Use these links to rapidly review the documentQWEST CORPORATION FORM 10-Q/A TABLE OF CONTENTS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q/A

|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended June 30, 2004                 
|Or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File No. 001-03040

---

QWEST CORPORATION(Exact name of registrant as specified in its charter)

Colorado

84-0273800(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)1801 California Street, Denver, Colorado

80202(Address of principal executive offices)

(Zip Code)


(303) 992-1400(Registrant's telephone number, including area code)

N/A(Former name, former address and former fiscal year, if changed since last report)

---

THE
REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF QWEST COMMUNICATIONS INTERNATIONAL INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM
10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTIONS H(2).

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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

On July 31, 2004, one share of Qwest Corporation common stock was outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

This Quarterly Report on Form 10-Q/A is being filed as an amendment to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
to revise certain disclosures contained in the original Form 10-Q. Unless the passage of time has rendered incorrect as of the time of its original filing any other information contained in the
original Form 10-Q, such information has not been updated in this
Form 10-Q/A. To update all other information, we hereby incorporate by reference herein all information contained in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, other than the financial statements and related footnotes thereto contained in such Form.



---





QWEST CORPORATION  FORM 10-Q/A

    

TABLE OF CONTENTS



|Item                         |  |                                                                                                              
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------
|PART IFINANCIAL INFORMATION
|                             |  | Glossary of terms                                                                                            
|1.                           |  | Financial Statements                                                                                         
|                             |  | Condensed Consolidated Statements of OperationsThree and six months ended June 30, 2004 and 2003 (unaudited)
|                             |  | Condensed Consolidated Balance SheetsJune 30, 2004 and December 31, 2003 (unaudited)                        
|                             |  | Condensed Consolidated Statements of Cash FlowsSix months ended June 30, 2004 and 2003 (unaudited)          
|                             |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                             
|2.                           |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        
|3.                           |  | Quantitative and Qualitative Disclosures About Market Risk                                                   
|4.                           |  | Controls and Procedures                                                                                      
|PART IIOTHER INFORMATION   
|1.                           |  | Legal Proceedings                                                                                            
|6.                           |  | Exhibits and Reports on Form 8-K                                                                             
|                             |  | Signature Page                                                                                               

2

---





Glossary of Terms

Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this document, we have provided below definitions of some of
these terms referred to in our document.



3

---





4

---







PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QWEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS)

(UNAUDITED)

|                                                                                                            |                                                                           | Three Months
Ended
June 30, |       | Six Months
Ended
June 30,
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------- | ----- | -------------------------
|
|Operating revenues                                                                                          |                                                                           | $                           | 2,338 |                          
|Operating revenuesaffiliates                                                                               |                                                                           |                             | 226   |                          
|                                                                                                            |                                                                           |                             |       |                          
|                                                                                                            |                                                                           | Total operating revenues    |       |                          
|Operating expenses:                                                                                         |                                                                           |                             |       |                          
|                                                                                                            | Cost of sales (exclusive of depreciation and amortization detailed below) |                             |       | 548                      
|                                                                                                            | Cost of salesaffiliates                                                  |                             |       | 101                      
|                                                                                                            | Selling, general and administrative                                       |                             |       | 349                      
|                                                                                                            | Selling, general and administrativeaffiliates                            |                             |       | 327                      
|                                                                                                            | Depreciation                                                              |                             |       | 584                      
|                                                                                                            | Impairment charge                                                         |                             |       | 19                       
|                                                                                                            | Intangible assets amortization                                            |                             |       | 95                       
|                                                                                                            | Restructuring, and other charges                                          |                             |       | 54                       
|                                                                                                            |                                                                           |                             |       |                          
|                                                                                                            |                                                                           | Total operating expenses    |       |                          
|                                                                                                            |                                                                           |                             |       |                          
|Operating income                                                                                            |                                                                           |                             | 487   |                          
|                                                                                                            |                                                                           |                             |       |                          
|Other expense (income):                                                                                     |                                                                           |                             |       |                          
|                                                                                                            | Interest expensenet                                                      |                             |       | 146                      
|                                                                                                            | Other incomenet                                                          |                             |       | (5                       
|                                                                                                            |                                                                           |                             |       |                          
|                                                                                                            |                                                                           | Total other expensenet     |       |                          
|                                                                                                            |                                                                           |                             |       |                          
|Income before income taxes, discontinued operations and cumulative effect of change in accounting principle |                                                                           |                             | 346   |                          
|Income tax expense                                                                                          |                                                                           |                             | 136   |                          
|                                                                                                            |                                                                           |                             |       |                          
|Income from continuing operations                                                                           |                                                                           |                             | 210   |                          
|Loss from discontinued operations, net of taxes of $7, $19, $34 and $40, respectively                       |                                                                           |                             | 12    |                          
|                                                                                                            |                                                                           |                             |       |                          
|Income before cumulative effect of change in accounting principle                                           |                                                                           |                             | 198   |                          
|Cumulative effect of change in accounting principle, net of taxes of $0, $0, $0, and $139, respectively     |                                                                           |                             |      |                          
|                                                                                                            |                                                                           |                             |       |                          
|Net income                                                                                                  |                                                                           | $                           | 198   |                          
|                                                                                                            |                                                                           |                             |       |                          

The
accompanying notes are an integral part of these condensed consolidated financial statements.

5

---



QWEST CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS)

(UNAUDITED)

|                                                                                                                  |                                                     | June 30,
2004                              |        | December 31,
2003 |       
|----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------ | ------ | ----------------- | ------
|ASSETS                                                                                                            |                                                     |                                            |        |                   |       
|Current assets:                                                                                                   |                                                     |                                            |        |                   |       
|                                                                                                                  | Cash and cash equivalents                           |                                            | $      | 453               |       
|                                                                                                                  | Accounts receivablenet                             |                                            |        | 1,211             |       
|                                                                                                                  | Accounts receivableaffiliates                      |                                            |        | 95                |       
|                                                                                                                  | Deferred income taxes                               |                                            |        | 162               |       
|                                                                                                                  | Prepaid and other assets                            |                                            |        | 288               |       
|                                                                                                                  | Assets associated with discontinued operations      |                                            |        |                  |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|Total current assets                                                                                              |                                                     |                                            | 2,209  |                   |       
|Property, plant and equipmentnet                                                                                 |                                                     |                                            | 15,924 |                   |       
|Intangible assetsnet                                                                                             |                                                     |                                            | 904    |                   |       
|Other assets                                                                                                      |                                                     |                                            | 1,340  |                   |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|                                                                                                                  | Total assets                                        |                                            | $      | 20,377            |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|LIABILITIES AND STOCKHOLDER'S EQUITY                                                                              |                                                     |                                            |        |                   |       
|Current liabilities:                                                                                              |                                                     |                                            |        |                   |       
|                                                                                                                  | Current borrowings                                  |                                            | $      | 773               |       
|                                                                                                                  | Accounts payable                                    |                                            |        | 433               |       
|                                                                                                                  | Accounts payableaffiliates                         |                                            |        | 511               |       
|                                                                                                                  | Dividends payableQSC                               |                                            |        | 696               |       
|                                                                                                                  | Accrued expenses and other current liabilities      |                                            |        | 853               |       
|                                                                                                                  | Liabilities associated with discontinued operations |                                            |        |                  |       
|                                                                                                                  | Deferred revenue and advanced billings              |                                            |        | 552               |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|Total current liabilities                                                                                         |                                                     |                                            | 3,818  |                   |       
|Long-term borrowings (net of unamortized debt discount of $153 million and $157 million, respectivelysee Note 4) |                                                     |                                            | 6,817  |                   |       
|Post-retirement and other post-employment benefit obligations                                                     |                                                     |                                            | 2,829  |                   |       
|Deferred income taxes                                                                                             |                                                     |                                            | 2,573  |                   |       
|Other long-term liabilities                                                                                       |                                                     |                                            | 556    |                   |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|                                                                                                                  | Total liabilities                                   |                                            |        | 16,593            |       
|                                                                                                                  |                                                     |                                            |        |                   |       
|Commitments and contingencies (Note 7)                                                                            |                                                     |                                            |        |                   |       
|Stockholder's equity:                                                                                             |                                                     |                                            |        |                   |       
|                                                                                                                  | Common stockone share without par, owned by QSC    |                                            |        | 10,134            |       
|                                                                                                                  | Note receivableaffiliate                           |                                            |        | (21               | )     
|                                                                                                                  | Accumulated deficit                                 |                                            |        | (6,329            | )     
|                                                                                                                  |                                                     |                                            |        |                   |       
|                                                                                                                  |                                                     | Total stockholder's equity                 |        |                   | 3,784 
|                                                                                                                  |                                                     |                                            |        |                   |       
|                                                                                                                  |                                                     | Total liabilities and stockholder's equity |        | $                 | 20,377
|                                                                                                                  |                                                     |                                            |        |                   |       

The
accompanying notes are an integral part of these condensed consolidated financial statements.

6

---



QWEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)

(UNAUDITED)

|                          |                                                           | Six Months Ended
June 30,                                                    |                                      
|------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------
|
|OPERATING ACTIVITIES      |                                                           |                                                                              |                                      
|                          | Net income                                                |                                                                              | $                                    
|                          | Adjustments to net income:                                |                                                                              |                                      
|                          |                                                           | Loss from discontinued operations, net of taxes of $34 and $40, respectively |                                      
|                          |                                                           | Depreciation and amortization                                                |                                      
|                          |                                                           | Provision for bad debts                                                      |                                      
|                          |                                                           | Cumulative effect of change in accounting principlenet                      |                                      
|                          |                                                           | Impairment charge                                                            |                                      
|                          |                                                           | Deferred income taxes                                                        |                                      
|                          |                                                           | Income tax benefit distributed to QSC                                        |                                      
|                          |                                                           | Other non-cash items                                                         |                                      
|                          | Changes in operating assets and liabilities:              |                                                                              |                                      
|                          |                                                           | Accounts receivable                                                          |                                      
|                          |                                                           | Accounts receivableaffiliate                                                |                                      
|                          |                                                           | Prepaid and other current assets                                             |                                      
|                          |                                                           | Prepaid income taxesQSC                                                     |                                      
|                          |                                                           | Accounts payable, accrued expenses and other current liabilities             |                                      
|                          |                                                           | Accounts payableaffiliate                                                   |                                      
|                          |                                                           | Deferred revenue and advance billings                                        |                                      
|                          |                                                           | Other long-term assets and liabilities                                       |                                      
|                          |                                                           |                                                                              |                                      
|                          |                                                           |                                                                              | Cash provided by operating activities
|                          |                                                           |                                                                              |                                      
|INVESTING ACTIVITIES      |                                                           |                                                                              |                                      
|                          | Expenditures for property, plant and equipment            |                                                                              |                                      
|                          | Other                                                     |                                                                              |                                      
|                          |                                                           |                                                                              |                                      
|                          |                                                           |                                                                              | Cash used for investing activities   
|                          |                                                           |                                                                              |                                      
|FINANCING ACTIVITIES      |                                                           |                                                                              |                                      
|                          | Collection on note receivableaffiliate                   |                                                                              |                                      
|                          | Repayments of current portion of long-term borrowings     |                                                                              |                                      
|                          | Proceeds from longterm borrowings                        |                                                                              |                                      
|                          | Dividends paid to QSC                                     |                                                                              |                                      
|                          | Equity Infusion from QSC                                  |                                                                              |                                      
|                          | Payment of current borrowingsaffiliate by Qwest Wireless |                                                                              |                                      
|                          | Debt issuance costs                                       |                                                                              |                                      
|                          |                                                           |                                                                              |                                      
|                          |                                                           |                                                                              | Cash used for financing activities   
|                          |                                                           |                                                                              |                                      
|CASH AND CASH EQUIVALENTS |                                                           |                                                                              |                                      
|                          | (Decrease) increase in cash                               |                                                                              |                                      
|                          | Net cash generated by discontinued operations             |                                                                              |                                      
|                          | Beginning balance                                         |                                                                              |                                      
|                          |                                                           |                                                                              |                                      
|                          | Ending balance                                            |                                                                              | $                                    
|                          |                                                           |                                                                              |                                      

The
accompanying notes are an integral part of these condensed consolidated financial statements.

7

---





QWEST CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        THREE AND SIX MONTHS ENDED JUNE 30, 2004        (UNAUDITED)

Unless the context requires otherwise, references in this report to "Qwest," "we," "us," the "Company" and "our" refer to Qwest
Corporation and its consolidated subsidiaries, and references to "QCII" refer to our ultimate parent company, Qwest Communications International Inc., and its consolidated
subsidiaries.

Note 1: Basis of Presentation

The condensed consolidated financial statements are unaudited. We prepared these condensed consolidated financial statements in accordance with the instructions
for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

We
made certain reclassifications to prior balances to conform to the current presentation. In addition, certain receivables and liabilities that were netted together in our previous
presentation have been presented on a gross basis. These statements include all the adjustments necessary to fairly present our condensed consolidated results of operations, financial position and
cash flows as of June 30, 2004 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31, 2003. The condensed consolidated results of operations for the three and six-month
periods ended June 30, 2004 and the condensed consolidated statement of cash flows for the six-month period ended June 30, 2004 are not necessarily indicative of the results
or cash flows expected for the full year.

Until
May 1, 2004, we provided wireless services through our wholly owned subsidiary, Qwest Wireless LLC ("Qwest Wireless"). On May 1, 2004, we transferred ownership of
Qwest Wireless to an affiliate. As a consequence, we no longer have wireless operations, and the results of Qwest Wireless are included in loss from discontinued operations in our condensed
consolidated statements of operations. See Note 2 for additional information on the results of Qwest Wireless.

Pension Plan Benefits

Our employees participate in the QCII pension benefit plans. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
or the Medicare Act, became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with Financial Accounting Standards Board, or FASB, Staff Position Nos. 106-1
and 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," we elected to defer recognition of the effects of
the Medicare Act in any measures of our benefit obligation or costs until adoption of the final authoritative guidance on accounting for the Medicare Act is required in the third quarter of 2004. When
adopted, the accounting guidance could require us to change previously reported information.

Stock Based-Compensation

Some of our employees participate in QCII's stock option plans. These plans are accounted for using the intrinsic-value method allowed under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25") under which no compensation expense is recognized for QCII's options granted to employees when the
exercise price of those options equals or

8

---



exceeds
the value of the underlying security on the measurement date. Any excess of the stock price on the measurement date over the exercise price is recorded as deferred compensation and amortized
over the service period during which the stock option award vests using the accelerated method described in Financial Accounting Standards Board ("FASB") Interpretation No. 28 "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans". QCII allocates to us, through a contribution, our share of the deferred compensation expense described herein based on
options granted.

Had
compensation cost for our employees' participation in the QCII stock-based compensation plans been determined under the fair-value method in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" our net income would have been changed to the pro forma amounts indicated
below:

|            |                                                                                                                                                    | Three Months Ended
June 30, |   | Six Months Ended
June 30, |  
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | - | ------------------------- | -
|
|
|Net income: |                                                                                                                                                    |                             |   |                           |  
|            | As reported                                                                                                                                        |                             | $ | 198                       |  
|            | Add: Stock-option-based employee compensation expense included in reported net income, net of related tax effects                                  |                             |   | (1                        | )
|            | Deduct: Total stock-option-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects |                             |   | (5                        | )
|            |                                                                                                                                                    |                             |   |                           |  
|            | Pro forma                                                                                                                                          |                             | $ | 192                       |  
|            |                                                                                                                                                    |                             |   |                           |  

The
pro forma amounts reflected above may not be representative of the effects on our reported net income or loss in future years because the number of future shares to be issued
under these plans is not known and the assumptions used to determine the fair value can vary significantly.

Recently adopted accounting pronouncements and cumulative effect of adoption.

