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

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FORM 10-K

|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|for the fiscal year ended December 31, 2002                  
|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

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

|Colorado(State or other jurisdiction
of incorporation or organization)         |  | 84-0273800(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------ |  | ----------------------------------------------
|1801 California Street, Denver, Colorado 80202
Telephone Number (303) 992-1400

Securities
registered pursuant to Section 12(b) of the Act:

|Title of Each Class   |  | Name of Each Exchange on Which Registered
|--------------------- |  | -----------------------------------------
|5.625% Notes Due 2008 |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act: None

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

On
December 31, 2003, one share of Qwest Corporation common stock was outstanding. None of Qwest Corporation's common stock is held by non-affiliates.

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 o    No ý.

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K o.

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

DOCUMENTS
INCORPORATED BY REFERENCE:NONE

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TABLE OF CONTENTS



|Item     |  | Description                                                                                   
|-------- |  | ----------------------------------------------------------------------------------------------
|PART I  
|1.       |  | Business                                                                                      
|2.       |  | Properties                                                                                    
|3.       |  | Legal Proceedings                                                                             
|4.       |  | Submission of Matters to a Vote of Security Holders                                           
|PART II 
|5.       |  | Market for Registrant's Common Equity and Related Stockholder Matters                         
|6.       |  | Selected Consolidated Financial Data                                                          
|7.       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations         
|7A.      |  | Quantitative and Qualitative Disclosures About Market Risk                                    
|8.       |  | Consolidated Financial Statements and Supplementary Data                                      
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|9A.      |  | Controls and Procedures                                                                       
|PART III
|10.      |  | Directors and Executive Officers of the Registrant                                            
|11.      |  | Executive Compensation                                                                        
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|13.      |  | Certain Relationships and Related Transactions                                                
|14.      |  | Principal Accounting Fees and Services                                                        
|PART IV 
|15.      |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|         |  | Signatures                                                                                    

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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.

PART I

ITEM 1.BUSINESS

We are wholly owned by Qwest Services Corporation, or QSC, which is wholly owned by QCII. We provide local telecommunications and related services, IntraLATA
long-distance services and wireless, 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
were incorporated under the laws of the State of Colorado in 1911. Pursuant to a merger between QCII and U S WEST, Inc. (our pre-merger parent) on June 30, 2000,
QCII acquired all the operations of U S WEST and its subsidiaries and we became an indirect wholly owned subsidiary of QCII. We refer to this merger as the "Merger" and have described it
in greater detail in Note 1Business and Background to our consolidated financial statements in Item 8 of this report. Our principal executive offices are located at 1801
California Street, Denver, Colorado 80202, telephone number (303) 992-1400.

For
a discussion of certain risks applicable to our business, financial condition and results of operations, see the risk factors described in "Special Note Regarding Forward-Looking
Statements" in Item 7 of this report.

Operations

We market and sell our products and services to consumer and business customers. In general, our business customers fall into the following categories: (1) small
businesses; (2) national and global businesses; (3) governmental entities; and (4) public and private educational institutions. We also provide our products and services to other telecommunications
providers on a wholesale basis.

Impact of Restatement

This report contains our restated consolidated financial statements for the years ended December 31, 2001 and 2000. We performed an analysis of our
previously issued consolidated financial statements for 2001 and 2000 and identified a number of errors. The nature of the errors and the restatement adjustments that we have made to our financial
statements for the years ended December 31, 2001 and 2000 are set forth in Note 3Restatement of Results to our consolidated financial statements in Item 8 of this
report. The net impact of the restatement adjustments is summarized as follows:

Year Ended
December 31,2001

2000(Dollars in millions)Revenue

$
(138
)
$
(216
)Income before income taxes and cumulative effect of change in accounting principle

$
(533
)
$
(258
)Net income

$
(330
)
$
(294
)


The restatements involve revenue recognition issues related to termination fees, wireless revenues and installation fees, and expense recognition, as well as
other matters. In making these restatements,

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we
have performed an internal analysis of our accounting policies, practices, procedures and disclosures for the affected periods.

Wireline Services

We offer a wide variety of wireline products and services in a variety of categories that help people and businesses communicate. Our wireline products and
services are offered through our traditional telecommunications network. The traditional telecommunications network is defined as all equipment used in processing telecommunications transactions
within our local service area and forms a portion of the public switched telephone network, or PSTN. The PSTN refers to the worldwide voice telephone network that is accessible to every person with a
telephone and a dial tone. Our traditional telephone network is made up of both copper cables and fiber optic broadband cables and serves approximately 16.5 million access lines (access lines are
telephone lines reaching from a central office to customers' premises).



The following reflects the key categories of our wireline products and services.

Local Voice ServicesConsumer, Business and Wholesale.Through our traditional telephone network, we originate
and terminate local voice services within local exchange service territories as defined by the state Public Utility Commissions, or PUCs. Our consumer and business local voice services include:



Recently,
we also began to offer Internet protocol telephony (sometimes referred to as Voice over Internet protocol, or VoIP) in Minnesota on a limited basis. This technology allows us
to offer more features at reduced costs to customers.

On
a wholesale basis, we provide network transport, billing services and access to our local network within our local service area to competitive local exchange carriers, or CLECs, and
wireless carriers. These services allow CLECs to provide telecommunications services using our local network. CLECs are communications companies certified by a state PUC or similar agency that provide
local exchange service within a local access transport area, or LATA, including LATAs within our local service area. At times, we sell unbundled network elements, or UNEs, that allow our wholesale
customers to build their own networks and interconnect with our network.

IntraLATA Long-Distance Voice ServicesConsumer and Business.We provide IntraLATA long-distance service to our
customers within our local service area. IntraLATA long-distance service refers to services that cross local exchange area boundaries but originate and terminate within the same geographic LATA. These
services include calls that terminate outside a caller's local calling area but

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within
their LATA and wide area telecommunications service or "800" services for customers with highly concentrated demand.

Access ServicesWholesale.We provide switched access services primarily to interexchange carriers, or IXCs, for
the use of our local network to connect their customers to their data and Internet protocol, or IP, networks. IXCs provide long-distance services to end-users by handling calls that are made from a
phone exchange in one LATA to an exchange in another LATA or between exchanges within a LATA. Competitive communications companies often operate as both CLECs and IXCs.

Data and Internet ServicesConsumer, Business and Wholesale.We offer a broad range of products and professional
services to enable our customers to transport voice, data and video telecommunications at speeds ranging from 14.4 kilobits per second to 10 gigabits per second. Our customers use these products and
services in a variety of ways. Our business customers use them to facilitate internal and external data transmissions, such as transferring files from one location to another. Our consumer customers
use them to access email and the Internet under a variety of connection speeds and pricing packages. We provide our data and Internet services in our local service area.

Our
consumer and business data and Internet services are described below:



On
a wholesale basis, we provide collocation services, or hosting of other providers' telecommunications equipment in our facilities. We also provide wholesale private line services
primarily to IXCs to allow them use of our local network to connect their customers to their networks.



From time to time we negotiate and enter into strategic relationships to expand our wireline services total product offering. For example, we recently entered
into strategic marketing arrangements with DIRECTV, Inc. and Echostar Communications Corporation to allow us to bundle satellite television products and services of these companies with our
traditional telecommunications and data and Internet offerings in several markets in our local service area, including Colorado, Nebraska,

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Arizona
and Washington. We believe relationships such as these will be important for us to provide the full suite of products being demanded by the market.



We sell our retail wireline products and services through a variety of channels, including direct-sales marketing, telemarketing and arrangements with third-party
agents. We also provide the use of similar products and services, and the use of our network assets on a wholesale basis, as described above.

Wireless Services

We operate wireless services primarily through our wholly owned subsidiary, Qwest Wireless LLC. Through Qwest Wireless, we operate a personal communications
service, or PCS, wireless network that serves select markets within our local service area, including Denver, Seattle, Phoenix, Minneapolis, Portland, Salt Lake City and other smaller markets. We
currently provide wireless products and services to consumer and business customers within these select markets. To provide these services, we hold 10 megahertz, or MHz, PCS licenses that were issued
in 1997 with 10-year terms and are renewable for successive 10-year terms under Federal Communications Commission, or FCC, regulations. We also provide digital wireless services in the 1900 MHz band.

In
August 2003, we entered into a services agreement with a subsidiary of Sprint Corporation that allows us to resell Sprint wireless services, including access to Sprint's nationwide
PCS wireless network, to consumer and business customers, primarily within our local service area. We plan to begin offering these Sprint services under our brand name in early 2004. Under the
services agreement, we retain control of all sales and marketing, customer service, billing and collection, pricing, promotion and product offerings relating to the Sprint services that we resell. The
services agreement provides that Sprint will be our exclusive wireless provider and has an initial term of five years (with automatic renewal for successive one-year terms until either party provides
notice of non-renewal). Our wireless customers who are currently being serviced through our proprietary wireless network will be transitioned onto Sprint's network.

We
market our wireless products and services through our website, partnership relationships and our sales/call centers. We offer consumer and business customers a broad range of wireless
plans, as well as a variety of custom and enhanced features, such as Call Waiting, Caller ID, 3-Way Calling, Voice Messaging, Enhanced Voice Calling and Two-Way Text Messaging. We also offer
integrated service, which enables customers to use the same telephone number and voicemail box for their wireless phone as for their home or business phone.

We
intend to transfer ownership of Qwest Wireless to an affiliate in the near future. After this transfer, we will no longer have significant wireless operations. This transfer will take
place as soon as we have received all necessary regulatory approvals, perhaps as early as the first quarter of 2004.

