL
                                         ---------  ---------
<S>                                      <C>        <C>
Service cost -- benefits earned during
 the period............................  $      11  $      71
Interest on accumulated benefit
 obligation............................         36        271
Actual return on plan assets...........        (52)      (125)
Net amortization and deferral..........         22         49
                                         ---------  ---------
Net postretirement benefit costs.......  $      17  $     266
                                         ---------  ---------
                                         ---------  ---------
</TABLE>
 
    The  expected long-term  rate of return  on plan assets  used in determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
 
    The funded status of the plans follows:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                               --------------------------------------------------------------------
                                                                             1995                               1994
                                                               ---------------------------------  ---------------------------------
                                                                 MEDICAL      LIFE       TOTAL      MEDICAL      LIFE       TOTAL
                                                               -----------  ---------  ---------  -----------  ---------  ---------
<S>                                                            <C>          <C>        <C>        <C>          <C>        <C>
Accumulated postretirement benefit obligation attributable
 to:
  Retirees...................................................   $   1,866   $     271  $   2,137   $   1,733   $     248  $   1,981
  Fully eligible plan participants...........................         293          34        327         264          38        302
  Other active plan participants.............................       1,059         165      1,224         940         135      1,075
                                                               -----------  ---------  ---------  -----------  ---------  ---------
  Total accumulated postretirement benefit obligation........       3,218         470      3,688       2,937         421      3,358
  Unrecognized net gain......................................         378         161        539         243          90        333
  Unamortized prior service cost.............................      --             (34)       (34)
  Fair value of plan assets, primarily stocks, bonds and life
   insurance (1).............................................      (1,385)       (460)    (1,845)       (894)       (374)    (1,268)
                                                               -----------  ---------  ---------  -----------  ---------  ---------
  Accrued postretirement benefit obligation..................   $   2,211   $     137  $   2,348   $   2,286   $     137  $   2,423
                                                               -----------  ---------  ---------  -----------  ---------  ---------
                                                               -----------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  Medical plan assets include  Communications Stock of $210  and Media Stock  of
  $112 in 1995, and U S WEST common stock of $164 in 1994.
 
                                      C-34
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
    The  actuarial assumptions used to  calculate the accumulated postretirement
benefit obligation follow:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                   ------------------------
                                                                      1995         1994
                                                                   -----------  -----------
<S>                                                                <C>          <C>
Discount rate....................................................       7.00%        8.00%
Medical trend*...................................................       9.00%        9.70%
</TABLE>
 
------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 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  1995 net  postretirement benefit  cost by  approximately $40  and
increased   the   1995   accumulated   postretirement   benefit   obligation  by
approximately $350.
 
    Anticipated  future   benefit  changes   have   been  reflected   in   these
postretirement benefit calculations.
 
    PLAN ASSETS  Assets of the postretirement medical and life plans may be used
to  provide benefits to employees of both the Communications Group and the Media
Group since plan  assets are  not legally  restricted to  providing benefits  to
either  Group. In  the event  that either plan  sponsored by  U S  WEST would be
separated into  two or  more plans,  there  are no  guidelines in  the  Internal
Revenue  Code for allocating assets  of the plan. U  S WEST allocates the assets
based on historical contributions for  postretirement medical costs, and on  the
ratio  of  salaries  for life  plan  participants.  U S  WEST  currently  has no
intention to split the plans.
 
    POSTRETIREMENT MEDICAL COSTS   The  service and interest  components of  net
postretirement medical benefit costs are calculated for the Communications Group
based  on  the  population  characteristics  of  the  Group.  Since  funding  of
postretirement medical costs is voluntary, return on assets is attributed to the
Communications Group  based on  historical funding.  The Communications  Group's
annual  funding amount is based on its cash requirements with the funding at U S
WEST Communications based on regulatory accounting requirements.
 
    Net postretirement medical  benefit costs recognized  by the  Communications
Group  for  1995, 1994  and 1993  were  $189, $207  and $238,  respectively. The
percentage of  postretirement medical  assets attributed  to the  Communications
Group   at  December   31,  1995  and   1994,  based   on  historical  voluntary
contributions,  was   96  and   95   percent,  respectively.   The   accumulated
postretirement medical benefit obligation attributed to the Communications Group
was $3,057 at December 31, 1995.
 
    ALLOCATION  OF POSTRETIREMENT LIFE COSTS  Net postretirement life costs, and
funding requirements, if any, are allocated  to the Communications Group in  the
same manner as pensions. U S WEST will generally fund the amount allowed for tax
purposes  and no funding of postretirement life insurance occurred in 1995, 1994
and 1993. U S WEST believes  its method of allocating postretirement life  costs
is reasonable.
 
    Net  postretirement life benefit costs allocated to the Communications Group
for 1995, 1994  and 1993 were  $0, $19  and $14, respectively.  The service  and
interest  costs  for  1995  and  the  accumulated  postretirement  life  benefit
obligation at December 31, 1995 attributed to the Communications Group were  $5,
$29, $425, respectively.
 
                                      C-35
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12: INCOME TAXES
    The components of the provision for income taxes follow:
 
<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                            -------------------------------
                                                                                              1995       1994       1993
                                                                                            ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
Federal:
  Current.................................................................................  $     434  $     368  $     350
  Deferred................................................................................        177        233       (115)
  Investment tax credits -- net...........................................................        (38)       (47)       (56)
                                                                                            ---------  ---------  ---------
                                                                                                  573        554        179
State and local:
  Current.................................................................................         56         58         48
  Deferred................................................................................         33         41        (19)
                                                                                            ---------  ---------  ---------
                                                                                                   89         99         29
                                                                                            ---------  ---------  ---------
Provision for income taxes................................................................  $     662  $     653  $     208
                                                                                            ---------  ---------  ---------
                                                                                            ---------  ---------  ---------
</TABLE>
 
    The  unamortized balance of investment tax  credits at December 31, 1995 and
1994, was $199 and $231, respectively.
 
    Amounts for income taxes  paid by the Communications  Group were $511,  $491
and $297 in 1995, 1994 and 1993, respectively.
 
    The effective tax rate differs from the statutory tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                              -------------------------------
                                                                                                1995       1994       1993
                                                                                              ---------  ---------  ---------
                                                                                                        IN PERCENT
<S>                                                                                           <C>        <C>        <C>
Federal statutory tax rate..................................................................       35.0       35.0       35.0
Investment tax credit amortization..........................................................       (1.3)      (1.7)      (3.5)
State income taxes -- net of federal effect.................................................        3.1        3.6        3.5
Rate differential on reversing temporary differences........................................     --         --           (2.6)
Depreciation on capitalized overheads -- net................................................     --         --            1.6
Tax law change -- catch-up adjustment.......................................................     --         --            3.7
Restructuring charge........................................................................     --         --           (2.4)
Other.......................................................................................       (0.9)      (0.7)      (0.6)
                                                                                                    ---        ---        ---
Effective tax rate..........................................................................       35.9       36.2       34.7
                                                                                                    ---        ---        ---
                                                                                                    ---        ---        ---
</TABLE>
 
                                      C-36
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12: INCOME TAXES (CONTINUED)
    The components of the net deferred tax liability follow:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1995       1994
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Property, plant and equipment..................................................................  $   1,433  $   1,428
State deferred taxes -- net of federal effect..................................................        180        221
Other..........................................................................................         68         77
                                                                                                 ---------  ---------
Deferred tax liabilities.......................................................................      1,681      1,726
                                                                                                 ---------  ---------
Postemployment benefits, including pension.....................................................        675        689
Restructuring and other........................................................................        231        287
Unamortized investment tax credit..............................................................         70         79
State deferred taxes -- net of federal effect..................................................        133        194
Other..........................................................................................        142        231
                                                                                                 ---------  ---------
Deferred tax assets............................................................................      1,251      1,480
                                                                                                 ---------  ---------
Net deferred tax liability.....................................................................  $     430  $     246
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    The  current portion of the deferred tax asset was $259 and $300 at December
31, 1995 and 1994, respectively, resulting primarily from restructuring  charges
and compensation related items.
 
    On  August 10,  1993, federal  legislation was  enacted which  increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $54.
 
NOTE 13: CONTINGENCIES
    At U S  WEST Communications there  are pending regulatory  actions in  local
regulatory  jurisdictions that call for price decreases, refunds or both. In one
such instance,  the  Utah Supreme  Court  has  remanded a  Utah  Public  Service
Commission  ("PSC") order to  the PSC for  reconsideration, thereby establishing
two exceptions to  the rule  against retroactive ratemaking:  1) unforeseen  and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request  from interexchange carriers and other parties related to the Tax Reform
Act of 1986. This action is still in the discovery process. If a formal filing -
made in accordance with  the remand from  the Supreme Court  - alleges that  the
exceptions apply, the range of possible risk to U S WEST Communications is $0 to
$150.
 
                                      C-37
<PAGE>
                         U S WEST COMMUNICATIONS GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                          QUARTERLY FINANCIAL DATA
                                                                             --------------------------------------------------
                                                                                FIRST       SECOND        THIRD       FOURTH
                                                                               QUARTER      QUARTER      QUARTER      QUARTER
                                                                             -----------  -----------  -----------  -----------
<S>                                                                          <C>          <C>          <C>          <C>
1995
  Operating revenues.......................................................   $   2,318    $   2,338    $   2,389    $   2,439
  Income before income taxes and extraordinary item........................         500          460          454          432
  Income before extraordinary item.........................................         315          293          292          284
  Net income...............................................................         315          293          287          281
  Pro forma earnings per common share before extraordinary
   item....................................................................        0.67         0.62         0.62         0.60
  Pro forma earnings per common share......................................        0.67         0.62         0.61         0.59
1994
  Operating revenues.......................................................   $   2,253    $   2,281    $   2,316    $   2,326
  Income before income taxes...............................................         467          456          422          458
  Net income...............................................................         295          289          267          299
  Pro forma earnings per common share......................................        0.66         0.64         0.59         0.65
</TABLE>
 
------------------------------
 
    Effective  November 1, 1995, each  share of U S  WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock.  Earnings
per  common share have  been presented on a  pro forma basis  to reflect the two
classes of stock  as if they  had been  outstanding since January  1, 1994.  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, Inc.
 
    1995  first-quarter net income includes $39 ($0.08 per share) from a gain on
the sales of certain rural  telephone exchanges. 1995 second-quarter net  income
includes  $10  ($0.02 per  share)  from a  gain on  the  sales of  certain rural
telephone exchanges.  1995  third-quarter net  income  includes $21  ($0.04  per
share)  from a  gain on the  sales of  certain rural telephone  exchanges and $5
($0.01 per share) for expenses  associated with the Recapitalization Plan.  1995
third-quarter  net income also includes a charge of $5 ($0.01 per share) for the
early extinguishment of debt. 1995 fourth-quarter net income includes $15 ($0.03
per share) from a  gain on the  sales of certain  rural telephone exchanges  and
other  charges of $6 ($0.01 per share),  including an extraordinary charge of $3
for the early  extinguishment of debt  and $3 for  expenses associated with  the
Recapitalization Plan.
 
    1994  net income includes gains on the sales of rural telephone exchanges of
$15 ($0.03 per share), $16 ($0.04 per share) and $20 ($0.04 per share) for first
quarter, second quarter and fourth quarter, respectively.
 
<TABLE>
<CAPTION>
                                                                                MARKET PRICE
                                                                       -------------------------------
1995 PER SHARE MARKET AND DIVIDEND DATA                                  HIGH        LOW       CLOSE     DIVIDENDS
---------------------------------------------------------------------  ---------  ---------  ---------  -----------
                                                                               (WHOLE DOLLARS)
<S>                                                                    <C>        <C>        <C>        <C>
November 1, 1995 through December 31, 1995...........................  $  36.375  $  28.375  $  35.625   $   0.535
</TABLE>
 
                                      C-38
<PAGE>
                              U S WEST MEDIA GROUP
                              FINANCIAL HIGHLIGHTS
 
<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                              -------------------------------------------------------
                                                                 1995        1994       1993       1992       1991
                                                              ----------  ----------  ---------  ---------  ---------
                                                                  DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>         <C>         <C>        <C>        <C>
Sales and other revenues:
  Directory and information services........................  $    1,180  $    1,075  $     956  $     949  $     891
  Wireless communications...................................         941         781        561        407        325
  Cable and telecommunications..............................         215          18     --         --         --
  Other.....................................................          38          34         32         28         45
                                                              ----------  ----------  ---------  ---------  ---------
Total sales and other revenues..............................  $    2,374  $    1,908  $   1,549  $   1,384  $   1,261
                                                              ----------  ----------  ---------  ---------  ---------
                                                              ----------  ----------  ---------  ---------  ---------
EBITDA (1)..................................................  $      716  $      533  $     485  $     410  $     373
Income from continuing operations before extraordinary item
 (2)........................................................         145         276         85        146         69
Earnings available for common stock.........................         138         276         85        146         69
Total assets................................................       8,615       7,394      5,446      3,130      3,235
Total debt (3)..............................................       2,101       1,814      1,526        249        682
Preferred securities (4)....................................         651          51     --         --         --
Media Group equity..........................................       4,472       4,203      3,139      2,265      2,057
Capital expenditures........................................         401         343        215        169        231
Pro forma earnings per common share (5).....................  $     0.29  $     0.61
Pro forma average common shares outstanding (thousands)
 (5)........................................................     470,549     453,316
</TABLE>
 
                             PROPORTIONATE DATA(6)
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1995       1994       1993
                                                                                       ---------  ---------  ---------
                                                                                             DOLLARS IN MILLIONS
<S>                                                                                    <C>        <C>        <C>
Sales and other revenues.............................................................  $   5,115  $   4,213  $   2,157
Operating income.....................................................................        476        401        195
Income from continuing operations before extraordinary item(2).......................        145        276         85
EBITDA(1) (excludes 1993 restructuring charge).......................................      1,149        902        527
Subscribers/advertisers (thousands)..................................................      5,959      4,234      3,086
</TABLE>
 
------------------------------
(1)
  Earnings   before  interest,  taxes,  depreciation,  amortization,  and  other
  ("EBITDA"). EBITDA  also excludes  gains  on asset  sales, equity  losses  and
  guaranteed minority interest expense.
 
(2)
  1995  income from continuing  operations before extraordinary  item includes a
  gain of $95 from the merger of  U S WEST's joint venture interest in  TeleWest
  plc  with SBC CableComms (UK) and costs  of $9 associated with the November 1,
  1995  recapitalization.  1994   income  from   continuing  operations   before
  extraordinary  item includes a gain of $105 on  the partial sale of U S WEST's
  joint venture interest in TeleWest and a gain of $41 on the sale of U S WEST's
  paging operation.  1993  and 1991  income  from continuing  operations  before
  extraordinary  item  was  reduced by  restructuring  charges of  $76  and $57,
  respectively.
 
(3)
  Excludes debt  associated with  the  capital assets  segment, which  has  been
  discontinued and is held for sale.
 
(4)
  Includes  Company-obligated  mandatorily  redeemable  preferred  securities of
  subsidiary trust holding solely Company-guaranteed debentures of $600 in  1995
  and preferred stock subject to mandatory redemption of $51 in 1995 and 1994.
 
(5)
  Effective  November 1,  1995, each share  of U  S WEST, Inc.  common stock was
  converted into one share  each of U S  WEST Communications Group common  stock
  and  U S WEST  Media Group common  stock. Earnings per  common share have been
  presented on a pro forma  basis to reflect the Media  stock as if it had  been
  outstanding  since January 1, 1994. 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, Inc.
 
(6)
  Selected  proportionate data is not  required by generally accepted accounting
  principles or intended to replace  the Combined Financial Statements  prepared
  in  accordance with GAAP.  It is presented  supplementally because the Company
  believes that proportionate data facilitates the understanding and  assessment
  of  its Combined  Financial Statements. Proportionate  accounting reflects the
  Media Group's relative ownership interests in operating revenues and  expenses
  for  both its consolidated  and equity method investments.  The table does not
  reflect financial data of the capital assets segment.
 
                                      D-1
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                             (DOLLARS IN MILLIONS)
THE RECAPITALIZATION PLAN
 
    On October  31,  1995,  the shareholders  of  U  S WEST,  Inc.,  a  Colorado
corporation   ("U  S  WEST   Colorado"),  voted  to   approve  a  proposal  (the
"Recapitalization Plan") adopted by the  Board of Directors to reincorporate  in
Delaware  and create  two classes  of common  stock. Under  the Recapitalization
Plan, shareholders approved  an agreement and  plan of merger  between U S  WEST
Colorado  and  U  S  WEST, Inc.,  a  Delaware  corporation ("U  S  WEST"  or the
"Company"), pursuant to which U S  WEST continues as the surviving  corporation.
In  connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S  WEST,
one  class of which is authorized as  U S WEST Communications Group Common Stock
("Communications Stock") and  the other class  which is authorized  as U S  WEST
Media Group Common Stock ("Media Stock").
 
    The  Communications  Stock and  Media  Stock provide  shareholders  with two
distinct securities that are intended  to reflect separately the  communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses of U S WEST (the "Media Group" and, together with the  Communications
Group, the "Groups").
 
THE MEDIA GROUP
 
    The  Media Group is  comprised of: (i)  cable and telecommunications network
businesses outside of the Communications Group Region and internationally,  (ii)
domestic  and international wireless communications network businesses and (iii)
domestic and international directory and information services businesses.
 
    On February 27,  1996, U S  WEST announced a  definitive agreement to  merge
with  Continental Cablevision,  Inc. ("Continental").  Continental, the nation's
third-largest cable operator, serves 4.2 million domestic customers, passes more
than seven  million domestic  homes  and holds  significant other  domestic  and
international  properties. U S WEST will purchase all of Continental's stock for
approximately  $5.3  billion  and  will  assume  Continental's  debt  and  other
obligations,  which amount to approximately  $5.5 billion. Consideration for the
$5.3 billion in  equity will consist  of approximately  $1 billion in  U S  WEST
preferred  stock, convertible to Media Stock; and, at U S WEST's option, between
$1 billion and $1.5 billion in cash, and $2.8 billion to $3.3 billion in  shares
of  Media  Stock. The  transaction, which  is  expected to  close in  the fourth
quarter of 1996, is subject to  a number of conditions and approvals,  including
approvals  from Continental  shareholders and  local franchising  and government
authorities.
 
    Continental's 4.2 million  domestic customers are  highly clustered in  five
large  markets -- New England, California,  Chicago, Michigan, Ohio and Florida.
Upon closing, U S WEST  will own or share management  of cable systems in 60  of
the  top  100  American  markets  and serve  nearly  one  of  every  three cable
households. In  addition,  Continental  has interests  in  cable  properties  in
Australia, Argentina and Singapore; a 10 percent interest in PRIMESTAR (a direct
broadcast  satellite  service);  telephone  access  businesses  in  Florida  and
Virginia; and interests in programming that include Turner Broadcasting  System,
E! Entertainment Television, the Golf Channel, and the Food Channel.
 
    The Media Group's cable and telecommunications businesses include U S WEST's
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, its cable systems in the Atlanta, Georgia metropolitan area ("the
Atlanta Systems"), and international  cable and telecommunications  investments,
including TeleWest plc ("TeleWest"). In 1995, TeleWest Communications plc merged
its  cable television and  telephony interests with SBC  CableComms (UK) to form
TeleWest, the largest provider of combined cable and telecommunications services
in the  United Kingdom.  The Media  Group also  owns interests  in cable  and/or
telecommunications properties in the Netherlands, Sweden, Norway, Hungary, Czech
Republic, Malaysia and Indonesia.
 
                                      D-2
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    The   Media  Group  provides   domestic  wireless  communications  services,
including cellular services, in  13 western and midwestern  states to a  rapidly
growing  customer base. During 1994, U S WEST signed a definitive agreement with
AirTouch Communications to combine their  domestic cellular assets. The  initial
equity ownership of this cellular joint venture will be approximately 70 percent
AirTouch  and approximately  30 percent Media  Group. The  combination will take
place in two phases. During Phase I,  which U S WEST entered effective  November
1, 1995, the two companies are operating their cellular properties separately. A
Wireless  Management  Company  (the  "WMC") has  been  formed  and  is providing
centralized services  to  both companies  on  a  contract basis.  In  Phase  II,
AirTouch and U S WEST will contribute their domestic cellular assets to the WMC.
In  this phase, the Media Group will reflect its share of the combined operating
results of the WMC using the equity method of accounting. The recent passage  of
the  Telecommunications Act of 1996  has removed significant regulatory barriers
to completion of Phase  II of the  business combination. U  S WEST expects  that
Phase II closing could take place by the end of 1996 or early 1997.
 
    U  S WEST partnered with AirTouch Communications, Bell Atlantic and NYNEX to
form a strategic  national wireless  alliance and  formed a  venture to  provide
personal  communications services ("PCS"). This  venture, PCS PrimeCo, purchased
11 licenses in the Federal  Communication Commission's (the "FCC") PCS  auction,
covering  57 million people in Chicago, Dallas, Honolulu, Houston, Jacksonville,
Miami, Milwaukee, New Orleans, Richmond, San Antonio and Tampa. The Media  Group
also  provides  wireless  communications  services  internationally  through its
Mercury One 2 One  ("One 2 One")  joint venture, the  world's first PCS  service
located  in the United Kingdom. The Media  Group also owns interests in wireless
properties in Hungary, the Czech  and Slovak Republics, Russia, Malaysia,  India
and Poland.
 