On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, generally referred to as asset retirement
obligations. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation required to be settled under law or written or oral contract. If a
reasonable estimate of fair value can be made, the fair value of the liability shall be recognized in the period it is incurred, or if not, in the period a reasonable estimate of fair value can be
made. This cost is initially capitalized and then amortized over the estimated remaining useful life of the asset. We determined that we have legal asset retirement obligations associated with the
removal of a limited group of long-lived assets and recorded a cumulative effect of a change in accounting principle charge upon adoption of SFAS No. 143 of $7 million (an
asset retirement obligation of $12 million net of an incremental adjustment to the historical cost of the underlying assets of $5 million) as of January 1, 2003.

Prior
to the adoption of SFAS No. 143, we included in our group depreciation rates estimated net removal costs (removal costs less salvage). These costs have historically been
reflected in the calculation of depreciation expense and therefore recognized in accumulated depreciation. When the assets were actually retired and removal costs were expended, the net removal costs
were recorded as a reduction to accumulated depreciation. While SFAS No. 143 requires the recognition of a liability for asset retirement obligations that are legally binding, it precludes the
recognition of a liability for asset retirement obligations that are not legally binding. Therefore, upon adoption of SFAS No. 143, we

9

---



reversed
the net removal costs within accumulated depreciation for those fixed assets where the removal costs exceeded the estimated salvage value and we did not have a legal removal obligation. This
resulted in income from the cumulative effect of a change in accounting principle of $365 million before taxes upon adoption of SFAS No. 143 on January 1, 2003. The net income
impact of the adoption for the six months ended June 30, 2003 is $219 million ($365 million less the $7 million charge disclosed above, net of income taxes of
$139 million). Beginning January 1, 2003, the net costs of removal related to these assets are being charged to our consolidated statement of operations in the period in which the costs
are incurred.

We
adopted the provisions of FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46R") in the first quarter of 2004. The
adoption of FIN No. 46R did not have a material impact on us.

Note 2: Transfer of Qwest Wireless Operations

On April 30, 2004, our direct parent, Qwest Service Corporation ("QSC"), made capital contributions of $2.185 billion to us. We, in turn, made
capital contributions of the same amount into Qwest Wireless, which used these proceeds to substantially pay down its $2.185 billion in outstanding borrowings which were due to QSC.

On
May 1, 2004, we transferred ownership of our subsidiary, Qwest Wireless LLC, which was the entity through which we held our wireless assets and conducted our wireless
operations. The transfer was made in the form of a dividend to QSC, our direct parent, and, as a result, no consideration was exchanged. Due to this transfer, we no longer have wireless operations,
and the results of Qwest Wireless operations are presented as discontinued operations in these financial statements. Qwest Wireless purchases services from Qwest Corporation that previously were
eliminated in our consolidation. These revenues will not be eliminated in the future and are shown below as "Qwest revenue from wireless operations."

The
following table presents the summarized results of operations related to our discontinued operations for the three and six months ended June 30, 2004 and 2003:

|                                       |                                     | Three Months Ended June 30, |     | Six Months Ended June 30, |  
|-------------------------------------- | ----------------------------------- | --------------------------- | --- | ------------------------- | -
|
|
|Wireless revenue                       |                                     | $                           | 42  |                           | $
|Qwest revenue from wireless operations |                                     |                             | (10 | )                         |  
|                                       |                                     |                             |     |                           |  
|Net revenue                            |                                     |                             | 32  |                           |  
|Costs and expenses:                    |                                     |                             |     |                           |  
|                                       | Costs of services                   |                             |     | 19                        |  
|                                       | Selling, general and administrative |                             |     | 18                        |  
|                                       | Depreciation and amortization       |                             |     | 1                         |  
|                                       |                                     |                             |     |                           |  
|Loss from operations                   |                                     |                             | (6  | )                         |  
|                                       | Other expense                       |                             |     | (13                       | )
|                                       |                                     |                             |     |                           |  
|Loss before income taxes               |                                     |                             | (19 | )                         |  
|                                       | Income tax benefit                  |                             |     | 7                         |  
|                                       |                                     |                             |     |                           |  
|Loss from discontinued operations      |                                     | $                           | (12 | )                         | $
|                                       |                                     |                             |     |                           |  

The
following table presents the assets and liabilities associated with our discontinued operations, related to our transfer of ownership of Qwest Wireless to an affiliate, as of
June 30, 2004 and

10

---



December 31,
2003. No figures are included in this table for June 30, 2004, as ownership of Qwest Wireless operations was transferred on May 1, 2004.

June 30, 2004

December 31, 2003(Dollars in millions)Current transferred assets

$


$
9Deferred income taxes





146Property, plant and equipment, net





36Other assets





166Total assets associated with discontinued operations

$


$
357Current borrowings-affiliates

$


$
2,118Current portion of liabilities associated with discontinued operations





27Other long-term liabilities





(11
)Total liabilities associated with discontinued operations

$


$
2,134


Current
borrowings-affiliates represent short-term borrowings by Qwest Wireless on unsecured lines of credit from related parties. As noted above, on April 30, 2004
Qwest Wireless paid off its $2.185 billion in outstanding borrowings at that date.

Note 3: Impairment Charges

In conjunction with our effort to sell certain assets we determined that the carrying amounts were in excess of their expected sales price, which indicated that
our investments in these assets may have been impaired at that date. In May 2004, pursuant to SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"), we compared gross undiscounted cash flow projections to the carrying value of our pay phones and determined that the carrying value of those assets was not expected to be
recovered through future projected cash flows. We then estimated the fair value using recent selling prices for comparable assets and determined that our assets relating to our pay phone business were
fully impaired by an aggregate amount of $19 million.

In
accordance with SFAS No. 144, the estimated fair value of the impaired assets becomes the new basis for accounting purposes. As such, approximately $119 million in
accumulated depreciation was eliminated in connection with the accounting for the impairments. The impact of the impairments is expected to reduce our depreciation and amortization expense by
approximately $4 million in fiscal 2004 and approximately $8 million in subsequent fiscal years.

11

---



Note 4: Borrowings

As of June 30, 2004 and December 31, 2003, our borrowings consisted of the following:

June 30,
2004

December 31, 2003(Dollars in millions)Current borrowings:Current portion of long-term borrowings

$
766

$
867Current portion of capital lease obligations and other


7


14Total current borrowings

$
773

$
881Long-term borrowings:Notes with various rates ranging from 5.50% to 9.125%, including LIBOR* plus 4.75%, with maturities from 2004 to 2043

$
7,736

$
7,887Unamortized discount and other


(153
)

(157
)Capital lease obligations and other


7


25Less: current portion


(773
)

(881
)Total long-term borrowings

$
6,817

$
6,874


---

On
May 1, 2004, we redeemed all of the $100 million outstanding principal on our 5.65% notes due November 1, 2004 and all of the $41 million outstanding
principal amount on our 39-year 5.5% debentures due June 1, 2005 at par and all related interest ceased to accrue.

Note 5: Restructuring Charges

The restructuring reserve balances discussed below are included in our condensed consolidated balance sheets in the category of accrued expenses and other current
liabilities for the current portion and other long-term liabilities for the long-term portion. As of June 30, 2004 and December 31, 2003, the amounts included as
current liabilities are $88 million and $58 million and the long-term portions are $11 million and $14 million, respectively. Charges to earnings for severance
benefits have been recognized in accordance with provisions of SFAS No. 112, "Employer's Accounting for Post employment Benefits" and SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and consisted primarily of cash severance, medical benefits, outplacement, payroll taxes and other benefits pursuant to
established severance policies. Costs to exit leased operating facilities have been charged to earnings in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities."

2004 Activities

An analysis of activity associated with the new and existing restructuring plans is as follows:

|                          |             | 2004
Restructuring Plan |    | 2003
Restructuring Plan |   | 2002 and Prior
Restructuring Plan |     | Totals |   
|------------------------- | ----------- | ----------------------- | -- | ----------------------- | - | --------------------------------- | --- | ------ | --
|
|Balance December 31, 2003 |             | $                       |   |                         | $ | 51                                |     | $      | 21
|                          | Provision   |                         |    | 57                      |   |                                   |    |        |   
|                          | Utilization |                         |    | (2                      | ) |                                   | (25 | )      |   
|                          | Reversal    |                         |    |                        |   |                                   | (1  | )      |   
|                          |             |                         |    |                         |   |                                   |     |        |   
|Balance June 30, 2004     |             | $                       | 55 |                         | $ | 25                                |     | $      | 19
|                          |             |                         |    |                         |   |                                   |     |        |   

12

---



During
the six months ended June 30, 2004, we, as part of our parent's restructuring, identified specific employee reductions in various functional areas to balance our
workload with business demands. As a result, we established a severance reserve and recorded a charge to our condensed consolidated statement of operations of $57 million for severance benefits
pursuant to established severance policies. Through June 30, 2004, approximately 500 of the 1,700 planned employee reductions had been completed. Severance payments generally extend from two to
twelve months. The remaining reductions are expected to occur over the next twelve months. Through June 30, 2004 we had utilized $2 million of the 2004 restructuring
reserves for severance payments.

As
of June 30, 2004, 1,500 of the 1,600 planned employee reductions under the 2003 restructuring plan had been completed. During the six months ended June 30, 2004,
$25 million of the restructuring reserve was used mainly for severance payments, and $1 million of the reserve was reversed.

In
prior periods, as a part of the 2002 and prior restructuring plans, we permanently abandoned 25 leased facilities with lease terms up to five years. We utilized
$2 million of the previously established restructuring provisions during the six months ended June 30, 2004 mainly for real estate payments and exit costs associated with
terminated leases. We expect the balance of the reserve to be utilized primarily to pay remaining severance and remaining lease payments.

Note 6: Contributions to QCII Segments and Revenue Information

Our operations are integrated into and are part of the segments of the QCII consolidated group. The chief operating decision maker ("CODM") for QCII makes
resource allocation decisions and assessments of financial performance for the consolidated group based on wireline, wireless and other segmentation. For more information about QCII's reporting
segments, see QCII's annual report on Form 10-K for the year ended December 31, 2003. Our business contributes to the segments reported by QCII, but the QCII CODM reviews our
financial information only in connection with this filing. Consequently, we do not provide discrete financial information for QC to a CODM on a regular basis.

Due
to the May 1, 2004 transfer of our wireless operations to one of our affiliates, we no longer include wireless revenue and expenses in our continuing operations. Wireless
revenue and expense are included in our discontinued operations. See Note 2Transfer of Qwest Wireless Operations. Following the transfer of the wireless operations, essentially all
of our operations contribute to QCII's wireline services segment. As such, we will no longer report our contribution to QCII's segments as this information does not differ materially from our
consolidated statements of operations. We will, however, continue to provide the following enterprise-wide information on revenues from external customers for each group of similar
products and services.

Three Months Ended June 30,

Six Months Ended June 30,2004

2003

2004

2003Voice services

$
1,795

$
1,985

$
3,645

$
4,027Data and Internet services


541


534


1,073


1,076Other services


2


2


9


9Total operating revenue

$
2,338

$
2,521

$
4,727

$
5,112


Voice
services revenue includes local voice services, IntraLATA long-distance voice services and access services. Local voice services revenue includes revenue from basic
local exchange services, switching services, custom calling features, enhanced voice services, operator services, collocation services and CPE. Local voice services revenue also includes revenue from
the provision of, on a wholesale basis, network transport, billing services and access to our local network. IntraLATA long-distance voice services revenue includes revenue from IntraLATA
long-distance services within our local service area. Access services revenue includes fees charged to other long-distance providers to connect to our network.

13

---



Data
and Internet services revenue includes data services (such as traditional private lines, wholesale private lines, frame relay, integrated services digital network, asynchronous
transfer mode and related CPE) and Internet services (such as DSL, Internet dial access and related CPE).

Other
services revenue is predominately derived from the sublease of some of our unused real estate assets, such as space in our office buildings, warehouses and other properties.

Note 7: Commitments and Contingencies

Throughout this section, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter. Until and unless
a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent. When we refer to a derivative action as
"purported," it is because the plaintiff alleges that he or it has brought the claim on our behalf and the court has not yet ruled that the complaint meets the requirements for a proper derivative
case.

Legal Proceedings Involving Qwest

Securities Action

On June 27, 2002, a putative class action was filed in the District Court for the County of Boulder against us, QCII, The Anschutz Family Investment Co.,
Philip Anschutz, Joseph P. Nacchio and Robin R. Szeliga on behalf of purchasers of QCII's stock between June 28, 2000 and June 27, 2002 and owners of U S WEST stock on
June 28, 2000. The complaint alleges, among other things, that QCII and the individual defendants issued false and misleading statements and engaged in improper accounting practices in order to
accomplish QCII's June 30, 2000 acquisition of U S WEST, Inc., or the Merger, to make QCII appear successful and to inflate the value of QCII's stock. The complaint asserts
claims under sections 11, 12, 15 and 17 of the Securities Act. The complaint seeks unspecified monetary damages, disgorgement of illegal gains and other relief. On July 31, 2002, the
defendants removed this state court action to federal district court in Colorado and subsequently moved to consolidate this action with the consolidated securities action identified below. The
plaintiffs have moved to remand the lawsuit back to state court. Defendants have opposed that motion, which is pending before the court.

Regulatory Matters

On February 14, 2002, the Minnesota Department of Commerce filed a formal complaint against us with the Minnesota Public Utilities Commission, or the
Minnesota Commission, alleging that we, in contravention of federal and state law, failed to file interconnection agreements with the Minnesota Commission relating to certain of our wholesale
customers, and thereby allegedly discriminated against other CLECs. On November 1, 2002, the Minnesota Commission issued a written order adopting in full a proposal by an administrative law
judge that we committed 26 individual violations of federal law by failing to file, as required under section 252 of the Telecommunications Act, 26 distinct provisions found in 12 separate
agreements with individual CLECs for regulated services in Minnesota. The order also found that we agreed to provide and did provide to McLeodUSA, Inc. and Eschelon Telecom, Inc.
discounts on regulated wholesale services of up to 10% that were not made available to other CLECs, thereby unlawfully discriminating against them. The order found we also violated state law, that the
harm caused by our conduct extended to both customers and competitors, and that the damages to CLECs would amount to several million dollars for Minnesota alone.

14

---



On
February 28, 2003, the Minnesota Commission issued its initial written decision imposing fines and penalties, which was later revised on April 8, 2003 to include a fine
of nearly $26 million and ordered us to:



The Minnesota Commission issued its final, written decision imposing penalties and credits described above on May 21, 2003. The Minnesota Commission decision would require a
penalty payment to the state of approximately $26 million and payments of carrier credits of approximately $18 million. Of the $18 million, about $3 million has been
released by the carriers in bankruptcy proceedings. On June 19, 2003, we appealed the Minnesota Commission's orders to the United States District Court for the District of Minnesota. On
August 25, 2004, the District Court issued its order. The Court affirmed the Commission's order requiring Qwest to pay the $26 million penalty. The Court reversed and vacated that
portion ruling on the credits finding that the Commission did not have the authority to order such remedies. The Commission and carriers have appealed the credit issue to the United States Court of
Appeals for the Eighth Circuit, and Qwest has cross-appealed the penalty issue. The appeal is pending.