Other Services

We provide other services that primarily involve the sublease of some of our real estate assets, such as space in our office buildings, warehouses and other
properties. The majority of these properties are located in our local service area. We also provide affiliate services which consist of telecommunication services provided to affiliated enterprises.

Importance, Duration and Effect of Patents, Tradenames and Copyrights

Either directly or through our subsidiaries, we own or have licenses to various patents, tradenames, copyrights and other intellectual property necessary to the
conduct of our business. We do not believe

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that
the expiration of any of our intellectual property rights, or the non-renewal of those rights, would materially affect our results of operations.

Competition

Wireline Services

Local Voice Services.In providing local voice services to our consumer and business customers within our local service area,
we compete with CLECs, including some owned by national carriers, smaller regional providers, competitive access providers, independent telephone companies, Internet telephony providers and,
increasingly, with wireless providers and cable companies. Technology substitution, such as wireless substitution for wireline, cable telephony substitution for wireline and cable modem substitution
for dial-up modem lines and DSL, has been a significant cause for a decrease in our total access lines in 2002. Competition is based primarily on pricing, packaging of services and features, quality
of service and increasingly on meeting customer care needs such as simplified billing and timely response to service calls.

The
obligation to make number portability available from wireline to wireless service, which was recently mandated by the FCC, is another competitive factor that may increase access line
losses. Also, revenue for local voice services may be affected adversely should providers of VoIP services attract a sizable base of customers who use VoIP to bypass traditional local exchange
carriers. A related concern is the risk that interconnect fees we receive from either IXCs or CLECs will be reduced if phone-to-phone VoIP calls are determined by the FCC or otherwise not to be
subject to intercarrier compensation obligations that apply to traditional telephony.

Our
existing infrastructure and long-standing customer relationships make us the market leader in providing local voice services in our local service area. Although our status as an
incumbent local exchange carrier, or ILEC, helps make us the leader in providing wireline services within our local service area, increased competition has resulted in recent declines in billable
access lines.

Our
competitors, mainly CLECs and CLEC/IXC combinations, have accelerated their use of unbundled network elementplatforms, or UNE-P. This wholesale service, which as a
matter of current federal and state laws and regulations we are required to provide at wholesale rates, allows our competitors to purchase all of the elements they may need to provide competitive
local services to our customers. Bell Operating Companies, or BOCs, such as Qwest, are required to make their network elements available to competitors, which allows IXCs and CLECs an alternative to
building their own telecommunications facilities. Consequently, we believe these competitors are able to provide local service at a cost advantage, allowing them to gain market share. Meanwhile, the
obligation to provide UNEs reduces our revenue and margin. We believe the offering of UNE-P services will continue to cause downward pressure on our margins and result in incremental retail access
line losses.

IntraLATA Long-Distance Voice Services.National carriers, CLECs and other resellers, such as AT&T Corporation, Sprint, and
MCI (formerly known as WorldCom, Inc.) compete with us in providing IntraLATA long-distance services in our local service area. Wireless providers also market long-distance services as a substitute to
traditional wireline service, and wireless services include both IntraLATA and InterLATA long-distance.

Competition
in the long-distance consumer market is based primarily on price, customer service, quality and reliability. We are the market share leader in providing IntraLATA
long-distance service within our local service area, but face increasing competition from national carriers, which have substantial financial and technical resources. Competition in the business
market is based on similar factors, as well as the ability to offer a ubiquitous solution nationwide.

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In
addition, the emergence of certain competitors, such as MCI, XO Communications, Inc. and McLeodUSA Incorporated, from bankruptcy proceedings with substantially reduced debt could
precipitate an industry-wide reduction in prices, thereby causing a decline in our revenues.

Access Services.In providing switched access services, we compete primarily with smaller regional providers, including
CLECs, competitive access providers and independent telephone companies. We compete on network quality, customer service, product features, the speed with which we can provide a customer with
requested services and price. Although our status as an ILEC helps make us the leader in providing these services within our local service area, increased competition has resulted in a reduction in
billable access minutes of use billed to IXCs and wireless carriers. Also, we earn certain revenues when we originate or terminate calls that are carried by IXCs and wireless carriers that generate
carrier access charges for the use of our network. To the extent that VoIP networks or VoIP service providers seek to bypass the traditional methods and obligations to pay this form of intercarrier
compensation, or the related "reciprocal compensation" which we earn for use of our network in originating or terminating local calls, these providers could enjoy a competitive advantage versus
traditional carriers who must factor the costs of carrier access charges and reciprocal compensation into their charges.

Data and Internet Services.Business customers are the primary market for these network-related services, although we are
increasing our DSL offerings to both consumer and business customers in several markets in our local service area. In providing these services, we compete with national long-distance carriers (such as
AT&T, Sprint and MCI), cable operators, BOCs, CLECs and large integrators. Large integrators like International Business Machines Corporation and Electronic Data Systems Corporation are also competing
in a new manner, providing customers with managed network services, which takes inter-site traffic off our network. Customers are particularly concerned with network reach, but are also sensitive to
quality, reliability, customer service and price. We also compete to a degree with cable operators who offer high-speed broadband facilities over cable modem, a technology directly competitive with
the DSL modems that we employ. Cable operators who sell data or Internet services via broadband may enjoy a regulatory advantage in that they are not presently subject, at least in the jurisdictions
in which we operate, to regulation as "telecommunications" providers which imposes many costs and obligations, such as that to make UNE-P available to competitors or to provide competitive access and
interconnect rights.

Wireless Services.The market for wireless services within our local service area remains highly competitive. We compete with
AT&T Wireless Services, Inc., Verizon Communications Inc., T-Mobile International, Sprint and Nextel Communications, among others. Although we expect our competitive position to improve after we begin
offering Sprint's nationwide wireless service under our brand name to customers in our local service area, we continue to face heavy competition from national, and some regional, wireless carriers.
Competition may increase as additional spectrum is made available within our local service area, both to new competitors and to current wireless providers who may acquire additional spectrum in order
to increase their coverage areas and service quality. Competition in the wireless market is based primarily on price, coverage area, services, features, handsets, technical quality and customer
service. Our future competitive position will depend on our ability to successfully integrate Sprint services into our branded service offerings and our ability to offer new features and services in
packages that meet our customers' needs.

Regulation

As a general matter, we are subject to extensive state and federal regulation, including requirements and restrictions arising under the Federal Communications
Act, as modified in part by the Telecommunications Act of 1996, or the Telecommunications Act, state utility laws, and the rules and policies of the FCC, state PUCs and other governmental entities.
Federal laws and FCC regulations

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apply
to regulated interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities have jurisdiction
over regulated telecommunications services that are intrastate in nature. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer
regulated services and must obtain prior regulatory approval of tariffs for our intrastate services, where required.

This
structure of public utility regulation generally prescribes the rates, terms and conditions of our regulated wholesale and retail products and services (including those sold or
leased to CLECs). While there is some commonality among the regulatory frameworks from jurisdiction to jurisdiction, each state has its own unique set of constitutional provisions, statutes,
regulations, stipulations and practices that impose restrictions or limitations on the regulated entities' activities. For example, in varying degrees, jurisdictions may provide limited restrictions
on the manner in which a regulated entity can interact with affiliates, transfer assets, issue debt and engage in other business activities.

Interconnection

The FCC is continuing to interpret the obligations of ILECs under the Telecommunications Act to interconnect their networks with, and make UNEs available to,
CLECs. These decisions establish our obligations in our local service area and affect our ability to compete outside our local service area. In May 2002, the U.S. Supreme Court issued its opinion in
the appeal of the FCC's rules on pricing of UNEs. The Court affirmed the FCC's rules. Since we were following the FCC's then current UNE pricing rules, this decision did not impact the pricing of our
UNEs.

In
May 2002, the D.C. Circuit Court of Appeals issued an order on the FCC's rules that determined the UNEs are required to be made available to competitors. The court reversed the FCC,
finding that the agency had not given adequate consideration to or properly applied the "necessary and impair" standard of the Telecommunications Act. The court also ruled that the FCC impermissibly
failed to take into account the relevance of competition by other types of service providers, including cable and satellite companies. Finally, the court overturned a separate order of the FCC that
had authorized "line sharing" where a CLEC purchases only a portion of the copper line connecting the end-user. This enables the CLEC to provide high-speed broadband services utilizing DSL technology.
Petitions for rehearing were filed with the D.C. Circuit and a petition for certiorari was filed with the United States Supreme Court. All of these were denied. The D.C. Circuit did stay its order
vacating the FCC's rules
until February 20, 2003 to permit the FCC to complete an ongoing rulemaking to determine what elements should be unbundled.