    The  Media Group's directory and information services businesses develop and
package content  and  information  services,  including  telephone  directories,
database  marketing and other interactive services in domestic and international
markets. The  Media  Group  publishes  more than  300  White  and  Yellow  Pages
directories  in 14 western and mid-western  states and nearly 200 directories in
the United Kingdom and Poland. The Media Group also has a 50 percent interest in
Listel, Brazil's largest telephone directory publisher.
 
    The Combined  Financial  Statements  of  the Media  Group  include  the  (i)
combined  historical balance sheets, results of operations and cash flows of the
businesses that  comprise  the  Media  Group;  and  (ii)  corporate  assets  and
liabilities  of  U  S WEST  and  related  transactions not  identified  with the
Communications Group; and (iii) an allocated portion of the corporate expense of
U  S  WEST.  All  significant  intra-group  financial  transactions  have   been
eliminated.  Transactions between the  Media Group and  the Communications Group
have not been eliminated. For a more complete discussion of U S WEST's corporate
allocation policies, see the U S WEST Media Group Combined Financial  Statements
-- Note 2: Summary of Significant Accounting Policies.
 
    The  following discussion  is based  on the  U S  WEST Media  Group Combined
Financial Statements prepared in accordance with GAAP. The discussion should  be
read in conjunction with the U S WEST, Inc. Consolidated Financial Statements. A
discussion  of the Media Group's operations on a proportionate basis follows the
GAAP presentation in "Selected Proportionate Financial Data."
 
                                      D-3
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
 
    Comparative  details   of   income   from   continuing   operations   before
extraordinary item by industry segment and for significant unconsolidated equity
investments follow:
 
<TABLE>
<CAPTION>
                                                                              PERCENT
                                                                             OWNERSHIP     1995(1)    1994(2)   (DECREASE)
                                                                           -------------  ---------  ---------  -----------
<S>                                                                        <C>            <C>        <C>        <C>
Consolidated:
  Directory and information services.....................................          100    $     240  $     247   $      (7)
  Wireless communications................................................          100           62         67          (5)
  Cable and telecommunications...........................................          100           (7)        (2)         (5)
Unconsolidated equity investments:
  Time Warner Entertainment (3)..........................................         25.5          (32)       (30)         (2)
  TeleWest...............................................................         26.8           53         76         (23)
  One 2 One..............................................................         50.0          (81)       (58)        (23)
Other (4)................................................................                       (90)       (24)        (66)
                                                                                          ---------  ---------  -----------
Income from continuing operations before extraordinary item..............                 $     145  $     276   $    (131)
                                                                                          ---------  ---------  -----------
                                                                                          ---------  ---------  -----------
Pro forma earnings per common share before extraordinary
 item (5)................................................................                 $    0.30  $    0.61   ($   0.31)
                                                                                          ---------  ---------  -----------
                                                                                          ---------  ---------  -----------
</TABLE>
 
------------------------------
(1)
  1995  income from continuing  operations before extraordinary  item includes a
  gain of $95 from the  merger of TeleWest with SBC  CableComms (UK) and $9  for
  costs associated with the Recapitalization Plan.
 
(2)
  1994  income from continuing  operations before extraordinary  item includes a
  gain of $105 from  the partial sale  of U S WEST's  joint venture interest  in
  TeleWest and a gain of $41 from the sale of U S WEST's paging operations.
 
(3)
  Percent  ownership represents  pro-rata priority  capital and  residual equity
  interests.
 
(4)
  Primarily includes interest  expense and divisional  expenses associated  with
  equity investments.
 
(5)
  Earnings  per common share have been presented on  a pro forma basis as if the
  Media Stock had been outstanding since  January 1, 1994. 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, Inc.
 
    During 1995,  income from  continuing operations  before extraordinary  item
declined  55  percent,  to $59,  excluding  the  effects of  the  one-time items
described in Notes 1 and 2 to the  table above. The decline is due primarily  to
higher  equity losses related to  international growth initiatives and increased
amortization and interest  expense. Interest  expense increases  relate to  debt
issued  in  connection with  the Atlanta  Systems  acquisition and  expansion of
international investments. The declines were partially offset by improvement  in
the domestic cellular and Yellow Pages operations.
 
    During  1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE.
 
    DIRECTORY AND INFORMATION SERVICES  Income related to Yellow Pages directory
advertising increased  10 percent  in 1995,  to $307,  due to  pricing,  product
enhancements  and the effect of improved  marketing programs on business volume.
Yellow Pages income was partially offset by net operating losses of $60  related
to   new  products  and  other  growth  initiatives,  including  development  of
interactive services.  The  Media  Group  views  new  service  offerings  as  an
important  part  of its  strategy and  expects investments  in new  products and
services in 1996 will  continue to partially offset  expected income related  to
the Yellow Pages business.
 
    Income  related to directory and information services in 1995 includes $7 in
losses related to  expansion of international  directory publishing  operations.
The international publishing operations were not significant to the 1994 results
of operations.
 
                                      D-4
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    WIRELESS COMMUNICATIONS  Income related to wireless communications more than
doubled,  to $62 in  1995, excluding the 1994  gain on sale  of paging assets of
$41. The increase in wireless communications income is attributable to continued
strong growth  in cellular  subscribers. The  cellular subscriber  base  reached
1,463,000 at December 31, 1995, a 51 percent increase compared with 1994.
 
    CABLE   AND  TELECOMMUNICATIONS     The  1995  loss  of   $7  in  cable  and
telecommunications  operations  is  primarily  the  result  of  amortization  of
intangible  assets  related  to the  December  1994 acquisition  of  the Atlanta
Systems. The subscriber base of the Atlanta Systems increased 6.7 percent during
the last twelve months, to 527,000 at December 31, 1995.
 
    OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS  The net loss related
to the Media Group's interests in TWE increased in 1995, due primarily to higher
TWE financing  costs and  depreciation charges,  partially offset  by  increased
income  related to cable and programming operations. Cable subscribers served by
TWE increased almost 6 percent compared with last year, excluding the impact  of
recent cable transactions.
 
    On  September 22, 1995, U S WEST  filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time  Warner and Turner Broadcasting. U S  WEST
has  alleged  breaches  of  contract  and fiduciary  duties  by  Time  Warner in
connection with this proposed merger. Time Warner filed a countersuit against  U
S  WEST on October 11, 1995,  alleging misrepresentation, breach of contract and
other misconduct on  the part of  U S  WEST. Time Warner's  countersuit seeks  a
reformation  of the  Time Warner  Entertainment partnership  agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and  unspecified
compensatory  damages. U S WEST  has denied each of  the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling  by
the Delaware Chancery Court is expected in June 1996.
 
    International businesses are experiencing rapid growth associated with their
early  development phases. New investments in  1995 include the acquisition of a
50 percent  interest  in  cable  television  systems  in  the  Netherlands,  the
acquisition  of a 29 percent  interest in cable television  systems in the Czech
Republic and additional capital provided to a 20 percent owned joint venture  in
Malaysia  to  provide  local  wireline and  wireless  communications.  The Czech
Republic venture  incurred significant  start-up losses  in 1995,  of which  the
Media   Group's  share  was  $13.  The   structure  of  this  venture  is  being
renegotiated.
 
    U S WEST ventures  have recently been awarded  licenses to provide  cellular
services  using digital technology in India  and Poland. The Media Group expects
losses related to international ventures will be significant in 1996.
 
    In October 1995, TeleWest completed its merger with SBC CableComms (UK). The
Media Group recognized an after-tax gain related to the merger of $95, and has a
26.8 percent interest in the combined company.
 
    Cable television  subscribers  of  TeleWest and  its  affiliates,  based  on
TeleWest's  equity interest  in affiliated  operations, increased  to 457,000 at
December 31, 1995, an increase of  44 percent compared with 1994, and  telephone
access  lines increased  93 percent during  the last twelve  months, to 527,000.
Both growth rates exclude the one-time impact of the merger.
 
    Subscribers to U S WEST's international wireless joint venture operations in
the United Kingdom, Hungary, the Czech and Slovak Republics, Russia and Malaysia
grew to 682,000 at December 31, 1995, which is almost twice the customer base at
December 31, 1994. One 2 One served  375,000 customers at December 31, 1995,  an
83 percent increase compared with 1994.
 
    Effective January 1, 1995, the capital assets segment is being accounted for
in  accordance with Staff  Accounting Bulletin No. 93,  issued by the Securities
and Exchange  Commission ("SEC"),  which  requires discontinued  operations  not
disposed  of  within  one year  of  the  measurement date  to  be  accounted for
 
                                      D-5
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
prospectively in continuing operations  as a net investment  in assets held  for
sale. The net realizable value of the assets are reevaluated on an ongoing basis
with  adjustments to the  existing reserve, if any,  being charged to continuing
operations. No adjustment was required in 1995.
 
SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                                                            INCREASE
                                                                                      1995       1994      (DECREASE)
                                                                                    ---------  ---------  -------------
<S>                                                                                 <C>        <C>        <C>
Directory and information services:
  Domestic........................................................................  $   1,058  $     997    $      61
  International...................................................................        122         78           44
                                                                                    ---------  ---------        -----
                                                                                        1,180      1,075          105
Wireless communications:
  Cellular service................................................................        845        633          212
  Cellular equipment..............................................................         96        120          (24)
  Paging sales and service (1)....................................................     --             28          (28)
                                                                                    ---------  ---------        -----
                                                                                          941        781          160
Cable and telecommunications......................................................        215         18          197
Other.............................................................................         38         34            4
                                                                                    ---------  ---------        -----
Sales and other revenues..........................................................  $   2,374  $   1,908    $     466
                                                                                    ---------  ---------        -----
                                                                                    ---------  ---------        -----
</TABLE>
 
------------------------------
(1)
  The paging business was sold in June 1994. Results reflect operations for  the
  six months ending June 30, 1994.
 
    Media  Group sales  and other  revenues increased  15 percent,  to $2,374 in
1995, excluding the effects of the  1994 Atlanta Systems acquisition and  paging
sale.  The  increase was  primarily  due to  strong  growth in  cellular service
revenue.
 
    DIRECTORY AND  INFORMATION  SERVICES    Revenues  related  to  Yellow  Pages
directory  advertising increased  6.4 percent, to  $1,026 in 1995,  due to price
increases of  4.5 percent,  higher revenue  per advertiser  and an  increase  in
Yellow Pages advertising volume.
 
    International directory publishing revenues increased $44 in 1995, primarily
due  to  U S  WEST's May  1994  purchase of  Thomson Directories.  The remaining
increase is due to an increase in advertisers and revenue per advertiser.
 
    WIRELESS COMMUNICATIONS  Cellular service revenues increased 34 percent,  to
$845 in 1995, due to a 51 percent increase in subscribers during the last twelve
months  (with  20 percent  of the  additions  occurring in  December), partially
offset by a  13 percent drop  in average  revenue per subscriber  to $60.00  per
month.  The increase  in subscribers relates  to continued growth  in demand for
wireless  services.  The  Media  Group  anticipates  continued  growth  in   its
subscriber base, although at slightly decreased rates.
 
    New distribution programs are being developed which increase availability of
cellular  products and simplify  the cellular service  activation process. These
programs have contributed to the shift  in the customer base from businesses  to
consumers.  This  shift, combined  with competitive  pressures on  pricing, will
cause the average revenue per subscriber to continue to decline.
 
    Cellular equipment  revenues decreased  20 percent,  to $96  in 1995,  as  a
result  of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers. The Media Group expects this  trend
to  continue  in 1996  as  the cost  of equipment  continues  to decline  and as
penetration into the consumer market increases.
 
    Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
 
                                      D-6
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    CABLE AND TELECOMMUNICATIONS  Domestic cable and telecommunications revenues
increased $197 in  1995, due  to the December  1994 acquisition  of the  Atlanta
Systems.
 
OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                               INCREASE
                                                                                         1995       1994      (DECREASE)
                                                                                       ---------  ---------  -------------
<S>                                                                                    <C>        <C>        <C>
Directory and information services:
  Domestic...........................................................................  $     399  $     397    $       2
  International......................................................................         (1)        (1)      --
                                                                                       ---------  ---------          ---
                                                                                             398        396            2
Wireless communications:
  Cellular...........................................................................        147         82           65
  Paging sales and service (1).......................................................     --              6           (6)
                                                                                       ---------  ---------          ---
                                                                                             147         88           59
Cable and telecommunications.........................................................         23     --               23
Other (2)............................................................................       (101)       (95)          (6)
                                                                                       ---------  ---------          ---
Operating income.....................................................................  $     467  $     389    $      78
                                                                                       ---------  ---------          ---
                                                                                       ---------  ---------          ---
</TABLE>
 
------------------------------
(1)
  The  paging business was sold in June 1994. Results reflect operations for six
  months ending June 30, 1994.
 
(2)
  Primarily includes divisional expenses associated with equity investments.
 
    During 1995, Media  Group operating  income increased 13  percent, to  $467,
excluding  the effects of the 1994  Atlanta Systems acquisition and paging sale.
EBITDA increased approximately 16 percent, to  $716, on a comparable basis.  The
Media  Group considers EBITDA an important indicator of the operational strength
and performance of its  businesses. The increases were  primarily due to  strong
growth in wireless communications operations.
 
    DIRECTORY AND INFORMATION SERVICES  During 1995, operating income related to
domestic  Yellow Pages directory advertising increased $40. Revenue increases of
$61 and general cost savings of  $15, including $8 associated with assuming  the
management   of  certain  data  base  services  from  the  Communications  Group
contributed to the increase. The revenue  gains and cost savings were  partially
offset  by  operating cost  increases of  $36,  primarily due  to an  11 percent
increase in  paper,  printing,  delivery and  distribution  costs.  New  product
development  activities  reduced  domestic  directory  and  information services
operating income  by $38  in 1995.  The decrease  is a  result of  higher  costs
associated  with  the  development  of new  database  marketing  and interactive
services, including a one-time charge of $8 to exit certain product lines.
 
    On October  15, 1995,  U S  WEST Direct  and the  Communications Workers  of
America  ("CWA") reached  a tentative  agreement on  their contract,  subject to
ratification by  the CWA  membership.  This contract  would provide  for  salary
increases  of 10.5 percent over  three years and provides  employees with a lump
sum payment of $850.
 
    EBITDA related  to  domestic  Yellow Pages  directory  advertising  services
increased  9 percent, to $519  in 1995. Expansion of  the business combined with
cost savings led to an EBITDA margin  related to the Yellow Pages operations  of
50.6 percent in 1995 compared with 49.4 percent in 1994.
 
    Operating  income  for  international  directory  publishing  operations was
unchanged from 1994.  The 1995  revenue gains of  $44 were  offset by  increased
operating  expenses,  primarily  associated  with the  May  1994  acquisition of
Thomson Directories and increased costs associated with business volume.
 
    WIRELESS COMMUNICATIONS  Cellular operating income increased 79 percent,  to
$147  in 1995. The increase in operating income is a result of revenue increases
associated with the rapidly expanding subscriber
 
                                      D-7
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
base combined with efficiency gains. The 1995 decline in revenue per  subscriber
of  13 percent has  been more than offset  by decreases in  the cost incurred to
acquire a customer  ("acquisition costs") and  the cost to  maintain a  customer
("support  costs").  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, intralata toll
calls and fraud. Support costs per subscriber have declined 20 percent in  1995.
The  decline is generally a result of  the efficiencies gained from an expanding
customer base without corresponding  increases in headcount and  infrastructure.
The  acquisition cost  per subscriber  added decreased 6  percent in  1995, as a
result of the  expanding customer base  and shifts in  the distribution  channel
resulting in generally less costly subscriber additions.
 
    Cellular  EBITDA increased 49 percent during  1995, to $268. The business is
realizing operating scale efficiencies  that have resulted in  lower costs on  a
per  subscriber basis.  The efficiencies  have resulted  in an  increase in 1995
cellular service EBITDA margin to 31.7 percent from 28.4 percent in 1994.
 
    CABLE AND TELECOMMUNICATIONS  Cable and telecommunications operating  income
reflects  the  December 1994  acquisition of  the  Atlanta Systems.  The Atlanta
Systems contributed operating income of $23 and EBITDA of $100 in 1995.
 
    OTHER  Other operating  income decreased primarily  due to costs  associated
with growth in international operations.
 
INTEREST EXPENSE AND OTHER
 
<TABLE>
<CAPTION>
                                                                                                                INCREASE
                                                                                          1995       1994      (DECREASE)
                                                                                        ---------  ---------  -------------
<S>                                                                                     <C>        <C>        <C>
Interest expense......................................................................  $     100  $      66    $      34
Equity losses in unconsolidated ventures..............................................        207        121           86
Other income..........................................................................          5         46          (41)
</TABLE>
 
    Interest  expense increased  $34, or  52 percent,  primarily as  a result of
financing costs associated  with the  December 1994 acquisition  of the  Atlanta
Systems,  new domestic and  international investments and  a reclassification of
debt from net investment in assets held for sale.
 
    Equity losses increased $86 in 1995,  primarily due to costs related to  the
expansion  of  the  network  and  additional  financing  costs  at  TeleWest and
additional costs associated with the significant increase in customers at One  2
One.  Start-up  and  other costs  associated  with new  international  cable and
telecommunications investments  primarily  located  in the  Czech  Republic  and
Malaysia  contributed  to the  increase. These  increased losses  were partially
offset by  earnings  in the  European  wireless operations.  Losses  related  to
domestic  investments in  TWE and  PCS PrimeCo  also increased.  The Media Group
expects the  PCS partnership  to experience  several years  of operating  losses
associated with the start-up phase of the PCS business.
 
    Other  income  decreased  $41,  or  89 percent,  primarily  as  a  result of
increased minority  interest  expense  associated  with  the  domestic  cellular
operations,  costs associated with the Recapitalization  Plan and a 1994 gain on
sale of nonstrategic operations.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                     1995         1994       (DECREASE)
                                                                                  -----------  -----------  -------------
<S>                                                                               <C>          <C>          <C>
Provision for income taxes......................................................  $     163    $     204      ($     41)
Effective tax rate..............................................................       52.9%        42.5%        --
</TABLE>
 
    The increase in  the effective  tax rate  primarily reflects  the impact  of
lower  pretax  income,  the  effects of  goodwill  amortization  related  to the
acquisition of the Atlanta Systems, higher  state and foreign income taxes,  and
expenses  associated with the Recapitalization Plan. Additionally, a tax benefit
was recorded in 1994 related  to the sale of  paging assets that contributed  to
the increase in the effective tax rate.
 
                                      D-8
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
 
    Income  from continuing operations  by industry segment  and for significant
unconsolidated equity investments follows:
 
<TABLE>
<CAPTION>
                                                                               PERCENT                             INCREASE
                                                                              OWNERSHIP     1994(1)    1993(2)    (DECREASE)
                                                                            -------------  ---------  ---------  -------------
<S>                                                                         <C>            <C>        <C>        <C>
Consolidated:
  Directory and information services......................................          100    $     247  $     220    $      27
  Wireless communications.................................................          100           67        (43)         110
  Cable and telecommunications............................................          100           (2)    --               (2)
Unconsolidated equity investments:
  Time Warner Entertainment (3)...........................................         25.5          (30)       (19)         (11)
  TeleWest................................................................         37.8           76        (21)          97
  One 2 One...............................................................         50.0          (58)       (22)         (36)
Other (4).................................................................                       (24)       (30)           6
                                                                                           ---------  ---------        -----
Income from continuing operations.........................................                 $     276  $      85    $     191
                                                                                           ---------  ---------        -----
                                                                                           ---------  ---------        -----
</TABLE>
 
------------------------------
(1)
  1994 income  from continuing  operations  includes a  gain  of $105  from  the
  partial  sale of U S WEST's joint venture  interest in TeleWest, and a gain of
  $41 from the sale of U S WEST's paging operations.
 
(2)
  1993 income from continuing  operations was reduced  by $76 for  restructuring
  charges;  $31 pertaining to the directory and information services segment and
  $45 pertaining to the wireless segment.
 
(3)
  Percent ownership  represents pro-rata  priority capital  and residual  equity
  interests.
 
(4)
  Primarily  includes interest  expense and divisional  expenses associated with
  equity investments.
 
    During 1994,  income from  continuing operations  decreased 19  percent,  to
$130,  excluding the effects of the one-time items described in Notes 1 and 2 to
the table  above. The  decline in  income  is primarily  a result  of  increased
start-up  losses associated  with international businesses,  partially offset by
income growth in domestic  wireless operations attributable  to rapid growth  in
customer demand.
 
    During  1993, the  Board approved  a plan to  dispose of  the capital assets
segment, which  includes activities  related  to financial  services,  financial
guarantee  insurance  operations and  real estate.  Until  January 1,  1995, the
capital  assets  segment  was  accounted  for  as  discontinued  operations   in
accordance  with Accounting Principles Board Opinion  No. 30, which provides for
the reporting of  the operating  results of  discontinued operations  separately
from  continuing operations. The Media Group recorded a provision of $100 (after
tax) for the estimated  loss on disposal of  the discontinued operations and  an
additional  provision of $20 to reflect  the cumulative effect on deferred taxes
of the  1993  federally mandated  increase  in  income tax  rates.  Income  from
discontinued  operations prior to  June 1, 1993,  was $38, net  of $15 in income
taxes. Income from discontinued operations subsequent to June 1, 1993, is  being
deferred  and was  included within  the provision  for loss  on disposal  of the
capital assets segment.
 