Arizona,
Colorado, New Mexico, Washington, Iowa and South Dakota have also initiated formal proceedings regarding our alleged failure to file required agreements in those states. New
Mexico has issued an order providing its interpretation of the standard for filing these agreements, identified certain of our contracts as coming within that standard and opened a separate docket to
consider further proceedings. On April 29, 2004, the New Mexico Staff filed comments recommending penalties totaling $5.05 million. Colorado has also opened an investigation into these
matters, and on February 27, 2004, the Staff of the Colorado Public Utilities Commission, or PUC, submitted its Initial Comments. The Colorado Staff's Initial Comments recommended that the PUC
open a show cause proceeding
based upon the Staff's view that Qwest and CLECs had willfully and intentionally violated federal and state law and Commission rules. The Staff also detailed a range of remedies available to the
Commission, including but not limited to an assessment of penalties and an obligation to extend credits to CLECs. On April 15, 2004, Qwest and the Office of Consumer Counsel for Colorado
entered into a settlement, subject to Commission approval, that would require Qwest to pay $7.5 million in contributions to state telecommunications programs to resolve claims relating to
potential penalties in the docket and that offers CLECs credits that could total approximately $9 million. The proceedings and investigations in New Mexico, Colorado and Washington could result
in the imposition of fines and other penalties against us that could be material. Iowa and South Dakota have concluded their inquiries resulting in no imposition of penalties or obligations to issue
credits to CLECs in those states. Also, some telecommunications providers have filed private actions based on facts similar to those underlying these administrative proceedings. These private actions,
together with any similar, future actions, could result in additional damages and awards that could be significant.

Illuminet, Inc.,
a traffic aggregator, and several of its customers have filed complaints with regulatory agencies in Idaho, Nebraska, Iowa, North Dakota and New Mexico, alleging
that they are

15

---



entitled
to refunds due to our purported improper implementation of tariffs governing certain signaling services we provide in those states. The commissions in Idaho and Nebraska have ruled in favor
of Illuminet and awarded it $1.5 million and $4.8 million, respectively. We sought reconsideration in both states, which was denied and subsequently we perfected appeals in both states.
The proceedings in the other states and in states where Illuminet has not yet filed complaints could result in agency decisions requiring additional refunds. In addition, Nextel has filed an
arbitration requesting refunds due to alleged improper implementation of the signaling services.

QCII
disclosed matters to the Federal Communications Commission, or FCC, in connection with its 2002 compliance review, including a change in traffic flow related to wholesale transport
for operator services traffic and certain toll-free traffic, certain bill mislabeling for commercial credit card bills, and certain billing errors for public telephone services originating
in South Dakota and for toll free services. If the FCC institutes an investigation into the latter categories of matters, it could result in the imposition of fines and other penalties against QCII.

We
have other regulatory actions pending in local regulatory jurisdictions, which call for price decreases, refunds or both. These actions are generally routine and incidental to our
business.

Other Matters

From time to time we receive complaints and become subject to investigations regarding "slamming" (the practice of changing long-distance carriers
without the customer's consent),
"cramming" (the practice of charging a consumer for goods or services that the consumer has not authorized or ordered) and other sales practices. In 2003, we resolved allegations and complaints of
slamming and cramming with the Attorneys General for the states of Arizona, Colorado, Idaho, Oregon, Utah and Washington. In each of those states, we agreed to comply with certain terms governing our
sales practices and to pay each of the states between $200,000 and $3.75 million. We may become subject to other investigations or complaints in the future and any such complaints or
investigations could result in further legal action and the imposition of fines, penalties or damage awards.

We
are subject to a number of environmental matters as a result of our prior operations as part of the Bell System. We believe that expenditures in connection with remedial actions under
the current environmental protection laws or related matters will not be material to our business or financial condition.

Legal Proceedings Involving QCII

QCII is involved in several investigations, securities actions and other matters that, if resolved against QCII, could have a material adverse effect on our
business and financial condition. These matters are more fully described below.

Investigations, Securities Actions and Derivative Actions

The investigations and securities actions described below present material and significant risks to QCII. The size, scope and nature of the restatements of our
and QCII's consolidated financial statements for fiscal 2001 and 2000 affect the risks presented by these investigations and actions, as these matters involve, among other things, QCII's prior
accounting practices and related disclosures. Plaintiffs in certain of the securities actions have alleged QCII's restatement of items in support of their claims. As QCII has previously disclosed, it
continues to engage in discussions for purposes of resolving certain of these matters. In December 2003, QCII recorded a charge in its financial statements amounting to $200 million.
QCII recently recorded an additional charge of $300 million, bringing the aggregate amount of the reserve to $500 million which represents the minimum estimated amount of loss QCII
believes is probable. QCII recorded its estimate of the minimum liability because no estimate of probable loss for these matters is a better estimate than

16

---



any other amount. If the $500 million in recorded reserve is insufficient to cover these matters, it will need to record additional charges to its statement of operations in future periods.
QCII is unable at this time to provide a reasonable estimate of the upper end of the range of loss associated with these matters due to their preliminary and complex nature. The ultimate outcomes of
these matters are still uncertain and there is a significant possibility that the amount of loss it may ultimately incur could be substantially more than the reserve it has provided. We can give no
assurance as to the impacts on our and QCII's financial results or financial condition that may ultimately result from these matters.

At this time, QCII believes that it is probable that a portion of the recorded reserve will be recoverable from a portion of $200 million of insurance proceeds, consisting of
$143 million of cash and $57 million of irrevocable letters of credit, that were placed in a trust to cover its losses and the losses of individual insureds following its
November 12, 2003 settlement of disputes with certain of its insurance carriers related to, among other things, the investigations and securities and derivative actions described below. As
discussed in Part II, Item 1 of this filing, in July 2004, QCII entered into an agreement with certain individual insureds with respect to how such insurance proceeds should be used and
allocated.

QCII continues to defend against the securities actions vigorously. However, QCII is currently unable to provide any estimate as to the timing of the resolution of the investigations or
securities actions. Any settlement of or judgment in one or more of these actions substantially in excess of QCII's recorded reserve could have a significant impact, and QCII can give no assurance
that it will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its
financial condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected.

Investigations

On April 3, 2002, the Securities and Exchange Commission, or SEC, issued an order of investigation that made formal an informal investigation of QCII
initiated on March 8, 2002. QCII is continuing in its efforts to cooperate fully with the SEC in its investigation. The investigation includes, without limitation, inquiry into several
specifically identified QCII accounting practices and transactions and related disclosures that are the subject of the various adjustments and restatements described in the QCII annual report on
Form 10-K for the year ended December 31, 2002. The investigation also includes inquiry into disclosure and other issues related to transactions between QCII and certain of
its vendors and certain investments in the securities of those vendors by individuals associated with QCII.

On
July 9, 2002, QCII was informed by the U.S. Attorney's Office for the District of Colorado of a criminal investigation of its business. QCII believes the U.S. Attorney's Office
is investigating various matters that include the subjects of the investigation by the SEC. QCII is continuing in its efforts to cooperate fully with the U.S. Attorney's Office in its investigation.

During
2002, the United States Congress held hearings regarding QCII and matters that are similar to those being investigated by the SEC and the U.S. Attorney's Office. QCII cooperated
fully with Congress in connection with those hearings.

While
QCII is continuing in its efforts to cooperate fully with the SEC and the U.S. Attorney's Office in each of their respective investigations, QCII cannot predict the outcome of
those investigations. QCII has engaged in discussions with the SEC staff in an effort to resolve the issues raised in the SEC's investigation of it. QCII cannot predict the likelihood of whether those
discussions will result in a settlement and, if so, the terms of such settlement. However, settlements typically involve, among other things, the SEC making claims under the federal securities laws in
a complaint filed in United States District Court that, for purposes of the settlement, the defendant neither admits nor denies. Were such a settlement to occur, QCII would expect such claims to
address many of the

17

---



accounting
practices and transactions and related disclosures that are the subject of the various restatements QCII has made as well as additional transactions. In addition, any settlement with the
SEC may also involve, among other things, the imposition of disgorgement and a civil penalty, the amounts of which could be substantially in excess of QCII's recorded reserve, and the entry of a court
order that would require, among other things, that QCII and its officers and directors comply with provisions of the federal securities laws as to which there have been allegations of prior
violations.

In addition, as previously reported, the SEC has conducted an investigation concerning QCII's earnings release for the fourth quarter and full year 2000 issued on January 24,
2001. The release provided pro



forma normalized earnings information that excluded certain nonrecurring expense and income items resulting primarily from the Merger. On November 21, 2001, the SEC staff informed QCII of its
intent to recommend that the SEC authorize an action against QCII that would allege it should have included in the earnings release a statement of its earnings in accordance with GAAP. As of
August 6, 2004 (the date of the original filing of this Form 10-Q), no action had been taken by the SEC. However, QCII expects that if its current discussions with the staff of the SEC
result in a settlement, such settlement will include allegations concerning the January 24, 2001 earnings release.

On
June 17, 2004, in connection with an informal investigation, QCII received a letter from the SEC requesting certain information concerning the methodologies used to calculate
its number of customers, subscribers and access lines. QCII believes that similar requests have been made to various other companies in the telecommunications sector. QCII is cooperating with the SEC
in this matter. On July 23, 2004, QCII received from the FCC a letter stating that the request by the SEC has raised concerns about the accuracy of certain information periodically submitted to
the FCC by QCII. The FCC has requested that QCII review information it submitted to the FCC for 2003 and affirm its accuracy or file appropriate revisions of these submissions. QCII believes that
similar requests from the FCC have also been made to other telecommunications companies.

Also, as the General Services Administration, or GSA, previously announced in July 2002, it is conducting a review of all contracts with QCII for purposes of determining present
responsibility. On September 12, 2003, QCII was informed that the Inspector General of the GSA had referred to the GSA Suspension/Debarment Official the question of whether QCII (including us
and its other subsidiaries) should be considered for debarment. QCII has been informed that the basis for the referral was the February 2003 indictment against four former QCII employees in
connection with a transaction with the Arizona School Facilities Board in June 2001 and a civil complaint also filed in February 2003 by the SEC against the same former employees and
others relating to the Arizona School Facilities Board transaction and a transaction with Genuity Inc. in 2000. QCII is cooperating fully with the GSA and believes that it and we will remain
suppliers of the government; however, if it and we are not allowed to be suppliers to the government, it and we would lose the ability to expand the services we could provide to a purchaser of
telecommunications services that has historically represented between 2% and 3% of QCII's consolidated annual revenue.

Securities Actions and Derivative Actions

Since July 27, 2001, 13 putative class action complaints have been filed in federal district court in Colorado against QCII alleging violations of the
federal securities laws. One of those cases has been dismissed. By court order, the remaining actions have been consolidated into a consolidated securities action, which we refer to herein as the
"consolidated securities action."

On
August 21, 2002, plaintiffs in the consolidated securities action filed their Fourth Consolidated Amended Class Action Complaint, or the Fourth Consolidated Complaint,
which defendants moved to dismiss. On January 13, 2004, the United States District Court for the District of Colorado granted the defendants' motions to dismiss in part and denied them in part.
In that order, the court allowed plaintiffs to file a proposed amended complaint seeking to remedy the pleading defects addressed in the court's dismissal order and ordered that discovery,
which previously had been stayed during the

18

---



pendency
of the motions to dismiss, proceed regarding the surviving claims. On February 6, 2004, plaintiffs filed a Fifth Consolidated Amended Class Action Complaint, or the Fifth
Consolidated Complaint. The Fifth Consolidated Complaint attempts to expand the putative class period previously alleged in the Fourth Consolidated Complaint, seeks to restore the claims dismissed by
the court, including claims against certain individual defendants who were dismissed as defendants by the court's dismissal order, and to add individual defendants who were not named as defendants in
plaintiffs' previous complaints. The Fifth Consolidated Complaint also advances allegations related to a number of matters and transactions that were not pleaded in the earlier complaints. The Fifth
Consolidated Complaint is purportedly brought on behalf of purchasers of publicly traded securities of QCII between May 24, 1999 and July 28, 2002, and names as defendants QCII, QCII's
former Chairman and Chief Executive Officer, Joseph P. Nacchio, QCII's former Chief Financial Officers, Robin R. Szeliga and Robert S. Woodruff, other of QCII's former officers and current directors
and Arthur Andersen LLP. The Fifth Consolidated Complaint alleges, among other things, that during the putative class period, QCII and certain of the individual defendants made materially false
statements regarding the results of QCII's operations in violation of section 10(b) of the Securities Exchange Act of 1934, or the Exchange Act, that certain of the individual defendants
are liable as control persons under section 20(a) of the Exchange Act, and that certain of the individual defendants sold some of their shares of QCII's common stock in violation of
section 20A of the Exchange Act. The Fifth Consolidated Complaint further alleges that QCII and certain other defendants violated section 11 of the Securities Act of 1933, as amended, or
the Securities Act, by preparing and disseminating false registration statements and prospectuses for the registration of QCII common stock to be issued to U S WEST shareholders in
connection with the merger of the two companies, and for the exchange of $3 billion of QCII's notes pursuant to a registration statement dated January 17, 2001, $3.25 billion of
QCII's notes pursuant to a registration statement dated July 12, 2001, and $3.75 billion of QCII's notes pursuant to a registration statement dated October 30, 2001. Additionally,
the Fifth Consolidated Complaint alleges that certain of the individual defendants are liable as control persons under section 15 of the Securities Act by reason of their stock ownership,
management positions and/or membership or representation on QCII's Board of Directors. The Fifth Consolidated Complaint seeks unspecified compensatory damages and other relief. However, counsel for
plaintiffs has indicated that the purported class will seek damages in the tens of billions of dollars. On March 8, 2004, QCII and other defendants filed motions to dismiss the Fifth
Consolidated Complaint. Those motions are pending before the court.

Since
March 2002, seven putative class action suits brought under the Employee Retirement Income Security Act of 1974, as amended, were filed in federal district court in Colorado
purportedly on behalf of all participants and beneficiaries of the Qwest Savings and Investment Plan and predecessor plans, or the Plan, from March 7, 1999 until the present. These suits also
purport to seek relief on behalf of the Plan. By court order, five of these putative class actions have been consolidated and the claims made by the plaintiff in the sixth case were subsequently
included in the Second Amended and Consolidated Complaint, filed on May 21, 2003 and referred to as the "consolidated ERISA action". QCII expects the seventh putative class action to be
consolidated with the other cases since it asserts substantially the same claims. An eighth case was filed in June 2004 which, although not a putative class action, purports to seek relief on
behalf of the Plan. This case contains allegations similar to those in the consolidated ERISA action, and thus QCII also expects this case to be consolidated with that action. Defendants in the
consolidated ERISA action include QCII, several former and current directors of QCII, certain former officers of QCII, Qwest Asset Management, QCII's Plan Design Committee, the Plan Investment
Committee and the Plan Administrative Committee of the pre-Merger Qwest 401(k) Savings Plan. The consolidated ERISA action alleges, among other things, that the defendants breached
fiduciary duties to the Plan participants and beneficiaries by allegedly excessively concentrating the Plan's assets invested in QCII's stock, requiring certain participants in the Plan to hold the
matching contributions received from QCII in the Qwest Shares Fund, failing to disclose to the participants the alleged accounting improprieties that are the subject of the consolidated securities
action, failing to investigate the prudence of investing in QCII's

19

---



stock,
continuing to offer QCII's stock as an investment option under the Plan, failing to investigate the effect of the Merger on Plan assets and then failing to vote the Plan's shares against it,
preventing Plan participants from acquiring QCII's stock during certain periods, and, as against some of the individual defendants, capitalizing on their private knowledge of QCII's financial
condition to reap profits in stock sales. Plaintiffs seek equitable and declaratory relief, along with attorneys' fees and costs and restitution. Plaintiffs moved for class certification on
January 15, 2003, and QCII has opposed that motion, which is pending before the court. Defendants filed motions to dismiss the consolidated ERISA action on August 22, 2002. Those motions
are also pending before the court.