On
February 20, 2003, the FCC announced that it planned to adopt revised rules prescribing ILECs' obligations to make UNEs available to competitors. The press release accompanying
the FCC's announcement indicated that the FCC's new rules would relieve ILECs of some unbundling obligations, while charging state regulators with the task of determining other unbundling obligations.
The FCC did not actually release these rules and an accompanying lengthy decision until August 21, 2003 in its triennial review order. The triennial review order addresses a number of UNEs and
the obligations of ILECs with respect to them. Among the more significant determinations made by the FCC in the triennial review order are: (i) CLECs are not impaired without access to unbundled
switching when serving medium-to-large business and government customers using DS-1 switching capacity and above, but state PUCs may initiate and conclude proceedings within 90 days of
October 2, 2003, to rebut this presumption of no impairment; (ii) CLECs are impaired without access to switching, and, concomitantly, the UNE-P, to serve mass market customers, as well as most
high capacity loops and dedicated transport services (the transmission facilities between an ILEC's central offices); proceedings before state PUCs to rebut these presumptions of impairment may be
initiated and concluded within nine months of October 2, 2003; (iii) state PUCs must initiate and conclude within nine months of October 2, 2003, proceedings to approve a "batch hot cut
migration process" (a process by which a CLEC's customers served by the UNE-P would be moved to the CLEC's own switch in the event

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switching
is eliminated from UNE-P) to be implemented by ILECs to address the costs and timeliness of the hot cut process; (iv) ILECs are no longer required to provide other carriers with access to
the high frequency portion of a loop that is used by CLECs to provide competing DSL services (referred to as line sharing); however, current line sharing customers are "grandfathered," and the
requirement to allow line sharing will be phased out over a three-year period; (v) ILECs are not required to provide CLECs with access to "next generation" networks and facilities used to provide
broadband services; and (vi) the FCC modified the prohibition against CLECs using enhanced, extended links, or combinations of unbundled loops, multiplexing and dedicated transport (referred to as
EELs) to provide both local and long-distance services; the FCC established requirements designed to prevent the substitution of EELs for special access services needed by a carrier for the provision
of its long-distance services.

We
have joined with other ILECs in requesting that the D.C. Circuit Court of Appeals invalidate the rules that accompanied and were described in the triennial review order. We believe
that the FCC did not comply with the May 2002 ruling by the D.C. Circuit by failing to properly apply the "necessary and impair" standard and that the FCC impermissibly, and without adequate guidance,
delegated to state PUCs its responsibilities under the Telecommunications Act. We have also joined with the same companies in requesting that the D.C. Circuit postpone the effectiveness of the
triennial review order and accompanying rules until after our appeal of the triennial review order is completed, assuming that the court does not grant our request that the rules be immediately
invalidated. Finally, we have filed an appeal of the triennial review order, which, together with appeals by a number of other parties, was consolidated in the Eighth Circuit Court of Appeals. Other
ILECs and we, in turn, filed a motion to have these consolidated appeals transferred back to the D.C. Circuit, and the Eighth Circuit granted this motion. Accordingly, all matters associated with the
appeal of the triennial review order will be heard by the D.C. Circuit.

On
September 15, 2003, the FCC released a Notice of Proposed Rulemaking, instituting a comprehensive review of the rules pursuant to which UNEs are priced and the discounts to
CLECs on our services they intend to resell are established. In particular, the FCC indicated that it will re-evaluate the rules and principles surrounding Total Element Long Run Incremental Cost, or
TELRIC, the basis upon which UNE prices are set. The outcome of this rulemaking could have a material effect on the revenues and margins associated with our provision of UNEs to CLECs.

Access Pricing

The FCC has initiated a number of proceedings that could affect the rates and charges for access services that we sell or purchase. These proceedings and related
implementation of resulting FCC decisions have not yet been completed. Because there are a number of such proceedings, and they are inter-related, and new technologies (such as VoIP) are emerging that
pose further complications, it may take some time for the rulemaking to be completed. It is possible that the FCC will recommend a major restructuring of the current system of intercarrier
compensation for use of local networks, and this would affect our rights to claim payment for carrier access charges. There has been a national trend towards reducing the amounts charged for
"reciprocal compensation" for use of networks to originate or terminate local, intraLATA and other intra-state calls, in preference for a "bill and keep" approach, but this is subject to varying
decisions and interests by the state agencies that govern these intrastate rates. From time to time, the state regulatory agencies that regulate intrastate access charges conduct proceedings that may
affect the rates and charges for those services.

On
May 31, 2000, the FCC adopted the access reform and universal service plan developed by the Coalition for Affordable Local and Long-Distance Service, or CALLS. The adoption of the
CALLS proposal resolved a number of outstanding issues before the FCC. The CALLS plan has a five-year life and provides for the following: (i) elimination of the residential pre-subscribed IXC charge;
(ii) increases in subscriber line charges; (iii) reductions in switched access usage rates; and (iv) the removal

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of
certain implicit universal service support from access charges and direct recovery from end-users; and commitments from participating IXCs to pass through access charge reductions to end-users. We
have opted into the five-year CALLS plan.

Advanced Telecommunications Services

The FCC has ruled that advanced services provided by an ILEC are covered by those provisions of the Telecommunications Act that govern telephone exchange and
exchange access services. In January 2002, the FCC released a Notice of Proposed Rulemaking regarding the Regulatory Requirements for ILEC
Broadband Telecommunications Services. In this proceeding the FCC has sought comment on what changes should be made in traditional regulatory requirements to reflect the competitive market and create
incentives for broadband services growth and investment. The FCC has not yet issued final rules.

Intercarrier Compensation

On April 27, 2001, the FCC released a Notice of Proposed Rulemaking that commenced a broad inquiry into, and initiated a fundamental re-examination of, all
forms of compensation flowing between carriers as a result of their networks being interconnected. There are two primary forms of intercarrier compensation: (i) reciprocal compensation that
applies to local traffic and (ii) access charges that apply to long-distance traffic. The purpose of this FCC proceeding is to examine existing forms of intercarrier compensation and explore
alternatives. One form of compensation that is being examined is "bill and keep" under which carriers freely exchange traffic and collect charges from their end-user customers in lieu of the present
system in which carriers are obliged to compensate one another for network utilization. The rules emanating from this rulemaking could result in fundamental changes in the charges we collect from
other carriers and our end-users.

On
April 27, 2001, the FCC issued an Order with regard to intercarrier compensation for Internet service provider, or ISP-bound traffic. The Order required carriers serving ISP-bound
traffic to reduce reciprocal compensation rates over a 36-month period beginning with an initial reduction to $0.0015 per minute of use and ending with a rate of $0.0007 per minute of use. In
addition, a cap was placed on the number of minutes of use on which the terminating carrier may charge such rates. This reduction lowered costs that we paid CLECs for delivering such traffic to other
carriers, but has not had, and is not likely to have, a material effect on our results of operations.

On
May 3, 2002, the D.C. Circuit Court of Appeals remanded the matter to the FCC to implement a rate methodology that is consistent with the court's ruling. The rules promulgated by the
FCC remain in effect while the agency contemplates further action. Modifications in the FCC's rules or prescribed rates could increase our expenses.

Wireless Local Number Portability

On November 10, 2003, the FCC issued an order and further notice of proposed rulemaking on local number portability, or LNP, mandating that wireline
carriers must port telephone numbers to wireless carriers. The LNP order provided guidance to both the wireline and wireless industries on matters related to "intermodal" LNP, or the ability of
customers to switch from a wireline carrier to a wireless carrier or from a wireless to a wireline carrier without changing telephone numbers.

In
the LNP order, the FCC prescribed that porting from a wireline carrier to a wireless carrier is required where the requesting wireless carrier's coverage area overlaps the geographic
location in which the wireline number is provisioned, including cases where the wireless carrier does not have a point of interconnection or numbering resources in the rate center to which the phone
number is assigned. The FCC also sought comment on and will issue further rules regarding the facilitation of wireless to wireline porting in cases where the rate center associated with the wireless
number is different from the

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rate
center in which the wireline carrier seeks to serve the customer. The LNP order was preceded by an FCC order, dated October 7, 2003, that dealt with issues related to implementation of
wireless-to-wireless LNP.

The
FCC's rules, particularly those related to wireline-to-wireless LNP, may result in an acceleration of wireline access line loss by the Company.

Voice Over IP

On December 1, 2003, the FCC conducted a public forum hearing to gather information concerning advancements, innovations, and regulatory issues related to
VoIP services. Chairman Powell of the FCC has announced an intention to make VoIP a higher priority on the FCC's agenda in the next year. Also, it is expected that sometime early in 2004 a formal
rulemaking proceeding will begin concerning VoIP, which will raise issues that overlap, to a degree, with the rulemaking concerning ILEC Broadband Telecommunications Services and the Intercarrier
Compensation proceeding. There are a number of issues that have been presented to the FCC that concern VoIP and that could affect our business. One is whether VoIP, and/or other forms of VoIP, should
be subject to ordinary intercarrier compensation requirements and other federal or state requirements such as those that impose a fee to support "universal service" and support the extension of
telecommunications and Internet facilities to rural areas and to public schools and facilities in inner cities. Another issue is whether VoIP providers should have some form of, or any, exemption or
immunity from either federal or state regulation. We are following these developments closely, as our network is capable of VoIP transport and similarly can be used to carry combinations of voice and
other forms of data in a packeted, IP-addressed format. As a company, we are committed to development of VoIP for our customers, and our VoIP offerings are likely to grow as the technology matures and
the regulatory situation is clarified.

Employees

As of November 30, 2003, we employed approximately 32,000 employees. In accordance with plans that QCII approved in the fourth quarter of 2001 and the third
quarter of 2002, we reduced our employee levels by approximately 5,500 employees. There is additional information regarding the restructuring in
Note 4Restructuring and Merger-related (Credits) Charges to our consolidated financial statements in Item 8 of this report.

Approximately
27,000 of our employees are represented by collective bargaining agreements with the Communications Workers of America, or CWA, and the International Brotherhood of
Electrical Workers, or IBEW. We recently entered into new two-year collective bargaining agreements with the CWA and IBEW. Each of these agreements was ratified by union members, went into effect on
August 17, 2003 and expires on August 13, 2005. Among other things, these agreements provide for guaranteed wage levels and continuing employment-related benefits.