    DIRECTORY AND  INFORMATION  SERVICES    Excluding the  effect  of  the  1993
restructuring  charge  of $31,  income from  directory and  information services
operations decreased  1.6  percent  in  1994, to  $247.  Costs  related  to  the
development  and launching of new products in directory and information services
offset income growth from the Yellow Pages publishing operations.
 
    WIRELESS COMMUNICATIONS  Excluding the effects  of the $41 gain on the  sale
of  paging operations in 1994  and a $45 restructuring  charge in 1993, cellular
income increased $24  to $26 in  1994. The increase  is due to  the addition  of
367,000 subscribers in 1994, a 61 percent increase compared with 1993.
 
                                      D-9
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    CABLE AND TELECOMMUNICATIONS  On December 6, 1994, the Media Group purchased
the  Atlanta Systems for $1.2 billion. The  results of operations of the Atlanta
Systems have been included in the Media Group's results of operations since  the
date of acquisition which did not have a material impact on 1994 net income.
 
    OPERATING  RESULTS  OF UNCONSOLIDATED  EQUITY  INVESTMENTS   TWE partnership
losses increased  in 1994  primarily  due to  the  full year  impact  (including
financing  costs) of the TWE investment compared  with three months in 1993. The
effects of lower prices for cable  services also contributed to the higher  loss
in 1994.
 
    In  1994, losses related to international  equity investments increased as a
result of expansion  of the  customer base at  One 2  One and build  out of  the
network at TeleWest.
 
SALES AND OTHER REVENUES
 
<TABLE>
<CAPTION>
                                                                                                            INCREASE
                                                                                      1994       1993      (DECREASE)
                                                                                    ---------  ---------  -------------
<S>                                                                                 <C>        <C>        <C>
Directory and information services:
  Domestic........................................................................  $     997  $     949    $      48
  International...................................................................         78          7           71
                                                                                    ---------  ---------        -----
                                                                                        1,075        956          119
Wireless communications:
  Cellular service................................................................        633        443          190
  Cellular equipment..............................................................        120         63           57
  Paging sales and service (1)....................................................         28         55          (27)
                                                                                    ---------  ---------        -----
                                                                                          781        561          220
Cable and telecommunications......................................................         18     --               18
Other.............................................................................         34         32            2
                                                                                    ---------  ---------        -----
Sales and other revenues..........................................................  $   1,908  $   1,549    $     359
                                                                                    ---------  ---------        -----
                                                                                    ---------  ---------        -----
</TABLE>
 
------------------------------
(1)
  The  paging business was sold in June 1994. Results reflect operations for the
  six months ending June 30, 1994.
 
    During 1994, Media Group  sales and other revenues  increased 25 percent  to
$1,862,  excluding the effect of the 1994 Atlanta Systems acquisition and paging
sale. The  increase was  primarily  due to  strong  growth in  cellular  service
revenue.
 
    DIRECTORY  AND  INFORMATION  SERVICES    Revenues  related  to  Yellow Pages
directory advertising increased approximately $59, or 6.5 percent, due primarily
to pricing. Product enhancements and  the effect of improved marketing  programs
on  business volume  also contributed  to the  increase in  revenues. Non-Yellow
Pages revenues increased $11,  including $7 related  to new products.  Partially
offsetting  these  increases  was the  absence  of revenues  related  to certain
publishing, software development and marketing operations that were sold,  which
reduced revenues by $22.
 
    The  increase in international directory publishing revenues is attributable
to U S WEST's May 1994 purchase of Thomson Directories.
 
    WIRELESS COMMUNICATIONS  Cellular service revenues increased 43 percent,  to
$633  in 1994, due to  a 61 percent increase in  subscribers (with 24 percent of
the additions occurring in December), partially  offset by an 8 percent drop  in
average revenue per subscriber to $70.00 per month.
 
    Cellular equipment revenues increased 90 percent, to $120 in 1994, primarily
due  to  an 83  percent  increase in  gross  customer additions,  with  a higher
percentage of those customers purchasing  equipment than in 1993. This  increase
was  partially offset by  a 13 percent  decline in the  average selling price of
wireless phones.
 
                                      D-10
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    CABLE AND TELECOMMUNICATIONS  Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
 
OPERATING INCOME
 
<TABLE>
<CAPTION>
                                                                                                                INCREASE
                                                                                          1994      1993(1)    (DECREASE)
                                                                                        ---------  ---------  -------------
<S>                                                                                     <C>        <C>        <C>
Directory and information services:
  Domestic............................................................................  $     397  $     359    $      38
  International.......................................................................         (1)        (3)           2
                                                                                        ---------  ---------        -----
                                                                                              396        356           40
Wireless communications:
  Cellular............................................................................         82        (29)         111
  Paging sales and service (2)........................................................          6     --                6
                                                                                        ---------  ---------        -----
                                                                                               88        (29)         117
Cable and telecommunications..........................................................     --         --           --
Other (3).............................................................................        (95)       (89)          (6)
                                                                                        ---------  ---------        -----
Operating income......................................................................  $     389  $     238    $     151
                                                                                        ---------  ---------        -----
                                                                                        ---------  ---------        -----
</TABLE>
 
------------------------------
(1)
  Includes pretax  restructuring  charges  of  $50  and  $70  for  the  domestic
  directory and information services and wireless segments, respectively.
 
(2)
  The  paging business was sold in June 1994. Results reflect operations for the
  six months ending June 30, 1994.
 
(3)
  Primarily includes divisional expenses associated with equity investments.
 
    Media Group operating income increased 7 percent, to $383 in 1994, excluding
the effects of the one-time items described in Notes 1 and 2 to the table above.
Revenue growth, partially offset by higher operating expenses, provided an  10.5
percent increase in 1994 EBITDA, on a comparable basis.
 
    DIRECTORY  AND  INFORMATION  SERVICES   Excluding  the  effect  of  the 1993
restructuring charge  of  $50,  operating income  from  domestic  directory  and
information  services operations decreased $12, or 3 percent, in 1994. Operating
income related to the  domestic Yellow Pages  directory business increased  $20.
The  increase was  driven by strong  revenue growth.  Non-Yellow Pages operating
income  decreased  $32,  primarily  a  result  of  increased  costs  related  to
development of new database marketing and interactive services.
 
    The  increase  in  international directory  publishing  operating  income is
attributable to U S WEST's May 1994 purchase of Thomson Directories.
 
    WIRELESS COMMUNICATIONS   Excluding  the effect  of the  1993  restructuring
charge  of $70,  cellular operating  income doubled  in 1994  to $41.  This is a
result of revenue  increases associated  with the  rapidly expanding  subscriber
base  and decreases in  the costs incurred  to acquire and  maintain a customer.
Cellular EBITDA increased $55,  or 44 percent in  1994. Cellular service  EBITDA
margin was 28.4 percent, essentially unchanged compared with 1993.
 
    OTHER    Other  operating  income  decreased  primarily  due  to  growth  in
international operations and  the inclusion of  administrative costs related  to
the  TWE investment  for the full  year in  1994, compared with  three months in
1993.
 
                                      D-11
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
INTEREST EXPENSE AND OTHER
 
<TABLE>
<CAPTION>
                                                                                           1994        1993        INCREASE
                                                                                         ---------     -----     -------------
<S>                                                                                      <C>        <C>          <C>
Interest expense.......................................................................  $      66   $      27     $      39
Equity losses in unconsolidated ventures...............................................        121          74            47
Other income...........................................................................         46           9            37
</TABLE>
 
    Interest expense  increased  $39,  primarily  as  a  result  of  incremental
financing costs associated with the September 1993 TWE investment.
 
    Equity  losses in  unconsolidated ventures  increased $47,  primarily due to
start-up costs related to the build out of TeleWest's network and costs  related
to the expansion of the customer base at One 2 One.
 
    Other  income increased  $37, primarily  due to an  $18 increase  in the TWE
management fee. This  increase resulted from  owning the investment  for a  full
year  in 1994, compared with three months  in 1993. Other income also includes a
$10 gain on the sale of certain software development and marketing operations in
1994.
 
PROVISION FOR INCOME TAXES
 
<TABLE>
<CAPTION>
                                                                                       1994         1993       INCREASE
                                                                                    -----------  -----------  -----------
<S>                                                                                 <C>          <C>          <C>
Provision for income taxes........................................................  $     204    $      61     $     143
Effective tax rate................................................................       42.5%        41.8%       --
</TABLE>
 
    The effective tax rate is significantly impacted by state and foreign  taxes
on the Media Group Combined Financial Statements.
 
LIQUIDITY AND CAPITAL RESOURCES --THREE YEARS ENDED DECEMBER 31, 1995
 
OPERATING ACTIVITIES
 
    Cash provided by operating activities increased $89 in 1995, to $640. During
1995,  an  income tax  payment related  to the  1994 partial  sale of  the Media
Group's joint venture interest in  TeleWest reduced cash provided by  operations
by  $60. Adjusted for this  one-time income tax payment,  operating cash flow of
the Media Group increased $149. Growth in operations from the cellular  business
and  acquisition of the  Atlanta Systems contributed to  the increase. Growth in
operating cash flow from directory and information services operations has  been
reduced  by investments related  to its growth  initiatives. Operating cash flow
from Media Group businesses  was partially offset by  a significant increase  in
income  taxes paid in 1995,  primarily due to lower  tax benefits generated from
the investment in TWE.
 
    Cash provided by operating  activities of the Media  Group increased $28  in
1994 compared with 1993 primarily due to expansion of the cellular business.
 
    The  Media Group expects that  cash from operations will  not be adequate to
fund expected cash requirements. Additional  financing will come primarily  from
new debt.
 
INVESTING ACTIVITIES
 
    Total  capital expenditures of the  Media Group were $363,  $349 and $193 in
1995, 1994 and 1993, respectively, the  majority was devoted to enhancement  and
expansion of the cellular network. In 1996, capital expenditures are expected to
exceed  $600,  of which  approximately 50  percent relates  to expansion  of the
cellular network  to  increase coverage  and  capacity, and  nearly  40  percent
relates to enhancement of the Atlanta Systems. The Media Group is in the process
of  upgrading its Atlanta Systems to  750 megahertz capacity, which will provide
more reliability, better  signal quality  and additional  capacity. The  upgrade
will  enable  the  provision  of  enhanced  cable,  data  and telecommunications
services to its Atlanta customers.
 
    Investing activities of the Media  Group also include equity investments  in
international  ventures. In 1995, the Media Group invested $681 in international
ventures, primarily investments in Malaysia, the
 
                                      D-12
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Netherlands, the Czech Republic and the United Kingdom. The Media Group invested
approximately $444 in developing international businesses in 1994, including the
acquisition of Thomson Directories. The Media Group anticipates that investments
in  international  ventures  will  approximate  $400  in  1996.  This   includes
investments  for  recently awarded  licenses to  provide cellular  service using
digital technology  in  India  and  Poland.  At December  31,  1995,  U  S  WEST
guaranteed  debt  in  the  principal amount  of  approximately  $140  related to
international ventures.
 
    In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the  licenses was approximately $268, all of  which
was  funded in 1995.  Under the PCS  PrimeCo partnership agreement,  U S WEST is
required to fund approximately 24 percent of PCS PrimeCo's operating and capital
costs, including licensing costs.  U S WEST anticipates  that its total  funding
obligations  to PCS  PrimeCo during the  next three years  will be approximately
$400.
 
    In 1994, the Media Group received cash proceeds of $143 from the sale of its
paging operations. In 1993, cash proceeds of $30 were received from the sale  of
certain  nonstrategic lines  of business. The  Media Group did  not receive cash
from the 1994 partial sale of its joint venture interest in TeleWest or from the
1995 merger. All  proceeds from the  1994 sale  have been used  by TeleWest  for
general business purposes, including financing both construction and operations,
and repaying debt.
 
    On  February 27, 1996,  U S WEST  announced a definitive  agreement to merge
with Continental. Continental, the nation's third-largest cable operator, serves
4.2 million domestic customers,  passes more than  seven million domestic  homes
and holds significant other domestic and international properties. U S WEST will
purchase  all of  Continental's stock  for approximately  $5.3 billion  and will
assume Continental's debt and other  obligations, which amount to  approximately
$5.5  billion.  Consideration for  the $5.3  billion in  equity will  consist of
approximately $1  billion in  U S  WEST preferred  stock, convertible  to  Media
Stock;  and, at U S WEST's option, between  $1 billion and $1.5 billion in cash,
and $2.8 billion  to $3.3  billion in shares  of Media  Stock. The  transaction,
which is expected to close in the fourth quarter of 1996, is subject to a number
of  conditions and approvals, including  approvals from Continental shareholders
and local franchising and government authorities.
 
FINANCING ACTIVITIES
 
    During 1995,  debt  increased  $287  primarily due  to  new  investments  in
international  ventures, cash funding of the PCS licenses and a reclassification
of debt from net investment in assets held for sale. During fourth-quarter 1995,
U S WEST  issued $130  of exchangeable notes,  or Debt  Exchangeable for  Common
Stock  ("DECS"),  due  December  15,  1998. Upon  maturity,  each  DECS  will be
mandatorily 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  31.5
percent of the outstanding Enhance common stock.
 
    These  increases in debt were partially offset by reductions of debt related
to the  investment in  TWE and  a  refinancing of  commercial paper  by  issuing
Company-obligated  mandatorily redeemable  preferred securities  of a subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities"). U S
WEST issued $600 of  Preferred Securities in 1995.  The payment of interest  and
redemption  amounts to holders  of the securities  are fully and unconditionally
guaranteed by U S WEST.
 
    Excluding debt associated with the capital assets segment, the Media Group's
percentage of  debt to  total capital  at December  31, 1995,  was 29.1  percent
compared  with 29.9 percent at December 31, 1994. Including debt associated with
the capital assets segment, Preferred Securities and other preferred stock,  the
Media  Group's percentage of debt to total  capital was 44.2 percent at December
31, 1995, and 42.8 percent at December 31, 1994.
 
                                      D-13
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
    Debt increased $288 in 1994, primarily due to the December 1994  acquisition
of  the Atlanta Systems, partially  offset by reductions in  debt related to the
investment in TWE. The cash investment related to the acquisition of the Atlanta
Systems was $745, obtained through short-term borrowing.
 
    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 maintains  lines  of credit  aggregating  approximately  $1.3
billion,  which  is  available to  both  the  Media Group  and  the nonregulated
subsidiaries of  the Communications  Group in  accordance with  their  borrowing
needs.  Under registration  statements filed  with the  SEC, as  of December 31,
1995, U S WEST  is permitted to  issue up to approximately  $1.2 billion of  new
debt  securities,  available  to  both  the  Media  Group  and  the nonregulated
subsidiaries of the Communications Group.
 
    Debt related to discontinued operations decreased  $487 in 1995 and $213  in
1994.  Cash to the capital assets segment of $101 in 1994 primarily reflects the
payment of debt, net of $154 in proceeds from the sale of 8.1 million shares  of
Financial  Security  Assurance  Holdings,  Ltd. ("FSA"),  an  investment  of the
capital assets segment.  For financial  reporting purposes debt  of the  capital
assets  segment is netted  against the related assets.  See Media Group Combined
Financial Statements -- Note 20: Net Investment in Assets Held for Sale.
 
    The Media Group reinvests earnings, if  any, for future growth and does  not
expect to pay dividends on the Media Stock in the foreseeable future.
 
    In connection with U S WEST's announcement on February 27, 1996 of a planned
merger  with Continental, U  S WEST, Inc.'s  credit rating is  being reviewed by
credit rating agencies, which may result in a downgrading.
 
    Financing activities for  the nonregulated  Communications Group  businesses
and  the  Media  Group,  including the  issuance,  repayment  and  repurchase of
short-term and  long-term debt,  and the  issuance and  repurchase of  Preferred
Securities,  is managed by U S WEST on a centralized basis. Financing activities
for U S WEST Communications  is separately identified and  accounted for in U  S
WEST's  records  and  U  S  WEST Communications  continues  to  conduct  its own
borrowing activities. Debt  incurred and investments  made by U  S WEST and  its
subsidiaries  is  specifically  allocated  to  and  reflected  on  the financial
statements of the Media Group except that debt incurred and investments made  by
U S WEST and its subsidiaries on behalf of the nonregulated Communications Group
businesses and all debt incurred and investments made by U S WEST Communications
is  specifically allocated to  and reflected on the  financial statements of the
Communications Group. Debt incurred by U S  WEST or a subsidiary on behalf of  a
Group  is  charged to  such Group  at the  borrowing rate  of U  S WEST  or such
subsidiary.
 
RISK MANAGEMENT
 
    The Media Group is exposed to market risks arising from changes in  interest
rates  and foreign exchange rates. Derivative  financial instruments are used to
manage these risks. U S WEST  does not use derivative financial instruments  for
trading purposes.
 
INTEREST RATE RISK MANAGEMENT
 
    The  objective of the  interest rate risk management  program is to minimize
the total cost  of debt. Interest  rate swaps are  used to adjust  the ratio  of
fixed-  to variable-rate debt. The market value of the debt portfolio, including
the interest rate swaps, is monitored and compared with predetermined benchmarks
to evaluate the effectiveness of the risk management program.
 
    Notional amounts of interest rate swaps outstanding were $825 and $850 as of
December 31, 1995 and 1994, respectively, with various maturities that extend to
2004. The estimated effect of U S WEST's interest
 
                                      D-14
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
rate derivative transactions was to adjust  the level of fixed-rate debt of  the
Media  Group from  86 percent to  87 percent at  December 31, 1995,  and from 68
percent to  71  percent  of  the  total debt  portfolio  at  December  31,  1994
(including debt associated with the capital assets segment).
 
FOREIGN EXCHANGE RISK MANAGEMENT
 
    U  S WEST has entered into forward and option contracts to manage the market
risks associated with fluctuations in foreign exchange rates after consideration
of offsetting  foreign  exposures among  international  operations. The  use  of
forward  and option  contracts allow U  S WEST  to fix or  cap the  cost of firm
foreign investment commitments in countries with freely convertible  currencies.
The  market  values of  the foreign  exchange  positions, including  the hedging
instruments, are continuously monitored  and compared with predetermined  levels
of acceptable risk.
 
    Notional   amounts  of   foreign  exchange  forward   and  option  contracts
outstanding were $456 and $170 as  of December 31, 1995 and 1994,  respectively,
with  maturities of  one year  or less. These  contracts were  primarily for the
purchase of Dutch  guilders and  British pounds in  1995 and  British pounds  in
1994.
 
    The  Media  Group  had  foreign  exchange  risks  associated  with  a  Dutch
guilder-denominated payable  in  the  translated principal  amount  of  $216  at
December  31, 1995, and British  pound-denominated receivables in the translated
principal amounts of $139 and $48  at December 31, 1995 and 1994,  respectively,
of  which  $63 and  $48 of  these respective  balances are  with a  wholly owned
subsidiary. These positions were hedged in 1995.
 
DISPOSITION OF THE CAPITAL ASSETS SEGMENT
 
    U S WEST announced a  plan of disposition of  the capital assets segment  in
June  1993. See the  Media Group Combined  Financial Statements --  Note 20: Net
Investment in Assets Held for Sale. In December 1993, U S WEST sold $2.0 billion
of finance receivables and the business of U S WEST Financial Services, Inc.  to
NationsBank  Corporation. Proceeds  from the sale  of $2.1 billion  were used to
repay related debt.
 
    During 1994, U S WEST reduced its ownership interest in FSA, a member of the
capital assets segment, to 60.9 percent and its voting interest to 49.8  percent
through  a series  of transactions.  In May  and June  1994, U  S WEST  sold 8.1
million shares of FSA common  stock and received $154  in net proceeds from  the
public  offering. In December 1995, FSA merged with Capital Guaranty Corporation
for shares of FSA and cash of  $51. The transaction was valued at  approximately
$203  and reduced U S  WEST's ownership interest in FSA  to 50.3 percent and its
voting interest to  41.7 percent. U  S WEST expects  to monetize and  ultimately
reduce its ownership in FSA through the issuance of Debt Exchangeable for Common
Stock  ("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged by
U S WEST  for FSA  common stock  held by  U S  WEST or,  at U  S WEST's  option,
redeemed at the cash equivalent.
 
    On  September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of cumulative redeemable preferred stock for a  total
of  $50. The shares are mandatorily redeemable in year ten and, at the option of
FFC, the preferred stock also can be redeemed for common shares of FSA.
 
    U S WEST Real Estate, Inc.  has sold various properties totaling $120,  $327
and  $66 in 1995, 1994  and 1993, respectively. The  sales proceeds were in line
with estimates.  Proceeds  from building  sales  were primarily  used  to  repay
related  debt. U S WEST has completed  construction of existing buildings in the
commercial  real  estate  portfolio   and  expects  to  substantially   complete
liquidation  of this portfolio by 1998.  The remaining balance of assets subject
to sale is approximately $490, net of reserves, as of December 31, 1995.
 