On
December 10, 2002, the California State Teachers' Retirement System, or CalSTRS, filed suit against QCII, certain of QCII's former officers and certain of QCII's current
directors and several other defendants, including Arthur Andersen LLP and several investment banks, in the Superior Court of the State of California in and for the County of San Francisco. CalSTRS
alleged that the defendants engaged in fraudulent conduct. CalSTRS has asserted that those actions caused it to lose in excess of $150 million invested in QCII's equity and debt securities. The
complaint alleges, among other things, that defendants engaged in a scheme to falsely inflate QCII's revenue and decrease its expenses so that QCII would appear more successful than it actually was
during the period in which CalSTRS purchased and sold QCII securities. The complaint purported to state causes of action against QCII for (i) violation of California Corporations Code
section 25400 et seq. (securities laws); (ii) violation of California Corporations Code section 17200 et seq. (unfair competition); (iii) fraud, deceit and concealment; and
(iv) breach of fiduciary duty. Among other requested relief, CalSTRS sought compensatory, special and punitive damages, restitution, pre-judgment interest and costs. QCII and the
individual defendants filed a demurrer, seeking dismissal of all claims. In response, CalSTRS voluntarily dismissed the unfair competition claim but maintained the balance of the complaint. The court
denied the demurrer as to the California securities law and fraud claims, but dismissed the breach of fiduciary duty claim against QCII with leave to amend. The court also dismissed the claims against
Robert S. Woodruff and Robin R. Szeliga on jurisdictional grounds. On or
about July 25, 2003, plaintiff filed a First Amended Complaint. The material allegations and the relief sought remain largely the same, but plaintiff no longer alleges claims against
Mr. Woodruff and Ms. Szeliga following the court's dismissal of the claims against them. CalSTRS reasserted its claim against QCII for breach of fiduciary duty as a claim of aiding and
abetting breach of fiduciary duty. QCII filed a second demurrer to that claim, and on November 17, 2003, the court dismissed that claim without leave to amend.

On
November 27, 2002, the State of New Jersey (Treasury Department, Division of Investment), or New Jersey, filed a lawsuit in New Jersey Superior Court, Mercer County. On
October 17, 2003, New Jersey filed an amended complaint alleging, among other things, that QCII, certain of QCII's former officers and certain current directors and Arthur Andersen LLP caused
QCII's stock to trade at artificially inflated prices by employing improper accounting practices, and by issuing false statements about QCII's business, revenues and profits. As a result, New Jersey
contends that it incurred hundreds of millions of dollars in losses. New Jersey's complaint purports to state causes of action against QCII for: (i) fraud; (ii) negligent
misrepresentation; and (iii) civil conspiracy. Among other requested relief, New Jersey seeks from the defendants, jointly and severally, compensatory, consequential, incidental and punitive
damages. On November 17, 2003, QCII filed a motion to dismiss. That motion is pending before the court.

On
January 10, 2003, the State Universities Retirement System of Illinois, or SURSI, filed a lawsuit in the Circuit Court of Cook County, Illinois. SURSI filed suit against QCII,
certain of QCII's former officers and certain current directors and several other defendants, including Arthur Andersen LLP and several investment banks. On October 29, 2003, SURSI filed a
second amended complaint which alleges, among other things, that defendants engaged in fraudulent conduct that caused it to lose in excess of $12.5 million invested in QCII's common stock and
debt and equity securities and that defendants engaged in a scheme to falsely inflate QCII's revenues and decrease its expenses by improper conduct related to transactions with the Arizona School
Facilities Board, Genuity, Calpoint

20

---



LLC,
KMC Telecom Holdings, Inc., KPNQwest N.V., and Koninklijke KPN, N.V. The second amended complaint purports to state the following causes of action against QCII: (i) violation of the
Illinois Securities Act; (ii) common law fraud; (iii) common law negligent misrepresentation; and (iv) violation of section 11 of the Securities Act. SURSI seeks, among
other relief, punitive and exemplary damages, costs, equitable relief, including an injunction to freeze or prevent disposition of the defendants' assets, and disgorgement. On July 9, 2004, the
court dismissed the action against certain individual defendants for lack of personal jurisdiction. QCII has indicated its intention to file a motion to dismiss the second amended complaint.
The court has not yet set a schedule for the briefing and resolution of such a motion.

On
February 9, 2004, Stichting Pensioenfonds ABP, or SPA, filed suit against QCII, certain of QCII's current and former directors, officers, and employees, as well as several
other defendants, including Arthur Andersen LLP, Citigroup Inc. and various affiliated corporations of Citigroup Inc., in the United States District Court for the District of Colorado.
QCII and certain other defendants moved to dismiss that complaint. On July 7, 2004, while those motions were pending, SPA filed an amended complaint. SPA alleges in its amended complaint that
the defendants engaged in fraudulent conduct that caused
SPA to lose more than $100 million related to SPA's investments in QCII's equity securities purchased between July 5, 2000 and March 11, 2002. The complaint alleges, among other
things, that defendants created a false perception of QCII's revenues and growth prospects. SPA alleges claims against QCII and other defendants for violations of sections 18 and
10(b) of the Exchange Act and SEC Rule 10b-5, violations of the Colorado Securities Act and common law fraud, negligent misrepresentation, respondeat superior, and civil
conspiracy. The complaint also contends that certain of the individual defendants are liable as "control persons" because they had the power to cause QCII to engage in the unlawful conduct alleged by
plaintiffs in violation of section 20(a) of the Exchange Act, and alleges other claims against defendants other than QCII. SPA seeks, among other things, compensatory and punitive damages,
rescission or rescissionary damages, pre-judgment interest, fees and costs.

On
March 22, 2004, Shriners Hospital for Children, or SHC, filed suit against QCII, certain of its former employees, and certain unidentified persons in the District Court for the
City and County of Denver. On April 16, 2004, defendants removed this case to the United States District Court for the District of Colorado. In July 2004, SHC filed an amended complaint
in the United States District Court for the District of Colorado. The amended complaint alleges claims against QCII and the individual defendants based upon Colorado state securities laws, common law
fraud, and negligent misrepresentation, similar to the claims alleged in the initial complaint, and adds new claims against all defendants based upon sections 10(b), 18(a) and
20(a) of the Exchange Act. SHC alleges compensatory damages of $17 million. SHC seeks compensatory and punitive damages, interest, costs and attorneys' fees.

On
or about March 30, 2004, Teachers' Retirement System of Louisiana, or TRSL, filed suit against QCII, certain of its former employees, and certain unidentified persons in the
District Court for the City and County of Denver. On April 16, 2004, defendants removed this case to the United States District Court for the District of Colorado. In July 2004, TRSL
filed an amended complaint in the United States District Court for the District of Colorado. The amended complaint alleges claims against QCII and the individual defendants based upon Colorado state
securities laws, common law fraud, and negligent misrepresentation, similar to the claims alleged in the initial complaint, and adds new claims against all defendants based upon sections 10(b),
18(a) and 20(a) of the Exchange Act. TRSL alleges compensatory damages of approximately $23 million. TRSL seeks compensatory and punitive damages, interest, costs and attorneys' fees.

On
each of March 6, 2002 and November 22, 2002, a purported derivative action was filed in Denver District Court, which we refer to collectively as the Colorado Derivative
Litigation. On February 5, 2004, plaintiffs in one of these cases filed an amended complaint naming as defendants

21

---



certain
of QCII's current and former officers and directors and Anschutz Company, and naming QCII as a nominal defendant. The two purported derivative actions were consolidated on February 17,
2004. The amended complaint alleges, among other things, that various of the individual defendants breached their legal duties to QCII by engaging in various kinds of self-dealings,
failing to oversee compliance with laws that prohibit insider trading and self-dealing, and causing or permitting QCII to commit alleged securities laws violations, thereby causing QCII to
be sued for such violations and subjecting QCII to adverse publicity, increasing its cost of raising capital and impairing earnings.

Beginning
in May 2003, the parties to the Colorado Derivative Litigation and the Delaware Derivative Litigation (defined below) participated in a series of mediation sessions. On
November 14, 2003, as a result of this process, the parties agreed in principle upon a settlement of the claims asserted in the Colorado Derivative Litigation and the Delaware Derivative
Litigation, subject to approval and execution of formal settlement documents, approval by the Denver District Court and dismissal with prejudice of the Colorado Derivative Litigation, the Delaware
Derivative Litigation and the Federal Derivative Litigation (defined below). From November 14, 2003 until February 17, 2004, the parties engaged in complex negotiations to resolve the
remaining issues concerning the potential settlement. On February 17, 2004, the parties agreed to a formal stipulation of settlement. The stipulation of settlement provided, among other things,
that if approved by the Denver District Court and upon dismissal with prejudice of the Delaware Derivative Litigation and the Federal Derivative Litigation, $25 million of the
$200 million fund from the insurance settlement with certain of QCII's insurance carriers will be designated for the exclusive use of QCII to pay losses and QCII will implement a number of
corporate governance changes. The stipulation of settlement also provided that the Denver District Court could enter awards of attorneys' fees and costs to derivative plaintiffs' counsel from the
$25 million in amounts not to exceed $7.625 million in the aggregate. Certain shareholders filed objections to the proposed settlement, some of which were later withdrawn. On
June 15, 2004, after a hearing at which the remaining objectors presented arguments in support of their objections, the Denver District Court approved the proposed settlement. Subsequently, the
Denver District Court entered an Order and Final Judgment effective June 15, 2004, approving the proposed settlement. The effectiveness of the settlement of the Colorado Derivative Litigation
is conditioned upon the dismissal with prejudice of the Delaware and Federal Derivative Litigations. The Denver District Court deferred decision regarding derivative plaintiffs' counsels' request for
an award of attorneys' fees and costs.

On
October 22, 2001, a purported derivative lawsuit was filed in the United States District Court for the District of Colorado, or the Federal Derivative Litigation. On
February 6, 2004, a third amended complaint was filed in the Federal Derivative Litigation, naming as defendants certain of QCII's present and former directors and certain former officers and
naming QCII as a nominal defendant. The Federal Derivative Litigation is based upon the allegations made in the consolidated securities action and alleges, among other things, that the defendants
breached their fiduciary duties to QCII by engaging in self-dealing, insider trading, usurpation of corporate opportunities, failing to oversee implementation of securities laws that
prohibit insider trading, failing to maintain appropriate financial controls within QCII, and causing or permitting QCII to commit alleged securities violations, thus (1) causing QCII to be
sued for such violations and (2) subjecting QCII to adverse publicity, increasing its cost of raising capital and impairing earnings. On March 26, 2004, a proposed fourth amended
complaint was filed in the Federal Derivative Litigation, which names additional defendants, including a former QCII officer, Citigroup Inc. and corporations affiliated with
Citigroup, Inc. The proposed fourth amended complaint contains allegations in addition to those set forth in the third amended complaint, including that certain individual defendants violated
securities laws as a result of the filing of false and misleading proxy statements by QCII from 2000 through 2003, and that the Citigroup defendants aided and abetted breaches of fiduciary duties owed
to QCII. The Federal Derivative Litigation has been consolidated with the consolidated securities action. Plaintiff seeks, among other remedies, disgorgement of alleged insider trading profits. As
discussed above, the effectiveness of the settlement of the Colorado Derivative Litigation approved by the Denver District

22

---



Court
is conditioned in part upon the dismissal with prejudice of the Federal Derivative Litigation, and we expect the parties to the Federal Derivative Litigation will be moving to effect such
dismissal shortly.

On
August 9, 2002, a purported derivative lawsuit was filed in the Court of Chancery of the State of Delaware. A separate alleged derivative lawsuit was filed in the Court of
Chancery of the State of Delaware on or about August 28, 2002. On October 30, 2002, these two alleged derivative lawsuits, or collectively, the Delaware Derivative Litigation, were
consolidated. The Second Amended Complaint in the Delaware Derivative Litigation was filed on or about January 23, 2003, naming as defendants certain of QCII's current and former officers and
directors and naming QCII as a nominal defendant. In the Second Amended Complaint the plaintiffs allege, among other things, that the individual defendants: (i) breached their fiduciary duties
by allegedly engaging in illegal insider trading in QCII's stock; (ii) failed to ensure compliance with federal and state disclosure, anti-fraud and insider trading laws within
QCII, resulting in exposure to it; (iii) appropriated corporate opportunities, wasted corporate assets and self-dealt in connection with investments in initial public offering
securities through QCII's investment bankers; and (iv) improperly awarded severance payments to QCII's former Chief Executive Officer, Mr. Nacchio and QCII's former Chief Financial
Officer, Mr. Woodruff. The plaintiffs seek recovery of incentive compensation allegedly wrongfully paid to certain defendants, all severance payments made to Messrs. Nacchio and
Woodruff, disgorgement, contribution and indemnification, repayment of compensation, injunctive relief, and all costs including legal and accounting fees. On March 17, 2003, defendants moved to
dismiss the Second Amended Complaint, or, in the alternative, to stay the action. As discussed above, the effectiveness of the settlement of the Colorado Derivative Litigation approved by the Denver
District Court is conditioned in part upon the dismissal with prejudice of the Delaware Derivative Litigation, and we expect the parties to the Delaware Derivative Litigation will be moving to effect
such dismissal shortly.

Other Matters

In January 2001, an amended purported class action complaint was filed in Denver District Court against QCII and certain current and former officers and
directors on behalf of stockholders of U S WEST. The complaint alleges that QCII had a duty to pay a quarterly dividend to U S WEST stockholders of record as of
June 30, 2000. Plaintiffs further claim that the defendants attempted to avoid paying the dividend by changing the record date from June 30, 2000 to July 10, 2000, a claim QCII
denies. In September 2002, QCII filed a motion for summary judgment on all claims. Plaintiffs filed a cross-motion for summary judgment on their breach of contract claims only. On
July 15, 2003, the court denied both summary judgment motions. Plaintiffs' claims for breach of fiduciary duty and breach of contract remain pending. Additionally, QCII recently filed motions
asking the court to rule on certain discrete issues of law affecting the action. The case is now in the class certification stage, which QCII is challenging.

Several
purported class actions relating to the installation of fiber optic cable in certain rights-of-way were filed in various courts against QCII on behalf of
landowners in Alabama, California, Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas.
Class certification was denied in the Louisiana proceeding and, subsequently, summary judgment was granted in QCII's favor. A new Louisiana class action complaint has recently been filed.
Class certification was also denied in the California proceeding, although plaintiffs have filed a motion for reconsideration. Class certification was granted in the Illinois proceeding.
Class certification has not been resolved yet in the other proceedings. The complaints challenge QCII's right to install its fiber optic cable in railroad rights-of-way
and, in Colorado, Illinois and Texas, also challenge QCII's right to install fiber optic cable in utility and pipeline rights-of-way. In Alabama, the complaint challenges
QCII's right to install fiber optic cable in any right-of-way, including public highways. The complaints allege that the railroads, utilities and pipeline companies own a
limited property right-of-way that did not include the right to permit QCII to install its fiber optic cable on the

23

---



plaintiffs'
property. The Indiana action purports to be on behalf of a national class of landowners adjacent to railroad rights-of-way over which QCII's network passes. The
Alabama, California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas actions purport to be on behalf of a class of such
landowners in those states, respectively. The Illinois action purports to be on behalf of landowners adjacent to railroad rights-of-way over which QCII's network passes in
Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. Plaintiffs in the Illinois action have filed a motion to expand the class to a nationwide class. The complaints seek
damages on theories of trespass and unjust enrichment, as well as punitive damages. Together with some of the other telecommunication carrier defendants, in September 2002, QCII filed a
proposed settlement of all these matters (except those in Louisiana) in the United States District Court for the Northern District of Illinois. On July 25, 2003, the court granted preliminary
approval of the settlement and entered an order enjoining competing class action claims, except those in Louisiana. Accordingly, with the exception of the Louisiana actions, all other right of way
actions are stayed. The settlement and the court's injunction are opposed by some, but not all, of the plaintiffs' counsel and are on appeal before the Seventh Circuit Court of Appeals. At this time,
QCII cannot determine whether such settlement will be ultimately approved or the final cost of the settlement if it is approved.