Website Access

Our website address is www.qwest.com. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports at our investor relations website, www.qwest.com/about/investor/, under the heading "SEC Filings." These reports are available on our investor relations
website as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission, or SEC.

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ITEM 2.PROPERTIES

Our principal properties do not lend themselves to simple description by character and location. The percentage allocation of our gross investment in property,
plant and equipment consisted of the following:

December 31,2002

2001

2000(As restated)Land and buildings

7
%
7
%
7
%Communications equipment

44
%
44
%
42
%Other network equipment

43
%
41
%
41
%General-purpose computers and other

6
%
7
%
7
%Construction in progress

0
%
1
%
3
%100
%
100
%
100
%


Land and buildings consist of land, land improvements, central office and certain administrative office buildings. Communications equipment primarily consists of
switches, routers and transmission electronics. Other network equipment primarily includes conduit and cable. General-purpose computers and other consists principally of computers, office equipment,
vehicles and other general support equipment. We own substantially all of our telecommunications equipment required for our business. Total gross investment in property, plant and equipment was
approximately $42.4 billion and $43.0 billion (as restated) at December 31, 2002 and 2001, respectively, including the effect of retirements, but before deducting accumulated
depreciation.

We
own and lease sales offices in major metropolitan locations. Our network management centers are located primarily in buildings that we own at various locations in geographic areas
that we serve. Substantially all of the installations of central office equipment for our local service business are located in buildings and on land that we own.

ITEM 3.LEGAL PROCEEDINGS

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 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 of 1933, as amended,
or the 1933 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 alleging that we, in
contravention of federal and state law, failed to file interconnection agreements with the Minnesota Commission relating to certain

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of
our wholesale customers, and thereby allegedly discriminated against other CLECs. On October 21, 2002, the Minnesota Commission adopted 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 McLeod 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.

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 setting forth the penalties described above on May 21, 2003. On June 19, 2003, we appealed the Minnesota Commission's
orders to the United States District Court for the District of Minnesota. 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. On
July 25, 2003, we entered into a settlement with the staff of the Arizona Corporation Commission to settle this and several other proceedings. The proposed settlement, which must be approved by
the Arizona Commission, requires that we provide approximately $21 million in consideration in the form of a voluntary contribution to the Arizona State Treasury, contributions to certain
organizations and/or infrastructure investments and refunds in the form of bill credits to CLECs. On December 1, 2003, an administrative law judge issued a recommended decision denying the proposed
settlement. The judge also recommended final orders requiring us to pay approximately $11 million in penalties and to issue credits to CLECs for a 24-month period from October 2000 to September
2002 equal to 10% of all wholesale intrastate services performed by us. We plan to file exceptions to the recommended decisions with the full Arizona Commission. 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. Colorado has also opened an investigation into these matters. On June 26, 2003, we received from the FCC a letter of inquiry seeking information about these matters. We submitted
our initial response to this inquiry on July 31, 2003. The proceedings and investigations in New Mexico, Colorado and Washington and at the FCC 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.

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

14

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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 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.

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. Through December 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. On December 11, 2003, we received a request for information from
the FCC related to changes in certain customers' preferred carriers for interLATA or intraLATA long distance service. 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

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 Form 10-K for the year ended December 31, 2002, or the QCII
2002 Form 10-K. Some of these accounting practices and transactions and related disclosures also are the subject of various adjustments and restatements described in this Form 10-K. See
Management's Discussion and Analysis of Financial Condition and Results of OperationsRestatement of 2001 and 2000 Consolidated Financial Statements in Part II, Item 7 below for more
information about our restatement. 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.

15

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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. Such discussions are preliminary and 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 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 a civil penalty, the amount of which could be material, 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 generally
accepted accounting principles in the United States of America, or GAAP. At the date of this filing, no action has 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.

Also,
as previously announced in July 2002 by the General Services Administration, or GSA, the GSA is conducting a review of all contracts with QCII for purposes of determining present
responsibility. On September 12, 2003, we were 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 is last
February's indictment against four former QCII employees in connection with a transaction with the Arizona School Facilities Board in June 2001 and a civil complaint filed the same day 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, although QCII cannot predict the outcome of this referral.

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". Plaintiffs in the consolidated securities action name as defendants in the Fourth Consolidated Amended Class Action Complaint, or the Fourth Consolidated Complaint,
which was filed on or about August 21, 2002, QCII, its former Chairman and Chief Executive Officer, Joseph P. Nacchio, its former Chief Financial Officers, Robin R. Szeliga and Robert S. Woodruff,
other of its former officers and current directors and Arthur Andersen LLP. The Fourth Consolidated Complaint is purportedly brought on behalf of purchasers of QCII's

16

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publicly
traded securities between May 24, 1999 and February 14, 2002, and 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 during the putative class period, 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 Fourth Consolidated Complaint also alleges that QCII's financial results during the putative class period and statements
regarding those results were false and misleading due to the alleged: (i) overstatement of revenue, (ii) understatement of costs, (iii) manipulation of employee benefits in order
to increase profitability and (iv) misstatement of certain assets and liabilities. The Fourth Consolidated Complaint further alleges that QCII and certain of the individual defendants violated
section 11 of the 1933 Act, and that certain of the individual defendants are liable as control persons under section 15 of the 1933 Act by preparing and disseminating false registration
statements and prospectuses for: (1) the registration of 897,907,706 shares of QCII's common stock to be issued to U S WEST shareholders dated June 21, 1999, as amended August 13, 1999
and September 17, 1999; (2) the exchange of $3.25 billion of QCII's notes dated July 12, 2001; and (3) the exchange of $3.75 billion of QCII's notes dated
October 30, 2001. The Fourth Consolidated Complaint seeks unspecified compensatory damages and other relief. However, lead counsel for the plaintiffs has indicated that plaintiffs will seek
damages in the billions of dollars. On September 20, 2002, both QCII and the individual defendants filed motions to dismiss the Fourth Consolidated Complaint. Those motions are currently pending
before the court. On November 4, 2002, lead plaintiffs in the consolidated securities action filed a motion for a temporary restraining order and preliminary injunction seeking to enjoin QCII's sale
of Qwest Dex, Inc. or, in the alternative, to place the proceeds of such sale in a constructive trust for the benefit of the plaintiffs. The court denied both motions.

On
October 22, 2001, an alleged derivative lawsuit was filed in the United States District Court for the District of Colorado, naming as defendants each of the then members of
QCII's Board of Directors, or the Board, and naming QCII as a nominal defendant. The derivative complaint is based upon the allegations made in the consolidated securities action and alleges, among
other things, that the Board members intentionally or negligently breached their fiduciary duties to QCII by failing to oversee implementation of securities laws that prohibit insider trading. The
derivative complaint also alleges that the Board members breached their fiduciary duties to QCII by causing or permitting it to commit alleged securities violations, thus (i) causing it to be
sued for such violations, and (ii) subjecting it to adverse publicity, increasing its cost of raising capital and impairing earnings. The derivative complaint further alleges that certain
directors sold shares between April 26, 2001 and May 15, 2001 using non-public information about QCII. On or about October 31, 2001, the court filed an order consolidating this derivative
lawsuit with the consolidated securities action. In December 2001, the derivative lawsuit was stayed, pending further order of the court, based on the fact that the merits of the derivative lawsuit
are intertwined with the resolution of the consolidated securities action. In March 2002, plaintiffs filed a first amended derivative complaint. The first amended derivative complaint adds allegations
relating to the disclosures of QCII's consolidated financial results from April 2000 through February 2002. On or about November 5, 2002, plaintiffs filed a second amended derivative complaint. The
second amended complaint adds as defendants to the lawsuit certain former officers, including Robin R. Szeliga, Robert S. Woodruff, and others. The second amended complaint contains allegations in
addition to those set forth in the prior complaints, stating, among other things, that (i) certain officers and/or directors traded QCII's stock while in the possession of inside information,
and (ii) certain officers and/or directors caused the restatement of more than $1 billion in revenue by concealing improper accounting practices. Plaintiffs seek, among other remedies,
disgorgement of alleged insider trading profits. The lawsuit remains stayed.

17

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On
March 6, 2002, an alleged derivative lawsuit was filed in the District Court for the City and County of Denver, naming as defendants each of the then members of the Board, certain
former officers of QCII and Arthur Andersen LLP. QCII is named as a nominal defendant. The derivative complaint is based upon the allegations made in the consolidated securities action and alleges
that the Board members intentionally or recklessly breached their fiduciary duties to QCII by causing or allowing it to issue financial disclosures that were false or misleading. Plaintiffs seek
unspecified damages on QCII's behalf against the defendants. On July 2, 2002, this state court derivative lawsuit was stayed pending further order of the court. On or about August 1, 2003, the
plaintiffs filed an amended derivative complaint, which does not contain claims against QCII's former officers and Arthur Andersen LLP, but continues to assert claims against the Board defendants. In
the amended complaint, the plaintiffs allege, among other things, that the individual defendants abdicated their duty to implement and maintain an adequate internal accounting control system and thus
allegedly violated (i) their fiduciary duties of loyalty and good faith; (ii) GAAP; and (iii) QCII's Audit Committee's charter (which requires, among other things, that QCII's
Audit Committee serve as an independent and objective party to monitor QCII's financial reporting and internal control system). The amended complaint also states new claims against Mr. Nacchio for his
alleged breach of fiduciary duties. Plaintiffs seek a court order requiring that Mr. Nacchio disgorge to QCII all of his 2001 compensation, including salary, bonus, long-term incentive payouts and
stock options. In addition, the plaintiffs contend that Mr. Nacchio breached his fiduciary duties to QCII by virtue of his sales of its stock allegedly made using his knowledge of material non-public
information. The plaintiffs seek the imposition of a constructive trust on any profits Mr. Nacchio obtained by virtue of these sales.