COMPETITIVE STRATEGY
 
    The Media Group's  strategy is based  on the belief  that communication  and
commerce  are migrating  from other mediums  to electronic  networks. Over time,
this global phenomenon will result in networks
 
                                      D-15
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
replacing traditional distribution channels. To  meet the needs of this  growing
market,   the  Media  Group  provides  local  connections  and  then  integrates
market-based service offerings to meet the  needs of end users. The Media  Group
executes   this  strategy  through   three  lines  of   business  --  cable  and
telecommunications, wireless  and  directory  and  information  services  --  in
selected high-growth markets worldwide.
 
COMPETITIVE AND REGULATORY ENVIRONMENT
 
    CABLE  AND TELECOMMUNICATIONS  The Telecommunications Act of 1996 (the "1996
Act") opens competition by  permitting local telephone companies,  long-distance
carriers  and cable television companies to  enter each other's businesses. This
legislation will  enable the  Media  Group to  provide "one-stop  shopping"  for
voice,  video and data services,  a key objective of  the Media Group. The Media
Group  is   currently   in   the   process   of   negotiating   reasonable   and
non-discriminatory  local  interconnection  rates,  terms  and  conditions  with
BellSouth and is  planning on entering  the local exchange  market, through  the
Atlanta Systems, on a competitive basis by the end of 1996.
 
    The  Atlanta Systems generally compete for viewer attention with programming
from  a  variety  of  sources,  including  the  direct  reception  of  broadcast
television signals by the viewer's own antenna, satellite master antenna service
and  direct broadcast satellite  services. Cable television  systems are also in
competition for  both viewers  and  advertising in  varying degrees  with  other
communications  and entertainment media. Such  competition may increase with the
development and growth of new technologies.
 
    The 1996 Act has  amended certain aspects of  the Cable Television  Consumer
Protection  and Competition Act of  1992 ("the 1992 Cable  Act"). Under the 1996
Act, cable  rates  are deregulated  effective  March  31, 1999,  or  earlier  if
competition  exists. In  addition, the provisions  of the 1996  Act simplify the
process  of  filing  rate  complaints,  relax  uniform  rate  requirements   and
subscriber notice provisions, expand the definition of effective competition and
eliminate  certain restrictions  on the sale  of cable  systems. Current program
access restrictions applying to cable operators are extended to common  carriers
by   the  1996  Act.  The  1996  Act  also  eliminates  certain  cross-ownership
restrictions between cable operators, broadcasters and multichannel,  multipoint
distribution system operators.
 
    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.
 
    In  1995, the  Georgia legislature  removed the  legal prohibition  on local
telephone competition  by authorizing  competition in  local telephone  exchange
service.  The Media  Group has  received certification  from the  Georgia Public
Service Commission to provide local  switched and nonswitched telephone  service
in  Georgia  and,  with  the  passage of  the  1996  Act,  certain long-distance
services.
 
                                      D-16
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
    WIRELESS COMMUNICATIONS  There are two competitive cellular licenses in each
market.  Competition is based on  the price of cellular  service, the quality of
the service and the size of the  geographic area served. The development of  PCS
services  will increase the number of  competitors and the level of competition.
The Media Group  is unable to  estimate the  impact of the  availability of  PCS
services on its cellular operations, though it could be significant.
 
    The  wireless operations are subject to regulation by federal and some state
and local authorities. The construction and transfer of cellular systems in  the
United  States are regulated  by the FCC  pursuant to the  Communications Act of
1934. The  FCC regulates  construction  and operation  of cellular  systems  and
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.
 
    The passage of the 1996 Act eliminates long-distance restrictions imposed by
the Modified Final Judgment ("MFJ"). As a result, the Media Group, including its
wireless partners,  are now  able to  offer integrated  local and  long-distance
services.  The 1996 Act  also permits the  Media Group to  enter into activities
related to the manufacture of telecommunications equipment.
 
    DIRECTORY AND  INFORMATION  SERVICES   The  Media Group  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 beginning to be offered via electronic databases through
telephone company and  third party networks.  As such offerings  expand and  are
enhanced   through  interactivity  and  other  features,  the  Media  Group  may
experience heightened competition in  its directory publishing businesses.  With
the  passage of the  1996 Act, the Media  Group will be  able to provide certain
information services across LATA  boundaries. The Media  Group will continue  to
expand  its core  products and develop  and package new  information products to
meet its customers' needs.
 
                                      D-17
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
SELECTED PROPORTIONATE FINANCIAL DATA
 
    The following table shows the entities included in the Media Group  Combined
Financial  Statements  and  the  percent  ownership  by  industry  segment.  The
proportionate financial and operating data for these entities are summarized  in
the proportionate data table that follows:
 
<TABLE>
<CAPTION>
                                                                                  DIRECTORY AND INFORMATION
             CABLE AND TELECOMMUNICATIONS        WIRELESS COMMUNICATIONS                   SERVICES
           --------------------------------  --------------------------------  --------------------------------
              DOMESTIC       INTERNATIONAL      DOMESTIC       INTERNATIONAL      DOMESTIC       INTERNATIONAL
           ---------------  ---------------  ---------------  ---------------  ---------------  ---------------
<S>        <C>              <C>              <C>              <C>              <C>              <C>
    C
    O
    N                                                                                               Thomson
    S                                                                                             Directories
    O                                                                             U S WEST           (UK)
    L      Atlanta Systems                      U S WEST                          Marketing          100%
    I           100%                            NewVector                      Resources Group     U S WEST
    D                                            92% (1)                            100%            Polska
    A                                                                                              (Poland)
    T                                                                                                100%
    E
    D
                               TeleWest
                                 (UK)                             Mercury
                                 26.8%                           One 2 One
                            TeleWest Europe                        (UK)
                               (Norway,                             50%
                                Sweden,                           Westel
                               Hungary)                        Radiotelefon
                                Varies                           (Hungary)
                              A2000 (KTA)                           49%
    E                        (Netherlands)                      Westel 900
    Q                             50%                            (Hungary)                          Listel
    U            TWE          Kabel Plus                            47%                            (Brazil)
    I          25.51%           (Czech                            EuroTel                             50%
    T                          Republic)                      (Czech & Slovak
    Y                             29%                           Republics)
                               Binariang                           24.5%
                            Communications                        Russian
                                Sdn Bhd                       Telecommunications
                              (Malaysia)                        Development
                                  20%                              Corp.
                               ARIAWEST                          (Russia)
                              (Indonesia)                           67%
                                  35%
<FN>
------------------------------
 
(1)  Proportionate  information  reflects  an  approximate  8  percent  minority
     interest in NewVector's underlying operations.
</TABLE>
 
                                      D-18
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
    The following table and  discussion is not required  by GAAP or intended  to
replace  the Combined Financial Statements prepared  in accordance with GAAP. It
is presented supplementally because the Media Group believes that  proportionate
financial  and operating data facilitate the understanding and assessment of its
Combined Financial  Statements.  Proportionate  accounting  reflects  the  Media
Group's relative ownership interests in operating revenues and expenses for both
its  consolidated  and  equity  method  investments.  The  financial information
included below departs materially from  GAAP because it aggregates the  revenues
and operating income of entities not controlled by the Media Group with those of
the  consolidated operations  of the Media  Group. The  following table includes
allocations of  Media  Group corporate  activity.  The table  does  not  reflect
financial data of the capital assets segment, which had net assets of $429, $302
and  $554 at December 31, 1995, 1994 and 1993, respectively. Previously reported
amounts have been reclassified to conform with current year presentation.
 
<TABLE>
<CAPTION>
                                                CABLE AND                WIRELESS             DIRECTORY AND
                                            TELECOMMUNICATIONS        COMMUNICATIONS       INFORMATION SERVICES
                                         ------------------------  --------------------  ------------------------
                                         DOMESTIC(1)   INTERN'L    DOMESTIC   INTERN'L    DOMESTIC     INTERN'L      TOTAL
                                         -----------  -----------  ---------  ---------  -----------  -----------  ---------
<S>                                      <C>          <C>          <C>        <C>        <C>          <C>          <C>
FINANCIAL DATA:
 
YEAR ENDED 1995
Revenue................................   $   2,661    $     128   $     824  $     295   $   1,065    $     142   $   5,115
EBITDA (2).............................         589          (55)        226        (40)        426            3       1,149
Operating income (loss)................         181         (117)        116        (92)        398          (10)        476
Income (loss) before extraordinary
 item..................................         (68)          18          50        (80)        238          (13)        145
Debt...................................                                                                                4,417
YEAR ENDED 1994
Revenue................................   $   2,196    $      85   $     662  $     186   $   1,005    $      79   $   4,213
EBITDA (2).............................         436          (42)        161        (68)        413            2         902
Operating income (loss)................         120          (73)         76       (103)        389           (8)        401
Income (loss) from continuing
 operations............................         (42)          65          74        (68)        251           (4)        276
Debt...................................                                                                                3,865
YEAR ENDED 1993
Revenue................................   $     568    $      59   $     487  $      78   $     958    $       7   $   2,157
EBITDA (2).............................          81          (42)        121        (48)        418           (3)        527
Operating income (loss)................          (7)         (64)        (25)       (53)        347           (3)        195
Income (loss) from continuing
 operations............................         (31)         (49)        (31)       (22)        221           (3)         85
Debt...................................                                                                                3,492
</TABLE>
 
                                      D-19
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
 
<TABLE>
<CAPTION>
                                                CABLE AND                WIRELESS             DIRECTORY AND
                                            TELECOMMUNICATIONS        COMMUNICATIONS       INFORMATION SERVICES
                                         ------------------------  --------------------  ------------------------
                                         DOMESTIC(1)   INTERN'L    DOMESTIC   INTERN'L    DOMESTIC     INTERN'L      TOTAL
                                         -----------  -----------  ---------  ---------  -----------  -----------  ---------
OPERATING DATA (THOUSANDS):
<S>                                      <C>          <C>          <C>        <C>        <C>          <C>          <C>
 
YEAR ENDED 1995
Subscribers/advertisers................       2,945          617       1,339        308         479          271       5,959
Homes passed...........................       4,551        1,172      --         --          --           --           5,723
POPs (3)...............................      --           --          33,800     44,300      --           --          78,100
Telephone lines........................      --              141      --         --          --           --             141
YEAR ENDED 1994
Subscribers/advertisers................       2,407          226         817        169         468          147       4,234
Homes passed...........................       3,952          576      --         --          --           --           4,528
POPs (3)...............................      --           --          18,900     38,300      --           --          57,200
Telephone lines........................      --               69      --         --          --           --              69
YEAR ENDED 1993
Subscribers/advertisers................       1,837          215         509         41         459           25       3,086
Homes passed...........................       3,061          524      --         --          --           --           3,585
POPs (3)...............................      --           --          18,200     38,300      --           --          56,500
Telephone lines........................      --               44      --         --          --           --              44
</TABLE>
 
------------------------------
(1)
  The proportionate results  include the  Media Group's  25.51 percent  pro-rata
  priority  and residual equity interests in  reported TWE results. The reported
  TWE results are prepared in accordance with GAAP and have not been adjusted to
  report  TWE  investments  accounted   for  under  the   equity  method  on   a
  proportionate basis.
 
(2)
  Proportionate  EBITDA  represents the  Media  Group's equity  interest  in the
  entities  multiplied   by  the   entities'   EBITDA.  1993   EBITDA   excludes
  restructuring  charges of  $59 and  $50 related  to the  domestic wireless and
  directory and information services segments, respectively.
 
(3)
  POPs are the estimated  market population multiplied by  U S WEST's  ownership
  interest in the market.
 
PROPORTIONATE RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
 
    In  1995, proportionate Media  Group revenue increased  17 percent, to $5.12
billion, and  EBITDA  increased 17  percent,  to $1.15  billion,  excluding  the
one-time  impacts of the 1994 Atlanta Systems acquisition and the sale of paging
operations. Strong  growth in  both domestic  cable and  telecommunications  and
wireless communications contributed to the increases.
 
    CABLE  AND TELECOMMUNICATIONS   During  1995, proportionate  revenue for the
Media Group  domestic  cable  and  telecommunications  operations  increased  12
percent,  to $2,661,  and proportionate  EBITDA increased  11 percent,  to $589,
excluding the one-time impact  of the 1994 acquisition  of the Atlanta  systems.
Proportionate  revenue  and EBITDA  growth is  primarily due  to the  TWE cable,
programming and filmed entertainment operations.  Cable growth is attributed  to
subscriber  growth of nearly six percent, excluding the impact of 1995 TWE cable
transactions, as well as increases in advertising and pay per view revenues.
 
    During  1995,  international  cable  and  telecommunications   proportionate
revenue increased $43, to $128, and proportionate EBITDA decreased $13 to ($55).
Results  for new ventures in the  Czech Republic, Netherlands and Malaysia, have
been included in the proportionate results beginning with the fourth quarter  of
1995.  The new ventures  contributed revenue of  $10 and EBITDA  of ($14), which
reflect the start-up nature of the operations.
 
    WIRELESS COMMUNICATIONS   During 1995, proportionate  revenue for the  Media
Group   domestic  wireless  operations  increased   30  percent,  to  $824,  and
proportionate EBITDA increased 52 percent, to $226,
 
                                      D-20
<PAGE>
                              U S WEST MEDIA GROUP
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
excluding  the  effect  of  the  paging  business,  which  was  sold  in   1994.
Proportionate  cellular service revenue  increased 39 percent,  to $736 in 1995.
This increase  is due  to a  64 percent  increase in  proportionate  subscribers
partially offset by a decrease in average revenue per subscriber.
 
    During  1995,  international wireless  communications  proportionate revenue
increased $109,  to $295,  and  proportionate EBITDA  increased $28,  to  ($40).
Venture results for Indonesia and Russia have been included in the proportionate
results  beginning with the  fourth quarter of  1995. These ventures contributed
revenue of $9  and EBITDA  of ($4),  which reflect  the start-up  nature of  the
operations.
 
    DIRECTORY  AND  INFORMATION  SERVICES   Proportionate  revenue  for domestic
directory and information services increased 6  percent, to $1,065 in 1995,  and
proportionate  EBITDA increased  3 percent,  to $426.  The proportionate revenue
increase is due to price and volume increases. Revenue increases were  partially
offset  by reinvestments in the business, resulting in the 3 percent increase in
EBITDA.
 
    Proportionate revenue  for  international directories  businesses  increased
$63,  to $142 in 1995, and proportionate EBITDA increased $1, to $3. Results for
Listel, a Brazilian directories operation, have been included in the Media Group
proportionate results beginning with the fourth quarter 1995. Listel contributed
proportionate revenue of $18 and EBITDA of $2.
 
PROPORTIONATE DEBT
 
    Proportionate debt increased $552 in 1995. The increase is primarily related
to the Media  Group's international  investments. Both  TeleWest and  One 2  One
raised  cash  through  the issuance  of  debt  in 1995,  primarily  to  fund the
continued expansion of their businesses.
 
                                      D-21
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareowners of U S WEST, Inc.:
 
    We have audited  the Combined Balance  Sheets of  U S WEST  Media Group  (as
described  in Note 2  to the Combined  Financial Statements) as  of December 31,
1995 and 1994, and the related Combined Statements of Operations and Cash  Flows
for  each  of the  three  years in  the period  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 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  combined financial position  of U  S WEST Media
Group as  of  December 31,  1995  and 1994,  and  the combined  results  of  its
operations  and its cash flows  for each of the three  years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
 
    As more fully discussed in Note 2, the Combined Financial Statements of U  S
WEST  Media Group  should be  read in  connection with  the audited Consolidated
Financial Statements of U S WEST, Inc.
 
    We have also  audited the  Supplementary Selected  Proportionate Results  of
Operations  for the three years in the period ended December 31, 1995, presented
on page D-55.  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 accordance  with generally accepted accounting principles.
In our opinion, the Supplementary  Selected Proportionate Results of  Operations
referred to above presents fairly, in all material respects, the information set
forth therein on the basis of accounting described on page D-55.
 
COOPERS & LYBRAND L.L.P.
 
Denver, Colorado
February 12, 1996, except for note 5, paragraph 3,
   as to which the date is February 27, 1996
 
                                      D-22
<PAGE>
                              U S WEST MEDIA GROUP
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1995       1994       1993
                                                                                   ---------  ---------  ---------
                                                                                   DOLLARS IN MILLIONS (EXCEPT PER
                                                                                           SHARE AMOUNTS)
<S>                                                                                <C>        <C>        <C>
Sales and other revenues:
  Directory and information services.............................................  $   1,180  $   1,075  $     956
  Wireless communications........................................................        941        781        561
  Cable and telecommunications...................................................        215         18     --
  Other..........................................................................         38         34         32
                                                                                   ---------  ---------  ---------
    Total sales and other revenues...............................................      2,374      1,908      1,549
Operating expenses:
  Cost of sales and other revenues...............................................        772        612        457
  Selling, general and administrative expenses...................................        886        763        607
  Depreciation and amortization..................................................        249        144        127
  Restructuring charge...........................................................     --         --            120
                                                                                   ---------  ---------  ---------
    Total operating expenses.....................................................      1,907      1,519      1,311
                                                                                   ---------  ---------  ---------
Income from operations...........................................................        467        389        238
Interest expense.................................................................        100         66         27
Equity losses in unconsolidated ventures.........................................        207        121         74
Gains on merger and partial sale of joint venture interest.......................        157        164     --
Gain on sale of paging assets....................................................     --             68     --
Guaranteed minority interest expense.............................................         14     --         --
Other income -- net..............................................................          5         46          9
                                                                                   ---------  ---------  ---------
Income from continuing operations before income taxes and extraordinary item.....        308        480        146
Provision for income taxes.......................................................        163        204         61
                                                                                   ---------  ---------  ---------
Income from continuing operations before extraordinary item......................        145        276         85
Discontinued operations..........................................................     --         --            (82)
                                                                                   ---------  ---------  ---------
Income before extraordinary item.................................................        145        276          3
Extraordinary item -- early extinguishment of debt, net of tax...................         (4)    --         --
                                                                                   ---------  ---------  ---------
NET INCOME.......................................................................  $     141  $     276  $       3
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Dividends on preferred stock.....................................................          3     --         --
                                                                                   ---------  ---------  ---------
EARNINGS AVAILABLE FOR COMMON STOCK..............................................  $     138  $     276  $       3
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Pro forma earnings per common share:
  Income before extraordinary item...............................................  $    0.30  $    0.61
  Extraordinary item -- early extinguishment of debt, net of tax.................       (.01)    --
                                                                                   ---------  ---------
PRO FORMA EARNINGS PER COMMON SHARE..............................................  $    0.29  $    0.61
                                                                                   ---------  ---------
                                                                                   ---------  ---------
PRO FORMA AVERAGE COMMON SHARES
 OUTSTANDING (thousands).........................................................    470,549    453,316
                                                                                   ---------  ---------
                                                                                   ---------  ---------
</TABLE>
 
The accompanying notes are an integral part of the Combined Financial Statements
 
                                      D-23
<PAGE>
                              U S WEST MEDIA GROUP
                            COMBINED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1995       1994
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................................................  $      20  $      93
  Accounts and notes receivable, less allowance for
   credit losses of $58 and $33, respectively...............................................        287        212
  Deferred directory costs..................................................................        247        234
  Receivable from Communications Group......................................................        106        109
  Deferred tax asset........................................................................         24         52
  Other.....................................................................................         57         56
                                                                                              ---------  ---------
Total current assets........................................................................        741        756
                                                                                              ---------  ---------
Property, plant and equipment -- net........................................................      1,148        956
Investment in Time Warner Entertainment.....................................................      2,483      2,522
Intangible assets -- net....................................................................      1,798      1,858
Investments in international ventures.......................................................      1,511        881
Net investment in assets held for sale......................................................        429        302
Other assets................................................................................        505        119
                                                                                              ---------  ---------
Total assets................................................................................  $   8,615  $   7,394
                                                                                              ---------  ---------
                                                                                              ---------  ---------
 
                                              LIABILITIES AND EQUITY
Current liabilities:
  Short-term debt...........................................................................  $     836  $   1,229
  Accounts payable..........................................................................        235        170
  Deferred revenue and customer deposits....................................................         87         76
  Other.....................................................................................        411        458
                                                                                              ---------  ---------
Total current liabilities...................................................................      1,569      1,933
                                                                                              ---------  ---------
Long-term debt..............................................................................      1,265        585
Deferred income taxes.......................................................................        382        344
Deferred credits and other..................................................................        276        278
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
 solely Company-guaranteed debentures.......................................................        600     --
Preferred stock subject to mandatory redemption.............................................         51         51
Media Group equity..........................................................................      4,599      4,390
Company LESOP guarantee.....................................................................       (127)      (187)
                                                                                              ---------  ---------
Total equity................................................................................      4,472      4,203
                                                                                              ---------  ---------
Total liabilities and equity................................................................  $   8,615  $   7,394
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Contingencies (see Note 6 to the Combined Financial Statements)
</TABLE>
 