On
October 31, 2002, Richard and Marcia Grand, co-trustees of the R.M. Grand Revocable Living Trust, dated January 25, 1991, filed a lawsuit in Arizona Superior
Court alleging that the defendants violated state and federal securities laws and breached their fiduciary duty in connection with an investment by the plaintiff in securities of KPNQwest. QCII is a
defendant in this lawsuit along with Qwest B.V., Joseph Nacchio and John McMaster, the former President and Chief Executive Officer of KPNQwest. The plaintiff trust claims to have lost
$10 million in its investment in KPNQwest. On January 27, 2004, the Arizona Superior Court granted QCII's motion to dismiss the state and federal securities law claims. On
March 19, 2004, plaintiffs filed a second amended complaint asserting violations of the securities laws and other claims. Defendants have moved to dismiss this complaint.

On
October 4, 2002, a putative class action was filed in the federal district court for the Southern District of New York against Willem Ackermans, the former Executive Vice
President and Chief Financial Officer of KPNQwest, in which QCII was a major shareholder. The complaint alleges, on behalf of certain purchasers of KPNQwest securities, that Ackermans engaged in a
fraudulent scheme and deceptive course of business in order to inflate KPNQwest revenue and securities. Ackermans was the only defendant named in the original complaint. On January 9, 2004,
plaintiffs filed an amended complaint adding as defendants QCII, certain of QCII's former executives who were also on the supervisory board of KPNQwest, and others. Plaintiffs seek compensatory
damages and/or rescission as appropriate against defendants, as well as an award of plaintiffs' fees and costs. Defendants have moved to dismiss the amended complaint.

On
June 25, 2004, J.C. van Apeldoorn and E.T. Meijer, in their capacity as trustees in the Dutch bankruptcy proceeding for KPNQwest, filed a complaint in the United States
District Court for the District of New Jersey alleging violations of the Racketeer Influenced and Corrupt Organizations Act, and breach of fiduciary duty and mismanagement under Dutch law. QCII is a
defendant in this lawsuit along with Joseph Nacchio, Robert S. Woodruff and John McMaster, the former President and Chief Executive Officer of KPNQwest. Plaintiffs seek compensatory and punitive
damages, as well as an award of plaintiffs' fees and costs.

Note 8: Subsequent Events

During the second quarter of 2004, we declared cash dividends of $253 million and paid cash dividends of $910 million. We have historically declared
and paid regular dividends to our parent, QSC, based on the earnings of our wireline operations. In July 2004, we modified our dividend practice to balance our financial needs, cash position
and credit profile with those of our parent. As a result, going forward, we may declare and pay dividends in excess of our earnings. In addition, during July 2004, we declared dividends of
$400 million.

24

---





ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references in this report to "Qwest," "we," "us," the "Company" and "our" refer to Qwest
Corporation and its consolidated subsidiaries, and references to "QCII" refer to our ultimate parent company, Qwest Communications International Inc., and its consolidated
subsidiaries.

Certain
statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "Special
Note Regarding Forward-Looking Statements" at the end of this Item 2 for additional factors relating to such statements as well as for a discussion of certain risk factors applicable to our
business, financial condition and results of operations.

Business Overview and Presentation

We provide local telecommunications and related services, long-distance services, data and video services within our local service area, which
consists of the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We previously
provided wireless services in our local service area through our wholly owned subsidiary Qwest Wireless. On April 30, 2004, our direct parent, QSC, made a capital contribution to us of
$2.2 billion. We in turn made a capital contribution of the same amount into Qwest Wireless, which used these proceeds to pay down its $2.2 billion in outstanding borrowings. On
May 1, 2004, we transferred ownership of Qwest Wireless to an affiliate and no longer have wireless operations. The results of Qwest Wireless are included in loss from discontinued operations
in our consolidated statements of operations for all periods presented in this report. See Note 2  Transfer of Qwest Wireless Operations to our consolidated financial
statements in Item 1 of this report for more information.

Our operations are included in the consolidated operations of our ultimate parent, QCII, and generally account for the majority of QCII's consolidated revenues. Our telecommunications
products and services are provided through our traditional telephone network located within our local service area. In addition to our operations, QCII maintains a wireless business (comprised of the
wireless operations



we transferred to an affiliate in May 2004) and a national fiber optic network. Through its fiber optic network, QCII provides the following wireline products and services that we do not
provide:



For certain other products and services we provide and for a variety of internal communications functions, we utilize QCII's fiber optic network to transport voice and data traffic.
Also, through its fiber optic network, QCII provides nationally some data and Internet access services, including private line, ATM and Frame Relay, which are similar to what we provide within our
local service area.

Our
analysis presented below is organized in a way that provides the information required, highlighting the information that we believe will be instructive for understanding the relevant
trends going forward that will affect our business in the future. Specific variances from overall trends are

25

---



further
explained in the relevant revenue and expense discussion and analysis that follows the trends discussion.

Our
operations are integrated into and are part of the segments of the QCII consolidated group. The chief operating decision maker ("CODM") for us is the same as that for the
consolidated group. The CODM makes resource allocation decisions and assessments of financial performance for the consolidated group based on wireline, wireless and other segmentation. For more
information about QCII's reporting segments, see QCII's annual report on Form 10-K for the year ended December 31, 2003. Our continuing business contributes primarily to the
wireline segment reported by QCII, but the QCII CODM reviews our financial information only in connection with this filing. See further discussion in Note 6Contributions to QCII
Segments to our consolidated financial statements in Item 1 of this report.

Business Trends

Our results continue to be impacted by two primary factors influencing the telecommunications industry. First, technology substitution and competition are
expected to continue to cause additional access line losses. We expect industry-wide competitive factors to continue to impact our results and we have developed new strategies for offering
complementary services such as satellite television and DSL. Second, our results continue to be impacted by regulatory responses to the competitive landscape for both our local and
long-distance services.

Revenue Trends

Historically, at least 95% of our revenue came from our wireline services, including voice services and data and Internet services. However, on May 1,
2004, we transferred ownership of Qwest Wireless to an affiliate. As a result, substantially all of our future revenue will come from our wireline services.

In
general, we have experienced a decline in local voice-related revenue as a result of a decrease in access lines and our competitors' accelerated use of UNE-P and unbundled
local loops to deliver voice services. Access lines are expected to continue decreasing primarily because of technology substitution, including wireless and cable substitution for wireline telephony,
and cable modem and DSL substitution for dial-up Internet access lines. UNE rules, which require us to sell access to our wireline network to our competitors at wholesale rates, will
continue to impact our results. The use of UNEs, including UNE-P, is expected to cause incremental losses of retail access lines and apply downward pressure on our revenue. The recent
action by the Washington DC Circuit Court vacating the Federal Communications Commission ("FCC") UNE-P rules, in conjunction with our efforts to negotiate new contracts with CLECs and data
access service providers may help mitigate this downward pressure on wireline margins. But with the current status of rules in doubt, we cannot predict how much or when the migration may occur.

We
have also begun to experience and expect increased competitive pressure from telecommunications providers either emerging from bankruptcy protection or reorganizing their capital
structure to more effectively compete against us. As a result of technology substitution and low-cost competitors benefiting from low UNE rates or bankruptcy reorganization, we have been
and may continue to be forced to respond with less profitable product offerings and pricing plans in an effort to retain and attract customers.

Expense Trends

Our expenses continue to be impacted by shifting demand due to increased competition and the expansion of our product offerings. Expenses associated with our new
product offerings tend to be more variable in nature. While existing products tend to rely upon our embedded cost structure, the

26

---



mix
of products we expect to sell combined with regulatory and market-pricing stresses may pressure operating margins.

In order to improve operational efficiencies, and in response to the decline in revenue, we have implemented restructuring plans in which we reduced the number of employees and
consolidated and subleased idle real estate properties. While we have realized savings due to reductions in salaries and wages resulting from our restructuring efforts, we continue to experience
partially offsetting increases in costs related to employee benefits. Costs of both our pension plan and our healthcare plans are expected to continue to rise in the short and long term due to lower
expected returns on plan assets based on our evaluation of current and expected market conditions and anticipated continuing double digit annual percentage increases in the overall cost of health care
and prescription drugs. We will continue to evaluate our staffing levels and cost structure and will adjust these as deemed necessary. The purpose of the cost savings measures is to facilitate our
efforts, in the face of downward price pressures and increasing competition, to maintain or improve our cash flow, financial position and results of operations for the forseeable future.

Beginning in 2002, we reduced capital expenditures and expect to continue at a reduced level for the foreseeable future. Given the current business environment, as discussed in
Item 1 of our 2003 Form 10-K, we believe that our current level of capital expenditures will sustain our business at existing levels and support our anticipated core growth requirements
in areas such as in our DSL product.

Results of Operations

Overview

We generate revenue from the provision of voice services, data and Internet services, other services and services to our affiliates. Certain prior periods revenue
and expense amounts have been reclassified to conform to the current year presentation. Depending on the product or service purchased, a customer may pay an up-front fee, a monthly fee, a
usage charge or a combination of these. The following is a description of the sources of our revenue:



27

---





The
following table summarizes our results of operations:

|                                                                                                            |                                                                           | Three Months Ended June 30, |       | Six Months Ended June 30, |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------- | ----- | ------------------------- | -
|
|
|Operating revenue                                                                                           |                                                                           | $                           | 2,564 |                           | $
|Operating expenses:                                                                                         |                                                                           |                             |       |                           |  
|                                                                                                            | Cost of sales (exclusive of depreciation and amortization detailed below) |                             |       | 649                       |  
|                                                                                                            | Selling, general and administrative                                       |                             |       | 676                       |  
|                                                                                                            | Depreciation                                                              |                             |       | 584                       |  
|                                                                                                            | Intangible assets amortization                                            |                             |       | 95                        |  
|                                                                                                            | Impairment, restructuring and other charges (credits)                     |                             |       | 73                        |  
|                                                                                                            |                                                                           |                             |       |                           |  
|Operating income                                                                                            |                                                                           |                             | 487   |                           |  
|Other expense (income):                                                                                     |                                                                           |                             |       |                           |  
|                                                                                                            | Interest expensenet                                                      |                             |       | 146                       |  
|Other (income)net                                                                                          |                                                                           |                             | (5    | )                         |  
|                                                                                                            |                                                                           |                             |       |                           |  
|Total other expensenet                                                                                     |                                                                           |                             | 141   |                           |  
|Income before income taxes, discontinued operations and cumulative effect of change in accounting principle |                                                                           |                             | 346   |                           |  
|Income tax expense                                                                                          |                                                                           |                             | 136   |                           |  
|                                                                                                            |                                                                           |                             |       |                           |  
|Income from continuing operations                                                                           |                                                                           |                             | 210   |                           |  
|Loss from discontinued operations net of taxes of $7, $19, $34 and $40, respectively                        |                                                                           |                             | 12    |                           |  
|                                                                                                            |                                                                           |                             |       |                           |  
|Income before cumulative effect of change in accounting principle                                           |                                                                           |                             | 198   |                           |  
|Cumulative effect of change in accounting principle, net of taxes                                           |                                                                           |                             |      |                           |  
|                                                                                                            |                                                                           |                             |       |                           |  
|Net income                                                                                                  |                                                                           | $                           | 198   |                           | $
|                                                                                                            |                                                                           |                             |       |                           |  

nmpercentages
greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.

28

---



Operating Revenue

The following table compares operating revenues for the three and six months ended June 30, 2004 and 2003:

|                           |  | Three Months Ended June 30, |       | Six Months Ended June 30, |  
|-------------------------- |  | --------------------------- | ----- | ------------------------- | -
|
|
|Voice services             |  | $                           | 1,795 |                           | $
|Data and Internet services |  |                             | 541   |                           |  
|Other services             |  |                             | 2     |                           |  
|Affiliate services         |  |                             | 226   |                           |  
|                           |  |                             |       |                           |  
|Total operating revenue    |  | $                           | 2,564 |                           | $
|                           |  |                             |       |                           |  

For
a description of the products and services included in each revenue line item, see "Overview" above.

Operating revenueThree months ended June 30, 2004 as compared to the three months ended
June 30, 2003:

Voice Services

Voice services revenues, comprised of local voice, long distance and services, decreased $190 million, or 10%, for the three months ended
June 30, 2004 as compared to the three months ended June 30, 2003. The voice services revenue decrease was primarily the result of access line losses and pricing declines. We have
experienced competition from technology substitution, CLECs and other telecommunications providers reselling our services by using UNE. The regulated pricing structure of the UNE has applied downward
pressure on revenues. Also, a migration of consumer and business customers to our new value packages with lower rates has caused an overall decrease in revenue for our local voice products.

For
the three months ended June 30, 2004 as compared to the three months ended June 30, 2003, local voice revenue declined $129 million, or 9%. Local
voice revenue declines were primarily driven by losses of access lines due to competition from both technology substitution and other telecommunications providers reselling our services through the
use of UNEs. Consistent with the table below, the average net access line loss was approximately 1% for the four consecutive quarters ended June 30, 2004.

June 30,
2004

June 30,
2003

(Decrease)

%(In thousands)Access Lines

15,839

16,507

(668
)
(4
)%


As
shown above, between June 30, 2003 and June 30, 2004, total access lines declined by 668,000 or 4%. Local voice wholesale revenue gains from increased UNE access lines
were offset by lower revenue for collocation, operator and other services. The increase in UNE access lines partially offset the loss of consumer and business retail access lines but, because the
regulated pricing structure of UNEs mandates lower rates, this transition has caused downward pressure on our gross margins. Competitive pressures on feature and package pricing and a migration of
customers to our new value packages have caused a decrease in rates for our local voice products.

Data and Internet Services

Data and Internet services revenue increased $7 million, or 1%, for the three months ended June 30, 2004 as compared to the three months
ended June 30, 2003. Pursuant to the amendment of

29

---



our
agreement with Microsoft in July 2003, we became responsible for providing broadband services to end-user customers, while we previously provided related services to Microsoft
on a wholesale basis. As a result, we are recognizing revenue at higher consumer retail rates rather than the lower wholesale rates we charged Microsoft. In addition, expanded availability and
increased marketing efforts are creating volume growth for broadband services. These increases were offset by a decline in in-region wholesale Internet services, a result of contract
losses and renegotiations of contracts to some of our large, bankrupt customers. Also, Internet and DSL rates are trending down as a result of increased competition, although the overall number of DSL
customers is growing.

Affiliate Services

Affiliate services revenue consists of telecommunications services provided to affiliated enterprises. Affiliate services revenue increased $40 million, or
22%, for the three months ended June 30, 2004 compared to the same period in 2003. The increases in affiliate services revenue were primarily caused by a migration of telecommunications
services from third-party providers onto our network and by QCII's entrance into the InterLATA long-distance business with the FCC's authorization of QCII's Section 271 filings.
These services and related revenue increases were related primarily to increases in InterLATA customer levels, and increases in marketing, sales and billing and collection services provided to QCII's
long-distance subsidiary.

Operating revenuesix months ended June 30, 2004 compared to the six months ended June 30, 2003:

Voice Services

Voice services revenue decreased $382 million, or 9%, for the six months ended June 30, 2004 as compared to the six months ended
June 30, 2003. The voice services decrease was primarily the result of a decrease in local voice services revenue. Local voice revenue declines were primarily driven by losses of access lines
due to competition from both technology substitution and other telecommunications providers reselling our services through the use of UNEs. See the access line loss trend table above for discussion on
access line trends. The average access line loss per quarter was approximately 167,000 during the four quarters ended June 30, 2004.