Since
March 2002, seven putative class action suits 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. 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 described below 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. The consolidated amended complaint filed on July 5, 2002 names as defendants, among
others, QCII, several former and current directors, officers and employees of QCII, Qwest Asset Management, the Plan's Investment Committee, and the Plan Administrative Committee of the pre-Merger
QCII 401(k) Savings Plan. Plaintiffs filed a Second Amended and Consolidated Complaint on May 21, 2003, naming as additional defendants a former employee and QCII's Plan Design Committee. The
consolidated ERISA action, which is brought under the Employee Retirement Income Security Act, or ERISA, alleges, among other things, that the defendants breached fiduciary duties to the Plan members
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 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 on August 22, 2002. Those motions are also pending before the court.

On
August 9, 2002, an alleged derivative lawsuit was filed in the Court of Chancery of the State of Delaware, naming as defendants each of the then members of the Board and QCII current
Chief Financial Officer, Oren G. Shaffer, and naming QCII as a nominal defendant. On or about September

18

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16,
2002, an amended complaint was filed in the action, naming the same defendants except Mr. Shaffer, who is no longer a defendant in the action. A separate alleged derivative lawsuit was filed in
the Court of Chancery of the State of Delaware on or about August 28, 2002. That lawsuit names as defendants QCII's former Chairman and Chief Executive Officer, Joseph P. Nacchio, QCII's former Chief
Financial Officer, Robert S. Woodruff, former Board member, Marilyn Carlson Nelson, and each of the then members of the Board and names QCII as a nominal defendant. On October 30, 2002, these
two alleged derivative lawsuits were consolidated, and an amended complaint, or the Second Amended Complaint, was later filed on or about January 23, 2003, and names as defendants the current members
of the Board, former Board member Hank Brown, QCII's former Chief Executive Officer, Joseph P. Nacchio, and QCII's former Chief Financial Officer, Robert Woodruff, and names 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 of $13 million to QCII's former Chief Executive Officer, Mr. Nacchio. The plaintiffs seek recovery of incentive compensation allegedly wrongfully paid
to certain defendants, all severance payments made to Messrs. Nacchio and Woodruff, and all costs including legal and accounting fees. Plaintiffs have also requested, among other things, that the
individual defendants compensate QCII for any insider trading profits. Plaintiffs likewise allege that QCII is entitled to contribution and indemnification by each of the individual defendants.
Plaintiffs request that the court cancel all unexercised stock options awarded to Messrs. Nacchio and Woodruff to which they were not entitled, that the defendants return to QCII all salaries and
other remuneration paid to them by it during the time they breached their fiduciary duties, and that the court order the defendants to enforce policies, practices and procedures on behalf of QCII
designed to detect and prevent illegal conduct by its employees and representatives. On March 17, 2003, defendants moved to dismiss the Second Amended Complaint, or, in the alternative, to stay the
action. That motion is pending before the court.

On
November 22, 2002, plaintiff Stephen Weseley IRA Rollover filed a purported derivative lawsuit in Denver District Court, naming as defendants each of the then members of QCII's Board
of Directors, certain of QCII's former officers, Anschutz Company and QCII as a nominal defendant. Plaintiff alleges, among other things, that the director defendants breached their fiduciary duties
to QCII and damaged QCII by deliberately in bad faith or recklessly (i) implementing a sham system of internal controls completely inadequate to ensure proper recognition of revenue;
(ii) causing QCII to issue false and misleading statements and financial results to the market regarding its earnings, revenues, business and investments; (iii) exposing QCII to massive
liability for securities fraud; (iv) damaging QCII's reputation; and (v) trading QCII's shares while in possession of material, non-public information regarding its true financial
condition. The complaint purports to state causes of action for breach of fiduciary duty, gross negligence and unjust enrichment against some of QCII's former officers and breach of contract and
breach of the duty of loyalty/insider trader trading against several of QCII's former officers and former and current directors. On or about January 7, 2003, plaintiff's counsel filed a proposed
amended complaint, which substitutes a new plaintiff, Thomas R. Strauss, and adds another
former officer as a defendant. In the amended complaint, plaintiff seeks (i) disgorgement of bonuses and other incentive compensation paid to certain defendants; (ii) disgorgement of any
profits that certain defendants made by virtue of their alleged trading on material, inside information; and (iii) other damages. By order dated January 9, 2003, the court permitted the
substitution and Strauss became the plaintiff in this lawsuit under the amended complaint.

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

19

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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 alleges that the
defendants engaged in fraudulent conduct that caused CalSTRS to lose in excess of $150 million invested in QCII's equity and debt securities. The complaint alleges, among other things that in press
releases and other public statements, defendants represented that QCII was one of the highest revenue producing telecommunications companies in the world, with highly favorable results and prospects.
CalSTRS alleges that defendants were engaged, however, "in a scheme to falsely inflate Qwest's revenues and decrease its expenses so that Qwest would appear more successful than it actually was." The
complaint purported to state causes of action against QCII for (i) violation of California Corporations Code section 25400 et seq. (securities laws) (seeking, among other damages, the
difference between the price at which CalSTRS sold QCII's notes and stock and their true value); (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 seeks 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, the plaintiff 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 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, and reasserted its claim against QCII for breach of fiduciary duty as an allegation of aiding and abetting breach of fiduciary duty. QCII filed a second demurrer to that claim, and on
November 7, 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 similar to the CalSTRS action 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 tens 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 similar to the CalSTRS and New Jersey lawsuits 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, dropping (i) certain individual and corporate defendants, and (ii) its claim under the Illinois Consumer Fraud and
Deceptive Business Practices Act. The second amended complaint alleges 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. The complaint alleges, among other things that in press releases and other public statements, defendants represented that QCII was one of the highest revenue producing
telecommunications companies in the world, with highly favorable results and prospects. SURSI alleges that defendants were engaged, however, in a scheme to falsely inflate QCII's revenues and decrease
its expenses by, among other allegations, improper conduct related to transactions with the Arizona School Facilities Board, Genuity, Calpoint, KMC, KPNQwest, and Koninklijke KPN, N.V. The complaint
purports to state causes of action against QCII under: (i) the Illinois Securities Act; (ii) common law fraud;

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(iii) common
law negligent misrepresentation; and (iv) section 11 of the 1933 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.

The
consolidated securities action, the consolidated ERISA action and the CalSTRS, New Jersey and SURSI actions described above present material and significant risk to QCII. Some of the
allegations in these lawsuits include many of the same subjects that the SEC and U.S. Attorney's Office are investigating. Moreover, the size, scope and nature of QCII's recent restatements of its
financial statements for fiscal 2001 and 2000 affect the risks presented by these cases. While QCII intends to defend against these matters vigorously, the ultimate outcomes of these cases are very
uncertain, and QCII can give no assurance as to the impacts on its financial results or financial condition as a result of these matters. Each of these cases is in a preliminary phase. None of the
plaintiffs or the defendants has advanced evidence concerning possible recoverable damages, and QCII has not yet conducted discovery on these and other relevant issues. QCII has disclosed that it is
unable to estimate reasonably a range of loss that it would incur if the plaintiffs in one or more of these lawsuits were to prevail. QCII has engaged in discussions for the purposes of resolving
these matters and continues to evaluate any possible range of loss. Any settlement of or judgment on one or more of these claims could be material, and QCII cannot give any assurance that it would
have the resources available to pay such judgments. Also, in the event of an adverse outcome of 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.

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 has 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. 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.

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 our 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 plaintiff's 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-

21

---

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 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. 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.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Not Applicable.

ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, the consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Item 7 of this report. For the years ended December 31, 2001 and 2000, the
data in the table below is presented on an as adjusted basis to reflect the restatement of results for those years (see below and Note 3Restatement of Results to our consolidated
financial statements in Item 8 of this report). The selected consolidated financial data for the years ended December 31, 2002, 2001 and 2000 are derived from, and are qualified by
reference to, the audited consolidated financial statements of the Company included in Item 8 of this report. The results presented below for the years ended December 31, 1999 and 1998
were previously audited by other independent auditors who have ceased operations.

22

---

|                                                                                   |  | Year Ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Operating revenues                                                                 |  | $                       | 11,916
|Operating expenses                                                                 |  |                         | 9,914 
|Operating income                                                                   |  |                         | 2,002 
|Income before income taxes and cumulative effect of change in accounting principle |  |                         | 1,294 
|Net income(1)                                                                      |  | $                       | 805   
|Balance sheet data:                                                                |  |                         |       
|Total assets                                                                       |  | $                       | 22,525
|Total debt(2)                                                                      |  |                         | 9,159 
|Debt to total capital ratio(3)                                                     |  |                         | 67    
|Other data:                                                                        |  |                         |       
|Cash provided by operating activities                                              |  | $                       | 4,253 
|Cash used for investing activities                                                 |  |                         | (1,818
|Cash (used for) provided by financing activities                                   |  |                         | (2,353
|Capital expenditures                                                               |  |                         | 1,823 

---



23

---



ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 7 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.