The accompanying notes are an integral part of the Combined Financial Statements
 
                                      D-24
<PAGE>
                              U S WEST MEDIA GROUP
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                                      -------------------------------
                                                                                        1995       1994       1993
                                                                                      ---------  ---------  ---------
                                                                                            DOLLARS IN MILLIONS
<S>                                                                                   <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income........................................................................  $     141  $     276  $       3
  Adjustments to net income:
    Restructuring charge............................................................     --         --            120
    Depreciation and amortization...................................................        249        144        127
    Equity losses in unconsolidated ventures........................................        207        121         74
    Gains on merger and partial sale of joint venture interest......................       (157)      (164)    --
    Gain on sale of paging assets...................................................     --            (68)    --
    Deferred income taxes and amortization of investment tax credits................        102        147        (34)
    Provision for uncollectibles....................................................         55         36         27
    Discontinued operations.........................................................     --         --             82
  Changes in operating assets and liabilities:
    Restructuring payments..........................................................        (19)       (10)    --
    Accounts and notes receivable...................................................       (103)       (76)       (39)
    Deferred directory costs, prepaid and other.....................................        (28)       (52)       (33)
    Accounts payable and accrued liabilities........................................         36        143         63
  Other -- net......................................................................        157         54        133
                                                                                      ---------  ---------  ---------
  Cash provided by operating activities.............................................        640        551        523
                                                                                      ---------  ---------  ---------
INVESTING ACTIVITIES
  Expenditures for property, plant and equipment....................................       (363)      (349)      (193)
  Investment in Time Warner Entertainment...........................................     --         --         (1,557)
  Investments in international ventures.............................................       (681)      (350)      (230)
  Investment in PCS licenses........................................................       (286)    --         --
  Investment in Atlanta Systems.....................................................     --           (745)    --
  Proceeds from sale of paging assets...............................................     --            143     --
  Other -- net......................................................................         92       (121)        (7)
                                                                                      ---------  ---------  ---------
  Cash (used for) investing activities..............................................     (1,238)    (1,422)    (1,987)
                                                                                      ---------  ---------  ---------
FINANCING ACTIVITIES
  Net (repayments of) proceeds from short-term debt.................................       (449)       936     --
  Repayments of long-term debt......................................................       (724)      (316)      (143)
  Proceeds from issuance of long-term debt..........................................      1,085     --         --
  Proceeds from issuance of trust originated preferred securities -- net............        581     --         --
  Proceeds from issuance of common stock............................................         57        323        794
  Proceeds from issuance of preferred stock.........................................     --             50     --
  Repayment of advance from Communications Group....................................     --         --            153
  Other -- net......................................................................        (25)    --         --
                                                                                      ---------  ---------  ---------
  Cash provided by financing activities.............................................        525        993        804
                                                                                      ---------  ---------  ---------
  Cash (used for) provided by continuing operations.................................        (73)       122       (660)
  Cash (to) from discontinued operations............................................     --           (101)       610
                                                                                      ---------  ---------  ---------
CASH AND CASH EQUIVALENTS
  Increase (decrease)...............................................................        (73)        21        (50)
  Beginning balance.................................................................         93         72        122
                                                                                      ---------  ---------  ---------
  Ending balance....................................................................  $      20  $      93  $      72
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
The accompanying notes are an integral part of the Combined Financial Statements
 
                                      D-25
<PAGE>
                              U S WEST MEDIA GROUP
                     NOTES TO COMBINED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                             (DOLLARS IN MILLIONS)
 
NOTE 1: RECAPITALIZATION PLAN
    On  October  31,  1995, the  shareholders  of  U S  WEST,  Inc.,  a Colorado
corporation  ("U  S   WEST  Colorado")   voted  to  approve   a  proposal   (the
"Recapitalization  Plan") adopted by  the Board of  Directors of U  S WEST, Inc.
(the "Board") to  reincorporate in  Delaware and  create two  classes of  common
stock   that  are  intended  to  reflect   separately  the  performance  of  the
communications and  multimedia  businesses.  Under  the  Recapitalization  Plan,
shareholders  approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware  corporation ("U S WEST" or "Company"),  pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger,  the  Certificate of  Incorporation of  U  S WEST  has been  amended and
restated to designate  two classes of  common stock of  U S WEST,  one class  of
which   is  authorized   as  U   S  WEST   Communications  Group   Common  Stock
("Communications Stock"), and the  other class which is  authorized as U S  WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of  common stock  of U  S WEST  Colorado was  converted into  one share  each of
Communications Stock and Media Stock.
 
    The Communications  Stock  and Media  Stock  provide shareholders  with  two
distinct  securities that are intended  to reflect separately the communications
businesses  of  U  S  WEST  (the  "Communications  Group")  and  the  multimedia
businesses  of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
 
    The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST  Federal
Services,  Inc., U  S WEST  Advanced Technologies,  Inc. and  U S  WEST Business
Resources,  Inc.   The  Communications   Group  primarily   provides   regulated
communications  services  to  more  than  25  million  residential  and business
customers within a 14 state region.
 
    The Media Group is  comprised of U S  WEST Marketing Resources Group,  Inc.,
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, U S WEST  Multimedia Communications, Inc.,  which owns domestic  cable
television  operations  and investments,  and U  S WEST  International Holdings,
Inc.,  which   primarily   owns   investments   in   international   cable   and
telecommunications, wireless communications and directory publishing operations.
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS  OF  PRESENTATION   The Combined  Financial  Statements of  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 Group
Combined Financial  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 Combined Financial 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  Combined Financial 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.
 
    Notwithstanding   the  allocation  of   assets  and  liabilities  (including
contingent liabilities)  and  stockholders' equity  between  the  Communications
Group  and the Media Group for the purpose of preparing the respective financial
statements of such Group,  holders 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. Such  allocation of  assets  and
liabilities   and   change  in   the  equity   structure  of   U  S   WEST  does
 
                                      D-26
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not result  in a  distribution or  spin-off  to shareholders  of any  assets  or
liabilities  of  U  S  WEST  or any  of  its  subsidiaries  or  otherwise affect
responsibility for  the liabilities  of U  S  WEST or  such subsidiaries.  As  a
result, the rights of the holders of U S WEST's or any of its subsidiaries' debt
are  not affected. 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,  the
Media Group Combined Financial Statements should be read in conjunction with U S
WEST's  Consolidated Financial Statements and  the Communications Group Combined
Financial Statements.
 
    The accounting policies  described herein applicable  to the preparation  of
the  Combined  Financial  Statements  of  the Media  Group  may  be  modified or
rescinded  at  the  sole  discretion  of  the  Board  without  approval  of  the
stockholders,  although there is  no present intention  to do so.  The Board may
also adopt additional policies depending on the circumstances. Any determination
of the Board to modify or rescind such policies, or to add additional  policies,
including  any  decision  that  would have  disparate  impacts  upon  holders of
Communications Stock and Media Stock, would be  made by the Board in good  faith
and  in the honest belief that such decision is in the best interests of all U S
WEST stockholders, including the holders of Communications Stock and the holders
of Media  Stock. In  making  such determination,  the  Board may  also  consider
regulatory requirements imposed on U S WEST Communications by the public utility
commissions  of  various states  and the  Federal Communications  Commission. In
addition, generally accepted  accounting principles require  that any change  in
accounting  policy be  preferable (in  accordance with  such principles)  to the
policy previously established.
 
    Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
 
    ALLOCATION OF SHARED SERVICES  Certain costs relating to U S WEST's  general
and  administrative  services  (including certain  executive  management, legal,
accounting and auditing,  tax, treasury,  strategic planning  and public  policy
services)  are directly assigned by  U S WEST to  each Group, and segment within
the Group, based on  actual utilization or are  allocated based on each  Group's
operating  expenses,  number of  employees,  external revenues,  average capital
and/or average equity. Beginning in 1996, certain shared services will no longer
be allocated to each segment  of the Media Group but  will be retained at  Media
Group  headquarters. U  S WEST  charges each  Group for  such services  at fully
distributed cost. These direct and indirect allocations were $55, $38 and $43 in
1995, 1994 and  1993, respectively.  In 1995, the  direct allocations  comprised
approximately 40 percent of the total shared corporate services allocated to the
Media  Group.  It is  not  practicable to  provide  a detailed  estimate  of the
expenses which would  be recognized  if the Media  Group were  a separate  legal
entity.  However, U  S WEST believes  that under the  Recapitalization Plan each
Group would benefit  from synergy's  with the other,  including lower  operating
costs than might be incurred if each Group was a separate legal entity.
 
    ALLOCATION OF INCOME TAXES  Federal, state and local income taxes, which are
determined  on a consolidated or combined basis,  are allocated to each Group in
accordance with tax sharing agreements between U S WEST and the entities  within
the  Groups. The  allocations will  generally reflect  each Group's contribution
(positive or  negative)  to consolidated  taxable  income and  consolidated  tax
credits.  A Group will  be compensated only at  such time as,  and to the extent
that, its tax attributes are utilized by U S WEST in a combined or  consolidated
income tax filing. Federal and state tax refunds and carryforwards or carrybacks
of  tax attributes will  generally be allocated  to the Group  to which such tax
attributes relate.
 
                                      D-27
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    The Media Group includes members which operate in states where U S WEST does
not file  consolidated or  combined  state income  tax returns.  Separate  state
income  tax returns are filed by these members in accordance with the respective
states' laws and regulations. The members  record a tax provision on a  separate
company  basis in  accordance with  the requirements  of Statement  of Financial
Accounting Standard ("SFAS") No. 109.
 
    GROUP  FINANCING    Financing  activities  for  the  Media  Group  and   the
nonregulated  Communications Group businesses, including the issuance, repayment
and repurchase of short-term and long-term debt, and the issuance and repurchase
of preferred  securities,  are managed  by  U S  WEST  on a  centralized  basis.
Financing  activities for U S WEST  Communications are separately identified and
accounted for in U S WEST's records and U S WEST Communications conducts its own
borrowing activities. Debt  incurred and investments  made by U  S WEST and  its
subsidiaries  on behalf  of the  Media Group  are specifically  allocated to and
reflected on the  financial statements  of the  Media Group.  Debt incurred  and
investments  made by U S WEST and its subsidiaries on behalf of the nonregulated
businesses of the  Communications Group  and all debt  incurred and  investments
made  by U S WEST Communications are  specifically allocated to and reflected on
the financial statements of the Communications Group. Debt incurred by U S  WEST
or  a subsidiary on behalf of a Group  is charged to such Group at the borrowing
rate of U S WEST or such subsidiary.
 
    As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST does not intend  to transfer funds between  the Groups, except for  certain
short-term,  ordinary course advances of funds at market rates associated with U
S WEST's centralized cash management. Such short-term transfers of funds will be
accounted for as  short-term loans between  the Groups bearing  interest at  the
market  rate at  which management  determines the  borrowing Group  could obtain
funds on a short-term  basis. If the Board,  in its sole discretion,  determines
that  a transfer of funds between the Groups  should be accounted for as a long-
term loan, the Board would establish the terms on which such loan would be made,
including the  interest rate,  amortization  schedule, maturity  and  redemption
terms.  Such terms would generally reflect  the then prevailing terms upon which
management determines such  Group could  borrow funds  on a  similar basis.  The
financial  statements of the  lending Group will be  credited, and the financial
statements of the borrowing Group will be  charged, with the amount of any  such
loan,  as  well  as  with  periodic interest  accruing  thereon.  The  Board may
determine that a transfer  of funds from the  Communications Group to the  Media
Group  should  be accounted  for as  an  equity contribution,  in which  case an
inter-group interest (determined by the Board  based on the then current  market
value  of  shares  of Media  Stock)  will  either be  created  or  increased, as
applicable.  Similarly,  if  an  inter-group  interest  exists,  the  Board  may
determine  that a transfer of  funds from the Media  Group to the Communications
Group should be accounted for as a reduction in the inter-group interest.
 
    DIVIDENDS   Under the  Recapitalization Plan,  U S  WEST intends  to  retain
future  earnings of the  Media Group, if  any, for the  development of the Media
Group's businesses and does not anticipate  paying dividends to the Media  Group
shareholders in the foreseeable future.
 
    EARNINGS  PER COMMON SHARE  Earnings per common share for 1995 and 1994 have
been presented on a pro forma basis to reflect the Media Group's Stock as if  it
had   been  outstanding  since  January  1,  1994.  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.
 
    INDUSTRY SEGMENTS  The businesses comprising the Media Group operate in four
industry  segments, as defined in SFAS No. 14, "Financial Reporting for Segments
of a Business  Enterprise," consisting  of directory  and information  services,
wireless  communications, cable  and telecommunications  and the  capital assets
segment, which is held for sale.
 
                                      D-28
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Prior to January 1,  1995, the capital assets  segment was accounted for  as
discontinued  operations. Effective January 1,  1995, the capital assets segment
has been accounted for as a net investment in assets held for sale, as discussed
in Note 20 to the Media Group Combined Financial Statements.
 
    USE OF ESTIMATES  The preparation of financial statements in conformity with
generally accepted accounting principles  requires management to make  estimates
and assumptions that affect the 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.
 
    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. All other repairs  and
maintenance costs are expensed as incurred.
 
    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 by the Media Group were $33, $8 and $5
in 1995, 1994 and 1993, respectively.
 
    Depreciation  is  calculated  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.
 
    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 the straight-line
method over  periods  ranging  from  five  to  forty  years.  These  assets  are
evaluated,  with other  related assets, for  impairment using  a discounted cash
flow methodology.
 
    FOREIGN CURRENCY  TRANSLATION    Assets  and  liabilities  of  international
investments  are  translated at  year-end exchange  rates, and  income statement
items are  translated  at  average  exchanges  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  Net interest received or paid on interest rate  swaps
is  recognized over the life of the  swaps as an adjustment to interest expense.
Foreign exchange  contracts  designated  as hedges  of  firm  equity  investment
commitments  are  carried at  market value,  with gains  and losses  recorded in
equity until sale of the investment.  Forward contracts designated as hedges  of
foreign  denominated loans are  recorded at market value,  with gains and losses
recorded in income.
 
    INVESTMENTS IN DEBT SECURITIES  Debt securities are classified as  available
for  sale and are carried at fair  market value with unrealized gains and losses
included in equity.
 
    REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS  Cellular access and  cable
television  revenues are generally billed monthly,  in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
wireless airtime usage are billed and recorded monthly as services are provided.
 
    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.  For
international  operations, directory advertising  revenues and related directory
costs are deferred and recognized upon publication.
 
    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
in accordance with SFAS No. 109. U S WEST
 
                                      D-29
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
implemented SFAS No. 109, "Accounting for Income Taxes" in 1993. Adoption of the
new standard did not have a material effect on the financial position or results
of operations, primarily because of U S WEST's earlier adoption of SFAS No. 96.
 
    NEW  ACCOUNTING  STANDARDS   In  1996, U  S WEST  will  adopt SFAS  No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."  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. U S WEST expects that the adoption
of SFAS No. 121  will not have  a material effect on  its financial position  or
results of operations.
 
    In  1996, U  S WEST  will adopt  SFAS No.  123, "Accounting  for Stock-Based
Compensation." This standard establishes a fair value method for accounting  for
stock-based  compensation plans  either through  recognition or  disclosure. U S
WEST  will  adopt   this  standard  through   compliance  with  the   disclosure
requirements  set forth in SFAS  No. 123. Adoption of  the standard will have no
impact on the financial position or results of operations of U S WEST.
 
NOTE 3: RELATED PARTY TRANSACTIONS
 
    CUSTOMER LISTS, BILLING  AND COLLECTION,  AND OTHER SERVICES   The  domestic
publishing  operations purchase customer lists, billing and collection and other
services from the Communications Group. The  data and services are purchased  at
market price. The charges for these services were $20, $29 and $26 in 1995, 1994
and 1993, respectively.
 
    TELECOMMUNICATIONS  SERVICES    The  domestic  wireless  operations purchase
telecommunications network access and usage  from the Communications Group.  The
charges  for  these services  were  $40, $30  and $24  in  1995, 1994  and 1993,
respectively.
 
NOTE 4: INDUSTRY SEGMENTS
    Industry segment data is presented for the combined operations of the  Media
Group.  U S  WEST's equity  method investments  and the  capital assets segment,
which is held  for sale,  are included  in "Corporate  and other."  Supplemental
Media  Group information on  a proportionate basis  is presented in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
 
    The directory and information services segment consists of the publishing of
White and Yellow  Pages telephone directories,  database marketing services  and
interactive  services  in  domestic  and  international  markets.  The  wireless
communications segment provides information products and services over  wireless
networks  in 13 western and midwestern  states. The cable and telecommunications
segment was created with  the December 6, 1994  acquisition of cable  television
systems  in  the Atlanta  metropolitan  area. (See  Note  5 to  the  Media Group
Combined Financial Statements.)
 
                                      D-30
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
    Industry segment financial information follows:
 
<TABLE>
<CAPTION>
                                       DIRECTORY AND                                         CORPORATE
                                        INFORMATION      WIRELESS           CABLE AND           AND
                                        SERVICES(1)   COMMUNICATIONS   TELECOMMUNICATIONS(2)  OTHER(3)    COMBINED
                                       -------------  ---------------  -------------------  -----------  -----------
<S>                                    <C>            <C>              <C>                  <C>          <C>
1995
Sales and other revenues.............    $   1,180       $     941          $     215        $      38    $   2,374
Operating income (loss)..............          398             147                 23             (101)         467
Identifiable assets..................          583           1,439              1,466            5,127        8,615
Depreciation and amortization........           36             121                 77               15          249
Capital expenditures.................           37             277                 64               23          401
1994
Sales and other revenues.............        1,075             781                 18               34        1,908
Operating income (loss) from
 continuing operations...............          396              88             --                  (95)         389
Identifiable assets..................          613           1,286              1,459            4,036        7,394
Depreciation and amortization........           30             102                  6                6          144
Capital expenditures.................           42             274                  2               25          343
1993
Sales and other revenues.............          956             561             --                   32        1,549
Operating income (loss) from
 continuing operations (4)...........          356             (29)            --                  (89)         238
Identifiable assets..................          450           1,175             --                3,821        5,446
Depreciation and amortization........           16             104             --                    7          127
Capital expenditures.................           32             175             --                    8          215
</TABLE>
 
------------------------------
(1)
  Includes revenue from directory publishing  activities in Europe of $122,  $78
  and  $7, operating losses of  $(1), $(1) and $(3),  and identifiable assets of
  $133, $124 and $4 for 1995, 1994 and 1993, respectively.
 
(2)
  Results of operations have been included since the date of acquisition of  the
  Atlanta Systems
 
(3)
  Includes  U S WEST's equity method investments and the capital assets segment,
  which has been discontinued and is held for sale.
 
(4)
  Includes pretax restructuring  charges of $50  and $70 for  the directory  and
  information services and wireless communications segments, respectively.
 
    Operating   income  represents  sales  and  other  revenues  less  operating
expenses,  and  excludes  interest  expense,  equity  losses  in  unconsolidated
ventures,  other income and  income taxes. Identifiable  assets are those assets
used in each segment's operations. Corporate and other assets consist  primarily
of  cash, debt securities, investments in international ventures, the investment
in Time Warner  Entertainment, the net  investment in assets  held for sale  and
other  assets. Corporate  and other  operating losses  include general corporate
expenses and  administrative costs  primarily associated  with the  Media  Group
equity investments.
 
    To  ensure consistency  and quality  of service,  the wireless  segment uses
Motorola as its primary vendor for infrastructure equipment and cellular  mobile
telephone  equipment  and accessories.  In  addition, Motorola  provides ongoing
technological support for  the infrastructure equipment.  The infrastructure  of
approximately  75  percent  of  the  Media  Group's  major  cellular  markets is
comprised of Motorola equipment.
 
    During  1994,  U  S  WEST  signed  a  definitive  agreement  with   AirTouch
Communications  to combine  their domestic  cellular assets.  The initial equity
ownership of  this  cellular joint  venture  will be  approximately  70  percent
AirTouch  and approximately  30 percent Media  Group. The  combination will take
place in two phases. During Phase I,  which U S WEST entered effective  November
1, 1995, the two companies are operating their cellular properties separately. A
Wireless  Management  Company  (the  "WMC") has  been  formed  and  is providing
centralized services  to  both companies  on  a  contract basis.  In  Phase  II,
AirTouch
 
                                      D-31
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
and  U S WEST will contribute their domestic cellular assets to the WMC. In this
phase, the Media Group will reflect its share of the combined operating  results
of  the WMC  using the equity  method of  accounting. The recent  passage of the
Telecommunications Act of  1996 has removed  significant regulatory barriers  to
completion  of Phase II of the business combination. U S WEST expects that Phase
II closing could take place by the end of 1996 or early 1997.
 
NOTE 5: ACQUISITION OF CABLE SYSTEMS
 
    ATLANTA SYSTEMS  On December 6, 1994, U S WEST acquired the stock of Wometco
Cable Corp.  and subsidiaries,  and the  assets of  Georgia Cable  Partners  and
Atlanta  Cable  Partners L.P.  (the  "Atlanta Systems"),  for  cash of  $745 and
12,779,206 U S WEST common shares valued at $459, for a total purchase price  of
approximately $1.2 billion. The Atlanta Systems' results of operations have been
included in the combined results of operations of the Media Group since the date
of  acquisition. Had the acquisition  occurred as of January  1, 1994, the Media
Group revenue  and  net  income  for  1994 would  have  been  $2,098  and  $265,
respectively.
 
    The  acquisition was accounted  for using the  purchase method. Accordingly,
the purchase  price  was  allocated to  assets  acquired  (primarily  identified
intangibles)  based on their  estimated fair values.  The identified intangibles
and goodwill are being amortized on a straight-line basis over 25 years.
 