Data and Internet Services

Data and Internet services revenue was relatively flat with a $3 million, or 0%, decrease for the six months ended June 30, 2004 as compared
to the six months ended June 30, 2003. Pursuant to the amendment of our agreement with Microsoft in July 2003, we became responsible for providing broadband services to
end-user customers, while we previously provided related services to Microsoft on a wholesale basis. As a result, we are recognizing revenue at higher consumer retail rates rather than the
lower wholesale rates we charged Microsoft. In addition, expanded availability and increased marketing efforts are creating volume growth for broadband services. These increases were offset by a
decline in in-region wholesale Internet services, a result of contract losses and renegotiations of contracts to some of our large, bankrupt customers. Also, Internet and DSL rates are
trending down as a result of increased competition, although the number of DSL customers is increasing.

Affiliate Services

Affiliate services revenue consists of telecommunications services provided to affiliated enterprises. Affiliate services revenue increased $104 million,
or 30%, for the six months ended June 30, 2004 compared to the same period in 2003. The increases in affiliate services revenue were primarily caused by a migration of telecommunications
services from third-party providers onto our network and by QCII's entrance into the InterLATA long-distance business with the FCC's authorization of QCII's Section 271 filings.
These services and related revenue increases were related primarily to increases in

30

---



InterLATA
customer levels and increases in marketing, sales and billing and collection services provided to QCII's long-distance subsidiary.

Operating Expense

The following table shows a breakdown of operating expenses:

|                         |                                              | Three Months Ended June 30, |       | Six Months Ended June 30, |  
|------------------------ | -------------------------------------------- | --------------------------- | ----- | ------------------------- | -
|
|
|Operating expenses:      |                                              |                             |       |                           |  
|                         | Cost of sales                                |                             | $     | 649                       |  
|                         | Selling, general and administrative ("SG&A") |                             |       | 676                       |  
|                         | Depreciation                                 |                             |       | 584                       |  
|                         | Intangible assets amortization               |                             |       | 95                        |  
|                         | Impairment, restructuring and other charges  |                             |       | 73                        |  
|                         |                                              |                             |       |                           |  
|Total operating expenses |                                              | $                           | 2,077 |                           | $
|                         |                                              |                             |       |                           |  

nmpercentages
greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.

Cost of Sales

The following table shows a breakdown of cost of sales by major component:

|                                   |                      | Three Months Ended June 30, |     | Six Months Ended June 30, |  
|---------------------------------- | -------------------- | --------------------------- | --- | ------------------------- | -
|
|
|Employee and service-related costs |                      | $                           | 415 |                           | $
|Network costs                      |                      |                             | 51  |                           |  
|Non-employee related costs         |                      |                             | 82  |                           |  
|Affiliate costs                    |                      |                             | 101 |                           |  
|                                   |                      |                             |     |                           |  
|                                   | Total costs of sales |                             | $   | 649                       |  
|                                   |                      |                             |     |                           |  

Cost
of sales includes network costs, salaries and wages, benefits, materials and supplies, contracted engineering services and computer systems support.

Cost of SalesThree months ended June 30, 2004 as compared to the three months ended June 30, 2003

Cost of sales as a percent of revenue was 25% for the period ended June 30, 2004, compared to 24% for the period ended June 30, 2003. Total cost of
sales decreased $12 million or 2% for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003.

Employee
and service-related costs, such as salaries and wages, benefits, commissions and third-party customer service costs increased $11 million, or 3%, for the
three months ended June 30, 2004 as compared to the three months ended June 30, 2003. While we have realized savings due to reduction in salaries and wages and professional
fees resulting from our restructuring efforts, we incurred increased

31

---



overtime
costs related to lower overall staffing levels and increased amortization of deferred costs associated with deferred revenue.

Non-employee
related costs, such as real estate costs and reciprocal compensation payments (fees for terminating our customers' local calls onto other networks), decreased
$12 million, or 13%, for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. The decrease is primarily due to reduced access
costs related to lower volumes.

Affiliate
costs decreased $12 million, or 11%, for the three months ended June 30, 2004 as compared with the same period in 2003. The decrease is primarily
attributable to adjustments with certain affiliates to clarify costs subject to affiliates billings.

Cost of SalesSix Months Ended June 30, 2004 as compared to the six months ended June 30, 2003

Total cost of sales decreased $42 million, or 3%, for the six months ended June 30, 2004 as compared to the six months ended
June 30, 2003. The cost of sales decline is consistent with lower revenue, although we have been unable to achieve savings in certain costs such as employee benefits and some
non-employee related costs, as discussed above in Expense Trends. Cost of sales as a percentage of revenue for the six months ended June 30, 2004 and for the
six months ended June 30, 2003 was 24%.

Employee
and service-related costs, such as salaries and wages, benefits, commissions and third-party customer service costs increased $19 million, or 2%, for the
six months ended June 30, 2004 compared to the six months ended June 30, 2003. While we have realized savings due to reduction in salaries and wages and professional fees
resulting from our restructuring efforts, we continue to experience some offsetting increases in overtime expense and increased amortization of deferred costs associated with deferred revenue.

Non-employee
related costs decreased $27 million, or 15%, for the six months ended June 30, 2004 as compared to the six months ended June 30,
2003. The decrease is attributable to lower wholesale volumes in addition to a favorable settlement on a reciprocal compensation agreement.

Affiliate
costs decreased $31 million, or 15%, for the six months ended June 30, 2004 as compared with the same period in 2003. The decrease is primarily
attributable to adjustments with certain affiliates.

Selling, General and Administrative (SG&A) Expense

The following table shows a breakdown of SG&A by major component for the three and six months ended June 30, 2004 and 2003:

|                                   |            | Three Months Ended June 30, |     | Six Months Ended June 30, |  
|---------------------------------- | ---------- | --------------------------- | --- | ------------------------- | -
|
|
|Employee and service-related costs |            | $                           | 170 |                           | $
|Bad debt                           |            |                             | (34 | )                         |  
|Property and other taxes           |            |                             | 92  |                           |  
|Non-employee related costs         |            |                             | 121 |                           |  
|Affiliate cost                     |            |                             | 327 |                           |  
|                                   |            |                             |     |                           |  
|                                   | Total SG&A |                             | $   | 676                       |  
|                                   |            |                             |     |                           |  

nmpercentages
greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.

32

---



SG&AThree months ended June 30, 2004 as compared to the three months ended June 30, 2003

SG&A expenses include taxes other than income taxes, bad debt charges, salaries and wages not directly attributable to the provision of products or services,
benefits, sales commissions, rent for administrative space, advertising, professional service fees and computer systems support.

SG&A,
as a percent of revenue, was 26% for the three-month period ended June 30, 2004 and 28% for the same period in 2003. Total SG&A decreased $ 93 million, or 12%, for
the three months ended June 30, 2004 as compared with the same period in 2003 for the reasons discussed below.

Employee
and service-related costs, such as salaries and wages, benefits, sales commissions, overtime, professional fees (such as telemarketing, and customer service costs) decreased
$33 million, or 16%, for
the three months ended June 30, 2004 as compared to the same period in 2003. The decline is primarily due to staffing reductions related to planned restructuring and reduced professional
fees related to accounting and network costs and decreased fees related to providing certain features.

Bad
debt expense decreased $57 million for the three months ended June 30, 2004 as compared to the same period in 2003. The decrease is due to one time settlements
of $45 million from companies emerging from bankruptcy. Also, decreased revenues and better collections practices, allowing us to reduce our overall reserve an additional $8 million.

Property
and other taxes decreased $14 million, or 13%, for the three months ended June 30, 2004 compared to the same period in 2003. Reduced property taxes are
primarily attributed to changes in property tax estimates recorded based on less locations and taxable property and lower gross receipts taxes incurred related to lower revenue levels in 2004.

Non-employee
related costs, such as real estate, insurance, marketing and advertising, net of amounts capitalized, increased $26 million, or 27%, for the
three months ended June 30, 2004 as compared to the same period in 2003. The increase is primarily attributable to increased external commissions and increased marketing and advertising
costs in the 2004 period. Prior to 2004, commission expenses were paid by QSC and allocated to us as an affiliate cost.

Affiliate
costs decreased $15 million, or 4%, for the three months ended June 30, 2004 as compared with the same period in 2003. As noted above, external commission
expenses, previously included in affiliate costs are now directly paid by us and included in non-employee costs.

SG&ASix months ended June 30, 2004 as compared to the six months ended June 30, 2003

SG&A, as a percentage of revenue, was 27% for the six months ended June 30, 2004 as compared to 28% for the six months ended June 30,
2003. Total SG&A decreased $112 million, or 7%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The SG&A decline is
consistent with our ongoing efforts to improve operational efficiencies although we have been unable to achieve savings in certain costs such as employee benefits, as discussed above in Expense
Trends.

Employee
and service-related costs, such as salaries and wages, benefits, sales commissions, overtime and professional fees, decreased $51 million or 12% for the six months
ended June 30, 2004 as compared to the six months ended June 30, 2003. The decrease can be attributed to reductions in total salaries and wages due to downsizing of employee
numbers, a decrease in professional fees related to accounting and network enhancement costs and decreased fees related to providing certain features. These decreases were offset by increases in
employee benefits and overtime expense.

Property
and other taxes decreased $49 million, or 24%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The
cause of the reduction in property and other taxes was due both to changes in property tax estimates recorded based on fewer locations and less

33

---



taxable
property and a one-time expense reduction from a successful property tax appeal for the six months ended June 30, 2004.

Bad
debt expense decreased $61 million, or 95%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 as a result of
one-time settlements of $47 million from companies emerging from bankruptcy. Also, reduced revenue levels and better collection practices allowed us to reduce our overall reserve an
additional $8 million.

Non-employee
related costs increased $73 million, or 36%, for the six months ended June 30, 2004, as compared to the six months ended June 30,
2003. The increase can be primarily attributed to the $46 million increased spending for marketing and advertising programs, and a $15 million increase in external commissions expenses.
Prior to 2004, commission expenses were paid by QSC and allocated to us as an affiliate cost. Beginning in 2004, commissions were paid directly by us.

Affiliate
costs decreased $24 million, or 4%, for the six months ended June 30, 2004 as compared with the same period in 2003. As noted above, external commission
expenses, previously included in affiliate costs are now directly paid by us and included in non-employee costs.

Combined Pension and Post-Retirement Benefits

Our results include post-retirement benefit expenses allocated to us by QCII, net of pension credits, of $50 million in the second quarter of
2004 and $54 million, in the second quarter of 2003. We recorded a net pension expense of $106 million and $108 million for the six months ended June 30, 2004 and
2003, respectively. The net pension expense or credit is a function of the amount of pension and post-retirement benefits earned, interest on projected benefit obligations, amortization of
costs and credits from prior benefit changes and the expected return on the assets held in the various plans. The net pension expense or credit is allocated partially to cost of sales and the
remaining balance included in SG&A.

In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") became law in the United States. The Act introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is
at least actuarially equivalent to the Medicare benefit. In accordance with Financial Accounting Standards Board, ("FASB"), Staff Position No. 106-1 and 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003", we elected to defer recognition of the effects of the Act in any measures
of the benefit obligation or cost until the adoption of the final authoritative guidance on accounting for the Act is required in the third quarter of 2004. When adopted, the accounting guidance could
require us to change previously reported information. Currently, we do not believe we will need to amend our plan to benefit from the Act.

Depreciation

Depreciation expense for the three months ended June 30, 2004 decreased $17 million, or 3%, compared to the three months ended
June 30, 2003. For the six months ended June 30, 2004, depreciation expense decreased $44 million, or 4%, when compared to the same period of 2003. The decrease was the
result of the third quarter 2003 wireless impairment and reduced capital expenditures in 2003 and 2004, which caused more assets to become fully depreciated relative to asset additions during the
period.

Intangible Assets Amortization

Amortization expense increased $11 million, or 13%, for the three months ended June 30, 2004 compared to the same period in 2003. For the
six months ended June 30, 2004, amortization expense

34

---



increased
$23 million, or 14% compared to the same period in 2003. The increase was attributed to increases in capitalized software.

Impairment and Restructuring Charges

The restructuring reserve for the three and six months ended June 30, 2004, included charges of $54 and $57 million respectively, for the
severance benefits pursuant to established severance policies and was partially offset by reversal of prior charges. QCII reviewed our employee levels in certain areas of our business and as a result,
identified 1,700 employees from various functional areas to be terminated as a part of this restructuring for the six months ended June 30, 2004. As a result of these restructuring
activities, we expect to realize annualized savings of approximately $170 million.

In
conjunction with our effort to sell certain assets we determined that the carrying amounts were in excess of their expected sales price, which indicated that our investments in these
assets may have been impaired at that date. In May 2004, pursuant to SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), we
compared gross undiscounted cash flow projections to the carrying value of our pay phones and determined that the carrying value of those assets was not expected to be recovered through future
projected cash flows. We then estimated the fair value using recent selling prices for comparable assets and determined that our assets relating to our pay phone business were fully impaired by an
aggregate amount of $19 million.

Total Other ExpenseNet

Other expensenet, includes interest expense, net of capitalized interest and other incomenet, which includes interest income. Components
of other expensenet are as follows:

|                     |                          | Three Months Ended June 30, |     | Six Months Ended June 30, |  
|-------------------- | ------------------------ | --------------------------- | --- | ------------------------- | -
|
|
|Interest expensenet |                          | $                           | 146 |                           | $
|Other income         |                          |                             | (5  | )                         |  
|                     |                          |                             |     |                           |  
|                     | Total other expensesnet |                             | $   | 141                       |  
|                     |                          |                             |     |                           |  

nmpercentages
greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.

Interest
expensenet, increased $18 million or 7% for the six months ended June 30, 2004 compared to the same period ended 2003. The increase was
attributable to higher average debt balances during the period, although total debt levels are lower as of June 30, 2004. Additionally, amortization of debt issuance expense, included in
interest expense, is higher in the six months ended June 30, 2004, as compared to the same period in the prior year.

Loss From Discontinued Operations.

On April 30, 2004, our direct parent, Qwest Service Corporation ("QSC"), made capital contributions of $2.185 billion to us. We, in turn, made
capital contributions of the same amount into Qwest Wireless, which used these proceeds to pay down its $2.185 billion in outstanding affiliate borrowings due to related parties.

On
May 1, 2004, we transferred ownership of Qwest Wireless. The transfer was made in the form of a dividend to QSC, our direct parent, and, as a result, no consideration was
exchanged. Due to this transfer, we no longer have wireless operations, and the results of Qwest Wireless operations are accounted for as discontinued operations.

35

---



Income Tax Provision

The effective income tax rate is the provision for income taxes as a percentage of pre-tax income. Our effective income tax rate for the
three months ended June 30, 2004 increased to 39.3% as compared to 37.9% for the three months ended June 30, 2003. The rate also increased to 39% for the six months
ended June 30, 2004 as compared to 38.2% for the six months ended June 30, 2003. The change reflects an annual accrual adjustment for our state income tax liabilities.

Liquidity and Capital Resources

We are a wholly owned subsidiary of Qwest Services Corporation, ("QSC") which is wholly owned by QCII. As such, factors relating to or affecting QCII's liquidity
and capital resources could have material impacts on us, including changes in the market's perception of us, impacts on our credit ratings and access to capital markets.

As
of June 30, 2004 and December 31, 2003, QCII and its consolidated subsidiaries had total borrowings of $17.3 billion and $17.5 billion, respectively. Some
of the borrowings issued by QCII and QSC are secured by liens on our stock. As a result, ownership of our stock could transfer if either QCII or QSC were to default on its debt obligations.

QCII
has cash management arrangements between certain of its subsidiaries that include lines of credit, inter-company obligations, capital contributions and dividends. As part of these
cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and inter-company obligations vary from time to time and
are classified as short-term borrowings.