Restatement of 2001 and 2000 Consolidated Financial Statements

This report contains our restated consolidated financial statements for the years ended December 31, 2001 and 2000. We performed an analysis of our
previously issued consolidated financial statements for 2001 and 2000 and identified a number of errors.

The
nature of the errors and the restatement adjustments that we have made to our financial statements for years ended December 31, 2001 and 2000 are described in Item 1
BusinessImpact of Restatement and are set forth in Note 3Restatement of Results to our consolidated financial statements in Item 8 of this report.

The
net impact of the restatement adjustments is summarized as follows:

Year Ended
December 31,2001

2000(Dollars in millions)Revenue

$
(138
)
$
(216
)Income before income taxes and cumulative effect of change in accounting principle

$
(533
)
$
(258
)Net income

$
(330
)
$
(294
)


The restatements involve revenue recognition issues related to termination fees, wireless revenues and installation fees, and expense recognition, as well as
other matters. In making these restatements, we have performed an internal analysis of our accounting policies, practices, procedures and disclosures for the affected periods.

Results of Operations

Overview

We generate revenues from the provision of voice services, data and Internet services, wireless services, other services and services to our affiliates. 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. A further description of each revenue category is as
follows:



24

---



Business Trends

Our results continue to be impacted by a number of factors influencing the telecommunications industry and our local service area. First, the weak economy in our
local service area has continued to impact demand from both our consumer and business customers. The impacts include reduced demand for services resulting in loss of access lines, renegotiated
commitments and loss of customers. We believe demand will continue to be affected because the economy's recovery in our local service area is expected to lag the national recovery. Second, technology
substitution and competition are expected to lead to continued access line loss. 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 wireless. Third, our results continue to be impacted by regulatory responses to the competitive landscape for our local
services.



In general, we expect to see a continued decrease in voice-related revenue as a result of a decrease in access lines and wireless subscribers. Access lines are
expected to continue decreasing primarily because of technology substitution, including wireless and cable substitution for wireline telephony, and cable modem substitution for dial-up
Internet access lines. In addition, our competitors have accelerated their use of UNE-P to deliver voice services. Although the use of UNE-P did not have a material impact on
our operations in 2002, we believe the offering of UNE-P services will cause downward pressure on our revenue and result in incremental retail access line losses.

We
have also begun to experience and expect increased competitive pressure from telecommunications providers either emerging from bankruptcy protection or reorganizing their capital

25

---

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 less profitable product offerings and
pricing plans that allow us to retain and attract customers. These pressures could adversely affect our operating results and financial performance.

Starting
in 2004, wireless offerings will be expanded through a new arrangement with Sprint. This arrangement will enable utilization of Sprint's nationwide digital wireless network to
offer customers new voice and data capabilities.

We
expect to see the pace of growth in affiliate revenue to accelerate. We continued to transition telecommunications traffic previously carried by third parties. In addition, our
affiliates have expanded their data communications needs. During 2004, we expect affiliate revenue to rise due to an increase in access fees charged to our affiliates selling interexchange services in
our region.



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

We
expect the pace of affiliate cost increases to slow and potentially stabilize as a result of the completion in 2003 of the bulk of functional consolidation and employee transfers.

Employee
costs savings due to restructuring and merger related synergies resulted from the cumulative reduction of employees from 2000 to 2002. However, these reductions coupled with
lower network costs were partially offset by increases in affiliate costs, bad debt, pension and retiree costs, and property and other taxes.

Presentation

The results for 2001 and 2000 presented below are "As Restated." Please refer to Note 3Restatement of Results to our consolidated financial
statements in Item 8 of this report. The analysis is organized in a way that provides the information required, while highlighting the information that we believe will be instructive for understanding
the relevant trends going forward. In addition to the discussion of the historical information that reviews the current reporting presentation of our consolidated financial statements, an overview of
the operational results is provided below. Unless otherwise indicated, all information is presented in accordance with GAAP.

Our
operations are integrated into and are part of the segments of the QCII consolidated group. The chief operating decision maker, or 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 2002
Form 10-K. 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 Qwest Corporation to a CODM on a regular basis. See
further discussion in Note 15Contributions to QCII Segments to our consolidated financial statements in Item 8 of this report.

26

---

Results of Operations

|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   | Percentage Change |     
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | - | ------ | ----- | - | ------ | ----- | - | ------ | ----- | - | ----------------- | ----
|
|
|
|
|
|
|Operating revenues                                                                 |                                                                           | $ | 11,916 |       | $ | 12,537 |       | $ | 12,084 |       | $ | (621              | )   
|Operating expenses:                                                                |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|                                                                                   | Cost of sales (exclusive of depreciation and amortization detailed below) |   |        | 2,674 |   |        | 3,058 |   |        | 2,987 |   |                   | (384
|                                                                                   | Selling, general and administrative                                       |   |        | 3,435 |   |        | 3,216 |   |        | 3,315 |   |                   | 219 
|                                                                                   | Depreciation                                                              |   |        | 2,655 |   |        | 2,902 |   |        | 2,311 |   |                   | (247
|                                                                                   | Intangible assets amortization                                            |   |        | 302   |   |        | 191   |   |        | 111   |   |                   | 111 
|                                                                                   | Asset impairment charges                                                  |   |        | 829   |   |        | 49    |   |        | 335   |   |                   | 780 
|                                                                                   | Restructuring and other chargesnet                                       |   |        | 49    |   |        | 212   |   |        |      |   |                   | (163
|                                                                                   | Merger-related (credits) chargesnet                                      |   |        | (30   | ) |        | 120   |   |        | 813   |   |                   | (150
|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|Operating income                                                                   |                                                                           |   | 2,002  |       |   | 2,789  |       |   | 2,212  |       |   | (787              | )   
|Other expense (income):                                                            |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|                                                                                   | Interest expensenet                                                      |   |        | 699   |   |        | 613   |   |        | 549   |   |                   | 86  
|                                                                                   | (Gain) loss on sale of rural exchanges and other fixed assets             |   |        |      |   |        | (51   | ) |        | 11    |   |                   | 51  
|                                                                                   | Other expense (income)net                                                |   |        | 9     |   |        | (18   | ) |        | 6     |   |                   | 27  
|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|Total other expensenet                                                            |                                                                           |   | 708    |       |   | 544    |       |   | 566    |       |   | 164               |     
|Income before income taxes and cumulative effect of change in accounting principle |                                                                           |   | 1,294  |       |   | 2,245  |       |   | 1,646  |       |   | (951              | )   
|Income tax expense                                                                 |                                                                           |   | (489   | )     |   | (838   | )     |   | (703   | )     |   | 349               |     
|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|Income before cumulative effect of change in accounting principle                  |                                                                           |   | 805    |       |   | 1,407  |       |   | 943    |       |   | (602              | )   
|Cumulative effect of change in accounting principle, net of tax                    |                                                                           |   |       |       |   |       |       |   | (41    | )     |   |                  |     
|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     
|Net income                                                                         |                                                                           | $ | 805    |       | $ | 1,407  |       | $ | 902    |       | $ | (602              | )   
|                                                                                   |                                                                           |   |        |       |   |        |       |   |        |       |   |                   |     

---

nmnot meaningful

Operating Revenues

|                           |                          |   |       |        |   |       |        |   |       |        |   | Percentage Change |     
|-------------------------- | ------------------------ | - | ----- | ------ | - | ----- | ------ | - | ----- | ------ | - | ----------------- | ----
|
|
|
|
|
|
|Voice services             |                          | $ | 8,606 |        | $ | 9,301 |        | $ | 9,434 |        | $ | (695              | )   
|Data and Internet services |                          |   | 2,189 |        |   | 2,168 |        |   | 1,888 |        |   | 21                |     
|Wireless                   |                          |   | 694   |        |   | 688   |        |   | 422   |        |   | 6                 |     
|Other services             |                          |   | 16    |        |   | 12    |        |   | 3     |        |   | 4                 |     
|Affiliate services         |                          |   | 411   |        |   | 368   |        |   | 337   |        |   | 43                |     
|                           |                          |   |       |        |   |       |        |   |       |        |   |                   |     
|                           | Total operating revenues |   | $     | 11,916 |   | $     | 12,537 |   | $     | 12,084 |   | $                 | (621
|                           |                          |   |       |        |   |       |        |   |       |        |   |                   |     

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



Voice services revenues decreased $695 million, or 7%, in 2002 and decreased $133 million, or 1%, in 2001.

27

---



The voice services decrease in 2002 was the result of access line losses, intense competition for products and services, and a reduction in wholesale switched
access revenue, each of which is discussed further below.

We
experienced a decline in local voice services revenue of $280 million in 2002 associated with the loss of approximately 781,000 access lines and related services. The access
line loss was driven by a soft economy in our local service area, technology substitution to wireless and broadband services and other competition. We are experiencing competition from both
facility-based and non facility-based providers such as cable companies providing telephony services, CLECs and other telecommunications providers reselling our services. Additionally, there is
another component of the decline of voice service revenue of $110 million in 2002 that reflects declines in demand for services such as collocation, public telephone services and directory
assistance. The declines were primarily driven by the soft telecommunications market, telecommunications company bankruptcies, wireless substitution of public telephones and deteriorating economic
conditions.

Intense
competition throughout the last half of 2001 and during 2002, caused IntraLATA long-distance voice revenues to decline by $98 million in 2002.