    CONTINENTAL CABLEVISION, INC. (SUBSEQUENT EVENT)  On February 27, 1996, U  S
WEST  announced a  definitive agreement  to merge  with Continental Cablevision,
Inc. ("Continental"). Continental,  the nation's  third-largest cable  operator,
serves  4.2 million domestic customers, passes  more than seven million domestic
homes and holds  significant other  domestic and international  properties. U  S
WEST will purchase all of Continental's stock for approximately $5.3 billion and
will   assume  Continental's  debt  and   other  obligations,  which  amount  to
approximately $5.5 billion. Consideration  for the $5.3  billion in equity  will
consist  of approximately $1 billion in U S WEST preferred stock, convertible to
Media Stock; and, at U S WEST's  option, between $1 billion and $1.5 billion  in
cash,  and  $2.8  billion  to  $3.3  billion  in  shares  of  Media  Stock.  The
transaction, which  is expected  to close  in  the fourth  quarter of  1996,  is
subject  to  a  number of  conditions  and approvals,  including  approvals from
Continental shareholders and local franchising and government authorities.
 
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 Company  L.P.  ("TWE"  or  "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 Inc.  ("Time
Warner"),  consisting primarily of its filmed entertainment, programming-HBO and
cable businesses.
 
    Upon  U  S  WEST's  admission  to  the  partnership,  certain   wholly-owned
subsidiaries  of Time  Warner ("General  Partners") and  subsidiaries of Toshiba
Corporation and ITOCHU Corporation held  pro-rata priority capital and  residual
equity  interests of 63.27,  5.61 and 5.61 percent,  respectively. In 1995, Time
Warner  acquired   the  limited   partnership  interests   previously  held   by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
 
    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.
 
    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); pro-rata priority capital (A
 
                                      D-32
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
preferred - held pro-rata by the general and limited partners); junior  priority
capital  (B  preferred -  held by  the General  Partners); and  common (residual
equity interests 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
capital and  $895  represents  common 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' common capital
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>
                                                                          TIME       LIMITED PARTNERS
                                                                         WARNER    --------------------
                                           CONTRIBUTED                  GENERAL      TIME
     PRIORITY OF CONTRIBUTED CAPITAL       CAPITAL(A)                   PARTNERS    WARNER    U S WEST
-----------------------------------------  -----------                 ----------  ---------  ---------
                                                          PRIORITY
                                                        CAPITAL RATES
                                                        OF RETURN(B)
                                                        -------------
                                                        (% PER ANNUM
                                                         COMPOUNDED
                                                         QUARTERLY)             (OWNERSHIP %)
<S>                                        <C>          <C>            <C>         <C>        <C>
Senior preferred.........................   $   1,400(c)       8.00%      100.00%     --         --
Pro-rata priority capital................       5,600        13.00%(d)     63.27%     11.22%     25.51%
Junior priority capital..................       2,900(e)      13.25%(f)    100.00%    --         --
Residual equity capital..................       3,300        --            63.27%     11.22%     25.51%
</TABLE>
 
------------------------------
(a)
  Estimated fair value of net assets contributed excluding partnership income or
  loss allocated thereto.
 
(b)
  Income  allocations related to  priority capital rates of  return are based on
  partnership income after any special tax allocations.
 
(c)
  The  senior  preferred  is  scheduled  to  be  distributed  in  three   annual
  installments beginning July 1, 1997.
 
(d)
  11.00 percent to the extent concurrently distributed.
 
(e)
  Includes  $300  for  the  September 1995  reacquisition  of  assets previously
  excluded from the partnership (the Time Warner service partnership assets) for
  regulatory reasons.
 
(f)
  11.25 percent to the extent concurrently distributed.
 
    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 were previously subject  to
restrictions  until July  1995, and are  now 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.
 
                                      D-33
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    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.
The  Media Group'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, the  Media
Group's recorded pretax share of TWE operating results before extraordinary item
was  $(31), $(18) and $(20)  in 1995, 1994 and  1993, respectively. In addition,
TWE recorded an extraordinary loss for the early extinguishment of debt in 1995.
The Media Group's share of this extraordinary loss was $4, net of an income  tax
benefit of $2.
 
    As consideration for its expertise and participation in the cable operations
of TWE, the Media Group earns a management fee of $130 over five years, which is
payable  over a four-year period beginning in  1995. Management fees of $26, $26
and $8 were recorded to other income  in 1995, 1994 and 1993, respectively.  The
Media  Group Combined Balance Sheet  includes a note payable  to TWE of $169 and
$771 and management  fee receivables of  $50 and  $34 at December  31, 1995  and
1994, respectively.
 
    Summarized financial information for TWE is presented below:
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                       -------------------------------
SUMMARIZED OPERATING RESULTS                                             1995       1994       1993
---------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Revenues.............................................................  $   9,517  $   8,460  $   7,946
Operating expenses (1)...............................................      8,557      7,612      7,063
Interest and other expense, net (2)..................................        777        647        611
                                                                       ---------  ---------  ---------
Income before income taxes and extraordinary item....................  $     183  $     201  $     272
Income before extraordinary item.....................................         97        161        208
                                                                       ---------  ---------  ---------
Net income...........................................................  $      73  $     161  $     198
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  Includes  depreciation and amortization of $1,039, $943 and $902 in 1995, 1994
  and 1993, respectively.
 
(2)
  Includes corporate  services of  $64, $60  and  $60 in  1995, 1994  and  1993,
  respectively.
 
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER
                                                                                           31,
                                                                                   --------------------
SUMMARIZED FINANCIAL POSITION                                                        1995       1994
---------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                <C>        <C>
Current assets (3)...............................................................  $   2,909  $   3,573
Noncurrent assets (4)............................................................     15,996     15,089
Current liabilities..............................................................      3,214      2,857
Noncurrent liabilities, including minority interest..............................      7,787      7,909
Senior preferred capital.........................................................      1,426      1,663
Partners' capital (5,6)..........................................................      6,478      6,233
</TABLE>
 
------------------------------
(3)
  Includes cash of $209 and $1,071 at December 31, 1995 and 1994, respectively.
 
(4)
  Includes  a loan receivable from Time Warner  of $400 at December 31, 1995 and
  1994.
 
(5)
  Net of a note receivable from U S  WEST of $169 and $771 at December 31,  1995
  and 1994, respectively.
 
(6)
  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  partner's capital as reflected in
  the Summarized Financial Position,  which is based on  the historical cost  of
  the contributed net assets.
 
                                      D-34
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
    In early 1995, Time Warner announced its intention to simplify its corporate
structure by establishing an enterprise that will be responsible for the overall
management  and financing  of the  cable and  telecommunications properties. Any
change in the structure of TWE would require U S WEST's approval in addition  to
certain creditors' and regulatory approvals.
 
CONTINGENCIES
 
    On  September 22, 1995, U S WEST  filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time  Warner and Turner Broadcasting. U S  WEST
has  alleged  breaches  of  contract  and fiduciary  duties  by  Time  Warner in
connection with this proposed merger. Time Warner filed a countersuit against  U
S  WEST on October 11, 1995,  alleging misrepresentation, breach of contract and
other misconduct on  the part of  U S  WEST. Time Warner's  countersuit seeks  a
reformation  of the  Time Warner  Entertainment partnership  agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and  unspecified
compensatory  damages. U S WEST  has denied each of  the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling  by
the Delaware Chancery Court is expected in June 1996.
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES
    The significant investments in international ventures follows:
 
<TABLE>
<CAPTION>
                                                                                     NET INVESTMENT AT
                                                                                        DECEMBER 31,
                                                           LINE OF     OWNERSHIP    --------------------
VENTURE                               LOCATION            BUSINESS    PERCENTAGE      1995       1994
---------------------------  ---------------------------  ---------  -------------  ---------  ---------
<S>                          <C>                          <C>        <C>            <C>        <C>
TeleWest...................  United Kingdom                  C&T            26.8    $     540  $     456
Binariang Sdn Bhd..........  Malaysia                        C&T          20              224         50
A2000 (KTA)................  Netherlands                     C&T          50              218     --
One 2 One..................  United Kingdom                   W           50               73        123
All other..................                                                               456        252
                                                                                    ---------  ---------
    Total..................                                                         $   1,511  $     881
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
------------------------------
(C&T)
   Cable and Telecommunications
 
(W)Wireless
 
    The  following table shows summarized combined financial information for the
Media Group's significant equity method investments in international ventures:
 
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                         -------------------------------
COMBINED OPERATIONS                                                        1995       1994       1993
-----------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                      <C>        <C>        <C>
Revenue................................................................  $   1,163  $     580  $     296
Operating expenses.....................................................      1,264        684        354
Depreciation and amortization..........................................        272        140         60
                                                                         ---------  ---------  ---------
  Operating loss.......................................................       (373)      (244)      (118)
Interest and other, net................................................       (141)       (75)       (40)
                                                                         ---------  ---------  ---------
  Loss before extraordinary item.......................................       (514)      (319)      (158)
Extraordinary gain -- interest rate swaps..............................     --             11     --
                                                                         ---------  ---------  ---------
  Net loss.............................................................  $    (514) $    (308) $    (158)
                                                                         ---------  ---------  ---------
                                                                         ---------  ---------  ---------
</TABLE>
 
                                      D-35
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER
                                                                                            31,
                                                                                    --------------------
COMBINED FINANCIAL POSITION                                                           1995       1994
----------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                 <C>        <C>
Current assets....................................................................  $   1,469  $     714
Property, plant and equipment -- net..............................................      3,545      1,462
Other assets......................................................................      1,644        343
                                                                                    ---------  ---------
Total assets......................................................................  $   6,658  $   2,519
                                                                                    ---------  ---------
                                                                                    ---------  ---------
Current liabilities...............................................................  $   1,260  $     344
Long-term debt....................................................................      2,065        463
Other liabilities.................................................................         58         71
Owners' equity....................................................................      3,275      1,641
                                                                                    ---------  ---------
Total liabilities and equity......................................................  $   6,658  $   2,519
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    In November 1994, TeleWest plc ("TeleWest") made an initial public  offering
of  its ordinary shares. Following the offering, in  which U S WEST sold part of
its 50 percent joint venture interest, U S WEST owned approximately 37.8 percent
of TeleWest. Net proceeds of approximately $650 were used by TeleWest to finance
construction and operating costs, invest in affiliated companies and repay debt.
It is U S WEST's  policy to recognize as income  any gains or losses related  to
the  sale of stock to the  public. The Media Group recognized  a gain of $105 in
1994, net of $59 in  deferred taxes, for the partial  sale of its joint  venture
interest in TeleWest.
 
    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  telecommunications  services  in  the  United
Kingdom.  Following completion of the merger,  U S WEST and Tele-Communications,
Inc., the major shareholders, each own 26.8 percent of the combined company. The
Media Group recognized  a gain of  $95 in 1995,  net of $62  in deferred  income
taxes, in conjunction with the merger.
 
    TeleWest,  which is  the only  equity method  investment for  which a quoted
market price is available, had a market value of $914 at December 31, 1995,  and
$1,004 at December 31, 1994.
 
    FOREIGN  CURRENCY TRANSACTIONS  U S WEST  enters into  forward and zero-cost
combination option contracts to  manage foreign currency  risk. Under a  forward
contract,  U S WEST agrees with another party to exchange a foreign currency and
U.S. dollars at a specified price at a future date. Under combination options, U
S WEST combines purchased options to cap the foreign exchange rate to be paid at
a future  date with  written options  to finance  the premium  of the  purchased
options.  The  commitments, forward  contracts and  combination options  are for
periods up to one year.
 
    Forward exchange contracts are carried at  market value. Gains or losses  on
the  portion of  the contracts  designated as  hedges of  firm equity investment
commitments are deferred as a component of Media Group equity and are recognized
in income upon sale  of the investment.  Gains or losses on  the portion of  the
contracts  designated to offset translation of  investee net income are recorded
in income.
 
    Forward contracts are also  used to hedge  foreign denominated loans.  These
contracts are carried at market value with gains or losses recorded in income.
 
                                      D-36
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
    Foreign exchange contracts outstanding follow:
 
<TABLE>
<CAPTION>
                                                                                                          $U.S. EQUIVALENT
                                                                                                            DECEMBER 31,
                                                                                                        --------------------
                                                                                               TYPE       1995       1994
                                                                                             ---------  ---------  ---------
<S>                                                                                          <C>        <C>        <C>
Forwards:
  Dutch Guilders...........................................................................        Buy  $     225  $  --
  British pounds...........................................................................        Buy        130        135
  British pounds...........................................................................       Sell         37     --
  Japanese yen.............................................................................        Buy         25     --
  French francs............................................................................        Buy         19     --
Combination options:
  British pounds...........................................................................     --      $  --      $      35
  French francs............................................................................     --             20     --
</TABLE>
 
    Cumulative  deferred gains on foreign exchange  contracts of $9 and deferred
losses  of  $25,  including   deferred  taxes  (benefits)   of  $4  and   ($10),
respectively,  are  included  in  Media  Group  equity  at  December  31,  1995.
Cumulative deferred  gains on  foreign  exchange contracts  of $7  and  deferred
losses   of  $25,  including   deferred  taxes  (benefits)   of  $3  and  ($10),
respectively, are included in Media Group equity at December 31, 1994.
 
    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.
 
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
    The composition of property, plant and equipment follows:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1995       1994
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Land and buildings.............................................................................  $     168  $     151
Cellular systems...............................................................................        733        585
Cable distribution systems.....................................................................        167        148
General purpose computers and other............................................................        471        412
Construction in progress.......................................................................        167        140
                                                                                                 ---------  ---------
                                                                                                     1,706      1,436
Less accumulated depreciation..................................................................        558        480
                                                                                                 ---------  ---------
Property, plant and equipment -- net...........................................................  $   1,148  $     956
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    The  Media Group depreciates buildings between  15 to 35 years, cellular and
cable distribution systems between 5 to  15 years, and general purpose  computer
and other between 3 to 20 years.
 
    Depreciation  expense  was $173,  $121,  and $113  in  1995, 1994  and 1993,
respectively.
 
                                      D-37
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 9: INTANGIBLE ASSETS
    The composition of intangible assets follows:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1995       1994
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Identified intangibles, primarily franchise value..............................................  $   1,183  $   1,166
Goodwill.......................................................................................        743        762
                                                                                                 ---------  ---------
                                                                                                     1,926      1,928
Less accumulated amortization..................................................................        128         70
                                                                                                 ---------  ---------
Total intangible assets -- net.................................................................  $   1,798  $   1,858
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    Amortization  expense  was  $76,  $23  and  $14  in  1995,  1994  and  1993,
respectively.
 
NOTE 10: RESTRUCTURING CHARGE
    The  Media  Group's  1993  results  reflected  a  $120  restructuring charge
(pretax) of which $50 related to the directory and information services  segment
and  $70 related to the wireless segment. The restructuring charge includes only
specific, incremental and direct  costs which can  be estimated with  reasonable
accuracy and are clearly identifiable with the restructuring plan.
 
    Following  is a  schedule of  the costs  included in  the 1993 restructuring
charge and amounts remaining at December 31, 1995 and 1994:
 
<TABLE>
<CAPTION>
                                                                                                    BALANCE AT DECEMBER
                                                                                                            31,
                                                                                    RESTRUCTURING   --------------------
                                                                                       CHARGE         1995       1994
                                                                                   ---------------  ---------  ---------
<S>                                                                                <C>              <C>        <C>
Asset write-down and other.......................................................     $      70     $  --      $  --
System development...............................................................            40            15         30
Employee separation costs and other..............................................            10             6         10
                                                                                          -----     ---------  ---------
    Total........................................................................     $     120     $      21  $      40
                                                                                          -----     ---------  ---------
                                                                                          -----     ---------  ---------
</TABLE>
 
    During 1993, the  Media Group's wireless  subsidiary replaced  substantially
all  of  its  cellular  network equipment,  consisting  primarily  of  cell site
electronics and switching equipment, in certain of its major market areas.
 
    System   development   costs   includes   the   replacement   of   existing,
single-purpose  systems  used  in  the publishing  businesses  with  new systems
designed to provide integrated, end-to-end customer service. Other costs consist
primarily of employee separation costs including severance payments, health care
coverage and postemployment education benefits  and relocation costs. The  Media
Group  expects the  restructuring to  be substantially  completed by  the end of
1996. Management does not anticipate  any material revisions in total  estimated
expenditures.   However,  should  expenditures  exceed  the  remaining  reserve,
additional amounts would be expensed as incurred.
 
                                      D-38
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: DEBT
 
SHORT-TERM DEBT
 
    The components of short-term debt follow:
 
<TABLE>
<CAPTION>
                                                                                                      DECEMBER 31,
                                                                                                  --------------------
                                                                                                    1995       1994
                                                                                                  ---------  ---------
<S>                                                                                               <C>        <C>
Notes payable:
  Commercial paper..............................................................................  $     203  $     868
  Bank loan.....................................................................................        216     --
Current portion of long-term debt...............................................................        568        561
Allocated to the capital assets segment -- net..................................................       (151)      (200)
                                                                                                  ---------  ---------
Total...........................................................................................  $     836  $   1,229
                                                                                                  ---------  ---------
                                                                                                  ---------  ---------
</TABLE>
 
    The weighted average interest rate on commercial paper was 5.79 percent  and
6.04 at December 31, 1995 and 1994, respectively.
 
    The bank loan, in the translated principal amount of $216, is denominated in
Dutch  guilders.  The  loan was  entered  into  in connection  with  U  S WEST's
investment in a cable  television venture in the  Netherlands and was repaid  in
February 1996.
 
    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.  Additional lines of  credit aggregating approximately  $1.3 billion are
available to the  Media Group as  well as the  nonregulated subsidiaries of  the
Communications  Group in accordance with their  borrowing needs. The Media Group
expects that cash  from operations will  not be adequate  to fund expected  cash
requirements. Additional financing will come primarily from new debt.
 
LONG-TERM DEBT
 
    Interest rates and maturities of long-term debt at December 31 follow:
 
<TABLE>
<CAPTION>
                                                                          MATURITIES
                                                    -------------------------------------------------------    TOTAL      TOTAL
INTEREST RATES                                        1997       1998       1999       2000     THEREAFTER     1995       1994
--------------------------------------------------  ---------  ---------  ---------  ---------  -----------  ---------  ---------
<S>                                                 <C>        <C>        <C>        <C>        <C>          <C>        <C>
Up to 5%..........................................  $  --      $  --      $  --      $  --       $  --       $  --      $     271
Above 5% to 6%....................................     --            130     --         --          --             130         13
Above 6% to 7%....................................     --         --             55        106         857       1,018     --
Above 7% to 8%....................................     --         --         --         --             737         737      1,057
Above 8% to 9%....................................     --         --            107     --              40         147        194
Above 9% to 10%...................................         29     --             15         25          10          79         79
Above 10%.........................................          1          1     --         --          --               2     --
                                                    ---------  ---------  ---------  ---------  -----------  ---------  ---------
                                                    $      30  $     131  $     177  $     131   $   1,644       2,113      1,614
                                                    ---------  ---------  ---------  ---------  -----------
                                                    ---------  ---------  ---------  ---------  -----------
Capital lease obligations and other...............                                                                   2          5
Unamortized discount -- net.......................                                                                (494)      (524)
Allocated to the capital assets segment -- net....                                                                (356)      (510)
                                                                                                             ---------  ---------
Total.............................................                                                           $   1,265  $     585
                                                                                                             ---------  ---------
                                                                                                             ---------  ---------
</TABLE>
 
    Long-term  debt consists principally of  debentures, medium-term notes, debt
associated with U S WEST's  Leveraged Employee Stock Ownership Plans  ("LESOP"),
and  zero coupon subordinated notes convertible at any time into equal shares of
Communications Stock and  Media Stock.  The zero coupon  notes have  a yield  to
maturity  of approximately 7.3 percent and are recorded at a discounted value of
$245 and $234 at December 31, 1995 and 1994, respectively.
 
                                      D-39
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11: DEBT (CONTINUED)
    In 1995,  U  S  WEST issued  $130  of  Debt Exchangeable  for  Common  Stock
("DECS"),  due December 15, 1998 in the principal amount of $24.00 per note. The
notes bear interest at 7.625 percent,  of which 1.775 percent has been  included
in  the  assets  held  for  sale  reserve.  Upon  maturity,  each  DECS  will be
mandatorily redeemed by U S WEST for shares of Enhance Financial Services Group,
Inc. ("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 value is greater than $28.32  per share, .8475 shares are delivered.
The capital  assets segment  currently owns  approximately 31.5  percent of  the
outstanding Enhance common stock.
 
    At  December 31, 1995, U  S WEST guaranteed debt  in the principal amount of
approximately $140, primarily related to international ventures.
 
    Interest payments, net of amounts capitalized, were $140, $167 and $272  for
1995,  1994 and 1993,  respectively, of which $87,  $134 and $272, respectively,
relate to the capital assets segment.
 
INTEREST RATE RISK MANAGEMENT
 
    Interest rate  swap  agreements are  used  to effectively  convert  existing
commercial  paper to fixed-rate debt.  This allows U S  WEST to achieve interest
savings over issuing fixed-rate debt directly.
 
    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. The net interest received or paid as
part  of the interest  rate swap is  accounted for as  an adjustment to interest
expense.
 