Near-Term View

Our working capital deficit, or the amount by which our current liabilities exceed our current assets, was $1.6 billion and $2.7 billion as of
June 30, 2004 and December 31, 2003, respectively. Our working capital deficit decreased $1.1 billion when compared to December 31, 2003. The decrease was primarily due to
the retirement of $2.2 billion of affiliate borrowings related to the discontinuance of Qwest Wireless operations, partially offset by an increase in dividend liability in the amount of
$497 million and ongoing capital expenditures. Due to the repayment of these borrowings and the transfer of Qwest Wireless to an affiliate, going forward we will not be directly impacted by
either the results of operations or by borrowings of Qwest Wireless.

Since
December 31, 2003, the following events have occurred impacting our working capital:



The
current working capital deficit at June 30, 2004 was primarily due to dividends that we declared to QSC and the current portion of long-term debt.

36

---



As discussed below, we continue to produce significant cash from operating activities. We believe that our financial resources together with our cash flows from operations will be
sufficient to meet our cash needs through the next twelve months. However, if we or QCII become subject to significant judgments as further discussed in Note 7- Commitments and
Contingencies in Item 1 of this report, we or QCII could be required to make significant payments that we or QCII do not have the resources to make. The magnitude of any settlements or judgments
resulting from these actions could materially and adversely affect QCII's ability to meet its debt service obligations and affect its financial condition, potentially impacting its credit rating, its
ability to access capital markets and its compliance with debt covenants. In addition, the magnitude of any settlements or judgments may cause QCII to draw down significantly on its cash balances,
which might force it to obtain additional financing or explore other methods to generate cash. Such actions could include issuing additional securities or asset sales. In particular, to the extent
that QCII's EBITDA (as defined in QCII's debt covenants) is reduced by cash judgments or settlements, its debt to consolidated EBITDA ratios in certain debt agreements will be adversely affected. As a
wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to capital markets. In addition, a
three-year revolving credit facility established by QSC in 2004 (the "2004 QSC Credit Facility") contains various limitations, including a restriction on using any proceeds from the facility to pay
settlements or judgments relating to investigations and securities actions discussed in Note 7Commitments and Contingencies in Item 1 of this report.

We
expect that our 2004 capital expenditures will approximate 2003 levels.

Long-Term View

We have historically operated with a working capital deficit as a result of the issues discussed above and due to our dividend paying policy. We expect this to
continue. As discussed below, we continue to generate substantial cash from operations. We believe that cash flows from operations, our current cash position and continued access to capital markets
will allow us to meet our business requirements, including debt service, dividends and capital expenditures, for the foreseeable future.

In addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods
to generate cash (such as further cost reductions or the sale of non-strategic assets) if cash provided by our and QCII's operations does not improve, if competitive pressures increase, if
revenue and cash provided by operations continue to decline, if economic conditions weaken or if we or QCII become subject to significant judgments as further discussed in
Note 7Commitments and Contingencies in Item 1 of this report. We or QCII could be required to make significant payments that we do not have the resources to make. The magnitude of
any settlements or judgments resulting from these actions could materially and adversely affect QCII's ability to meet its debt service obligations and affect its financial condition, potentially
impacting its credit ratings, its ability to access capital markets and its compliance with debt covenants. In addition, the magnitude of any settlements or judgments may cause QCII to draw down
significantly on its cash balances, which might force it to obtain additional financing or explore other methods to generate cash. Such actions could include issuing additional securities or asset
sales. As a wholly owned subsidiary of QCII, our business



operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to the capital markets.

The 2004 QSC Credit Facility has a cross payment default provision, and the 2004 QSC Credit Facility and certain other debt issues of QCII and its other subsidiaries have cross
acceleration provisions. When present, such provisions could have a wider impact on liquidity than might otherwise

37

---



arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments will occur if:



Upon such a cross default, the creditors of a material amount of QCII's debt may elect to declare that a default had occurred under their debt instruments and to accelerate the principal
amounts due such creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if in addition to a default
occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated. As a wholly owned subsidiary of QCII, our business operations and financial
condition could be affected, potentially impacting our credit ratings and access to capital markets. In addition, the 2004 QSC Credit Facility contains various limitations, including a restriction on
using any proceeds from the facility to pay settlements or judgments relating to investigations and securities actions discussed in Note 7Commitments and Contingencies in
Item 1 of this report.

Contingencies

We and QCII are defendants in a number of legal actions, and QCII is the subject of a number of investigations by federal and state agencies. While we and QCII
intend to defend against these actions vigorously, the ultimate outcomes of these cases are very uncertain, and we can give no assurance as to the impacts on our financial results or financial
condition as a result of these matters. For a description of these legal matters and the potential impact on our liquidity, please see Note 7Commitments and Contingencies in Item 1
of this report and the Near-Term View and the Long-Term View above.

Historical View

Operating Activities

We generated cash from operating activities of $1.6 billion and $2.7 billion for the six months ended June 30, 2004 and 2003,
respectively, or a decrease of $1.1 billion. For the six months ended June 30, 2004, the decrease in cash provided by operating activities compared to 2003 resulted from a
$362 million decrease in cash generated from operating income, a $533 million decrease in cash relating to intercompany tax payments (of which approximately $160 million relates
to 2003 taxes) from our internal tax allocation and payment policy and a $173 million decrease in cash from changes in other working capital accounts. The decrease in income from continuing
operations was primarily due to the continued trend of decreasing revenues. As in prior periods, we can attribute the current declines to intense competition, as evidenced by access line losses,
pricing declines and reduction in access services revenue.

Our
employees participate in the QCII pension, post-retirement and other post-employment benefit plans. QCII does not anticipate a requirement to make any
significant contribution to the QCII retirement plans in 2004, and thus no payment by QC to QCII would be required.

Investing Activities

Cash used in investing activities was $794 million and $741 million for the six months ended June 30, 2004 and 2003, respectively.
Cash used in investing activities for the three months ended

38

---



June 30,
2004 increased $53 million compared to the same period ended 2003 primarily as a result of a $69 million increase in capital expenditures in 2004. Although our capital
spending remains historically low due to the drop in wireline demand, we are beginning to selectively spend capital for new product infrastructure and in markets with growth potential.

Financing Activities

Cash used for financing activities was $1.3 billion through June 30, 2004 and $506 million for the same period ended 2003. The increase in
cash used for financing activities reflected dividend payments of $1.410 billion to QSC during the six months ended June 30, 2004. At June 30, 2004, we were in compliance
with all provisions or covenants of our borrowings.

Credit ratings

The table below summarizes our long-term debt ratings at June 30, 2004 and December 31, 2003 and 2002. In June 2004, S&P and
Fitch upgraded our rating three notches. The ratings as of June 30, 2004 are still in effect.

June 30,

December 31,2004

2003

2002S&P

BB-

B-

B-Fitch

BB

B

BMoody's

Ba3

Ba3

Ba3


With
respect to S&P, any rating below BBB indicates that the security is speculative in nature. A BB rating indicates that the issuer is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation. The plus or minus symbols show relative standing within major categories.

With
respect to Fitch, any rating below BBB is considered speculative in nature. A BB rating indicates that there is a possibility of credit risk developing, particularly as the result
of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.

With
respect to Moody's, a Ba rating is judged to have speculative elements, meaning that the future of the issuer cannot be considered to be well-assured. Often the
protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times. The "1, 2, 3" modifiers show relative standing within the major
categories, 1 being the highest, or best, modifier in terms of credit quality.

Debt
ratings by the various rating agencies reflect each agency's opinion of the ability of the issuers to repay debt obligations as they come due. In general, lower ratings result in
higher borrowing costs and/or impaired ability to borrow. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.

Given
these current credit ratings, as noted above, our ability to raise additional capital under acceptable terms and conditions may be negatively impacted.

Risk Management

We are exposed to market risks arising from changes in interest rates. We have excluded our fixed-rate affiliate borrowings from the following
discussion as they are not subject to market risk. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative
financial instruments to manage our interest rate risk

39

---



exposure.
We may also employ financial derivatives to hedge foreign currency exposures associated with particular debt.

As of June 30, 2004 and at December 31, 2003, approximately $1.3 billion of floating-rate debt was exposed to changes in interest rates. As of
June 30, 2004 and December 31, 2003, we had approximately $750 million and $850 million respectively, of long-term fixed rate debt obligations maturing in the
following 12 months. Any new debt obtained to refinance this debt would be exposed to changes in interest rates. A hypothetical 10% change in the interest rates on this debt would not have had
a material effect on our earnings. We had $5.7 billion and $5.8 billion of long-term fixed rate debt at June 30, 2004 and at December 31, 2003, respectively. A
100 basis point increase in the interest rates on this debt would result in a decrease in the fair value of these instruments of $400 million at June 30, 2004 and December 31,
2003. A 100 basis point decrease in the interest rates on this debt would result in an increase in the fair value of these instruments of $400 million and $500 million at June 30,
2004 and December 31, 2003, respectively.

As
of June 30, 2004, we had $453 million of cash invested in money market and other short-term investments. Most cash investments are invested at floating
rates. As interest rates change, so will the interest income derived from these accounts.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q/A contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, about our
financial condition, results of operations and business. These statements include, among others:



These
statements may be made expressly in this document or may be incorporated by reference to other documents we will file with the SEC. You can find many of these statements by looking
for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used in this report or incorporated by reference in this report.

These
forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results
expressed or implied by us in those statements. Some of these risks are described below under "Risk Factors." These risk factors should be considered in connection with any subsequent written or oral
forward-looking statements that we or persons acting on our behalf may issue. We do not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Further, the information contained in
this document is a statement of our intention as of the date of this filing and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and
prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or
otherwise.

40

---





Risk Factors

Risks Affecting Our Business

We face pressure on profit margins as a result of increasing competition, including product substitution, which could adversely affect our operating
results and financial performance.

We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify. We have faced greater competition in our core local
business from cable companies, wireless providers (including our affiliates), facilities-based providers using their own networks as well as those leasing parts of our network (unbundled network
elements) and resellers. Regulatory developments have generally increased competitive pressures on our business, such as the recent decision allowing for number portability from wireline to wireless
phones.

Due to these and other factors, we believe competitive telecommunications providers are no longer hindered by historical barriers to entry. As a result, we are seeking to distinguish
ourselves from our competitors through a number of customer service initiatives. These initiatives include expanded product bundling, simplified billing, improved customer support and other ongoing
measures. However, these initiatives are new and untested. We may not have sufficient resources to distinguish our service levels from those of our competitors, and we may not be successful in
integrating our product offerings, especially products for which we act as a reseller. Even if we are successful, these initiatives may not be sufficient to offset our continuing loss of access lines.
Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this report for more information regarding trends affecting our access lines.

We
have also begun to experience and expect further increased competitive pressure from telecommunications providers either emerging from bankruptcy protection or reorganizing their
capital
structure to more effectively compete against us. As a result of these increased competitive pressures, we have been and may continue to be forced to respond with lower profit margin product offerings
and pricing schemes in an effort to retain and attract customers. These pressures could adversely affect our operating results and financial performance.

Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any
inability to respond to those changes could reduce our market share.

The telecommunications industry is experiencing significant technological changes, and our ability to execute on our business plans and compete depends upon our
ability to develop new products and accelerate the deployment of advanced new services, such as broadband data, video services and VoIP services. The development and deployment of new products could
require substantial expenditure of financial and other resources in excess of contemplated levels. If we are not able to develop new products to keep pace with technological advances, or if such
products are not widely accepted by customers, our ability to compete could be adversely affected and our market share could decline. Any inability to keep up with changes in technology and markets
could also adversely affect the trading price of our debt securities and our ability to service our debt.

If we are not able to stem the loss of our access lines or grow other areas of our business to compensate for these losses, our revenue will continue to
decline.

Our revenue decline over the past few years is largely attributable to our continued loss of access lines, which is a result of increased competition and
technology substitution (such as wireless and cable substitution for wireline telephony). We are seeking to improve our competitive position through product bundling and other sales and marketing
initiatives. However, we may not be successful in these efforts. If we are not successful and our revenue declines materially without corresponding cost

41

---



reductions, this will cause a material deterioration to our results of operations and financial condition and adversely affect our ability to service debt and pay other obligations.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of investigations of QCII currently being conducted by the Securities and Exchange Commission ("SEC") and the U.S. Attorney's Office
or the assessment being undertaken by the General Services Administration ("GSA") could have a material adverse impact on us, on the trading price for our debt securities and on our ability to access
the capital markets.

On April 3, 2002, the SEC issued an order of investigation that made formal an informal investigation of QCII initiated on March 8, 2002. QCII is
continuing in its efforts to cooperate fully with the SEC in its investigation. The investigation includes, without limitation, inquiry into several specifically identified QCII accounting practices
and transactions and related disclosures that are the subject of the various adjustments and restatements described in the QCII annual report on Form 10-K for the year ended
December 31, 2002. The investigation also includes inquiry into disclosure and other issues related to transactions between QCII and certain of its vendors and certain investments in the
securities of those vendors by individuals associated with QCII.

On
July 9, 2002, QCII was informed by the U.S. Attorney's Office for the District of Colorado of a criminal investigation of QCII's business. QCII believes the U.S. Attorney's
Office is investigating various matters that include the subjects of the investigation by the SEC.

While
QCII is continuing in its efforts to cooperate fully with the SEC and the U.S. Attorney's Office in each of their respective investigations, QCII cannot predict the outcome of
those investigations. QCII has engaged in discussions with the SEC staff in an effort to resolve the issues raised in the SEC's investigation of it. QCII has provided a reserve for this matter and its
securities actions (see Note 7Commitments and Contingencies in Item 1 of this report), but it cannot predict the likelihood of whether the discussions with the SEC staff will
result in a settlement and, if so, the terms of such settlement. However, settlements typically involve, among other things, the SEC making claims under the federal securities laws in a complaint
filed in United States District Court that, for purposes of the settlement, the defendant neither admits nor denies. Were such a settlement to occur, QCII would expect such claims to address many of
the accounting practices and transactions and related disclosures that are the subject of the various restatements QCII has made as well as additional transactions. In addition, any settlement with
the SEC may also involve, among other things, the imposition of disgorgement and a civil penalty, the amounts of which could be substantially in excess of QCII's recorded reserve, and the entry of a
court order that would require, among other things, that QCII and its officers and directors comply with provisions of the federal securities laws as to which there have been allegations of prior
violations.

In addition, the SEC has conducted an investigation concerning QCII's earnings release for the fourth quarter and full year 2000 issued on January 24, 2001. The release provided
pro forma normalized earnings information that excluded certain nonrecurring expense and income items resulting primarily from QCII's June 30, 2000 acquisition of US WEST. On
November 21, 2001, the SEC staff informed QCII of its intent to recommend that the SEC authorize an action against QCII that would allege it should have included in the earnings release a
statement of its earnings in accordance with generally accepted accounting principles in the United States of America ("GAAP"). As of August 6, 2004 (the date of the original filing of this
Form 10-Q), no action had been taken by the SEC. However, QCII expects that if its current discussions with the staff of the SEC result in a settlement, such settlement will include allegations
concerning the January 24, 2001 earnings release.

On
June 17, 2004, in connection with an informal investigation, QCII received a letter from the SEC requesting certain information concerning the methodologies used to calculate
its number of customers, subscribers and access lines. QCII believes that similar requests have been made to various

42

---



other
companies in the telecommunications sector. QCII is cooperating with the SEC in this matter. On July 23, 2004, QCII received from the FCC a letter stating that the request by the SEC has
raised concerns about the accuracy of certain information periodically submitted to the FCC by QCII. The FCC has requested that QCII review information QCII submitted to the FCC for 2003 and affirm
its accuracy or file appropriate revisions of these submissions. QCII believes that similar requests from the FCC have also been made to other telecommunication companies.