We
also experienced a revenue decline of $207 million in switched access revenue in 2002. The switched access revenue declines were primarily due to pricing and volume declines.
Pricing declines occurred due to state regulatory actions and the CALLS order. The CALLS order capped prices for certain services, which resulted in a price decline for switched access services.
Volumes also fell due to general declines in demand for long-distance usage and competitive losses.



The decrease in 2001 voice services revenue of $133 million included declines in switched access revenue, business customer price reductions, and access
line losses in 2001. Total access lines declined by 304,000. The switched access revenue declines were primarily due to the same competitive and industry effects described for 2002 above. During 2001
and 2000, we reduced our rates to business customers to remain competitive in the marketplace for advanced voice services. In addition, business customers converted their single access lines to a
fewer number of high-speed, high-capacity access lines allowing for the transport of multiple simultaneous telephone calls and transmission of data at higher rates of speed.
This conversion effectively resulted in the rate reduction and contributed to access line loss.



Data and Internet services revenues remained relatively flat in 2002 and increased $280 million, or 15%, in 2001.



In 2002, data and Internet services revenue increases of $21 million were derived primarily from DSL and other Internet services that were partially offset
by declines in data services such as wholesale private line and ISDN.



In 2001, data and Internet services revenue increases of $280 million were derived primarily from business and wholesale private line services, ISDN and
frame relay sales. This reflected expanding customer telecommunications needs during 2000 and early 2001. DSL revenues also increased in 2001 as a result of subscriber growth.

28

---



Although net subscribers fell to 1.03 million in 2002, from 1.12 million in 2001, revenues increased slightly. We did not experience an overall
revenue decline due to the timing of the acquisition and disposition of customers between the years. The fall in subscribers, despite an expanding overall market, reflects our decision to de-emphasize
sales of wireless services on a stand-alone basis, tighten credit policies and limit product marketing, as well as the impact of intense industry competition, the economic slowdown, lack of a national
network and higher than expected customer disconnects. During 2002, our wireless penetration percentage (our wireless subscribers divided by the total number of subscribers in the points-of-presence
we cover) declined in the markets we serve to 4.66% in 2002 from 5.73% in 2001.



In 2001, revenues increased $266 million or 63%. Total wireless subscribers increased to 1.12 million in 2001 from 805,000 in 2000. The increase in
subscribers reflected the increase in demand for wireless services and our focus on growing the wireless subscriber base.



Affiliate services revenue increased $43 million, or 12%, in 2002 and increased $31 million, or 9%, in 2001. These increases were caused by a
migration of telecommunications traffic from third-party providers onto our network.

Operating Expenses

The following table provides detail regarding our operating expenses:

|                    |                                              |  |   |       |   |   |       |  |   |       |  | Percentage Change |     
|------------------- | -------------------------------------------- |  | - | ----- | - | - | ----- |  | - | ----- |  | ----------------- | ----
|
|
|
|
|
|
|Operating expenses: |                                              |  |   |       |   |   |       |  |   |       |  |                   |     
|                    | Cost of sales                                |  | $ | 2,674 |   | $ | 3,058 |  | $ | 2,987 |  | $                 | (384
|                    | Selling, general and administrative ("SG&A") |  |   | 3,435 |   |   | 3,216 |  |   | 3,315 |  |                   | 219 
|                    | Depreciation                                 |  |   | 2,655 |   |   | 2,902 |  |   | 2,311 |  |                   | (247
|                    | Intangible assets amortization               |  |   | 302   |   |   | 191   |  |   | 111   |  |                   | 111 
|                    | Asset impairment charges                     |  |   | 829   |   |   | 49    |  |   | 335   |  |                   | 780 
|                    | Restructuring and other charges  net        |  |   | 49    |   |   | 212   |  |   |      |  |                   | (163
|                    | Merger-related (credits) charges  net       |  |   | (30   | ) |   | 120   |  |   | 813   |  |                   | (150
|                    |                                              |  |   |       |   |   |       |  |   |       |  |                   |     
|                    | Total operating expenses                     |  | $ | 9,914 |   | $ | 9,748 |  | $ | 9,872 |  | $                 | 166 
|                    |                                              |  |   |       |   |   |       |  |   |       |  |                   |     

---

nmnot meaningful

29

---

Cost of Sales

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

|                                   |                     |   |       |       |   |       |       |   |       |       |   | Percentage Change |     
|---------------------------------- | ------------------- | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | - | ----------------- | ----
|
|
|
|
|
|
|Employee and service-related costs |                     | $ | 1,600 |       | $ | 1,696 |       | $ | 1,651 |       | $ | (96               | )   
|Network costs                      |                     |   | 331   |       |   | 496   |       |   | 518   |       |   | (165              | )   
|Non-employee related costs         |                     |   | 363   |       |   | 529   |       |   | 462   |       |   | (166              | )   
|Affiliate costs                    |                     |   | 380   |       |   | 337   |       |   | 356   |       |   | 43                |     
|                                   |                     |   |       |       |   |       |       |   |       |       |   |                   |     
|                                   | Total cost of sales |   | $     | 2,674 |   | $     | 3,058 |   | $     | 2,987 |   | $                 | (384
|                                   |                     |   |       |       |   |       |       |   |       |       |   |                   |     

Cost of sales includes salaries and wages, benefits, network costs, materials and supplies, contracted engineering services and computer systems
support. Network costs include third-party expenses to repair and maintain the network and supplies to provide services to customers. Cost of sales, as a percentage of revenue, was 22% for 2002, 24%
for 2001 and 25% in 2000. The decrease in cost of sales as a percent of revenue between 2001 and 2000 was primarily driven by increased revenue. In 2002, the decrease was driven by the cost reductions
described below.

Total
cost of sales decreased $384 million, or 13%, in 2002 and increased $71 million, or 2%, in 2001. During 2002, our expenses declined primarily due to lower staffing
requirements and lower sales volumes. During 2001, our expenses increased primarily due to higher employee and non-employee costs described below.

Employee
and service-related costs, such as salaries and wages, benefits, commissions and third-party customer service costs decreased $96 million, or 6%, in 2002 and increased
$45 million, or 3%, in 2001. The decrease in 2002 was related to lower headcount requirements associated with prior restructuring efficiencies and moving work previously performed by
third-party contractors to employees, partially offset by a lower pension credit and higher healthcare costs in 2002. The increase in 2001 was primarily related to higher employee benefits costs and
professional fees.

Our
network costs decreased $165 million, or 33%, in 2002 and decreased $22 million, or 4%, in 2001. During 2002, we reduced our reliance on third-party contractors to
provide network maintenance services by shifting this work to our employees. We also experienced lower costs associated with wireless handset sales as a result of lower unit prices and decreases in
the number of new wireless subscribers. In 2001, the decrease was primarily due to reductions in third-party contractors providing network maintenance services.

Non-employee
related costs, such as real estate costs, and reciprocal compensation payments due to ISPs (fees for terminating our customers' calls onto their networks),
decreased $166 million, or 31%, in 2002 and increased $67 million, or 15%, in 2001. The decrease in 2002 is attributable to lower reciprocal compensation costs due to an
April 2001 FCC order which limited the amount of reciprocal compensation due to ISPs and improved management expense controls in the areas of postage and shipping costs. The increase in 2001 is
primarily due to reserves for legal liabilities and increased software expenses.

Affiliate
costs, such as services for corporate administration, information technology, advertising and technical support, increased $43 million, or 13%, in 2002 and were
relatively flat in 2001. The increase in 2002 is primarily due to increases of purchased technical support resources, and buying long distance services from an affiliate rather than a third party.

30

---

Selling, General and Administrative (SG&A) Expense

The following table shows a breakdown of SG&A by major component:

|                                   |            |   |       |       |   |       |       |   |       |       |   | Percentage Change |    
|---------------------------------- | ---------- | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | - | ----------------- | ---
|
|
|
|
|
|
|Employee and service-related costs |            | $ | 884   |       | $ | 1,178 |       | $ | 1,620 |       | $ | (294              | )  
|Bad debt                           |            |   | 331   |       |   | 278   |       |   | 187   |       |   | 53                |    
|Property and other taxes           |            |   | 427   |       |   | 386   |       |   | 414   |       |   | 41                |    
|Non-employee related costs         |            |   | 503   |       |   | 356   |       |   | 337   |       |   | 147               |    
|Affiliate costs                    |            |   | 1,290 |       |   | 1,018 |       |   | 757   |       |   | 272               |    
|                                   |            |   |       |       |   |       |       |   |       |       |   |                   |    
|                                   | Total SG&A |   | $     | 3,435 |   | $     | 3,216 |   | $     | 3,315 |   | $                 | 219
|                                   |            |   |       |       |   |       |       |   |       |       |   |                   |    

SG&A expenses include salaries and wages that are not directly attributable to products or services, employee benefits, sales commissions, bad
debt charges, taxes other than income taxes, rent for administrative space, advertising, professional service fees and computer systems support. SG&A, as a percent of revenue, was 29% for 2002, 26%
for 2001 and 27% for 2000. The variances driving the percentage changes are described below.

Total
SG&A increased $219 million, or 7%, in 2002 and decreased $99 million, or 3%, in 2001. The 2002 increase relates primarily to increased affiliate expenses and
establishing reserves for outstanding litigation. The 2001 decrease was due to lower employee costs partially offset by higher bad debt.