    The following table summarizes terms of swaps. Variable rates are indexed to
the 30-day commercial paper rate.
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                          ------------------------------------------------------------------------------------------------------
                                                 1995                                                1994
                          --------------------------------------------------  --------------------------------------------------
                                                        WEIGHTED AVERAGE                                    WEIGHTED AVERAGE
                                                              RATE                                                RATE
                           NOTIONAL                 ------------------------   NOTIONAL                 ------------------------
                            AMOUNT     MATURITIES     RECEIVE        PAY        AMOUNT     MATURITIES     RECEIVE        PAY
                          -----------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
<S>                       <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Variable to fixed.......   $      55     1997-2004        5.85         9.30    $      75     1995-2004        6.06         9.17
Fixed to variable.......      --           --           --           --                5          1995        6.61         5.87
</TABLE>
 
    The counterparties  to these  interest rate  contracts are  major  financial
institutions.  The  Media  Group 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 12: 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  fair  values of  mandatorily redeemable  preferred stock  and long-term
receivables, based on  discounting future cash  flows, approximate the  carrying
values. The fair value of foreign exchange contracts, based on estimated amounts
U  S WEST  would receive  or pay to  terminate such  agreements, approximate the
carrying values. It is not practicable  to estimate the fair value of  financial
guarantees  associated with international operations because there are no quoted
market prices for similar transactions.
 
                                      D-40
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
    The fair values of interest rate swaps, including swaps associated with  the
capital assets segment, 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  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,
                                                                           ----------------------------------------------
                                                                                    1995                    1994
                                                                           ----------------------  ----------------------
                                                                            CARRYING      FAIR      CARRYING      FAIR
                                                                              VALUE       VALUE       VALUE       VALUE
                                                                           -----------  ---------  -----------  ---------
<S>                                                                        <C>          <C>        <C>          <C>
Debt (includes short-term portion).......................................   $   2,897   $   3,000   $   3,097   $   3,100
Interest rate swap agreements -- assets..................................      --             (13)     --          --
Interest rate swap agreements -- liabilities.............................      --              34      --              20
                                                                           -----------  ---------  -----------  ---------
Debt -- net..............................................................   $   2,897   $   3,021   $   3,097   $   3,120
                                                                           -----------  ---------  -----------  ---------
                                                                           -----------  ---------  -----------  ---------
Preferred Securities.....................................................   $     600   $     636   $  --       $  --
Preferred stock..........................................................          51          55          51          51
                                                                           -----------  ---------  -----------  ---------
                                                                           -----------  ---------  -----------  ---------
</TABLE>
 
    Investments  in debt securities are classified as available for sale and are
carried at market value.  These securities have  various maturity dates  through
the  year 2001. 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.
 
    The amortized cost and estimated market value of debt securities follow:
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                     ----------------------------------------------------------------------------------
                                                              1995                                      1994
                                     ------------------------------------------------------  --------------------------
                                                      GROSS          GROSS                                    GROSS
DEBT                                               UNREALIZED     UNREALIZED       FAIR                    UNREALIZED
SECURITIES                              COST          GAINS         LOSSES         VALUE        COST          GAINS
-----------------------------------      ---      -------------  -------------     -----         ---      -------------
<S>                                  <C>          <C>            <C>            <C>          <C>          <C>
Corporate debt.....................   $      20     $  --          $  --         $      20    $      19     $  --
Securitized loan...................          55        --                 (5)           50       --            --
                                            ---         -----            ---           ---          ---         -----
Total..............................   $      75     $  --          $      (5)    $      70    $      19     $  --
                                            ---         -----            ---           ---          ---         -----
                                            ---         -----            ---           ---          ---         -----
 
<CAPTION>
 
                                         GROSS
DEBT                                  UNREALIZED       FAIR
SECURITIES                              LOSSES         VALUE
-----------------------------------  -------------     -----
<S>                                  <C>            <C>
Corporate debt.....................    $  --         $      19
Securitized loan...................       --            --
                                           -----           ---
Total..............................    $  --         $      19
                                           -----           ---
                                           -----           ---
</TABLE>
 
    The 1995 net unrealized losses of $3  (net of a deferred tax benefit of  $2)
are included in Media Group equity.
 
NOTE 13: LEASING ARRANGEMENTS
    U  S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent  expense under operating  leases was $60,  $63 and $57  in
1995,  1994 and 1993, respectively. Minimum future lease payments as of December
31, 1995, under noncancelable operating leases, follow:
 
<TABLE>
<CAPTION>
YEAR
----------------------------------------------------------------------------
<S>                                                                           <C>
1996........................................................................  $      55
1997........................................................................         49
1998........................................................................         43
1999........................................................................         33
2000........................................................................         24
Thereafter..................................................................         83
                                                                              ---------
Total.......................................................................  $     287
                                                                              ---------
                                                                              ---------
</TABLE>
 
                                      D-41
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
        OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
    On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of  U
S  WEST ("Financing  I"), issued $600  million of 7.96  percent Trust Originated
Preferred Securities (the "Preferred Securities") and $19 of common  securities.
U  S  WEST  holds all  of  the  outstanding common  securities  of  Financing I.
Financing I used  the proceeds  from such  issuance to  purchase from  U S  WEST
Capital  Funding,  Inc.,  a  wholly  owned  subsidiary  of  U  S  WEST ("Capital
Funding"), $619 principal amount of Capital Funding's 7.96 percent  Subordinated
Deferrable  Interest Notes  due 2025  (the "Subordinated  Debt Securities"), the
obligations under which  are fully and  unconditionally guaranteed by  U S  WEST
(the  "Debt Guarantee").  The sole  assets of  Financing I  are and  will be the
Subordinated Debt Securities and the Debt Guarantee.
 
    In addition, U S WEST has guaranteed the payment of interest and  redemption
amounts  to holders of Preferred Securities when Financing I has funds available
for such  payments  (the  "Payment  Guarantee") as  well  as  Capital  Funding's
undertaking  to pay all  of Financing I'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'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. The 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,  1995, 24,000,000
Preferred Securities were outstanding.
 
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
    On September  2,  1994, the  Company  issued to  Fund  American  Enterprises
Holdings  Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock  for a total  of $50.  (See Note 20  to the  Combined
Financial Statements.) The preferred stock was attributed to the Media Group and
was  recorded at fair market  value of $51 at  the issue date. U  S WEST has the
right, commencing five years  from September 2, 1994,  to redeem the shares  for
one  thousand dollars per share plus  unpaid dividends and a redemption premium.
The shares are  mandatorily redeemable  in year ten  at face  value plus  unpaid
dividends.  At the option of  FFC, the preferred stock  also can be redeemed for
common shares of Financial Security Assurance, an investment held by the capital
assets segment. The market  value of the  option was $20 and  $22 (based on  the
Black-Scholes Model) at December 31, 1995 and 1994, with no carrying value.
 
                                      D-42
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
 
NOTE 16: MEDIA GROUP EQUITY
    Following are the changes in Media Group equity:
 
<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1995       1994       1993
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Balance at beginning of period.......................................................  $   4,203  $   3,139  $   2,265
Net income...........................................................................        141        276          3
Equity issuances prior to recapitalization...........................................         37        790        786
Media stock issuances................................................................          7     --         --
Market value adjustment for debt securities..........................................         36        (64)        35
Foreign currency translation.........................................................         (9)         6         (1)
Company LESOP guarantee..............................................................         60         56         51
Preferred dividends..................................................................         (3)    --         --
                                                                                       ---------  ---------  ---------
Balance at end of period.............................................................  $   4,472  $   4,203  $   3,139
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
    U S WEST has issued 392,000 shares of Media Stock since the November 1, 1995
recapitalization and has 472,314,000 shares outstanding at December 31, 1995.
 
    Included   in  Media  Group  equity   is  the  cumulative  foreign  currency
translation adjustment of $(38), $(29) and $(35) at December 31, 1995, 1994  and
1993, respectively, net of income tax benefits of $24, $18 and $9, respectively.
 
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP")
 
    The  Media Group  and the  Communications Group  participate in  the defined
contribution savings plan sponsored  by U S WEST.  Employees of the Media  Group
are  covered  by  the  plan  except for  Atlanta  Systems  and  foreign national
employees. U S WEST matches a percentage of eligible employee contributions with
shares of Media Stock and/or Communications Stock in accordance with participant
elections. Participants may also elect to reallocate past company  contributions
between  Media Stock and Communications 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, 1995, 10,145,485 shares  each of Media Stock and Communications
Stock had been allocated from the LESOP to participants accounts while 2,839,435
shares each of Media Stock and Communications Stock remained unallocated.
 
    The  borrowings  associated  with  the  LESOP,  which  are   unconditionally
guaranteed  by U S WEST,  are included in the  accompanying Media Group Combined
Financial Statements. Contributions from the Communications Group and the  Media
Group  as well as dividends on unallocated shares held by the LESOP ($8, $11 and
$14 in 1995, 1994, and 1993, respectively) are used for 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. Tax benefits related to dividend  payments on eligible shares in the
savings plan have  been allocated to  the Communications Group,  which paid  the
dividends.
 
    U S WEST recognizes expense based on the cash payments method. Contributions
to  the plan related to the Media Group were  $16, $12, and $7 in 1995, 1994 and
1993, respectively, of which $3, $3  and $4, respectively, have been  classified
as interest expense.
 
NOTE 17: STOCK INCENTIVE PLANS
    U  S WEST maintains stock incentive  plans for executives and key employees,
and nonemployees.  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, Inc. Stock Incentive Plan and  the
U  S WEST 1991 Stock Incentive Plan (the "Predecessor Plans"). No further grants
of options or
 
                                      D-43
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
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.
 
    During calendar  year 1995,  up  to 1,485,000  shares  of Media  Stock  were
available  for grant. The maximum aggregate number of shares of Media Stock that
may be granted in  any other calendar  year for all purposes  under the Plan  is
three-quarters  of  one  percent (0.75  percent)  of  the shares  of  such class
outstanding (excluding shares held in the  Company'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 may be exercised
no later than 10 years after the date on which the option was granted.
 
    Data for outstanding options under the Plan is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                          MEDIA GROUP           U S WEST INC.
                                                                     ---------------------  ----------------------
                                                                                  AVERAGE                 AVERAGE
                                                                     NUMBER OF    OPTION     NUMBER OF    OPTION
                                                                       SHARES      PRICE      SHARES*      PRICE
                                                                     ----------  ---------  -----------  ---------
<S>                                                                  <C>         <C>        <C>          <C>
Outstanding January 1, 1993........................................                           4,450,150  $   35.81
                                                                                            -----------  ---------
  Granted..........................................................                           1,486,106      48.83
  Exercised........................................................                            (412,444)     31.73
  Canceled or expired..............................................                            (222,273)     36.87
                                                                                            -----------  ---------
Outstanding December 31, 1993......................................                           5,301,539  $   39.76
                                                                                            -----------  ---------
  Granted..........................................................                           2,438,409      36.15
  Exercised........................................................                            (139,762)     33.72
  Canceled or expired..............................................                            (214,149)     40.71
                                                                                            -----------  ---------
Outstanding December 31, 1994......................................                           7,386,037  $   38.66
                                                                                            -----------  ---------
  Granted..........................................................                           3,062,920      43.63
  Exercised........................................................                            (430,631)     34.03
  Canceled or expired..............................................                            (175,147)     39.76
                                                                                            -----------  ---------
Outstanding October 31, 1995.......................................                           9,843,179  $   40.39
                                                                                            -----------  ---------
Recapitalization Plan..............................................   9,843,179  $   16.28   (9,843,179) $  (40.39)
                                                                     ----------  ---------
  Granted..........................................................      71,580      18.51
  Exercised........................................................    (191,243)     14.71
  Canceled or expired..............................................     (15,350)     16.82
                                                                     ----------  ---------  -----------  ---------
Outstanding December 31, 1995......................................   9,708,166  $   16.33      --          --
                                                                     ----------  ---------  -----------  ---------
                                                                     ----------  ---------  -----------  ---------
</TABLE>
 
------------------------------
 *Includes options granted in tandem with SARs.
 
    Options to  purchase 3,021,166  shares of  Media Stock  were exercisable  at
December  31, 1995. Options to purchase 2,374,394  shares of U S WEST stock were
exercisable at December  31, 1994. A  total of 1,419,795  shares of Media  Stock
were available for grant under the plans in effect at December 31, 1995. A total
of  914,816 shares of U  S WEST common stock were  available for grant under the
plans in effect  at December 31,  1994. A  total of 11,121,186  shares of  Media
Stock were reserved for issuance under the Plan at December 31, 1995.
 
                                      D-44
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS
 
PENSION PLAN
 
    The  Communications Group  and the  Media Group  participate in  the defined
benefit pension plan sponsored by U S WEST. The employees of the Media Group are
covered by the plan except for  Atlanta Systems and foreign national  employees.
Since  plan assets  are not segregated  into separate accounts  or restricted to
providing benefits to employees of  the Media Group, assets  of the plan may  be
used  to provide benefits to employees of  both the Communications Group and the
Media Group. In the event the single employer pension plan sponsored by U S WEST
would be separated into  two or more plans,  guidelines in the Internal  Revenue
Code dictate how assets of the plan must be allocated to the new plans. U S WEST
currently  has no intentions  to split the  plan. Because of  these factors, U S
WEST believes there is no reasonable basis to attribute plan assets to the Media
Group as if they had funded separately their actuarially determined obligation.
 
    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.  The Company's
policy is to fund amounts required under the Employee Retirement Income Security
Act of 1974 ("ERISA") and no funding was required in 1995, 1994 or 1993.  Should
funding  be required in  the future, funding  amounts would be  allocated to the
Media Group based upon  the ratio of  service cost of the  Media Group to  total
service cost of plan participants.
 
    The composition of the net pension cost and the actuarial assumptions of the
plan follow:
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                              -------------------------------
                                                                                1995       1994       1993
                                                                              ---------  ---------  ---------
<S>                                                                           <C>        <C>        <C>
Details of pension cost:
  Service cost -- benefits earned during the period.........................  $     173  $     197  $     148
  Interest cost on projected benefit obligation.............................        558        561        514
  Actual return on plan assets..............................................     (1,918)       188     (1,320)
  Net amortization and deferral.............................................      1,185       (946)       578
                                                                              ---------  ---------  ---------
Net pension cost............................................................  $      (2) $       0  $     (80)
                                                                              ---------  ---------  ---------
                                                                              ---------  ---------  ---------
</TABLE>
 
    The expected long-term rate of return on plan assets used in determining net
pension  cost was 8.50 percent for 1995,  8.50 percent for 1994 and 9.00 percent
for 1993.
 
    The funded status of the U S WEST plan follows:
 
<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                            --------------------
                                                                                              1995       1994
                                                                                            ---------  ---------
<S>                                                                                         <C>        <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044,
 respectively.............................................................................  $   6,617  $   5,616
                                                                                            ---------  ---------
                                                                                            ---------  ---------
Plan assets at fair value, primarily stocks and bonds.....................................  $   9,874  $   8,388
Less: Projected benefit obligation........................................................      8,450      7,149
                                                                                            ---------  ---------
Plan assets in excess of projected benefit obligation.....................................      1,424      1,239
Unrecognized net (gain) loss..............................................................       (101)       161
Prior service cost not yet recognized in net periodic pension cost........................        (62)       (67)
Balance of unrecognized net asset at January 1, 1987......................................       (705)      (785)
                                                                                            ---------  ---------
Prepaid pension cost......................................................................  $     556  $     548
                                                                                            ---------  ---------
                                                                                            ---------  ---------
</TABLE>
 
                                      D-45
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
    The actuarial assumptions used to calculate the projected benefit obligation
follow:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1995       1994
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
Discount rate...............................................................................      7.00%      8.00%
Weighted average rate of compensation increase..............................................      5.50%      5.50%
</TABLE>
 
    Anticipated  future  benefit  changes  have  been  reflected  in  the  above
calculations.
 
    ALLOCATION  OF PENSION COSTS   U S WEST's allocation  policy is to 1) offset
the company-wide service cost, interest cost and amortizations by the return  on
plan  assets; and 2) allocate the remaining  net pension cost to the Media Group
based on the ratio of actuarially determined service cost of the Media Group  to
total  service  cost of  plan  participants. U  S  WEST believes  allocating net
pension cost based on service cost is reasonable since service cost is a primary
factor in determining  pension cost. Net  pension costs allocated  to the  Media
Group were $0, $0 and $(9) in 1995, 1994 and 1993, respectively. The service and
interest  costs for  1995 and the  projected benefit obligation  at December 31,
1995 attributed to the Media Group were $24, $29 and $429, respectively.
 
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
    The Communications Group and the Media Group participate in plans  sponsored
by  U S WEST  which provide certain  health care and  life insurance benefits to
retired employees. In conjunction with the  Company's 1992 adoption of SFAS  No.
106,  "Employers' Accounting  for Postretirement Benefits  Other Than Pensions,"
the Company  elected to  immediately  recognize the  accumulated  postretirement
benefit obligation for current and future retirees.
 
    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  postretirement  benefit  costs  and  actuarial assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                      --------------------------------------------------------------------------------------------
                                                    1995                               1994                          1993
                                      ---------------------------------  ---------------------------------  ----------------------
                                        MEDICAL      LIFE       TOTAL      MEDICAL      LIFE       TOTAL      MEDICAL      LIFE
                                      -----------  ---------  ---------  -----------  ---------  ---------  -----------  ---------
<S>                                   <C>          <C>        <C>        <C>          <C>        <C>        <C>          <C>
Service cost -- benefits earned
 during the period..................   $      59   $       6  $      65   $      62   $      13  $      75   $      60   $      11
Interest on accumulated benefit
 obligation.........................         235          32        267         221          39        260         235          36
Actual return on plan assets........        (319)        (96)      (415)          3           1          4         (73)        (52)
Net amortization and deferral.......         228          58        286         (68)        (31)       (99)         27          22
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
Net postretirement benefit costs....   $     203   $       0  $     203   $     218   $      22  $     240   $     249   $      17
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
                                           -----         ---  ---------       -----         ---  ---------       -----         ---
 
<CAPTION>
 
                                        TOTAL
                                      ---------
<S>                                   <C>
Service cost -- benefits earned
 during the period..................  $      71
Interest on accumulated benefit
 obligation.........................        271
Actual return on plan assets........       (125)
Net amortization and deferral.......         49
                                      ---------
Net postretirement benefit costs....  $     266
                                      ---------
                                      ---------
</TABLE>
 
    The expected long-term  rate of return  on plan assets  used in  determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
 
                                      D-46
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
    The funded status of the plans follow:
 
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------------------------------
                                                                     1995                              1994
                                                        -------------------------------  ---------------------------------
                                                         MEDICAL     LIFE       TOTAL      MEDICAL      LIFE       TOTAL
                                                        ---------  ---------  ---------  -----------  ---------  ---------
<S>                                                     <C>        <C>        <C>        <C>          <C>        <C>
Accumulated postretirement benefit obligation
 attributable to:
  Retirees............................................  $   1,866  $     271  $   2,137   $   1,733   $     248  $   1,981
  Fully eligible plan participants....................        293         34        327         264          38        302
  Other active plan participants......................      1,059        165      1,224         940         135      1,075
                                                        ---------  ---------  ---------  -----------  ---------  ---------
Total accumulated postretirement benefit obligation...      3,218        470      3,688       2,937         421      3,358
Unrecognized net gain.................................        378        161        539         243          90        333
Unamortized prior service cost........................     --            (34)       (34)     --          --         --
Fair value of plan assets, primarily stocks, bonds and
 life insurance (1)...................................     (1,385)      (460)    (1,845)       (894)       (374)    (1,268)
                                                        ---------  ---------  ---------  -----------  ---------  ---------
Accrued postretirement benefit obligation.............  $   2,211  $     137  $   2,348   $   2,286   $     137  $   2,423
                                                        ---------  ---------  ---------  -----------  ---------  ---------
                                                        ---------  ---------  ---------  -----------  ---------  ---------
</TABLE>
 
------------------------------
(1)
  Medical  plan assets include  Communications Stock of $210  and Media Stock of
  $112 in 1995 and U S WEST common stock of $164 in 1994.
 
    The actuarial assumptions used  to calculate the accumulated  postretirement
benefit obligation follow:
 
<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                    --------------------
                                                                                      1995       1994
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Discount rate.....................................................................      7.00%      8.00%
Medical trend*....................................................................      9.00%      9.70%
</TABLE>
 
------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 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 1995  net postretirement  benefit cost  by approximately  $40 and
increased  the   1995   accumulated   postretirement   benefit   obligation   by
approximately $350.
 
    Anticipated   future   benefit  changes   have   been  reflected   in  these
postretirement benefit calculations.
 
    PLAN ASSETS  Assets of the postretirement medical and life plans may be used
to provide benefits to employees of both the Communications Group and the  Media
Group  since plan  assets are  not legally  restricted to  providing benefits to
either Group. In  the event  that either  plan sponsored by  U S  WEST would  be
separated  into  two or  more plans,  there  are no  guidelines in  the Internal
Revenue Code for allocating assets  of the plan. U  S WEST allocates the  assets
based  on historical contributions for postretirement  medical costs, and on the
ratio of  salaries  for  life plan  participants.  U  S WEST  currently  has  no
intention to split the plans.
 