Also, the GSA is conducting a review of all contracts with QCII for purposes of determining present responsibility. On September 12, 2003, QCII was informed that the Inspector
General of the GSA had referred to the GSA Suspension/Debarment Official the question of whether QCII (including us and its other subsidiaries) should be considered for debarment. QCII is cooperating
fully with the GSA and believes that it and we will remain suppliers of the government; however, if it and we are not allowed to be suppliers to the government, it and we would lose the ability to
expand the services we could provide to a purchaser of telecommunications services that has historically represented between 2% and 3% of QCII's consolidated annual revenue.

An
adverse outcome with respect to one or more of the SEC investigations, the U.S. Attorney's Office investigation or the GSA evaluation could have a material and significant adverse
impact upon us.

Major lawsuits have been brought against QCII involving its accounting practices and other matters. The outcomes of these lawsuits and other lawsuits
affecting us may have a material adverse effect on our business, financial condition and operating results.

Several lawsuits have been filed against QCII, as well as certain of QCII's past and present officers and directors. These lawsuits include putative class action
lawsuits in which the plaintiffs allege numerous violations of securities laws. In one of these actions, lead counsel for the plaintiffs has indicated that plaintiffs will seek damages in the tens
of billions of dollars. For a description of these legal actions, please see Note 7Commitments and Contingencies in Item 1 of this report.

The investigations and securities actions described in Note 7Commitments and Contingencies in Item 1 of this report present material and significant risks to QCII.
The size, scope and nature of the restatements of our and QCII's consolidated financial statements for fiscal 2001 and 2000 affect the risks presented by these investigations and securities actions,
as these matters involve,



among other things, QCII's prior accounting practices and related disclosures. Plaintiffs in certain of the securities actions have alleged QCII's restatement of items in support of their claims. As
QCII has previously disclosed, QCII continues to engage in discussions for purposes of resolving certain of these matters. In December 2003, QCII recorded a charge in its financial statements
amounting to $200 million. It recently recorded an additional charge of $300 million, bringing the aggregate amount of the reserve to $500 million which represents the minimum
estimated amount of loss it believes is probable. However, the ultimate outcomes of these matters are still uncertain and there is a significant possibility that the amount of loss QCII may ultimately
incur could be substantially more than the reserve QCII has provided. We can give no assurances as to the impacts on our or QCII's financial results or financial condition that may ultimately result
from these matters.

QCII continues to defend against the securities actions vigorously. QCII is currently unable to provide any estimate as to the timing of the resolution of the investigations or
securities actions. Any settlement of or judgment in one or more of these actions substantially in excess of QCII's recorded reserve could have a significant impact, and QCII can give no assurance
that it will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its
financial condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

43

---



Further,
given the size and nature of QCII's and our business, QCII and we are subject from time to time to various other lawsuits which, depending on their outcome, may have a material
adverse effect on our financial position. Thus, we can give no assurances as to the impacts on our financial results or financial condition as a result of these matters.

Increased scrutiny of financial disclosure, particularly in the telecommunications industry in which we operate, could reduce investor confidence in us
and affect our business opportunities.

As a result of QCII's accounting issues and the increased scrutiny of financial disclosure, investor confidence in QCII has suffered and could suffer further.
Congress, the SEC, other government authorities and the media are intensely scrutinizing a number of financial reporting issues and practices. In addition, as discussed earlier, the SEC and the U.S.
Attorney's Office are currently conducting investigations including, without limitation, inquiries into several specifically identified accounting practices and transactions and related disclosures
and QCII's earnings release for the fourth quarter and full year 2000.

A criminal trial of four former employees concluded in April 2004, resulting in the complete acquittals of two of these former employees and no complete resolution as to the
charges against the other two



former employees. Subsequent to the trial, one of these other individuals pleaded guilty to a felony charge and the second pleaded guilty to a misdemeanor charge. Additional civil and criminal trials
could take place in the future. Evidence that is introduced at such trials may result in further scrutiny by governmental authorities and others.

The
existence of this heightened scrutiny and these pending investigations could adversely affect investor confidence and cause the trading price for our debt securities to decline.

We operate in a highly regulated industry, and are therefore exposed to restrictions on our manner of doing business and a variety of claims relating to
such regulation.

Our operations are subject to extensive federal regulation, including the Communications Act of 1934, as amended, and FCC regulations thereunder. We are also
subject to the applicable laws and regulations of various states, including regulation by public utilities commissions and other state agencies. Federal laws and FCC regulations generally apply to
interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities generally have jurisdiction over
telecommunications that originate and terminate within the same state. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer intrastate
services and must obtain prior regulatory approval of rates, terms and conditions for our intrastate services in most of these jurisdictions. Our businesses are subject to numerous, and often quite
detailed, requirements under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are always in compliance with all of these requirements at any single point in
time.

Regulation
of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. All of our operations are also subject to a
variety of environmental, safety, health and other governmental regulations. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse
effect on our operations, or that domestic or international regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.

We
monitor our compliance with federal, state and local regulations governing the discharge and disposal of hazardous and environmentally sensitive materials, including the emission of
electromagnetic radiation. Although we believe that we are in compliance with such regulations, any such discharge, disposal or emission might expose us to claims or actions that could have a material
adverse effect on our business, financial condition and operating results.

44

---



Risks Affecting Our Liquidity

QCII's high debt levels, the restrictive terms of its debt instruments and the substantial litigation pending against it pose risks to our viability and
may make us more vulnerable to adverse economic and competitive conditions, as well as other adverse developments.

Our ultimate parent, QCII, is highly leveraged on a consolidated basis. As of June 30, 2004, the face value of our consolidated debt was
$7.6 billion, excluding affiliate borrowings, which is included in QCII's total consolidated debt of $17.3 billion as of such date. A considerable amount of our and QCII's debt
obligations comes due over the next few years. While we currently believe we, together with QCII, will have the financial resources to meet our obligations when they come due, we cannot
anticipate what our or QCII's future condition will be. We may have unexpected costs and liabilities and we may have limited access to financing.

In
addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods
to generate cash (such as further cost reductions or the sale of non-strategic assets) if cash provided by our and QCII's operations does not improve, if revenue and cash provided by
operations continue to decline, if economic conditions weaken or if we or QCII become subject to significant judgments and/or settlements as further discussed in Note 7Commitments
and Contingencies in item 1 of this report and in "Liquidity and Capital Resources" above. Also, we may be impacted by factors relating to or affecting QCII's liquidity and capital resources due to
perception in the market, impacts on credit ratings, or provisions in our and QCII's financing agreements that may restrict our flexibility under certain conditions. The 2004 QSC Credit Facility has a
cross payment default provision, and the 2004 QSC Credit Facility and certain other debt issues of QCII and its other subsidiaries have cross acceleration provisions. When present, such provisions
could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. As a wholly owned subsidiary of QCII and QSC, any such event could
adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings.

QCII's
high consolidated debt levels could adversely impact our credit ratings. Additionally, the degree to which we, combined with QCII, are leveraged may have important limiting
consequences on us, such as:



We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operate our business, which
may in turn affect our operating results.

We anticipate that our capital requirements relating to maintaining and routinely upgrading our network will continue to be significant in the
coming years. We also may be unable to significantly reduce the operating expenses associated with our future contractual cash obligations, including future purchase commitments, which may in
turn affect our operating results. While we believe that our current level of capital expenditures will meet both our maintenance and our core growth, if circumstances underlying our expectations
change, we may be unable to further significantly reduce our capital requirements or operating expenses, even if revenues are decreasing. Such nondiscretionary

45

---



capital
outlays and operating expenses may lessen our ability to compete with other providers who face less significant spending requirements.

The cash needs of our affiliated companies consume a significant amount of the cash we generate.

We have historically declared and paid regular dividends to our parent, QSC, based on the earnings of our wireline operations. In July 2004, we modified
our dividend practice to balance our financial needs, cash position and credit profile with those of our parent. As a result, going forward, we may declare and pay dividends in excess of our earnings.

The debt agreements of QCII and Qwest will allow each to incur significantly more debt, which, if incurred, could exacerbate the other risks described
herein.

The terms of QCII's and our debt instruments permit QCII and us to incur additional indebtedness. Such debt may be necessary to comply with regulatory obligations
to maintain QCII's or our assets, to satisfy regulatory service obligations, to adequately respond to competition or for financial reasons alone. Incremental borrowings or borrowings at maturities
that impose additional financial risks to our various efforts to improve our financial condition and results of operations could exacerbate the other risks described herein.

Other Risks Relating to Qwest

If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial
statements and related disclosures could be affected.

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that
affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in our 2003 Form 10-K
describe the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. These accounting policies are considered "critical" because they
require judgments, assumptions and estimates that materially impact our condensed consolidated financial statements and related disclosures. As a result, if future events differ significantly from the
judgments, assumptions and estimates in our critical accounting policies or different assumptions are used in the future, such events or assumptions could have a material impact on our condensed
consolidated financial statements and related disclosures.

If we fail to extend or renegotiate our collective bargaining contracts with our labor unions as they expire from time to time, or if our unionized
employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.

We are a party to collective bargaining contracts with our labor unions, which represent a significant number of our employees. Although we believe that our
relations with our employees are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire from time to
time. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur
higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business. In August 2003, we reached agreements with the
Communications Workers of America and the International Brotherhood of Electrical Workers on new two-year labor contracts. Each of these agreements was ratified by union members and
expires on August 13, 2005.

46

---



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption "Risk Management" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there
can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable
assurance regarding management's control objectives.

Under
the supervision and with the participation of QCII's management, including QCII's Chief Executive Officer and Chief Financial Officer, QCII evaluated the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") as of June 30, 2004. On the basis of this review, our management, including our Chief Executive
Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed
by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
in a manner that allows timely decisions regarding required disclosure. There were no changes in the Company's internal controls over financial reporting that occurred in the second quarter of 2004
that materially affected, or were reasonably likely to materially affect, its internal control over financial reporting.

47

---





PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth above under Note 7Commitments and Contingencies contained in the "Notes to Condensed Consolidated Financial
Statements" included in this Quarterly Report on Form 10-Q/A is hereby incorporated by reference.

Matters Resolved in the First and Second Quarters of 2004

Section 271 of The Communications Act of 1934 as amended by The Telecommunications Act of 1996, or the Act, prohibited QCII from providing InterLATA
long-distance services within its traditional 14-state (in-region) local service area prior to the FCC granting state specific authority for it to provide those
services. For QCII to merge with U S WEST it was necessary for QCII to divest its in-region long-distance operations prior to completing the Merger in
June 2000. In 2001, the FCC began an investigation of QCII's compliance with the divestiture of in-region InterLATA services and QCII's ongoing compliance with Section 271
for the audit years 2000 and 2001. In connection with this investigation, QCII disclosed certain matters to the FCC that occurred in 2000, 2001, 2002 and 2003. These matters were resolved with the
issuance of a consent decree on May 7, 2003, by which the investigation was concluded. As part of the consent decree, QCII made a voluntary payment to the U.S. Treasury in the amount of
$6.5 million, and agreed to a compliance plan for certain future activities. The consent decree compliance plan required QCII to strengthen its internal controls to prevent the sales and
provisioning of in-region InterLATA private line services prior to receiving FCC approval for such sales, and required QCII to not sell any operational InterLATA telecommunications
facilities in Arizona or Minnesota prior to obtaining FCC approval to provide InterLATA long distance services in those states and to not sell such facilities in any in-region state prior
to complying with the Act's separate affiliate requirements related to providing such facilities or services. These compliance plan requirements expired on December 15, 2003, when the FCC order
approving QCII's last in region 271 application to provide InterLATA services became effective.

The
FCC also instituted an investigation into whether QCII may have impermissibly engaged in the marketing of InterLATA services in Arizona prior to receiving FCC approval of its
application to provide such services in that state. In May 2004, QCII and the FCC entered into a consent decree to resolve this matter with QCII making a voluntary payment of $100,000 to the
U.S. Treasury and adopting a compliance plan which strengthens QCII's controls of its outbound telemarketing agents. The compliance plan will sunset 12 months from the May 28, 2004
effective date of the FCC order adopting the consent decree.

In
2003, Arizona initiated formal proceedings regarding our alleged failure to file required agreements in that state. On April 14, 2004, the Arizona Corporation Commission
ordered us to issue bill credits or pay cash totaling approximately $11.7 million to Arizona CLECs on the basis of a settlement among three CLECs and us. The commission also ordered us to pay
penalties of approximately $8.8 million to the state treasury. We paid the penalty in May 2004 and are in the process of issuing the credits. Also in 2003, we received a Notice of
Apparent Liability from the FCC, which recommended penalties of $9 million for alleged delays in filing 46 agreements in Arizona and Minnesota. We also paid this amount in May 2004.

In
November 2003, QCII reached a settlement with certain of its insurance carriers over disputes concerning their attempts to rescind or otherwise deny coverage under QCII's
director and officer liability insurance policies and employee benefit plan fiduciary liability policies that could provide coverage for, among other things, the SEC and U.S. Attorney's Office
investigations and the securities actions and derivative actions described in Note 7Commitments and Contingencies contained in the "Notes to Condensed Consolidated Financial
Statements" included in this Quarterly Report on Form 10-Q. The use and allocation of the $200 million of the proceeds of this settlement placed into

48

---



trust
was not resolved between QCII and individual insureds at the time of the settlement, but QCII subsequently reached agreement with certain individual insureds in July 2004. Under this
agreement, the $200 million of proceeds has been divided into the following four funds, which will be administered by a claims trustee:



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



Exhibits
identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)          |  | Restated Articles of Incorporation of Qwest (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-3040).                                                                                                      
|(3.2)          |  | Articles of Amendment to the Articles of Incorporation of Qwest (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-3040).                                                                                
|(3.3)          |  | Amended and Restated Bylaws of Qwest (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-3040).                                                                                                             
|(4.1)          |  | Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 1-3040).     
|(4.2)          |  | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 1-3040).    
|(4.3)          |  | Indenture, dated as of October 15, 1999, by and between U S WEST Communications, Inc. and Bank One Trust Company, National Association as trustee (incorporated by reference to Qwest's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-3040).
|               |  |                                                                                                                                                                                                                                                                           

49

---



|(10.1) |  | Purchase Agreement, dated as of June 5, 2000, among U S WEST Communications, Inc. and Lehman Brothers Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC,
and J.P. Morgan Securities Inc., as Representatives of the Initial Purchasers listed therein (incorporated by reference to Qwest's Form S-4 filed on October 11, 2000, File No. 333-47772).                                                                                                                                                                              
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10.2) |  | Registration Rights Agreement, dated March 12, 2002, by and among Qwest and the initial purchasers named therein (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File
No. 1-3040).                                                                                                                                                                                                                                                                                                                                                  
|(10.3) |  | Term Loan Agreement, dated as of June 9, 2003, by and among Qwest, the Lenders listed therein, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole book-runner, joint lead arranger and syndication
agent, and Credit Suisse First Boston, acting through its Cayman Islands branch as joint lead arranger and administrative agent, and Deutsche Bank Trust Company Americas, as documentation agent and Deutsche Bank Securities, Inc. as arranger.
(Incorporated by reference to Qwest's Current Report on Form 8-K, dated June 10, 2003, File No. 1-3040)
|31.1   |  | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|31.2   |  | Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|32     |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

---

We
filed the following report on Form 8-K during the second quarter of 2004:

On
May 17, 2004, we filed a report on Form 8-K announcing that, on May 1, 2004, we transferred to an affiliate ownership of our subsidiary, Qwest
Wireless LLC, which was the entity through which we held our wireless assets and conducted our wireless operations.

50

---





SIGNATURE

Pursuant to the requirements 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.

| |  | Qwest Corporation
| |  | -----------------
| |  | By:              

November 12, 2004

51

---