    POSTRETIREMENT  MEDICAL COSTS   The service  and interest  components of net
postretirement medical benefit costs  are calculated for  the Media Group  based
upon   the   population  characteristics   of  the   Group.  Since   funding  of
postretirement medical costs is voluntary, return on assets is attributed to the
Media Group  based upon  historical funding.  The Media  Group has  historically
funded  the maximum annual tax  deductible contribution for management employees
and the amount  of annual expense  for occupational employees.  The Media  Group
periodically  reviews its funding  strategy and future  funding amounts, if any,
will be based upon the cash requirements of the Group.
 
                                      D-47
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
    Net postretirement medical benefit costs  recognized by the Media Group  for
1995,  1994 and  1993 were  $14, $11  and $11,  respectively. The  percentage of
postretirement medical assets attributed to the Media Group at December 31, 1995
and 1994, based upon  historical voluntary contributions, was  4 and 5  percent,
respectively.   The  accumulated   postretirement  medical   benefit  obligation
attributed to the Media Group was $161 at December 31, 1995.
 
    ALLOCATION OF POSTRETIREMENT LIFE COSTS   Net postretirement life costs, and
funding requirements,  if any,  are allocated  to the  Media Group  in the  same
manner  as pensions.  U S WEST  will generally  fund the amount  allowed for tax
purposes and no funding of postretirement life insurance occurred in 1995,  1994
and  1993. U S WEST believes its  method of allocating postretirement life costs
is reasonable.
 
    Net postretirement life benefit costs allocated to the Media Group for 1995,
1994 and 1993 were $0, $3, and $3, respectively. The service and interest  costs
for  1995 and the accumulated postretirement life benefit obligation at December
31, 1995 attributed to the Media Group were $1, $3 and $45, respectively.
 
NOTE 19: INCOME TAXES
    The components of the provision for income taxes follow:
 
<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                             -------------------------------
                                                                                               1995       1994       1993
                                                                                             ---------  ---------  ---------
<S>                                                                                          <C>        <C>        <C>
Federal:
  Current..................................................................................  $      47  $      50  $      72
  Deferred.................................................................................         48        104        (32)
                                                                                             ---------  ---------        ---
                                                                                                    95        154         40
Foreign:
  Current..................................................................................          6     --         --
  Deferred.................................................................................         33         14          2
                                                                                             ---------  ---------        ---
                                                                                                    39         14          2
State and local:
  Current..................................................................................          8         (6)        23
  Deferred.................................................................................         21         42         (4)
                                                                                             ---------  ---------        ---
                                                                                                    29         36         19
                                                                                             ---------  ---------        ---
Provision for income taxes.................................................................  $     163  $     204  $      61
                                                                                             ---------  ---------        ---
                                                                                             ---------  ---------        ---
</TABLE>
 
    Amounts U S WEST  paid for income  taxes were $566, $313  and $391 in  1995,
1994  and 1993, respectively, inclusive of  the capital assets segment, of which
$55, ($178) and $94 related to the  Media Group. The Media Group, including  the
capital assets segment, had taxes payable of $90 and $88 as of December 31, 1995
and 1994, respectively.
 
                                      D-48
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 19: INCOME TAXES (CONTINUED)
    The effective tax rate differs from the statutory tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                              -------------------------------
                                                                                                1995       1994       1993
                                                                                              ---------  ---------  ---------
                                                                                                        IN PERCENT
<S>                                                                                           <C>        <C>        <C>
Federal statutory tax rate..................................................................       35.0       35.0       35.0
Foreign taxes -- net of federal effect......................................................        8.3        1.9         .6
State income taxes -- net of federal effect.................................................        6.1        4.9        6.6
Amortization................................................................................        2.5     --             .2
Restructuring charge........................................................................     --         --            1.1
Other.......................................................................................        1.1         .7       (1.7)
                                                                                                    ---        ---        ---
Effective tax rate..........................................................................       53.0       42.5       41.8
                                                                                                    ---        ---        ---
                                                                                                    ---        ---        ---
</TABLE>
 
    The components of the net deferred tax liability follow:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                 --------------------
                                                                                                   1995       1994
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Property, plant and equipment..................................................................  $     107  $      76
Leases.........................................................................................        662        684
State deferred taxes -- net of federal effect..................................................        178        174
Intangible assets..............................................................................        112        164
Investments in partnerships....................................................................        213        142
Other..........................................................................................         12         13
                                                                                                 ---------  ---------
Deferred tax liabilities.......................................................................      1,284      1,253
                                                                                                 ---------  ---------
Postemployment benefits, including pension.....................................................         22         29
Restructuring, assets held for sale and other..................................................         98        130
Currency translation...........................................................................         15         16
Start-up expenditures..........................................................................         17          9
State deferred taxes -- net of federal effect..................................................         33         38
Other..........................................................................................         55         61
                                                                                                 ---------  ---------
Deferred tax assets............................................................................        240        283
                                                                                                 ---------  ---------
Net deferred tax liability.....................................................................  $   1,044  $     970
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    The  current portion of the  deferred tax asset was  $24 and $52 at December
31, 1995 and 1994, respectively, resulting primarily from restructuring  charges
and compensation-related items.
 
    The  net  deferred tax  liability includes  $686  in 1995  and $678  in 1994
related to the capital assets segment.
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
    The  Combined  Financial   Statements  of  the   Media  Group  include   the
discontinued operations of the capital assets segment. During the second quarter
of  1993, the  U S WEST  Board of  Directors approved a  plan to  dispose of the
capital assets  segment  through the  sale  of segment  assets  and  businesses.
Accordingly,  the  Media Group  recorded  an after-tax  charge  of $100  for the
estimated loss on disposition. An additional provision of $20 is related to  the
effect  of the  1993 increase  in federal income  tax rates.  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 and a $500  valuation
allowance was established to cover both carrying costs and losses on disposal of
related properties.
 
                                      D-49
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
    Effective January 1, 1995, the capital assets segment has been accounted for
in  accordance with Staff  Accounting Bulletin No. 93,  issued by the Securities
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  reevaluated  on  an  ongoing  basis with
adjustments to the existing reserve,  if any, charged to continuing  operations.
No  such adjustment was required  in 1995. Prior to  January 1, 1995, the entire
capital  assets  segment  was  accounted  for  as  discontinued  operations   in
accordance with Accounting Principles Board Opinion No. 30.
 
    During  1994, U S WEST reduced  its ownership interest in Financial Security
Assurance Holdings, Ltd.  ("FSA"), a member  of the capital  assets segment,  to
60.9  percent,  and its  voting interest  to  49.8 percent  through a  series of
transactions. In May and  June 1994, U  S WEST sold 8.1  million shares of  FSA,
including  2  million shares  sold to  Fund  American Enterprises  Holdings Inc.
("FFC"), in an initial public  offering of FSA common  stock. U S WEST  received
$154  in net proceeds from the offering.  The Media Group retained certain risks
in asset-backed obligations related to the commercial real estate portfolio.  On
September 2, 1994, U S WEST issued to FFC 50,000 shares of cumulative redeemable
preferred  stock for  a total  of $50.  (See Note  15 to  the Combined Financial
Statements.) In December 1995, FSA merged with Capital Guaranty Corporation  for
shares  of FSA and cash of $51. The transaction was valued at approximately $203
and reduced U S WEST's ownership interest in FSA to 50.3 percent and its  voting
interest to 41.7 percent. U S WEST expects to monetize and ultimately reduce its
ownership  in FSA  through the  issuance of  Debt Exchangeable  for Common Stock
("DECS") in 1996. At maturity,  each DECS will be  mandatorily exchanged by U  S
WEST  for shares of FSA common stock held by  U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
 
    U S WEST  entered into  a transaction to  reduce its  investment in  Enhance
Financial  Services Group, Inc. ("Enhance") during fourth-quarter 1995. U S WEST
issued DECS due December 15, 1998. Upon maturity, each DECS will be  mandatorily
exchanged  by U  S WEST for  shares of  Enhance Common Stock  or, at  U S WEST's
option, redeemed at the  cash equivalent. The  capital assets segment  currently
owns  approximately 31.5 percent  of the outstanding  Enhance common stock. (See
Note 11 to the Combined Financial Statements.)
 
    U S WEST Real Estate, Inc.  has sold various properties totaling $120,  $327
and  $66 in each of  the three years ended  December 31, 1995, respectively. The
sales proceeds were in  line with estimates. Proceeds  from building sales  were
primarily  used to repay  related debt. U  S WEST has  completed construction of
existing buildings  in  the commercial  real  estate portfolio  and  expects  to
substantially  complete the liquidation of this portfolio by 1998. The remaining
balance of assets subject to sale is approximately $490, net of reserves, as  of
December 31, 1995.
 
    In  December 1993, U S WEST sold $2.0 billion of finance receivables and the
business of U S WEST Financial Services, Inc. to NationsBank Corporation.  Sales
proceeds  of $2.1 billion were used primarily  to repay related debt. The pretax
gain on the sale  of approximately $100,  net of selling  expenses, was in  line
with  management's estimate  and was included  in the Media  Group's estimate of
provision for loss on disposal. The management team that previously operated the
entire capital assets segment transferred to NationsBank.
 
    Building sales and  operating revenues  of the capital  assets segment  were
$237,  $553  and  $710  in  1995,  1994  and  1993,  respectively.  Income  from
discontinued operations for 1993 (to June 1) totaled $38. Income (loss) from the
capital assets  segment subsequent  to June  1, 1993  is being  deferred and  is
included within the reserve for assets held for sale.
 
    The  assets  and  liabilities  of  the  capital  assets  segment  have  been
separately classified on the Combined Balance Sheets as net investment in assets
held for sale.
 
                                      D-50
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
    The components of net investment in assets held for sale follow:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1995       1994
                                                                                              ---------  ---------
                                                                                              DOLLARS IN MILLIONS
<S>                                                                                           <C>        <C>
ASSETS
Cash and cash equivalents...................................................................  $      38  $       7
Finance receivables -- net..................................................................        953      1,073
Investment in real estate -- net of valuation allowance.....................................        368        465
Bonds, at market value......................................................................        149        155
Investment in FSA...........................................................................        384        329
Other assets................................................................................        177        347
                                                                                              ---------  ---------
Total assets................................................................................  $   2,069  $   2,376
                                                                                              ---------  ---------
                                                                                              ---------  ---------
 
LIABILITIES
Debt........................................................................................  $     796  $   1,283
Deferred income taxes.......................................................................        686        678
Accounts payable, accrued liabilities and other.............................................        148        103
Minority interests..........................................................................         10         10
                                                                                              ---------  ---------
Total liabilities...........................................................................      1,640      2,074
                                                                                              ---------  ---------
Net investment in assets held for sale......................................................  $     429  $     302
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</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,
                                                                                              --------------------
                                                                                                1995       1994
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
Receivables.................................................................................  $     921  $   1,095
Unguaranteed estimated residual values......................................................        447        467
                                                                                              ---------  ---------
                                                                                                  1,368      1,562
Less: Unearned income.......................................................................        390        459
     Credit loss and other allowances.......................................................         25         30
                                                                                              ---------  ---------
Finance receivables -- net..................................................................  $     953  $   1,073
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</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 Media Group
equity.
 
                                      D-51
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
    The amortized  cost  and  estimated  market value  of  investments  in  debt
securities are as follows:
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                   -----------------------------------------------------------------------------------------------
                                                            1995                                            1994
                                   ------------------------------------------------------  ---------------------------------------
                                                   GROSS            GROSS                                 GROSS          GROSS
                                                UNREALIZED       UNREALIZED       FAIR                 UNREALIZED     UNREALIZED
DEBT SECURITIES                      COST          GAINS           LOSSES         VALUE      COST         GAINS         LOSSES
---------------------------------  ---------  ---------------  ---------------  ---------  ---------  -------------  -------------
<S>                                <C>        <C>              <C>              <C>        <C>        <C>            <C>
Municipal........................  $      91     $       1        $       1     $      91  $     113    $  --          $      13
Other............................         58        --               --                58         65                          10
                                                        --               --
                                   ---------                                    ---------  ---------        -----            ---
Total............................  $     149     $       1        $       1     $     149  $     178    $  --          $      23
                                                        --               --
                                                        --               --
                                   ---------                                    ---------  ---------        -----            ---
                                   ---------                                    ---------  ---------        -----            ---
 
<CAPTION>
 
                                     FAIR
DEBT SECURITIES                      VALUE
---------------------------------  ---------
<S>                                <C>
Municipal........................  $     100
Other............................         55
 
                                   ---------
Total............................  $     155
 
                                   ---------
                                   ---------
</TABLE>
 
Note:  Also  included in Media  Group equity are unrealized  gains and losses on
       debt securities associated  with the Media  Group's equity investment  in
       FSA. 1995 includes unrealized gains of $24, net of deferred taxes of $13,
       and  1994 includes unrealized losses of $49, net of deferred tax benefits
       of $26.
 
    The 1995 net unrealized gains of $39 (net of deferred taxes of $21 ) and the
1994 net unrealized losses  of $64 (net  of deferred tax  benefits of $34),  are
included in Media Group equity.
 
DEBT
 
    Interest  rates and  maturities of debt  associated with  the capital assets
segment at December 31 follow:
 
<TABLE>
<CAPTION>
                                                                         MATURITIES
                                                         ------------------------------------------    TOTAL      TOTAL
INTEREST RATES                                             1997       1998       1999       2000       1995       1994
-------------------------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                      <C>        <C>        <C>        <C>        <C>        <C>
Up to 5%...............................................  $  --      $  --      $  --      $  --      $  --      $      55
Above 5% to 6%.........................................         10     --         --         --             10         15
Above 6% to 7%.........................................         54     --         --         --             54        154
Above 7% to 8%.........................................          5     --         --         --              5         17
Above 8% to 9%.........................................     --         --            134          4        138        189
Above 9% to 10%........................................         48          5     --         --             53        114
Above 10% to 11%.......................................     --             29     --         --             29         29
                                                         ---------  ---------  ---------  ---------  ---------  ---------
                                                         $     117  $      34  $     134  $       4        289        573
                                                         ---------  ---------  ---------  ---------
                                                         ---------  ---------  ---------  ---------
Allocated to the capital assets segment -- net.........                                                    507        710
                                                                                                     ---------  ---------
Total..................................................                                              $     796  $   1,283
                                                                                                     ---------  ---------
                                                                                                     ---------  ---------
</TABLE>
 
    Debt of  $71 and  $119 at  December  31, 1995  and 1994,  respectively,  was
collateralized  by first deeds of trust on associated real estate and assignment
of rents from leases.
 
    The following table summarizes  terms of swaps  associated with the  capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31, 1995 AND 1994
                                                               --------------------------------------------------------------------
                                                                                           WEIGHTED AVERAGE      WEIGHTED AVERAGE
                                                                                             RECEIVE RATE            PAY RATE
                                                                NOTIONAL                 --------------------  --------------------
                                                                 AMOUNT     MATURITIES     1995       1994       1995       1994
                                                               -----------  -----------  ---------  ---------  ---------  ---------
<S>                                                            <C>          <C>          <C>        <C>        <C>        <C>
Variable to fixed (1)........................................   $     380    1996-1997        5.96       5.69       9.03       9.03
Fixed to variable (1)........................................         380    1996-1997        7.29       7.29       5.87       5.80
Variable rate basis adjustment (2)...........................          10      1997           5.92       5.89       5.85       7.04
</TABLE>
 
------------------------------
(1)
  The fixed to variable swaps have the same terms as the variable to fixed swaps
  and  were entered into to terminate the  variable to fixed swaps. The net loss
  on the swaps is deferred  and amortized over the  remaining life of the  swaps
  and is included in the reserve for assets held for sale.
 
(2)
  Variable  rate debt based  on Treasuries is swapped  to a LIBOR-based interest
  rate.
 
                                      D-52
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
 
    The Media Group 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 TO MATURITY                                                                     1995       1994
----------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                 <C>        <C>
0 to 5 Years......................................................................  $     639  $     540
5 to 10 Years.....................................................................        450        537
10 to 15 Years....................................................................         10        391
                                                                                    ---------  ---------
Total.............................................................................  $   1,099  $   1,468
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    Concentrations  of   collateral   associated   with   insured   asset-backed
obligations follow:
 
<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                    --------------------
TYPE OF COLLATERAL                                                                    1995       1994
----------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                 <C>        <C>
Commercial mortgages:
  Commercial real estate..........................................................  $     442  $     530
  Corporate secured...............................................................        657        888
Other asset-backed................................................................     --             50
                                                                                    ---------  ---------
Total.............................................................................  $   1,099  $   1,468
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
ADDITIONAL FINANCIAL INFORMATION
 
    Information  for U S WEST Financial Services,  Inc., a member of the capital
assets segment, follows:
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
SUMMARIZED FINANCIAL INFORMATION                                                         1995       1994       1993
-------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Revenue..............................................................................  $      44  $      54  $     410
Net finance receivables..............................................................        931        981      1,020
Total assets.........................................................................      1,085      1,331      1,797
Total debt...........................................................................        274        533        957
Total liabilities....................................................................      1,024      1,282      1,748
Equity...............................................................................         61         49         49
</TABLE>
 
                                      D-53
<PAGE>
                              U S WEST MEDIA GROUP
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                          QUARTERLY FINANCIAL DATA
                                                                             --------------------------------------------------
                                                                                FIRST       SECOND        THIRD       FOURTH
                                                                               QUARTER      QUARTER      QUARTER      QUARTER
                                                                             -----------  -----------  -----------  -----------
<S>                                                                          <C>          <C>          <C>          <C>
1995
  Sales and other revenues.................................................   $     536    $     585    $     604    $     649
  Income before income taxes and extraordinary item........................          38           54           84          132
  Income before extraordinary item.........................................          15           25           33           72
  Net income...............................................................          15           25           29           72
  Pro forma earnings per common share before
   extraordinary item......................................................        0.03         0.05         0.07         0.15
  Pro forma earnings per common share......................................        0.03         0.05         0.06         0.15
1994
  Sales and other revenues.................................................   $     418    $     459    $     482    $     549
  Income from continuing operations before income taxes....................          55          153           92          180
  Income from continuing operations and net income.........................          29           86           51          110
  Pro forma earnings per common share......................................        0.07         0.19         0.11         0.24
</TABLE>
 
------------------------------
 
    Effective November 1, 1995, each  share of U S  WEST, Inc. common stock  was
converted  into one share each of Communications Stock and Media Stock. Earnings
per common share have  been presented on  a pro forma basis  to reflect the  two
classes  of stock  as if they  had been  outstanding since January  1, 1994. 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, Inc.
 
    1995 third-quarter  net  income  includes  costs of  $5  ($0.01  per  share)
associated  with the Recapitalization Plan and costs  of $4 ($.01 per share) for
the early extinguishment of debt. 1995 fourth-quarter net income includes a gain
of $95 ($0.20 per share) from the merger of U S WEST's joint venture interest in
TeleWest. 1995 fourth-quarter  net income also  includes costs of  $4 ($.01  per
share) associated with the Recapitalization Plan.
 
    1994  second-quarter net income includes  a gain of $41  ($.09 per share) on
the sale of paging operations. 1994 fourth-quarter net income includes a gain of
$105 ($.23 per share) from the partial sale of U S WEST's joint venture interest
in TeleWest.
 
<TABLE>
<CAPTION>
                                                                                            MARKET PRICE
                                                                                   -------------------------------
1995 PER SHARE MARKET DATA                                                           HIGH        LOW       CLOSE
---------------------------------------------------------------------------------  ---------  ---------  ---------
                                                                                           (WHOLE DOLLARS)
<S>                                                                                <C>        <C>        <C>
November 1, 1995 through December 31, 1995.......................................  $  20.000  $  17.375  $  19.000
</TABLE>
 
                                      D-54
<PAGE>
                              U S WEST MEDIA GROUP
 
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
 
    The Media Group believes that  proportionate financial data facilitates  the
understanding and assessment of its Combined Financial Statements. The following
proportionate accounting table reflects the relative weight of the Media Group's
ownership  interest in its  domestic and international  investments in cable and
telecommunications, wireless and directory and information services  operations.
The  financial  information  included below  departs  materially  from generally
accepted accounting principles ("GAAP") because  it aggregates the revenues  and
operating income of entities not controlled by the Media Group with those of the
consolidated  operations  of the  Media  Group. This  table  is not  intended to
replace the  Combined Financial  Statements prepared  in accordance  with  GAAP.
Supplemental  Media Group information  on a proportionate  basis is presented in
Management's Discussion and Analysis.
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1995       1994       1993
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Sales and other revenues.............................................................  $   5,115  $   4,213  $   2,157
Operating expenses...................................................................      3,966      3,311      1,630
                                                                                       ---------  ---------  ---------
EBITDA(1)............................................................................      1,149        902        527
Restructuring charge.................................................................     --         --            109
Depreciation and amortization........................................................        673        501        223
                                                                                       ---------  ---------  ---------
Operating income.....................................................................        476        401        195
Income from continuing operations before extraordinary item..........................        145        276         85
Net income...........................................................................  $     141  $     276  $       3
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
------------------------------
 
Note: Certain reclassifications  within the  Selected Proportionate  Results  of
      Operations have been made to conform to the current year presentation.
 
(1) Earnings before interest, taxes, depreciation and amortization ("EBITDA").
 
                                      D-55