Employee
and service-related costs, such as salaries and wages, benefits, sales commissions, overtime and professional fees (such as telemarketing and customer service costs), decreased
$294 million, or 25%, in 2002 and decreased $442 million, or 27%, in 2001. In 2002, the decrease was associated with lower salaries and wages from staffing reductions associated with
prior restructuring efficiencies and transition of employees to other affiliates, and was due to lower professional fees associated with reduced payments to third-party service providers for
previously outsourced customer service functions in the wireless services segment. Employee and service-related expenses decreased $442 million in 2001 primarily from lower salaries and wages,
benefits and incentive compensation costs due to staffing reductions and transfers of employees to affiliates.

Bad
debt expense increased $53 million, or 19%, in 2002 and increased $91 million, or 49%, in 2001. Bad debt expense increased as a percentage of revenue to 2.8% in 2002
from 2.2% in 2001. The 2002
increase as a percentage of revenue was due primarily to bankruptcies of wholesale customers and weak economic conditions offset by improved collections practices and tighter credit policies. Bad debt
expense increased $91 million in 2001 as a result of the impact of the slow down of the economy and the customer bankruptcies.

Property
and other taxes increased $41 million, or 11%, in 2002 and decreased $28 million, or 7%, in 2001. The increase in 2002 is attributable to capital expansion for the
traditional telephone network that took place during the years ended December 31, 2001 and 2000. The decrease in 2001 is attributable to changes in estimates of property tax liabilities.

Non-employee
related costs, such as marketing and advertising, rent for administrative space and software expenses, increased $147 million, or 41%, in 2002 and
increased $19 million, or 6%, in 2001. In 2002, increased expenses were due to increased reserves for outstanding litigation. In 2001, increased expenses were due to increased marketing and
advertising costs.

Affiliate
expenses, such as services for corporate administration, information technology, advertising and technical support, increased $272 million, or 27%, in 2002 and increased
$261 million,

31

---

or
34%, in 2001. The 2002 increase was primarily due to an increase in marketing, advertising, and administrative costs from affiliates. The increase in 2001 is primarily attributable to the purchase
of services from affiliates. Previously, a portion of these services were provided by our employees however, as noted above and explained more fully below, these employees were transferred to an
affiliate and charged back to us. In addition, affiliate entities reviewed the services performed and began billing us for administrative services during 2001.

Prior
to a company realignment that occurred in March 2001, our employees performed services that are now performed by QSC employees. Employees that were transferred to QSC
provide services such as technical support, marketing, sales, product management, and risk management. In addition, the level of service QSC employees were providing to us for our corporate finance,
accounting, human resources, executive management and public policy services increased. As a result, during 2002, our affiliates increased the proportionate share of administrative costs billed to us.
The 2001 increase includes a partial year of realigned operations; the 2002 increase includes a full year of realigned operations.

In
addition to the increases due to realignment, allocation of marketing costs from QSC to us increased in 2002 due to a proportionate increase in revenues from the sale of our products
relative to the revenues generated from the sale of our affiliates' products.

Combined Pension and Post-Retirement Benefits

Our results include a pension credit allocated by QCII, net of post-retirement expenses, of $53 million in 2002, $267 million in 2001 and $245 million in
2000. Absent these credits, our net income in each of these years would have been lower by these amounts. The net pension 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. We expect that we will
incur net pension expense of approximately $217 million in 2003 as opposed to the net pension credits discussed above.

The
net pension credit is allocated partially to cost of sales and the remaining balance to SG&A. For 2002, 2001 and 2000, the net pension credit allocated to cost of sales was
$30 million, $186 million and $166 million, respectively. For 2002, 2001 and 2000, the net pension credit allocated to SG&A was $23 million, $81 million and
$79 million, respectively. A reduction in the expected return on plan assets as well as a reduction in recognized actuarial gains, offset by lower service and interest costs, accounted for the
decrease in the allocated pension credit for 2002. We expect that our 2003 allocated pension credit will be lower than 2002 due to the volatile equity market conditions of 2000 through 2002 and the
scheduled increase in pension benefits required under our union contracts. We also expect our allocated post-retirement expenses to increase as a result of rising health care rates. As a result, we
expect that we will record a net expense in 2003 as opposed to a net credit. We do not expect to make any contributions to the post-retirement healthcare or life trusts in 2003. You can find
additional information on our participation in QCII's pension and post-retirement plans in Note 11Employee Benefits to our consolidated financial statements in Item 8 of this
report. Also, for a discussion of the accounting treatment and assumptions regarding pension and post-retirement benefits, see the discussion of Critical Accounting Policies in this item 7
below.



Depreciation expense decreased $247 million, or 9%, in 2002 and increased $591 million, or 26%, in 2001. The decrease in 2002 was primarily the result of higher
depreciation in 2001 due to the one-time "catch-up" adjustment discussed below. During 2002, we also recorded an impairment charge, as discussed below, that reduced our annual depreciation expense by
approximately $125 million, effective July 1, 2002. The 2001 increase is the result of the 2001 "catch-up" in our depreciation and the high levels of capital expenditures we incurred to expand our
network during 2000 and 2001.

32

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During 1999 and 2000, U S WEST agreed to sell approximately 800,000 access lines to third-party telecommunications service providers, including approximately 570,000 access
lines to Citizens Communications Company in nine states. Because these access lines were classified as "held for sale," we stopped recognizing depreciation expense on these assets and recorded them at
the lower of their cost or fair value less estimated cost to sell.

On
July 20, 2001, we terminated our agreement with Citizens under which the majority of the remaining access lines in eight states were to have been sold, and ceased actively marketing
the remaining lines. As a result, the remaining access lines in eight states were reclassified to "held and used" as of June 30, 2001. At the date of the change, the access lines were measured
individually at the lower of their (1) carrying value before they were classified as held for sale, adjusted for any depreciation expense or impairment losses that would have been recognized
had the assets been continuously classified as held for use, or (2) estimated fair value at June 30, 2001. The required depreciation adjustments to the carrying value of the individual
access lines were included in operating income for 2001. This resulted in a charge to depreciation expense of $222 million to "catch-up" the depreciation on these access lines for the period they were
held for sale.



Amortization expense increased $111 million, or 58%, in 2002 and increased $80 million, or 72%, in 2001. The increase in both 2002 and 2001 was attributed to
increases in capitalized software costs.



During 2002, 2001 and 2000, we recorded asset impairment charges of $829 million, $49 million and $335 million, respectively, detailed as
follows:

Year ended December 31,2002

2001

2000(As restated)(Dollars in millions)Impairment of property, plant and equipment

$
825

$


$
Special purpose access lines








191Capitalized software due to restructuring activities


4


29


Impairment, capitalized software and other due to Merger





20


144Total asset impairments charges

$
829

$
49

$
335


Effective June 30, 2002, pursuant to Statement of Financial Accounting Standards, or SFAS, No. 144, "Accounting for the Impairment
on Disposal of Long-Lived Assets," or SFAS No. 144, a general deterioration of the telecommunications market, downward revisions to our expected future results of operations and other factors
indicated that our investments in long-lived assets may have been impaired at that date. In accordance with SFAS No. 144 we performed an evaluation of the recoverability of the carrying value
of our long-lived assets using gross undiscounted cash flow projections. For impairment analysis purposes, we grouped our property, plant and equipment and projected cash flows by our traditional
telephone network and our wireless network. Based on the gross undiscounted cash flow projections, we determined that the value of our traditional telephone network was not impaired. However, we
determined that the value of our wireless network, which provides PCS in select markets in our local service area, was impaired at June 30, 2002. For the wireless network, we then estimated the
fair value based on replacement cost. Based on our analysis, the estimated fair value of the wireless assets was less than our carrying amounts and we recorded an impairment charge of
$825 million as of June 30, 2002. Replacement cost was determined by using current cost adjusted for physical deterioration, functional obsolescence and economic obsolescence.

33

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In
accordance with SFAS No. 144, the fair value of the impaired assets becomes the new basis for accounting purposes. As such, approximately $410 million in accumulated
depreciation was eliminated in connection with the accounting for the impairments. The impact of the impairments reduced our annual depreciation and amortization expense by approximately
$135 million, effective July 1, 2002.

We
also recorded asset impairment charges of $4 million and $29 million in 2002 and 2001, respectively, related to internal software projects that we terminated, including
customer database system projects.

Subsequent
to the Merger in 2000, we began to reevaluate all of our assets for potential impairment and concluded that the fair values of some of our assets were below their carrying
value. As a result, we recorded an impairment charge related to equipment and internal use construction projects of $30 million in 2000, writing off the full carrying value of certain internal
use construction projects and equipment.

Also,
in connection with the Merger, we evaluated our dedicated special-purpose access lines that we lease to CLECs for potential impairment. After considering the declining industry
conditions and regulatory changes affecting CLECs in 2000, as well as the fact that these access lines had no alternative use and could not be sold or re-deployed, we concluded that sufficient net
cash flows would not be generated to recover the carrying value of these assets. Therefore, we concluded that the fair value of these assets was minimal and recorded an impairment charge of
$191 million in our 2000 consolidated statement of operations.

Lastly,
we reviewed all internal use software projects in process, and determined that certain projects should no longer be pursued. Because the projects were incomplete and abandoned,
the fair value of such software was determined to be zero. Capitalized software costs of $20 million and $114 million were written off in 2001 and 2000, respectively, and recorded to
asset impairment charges on our consolidated statements of operations at the time they were abandoned. A billing system replacement project was the most significant of the abandoned projects.



During 2002 and 2001, in order to streamline QCII's business and consolidate operations in response to lower customer demand resulting from a decline in economic
conditions, QCII implemented plans to reduce the number of employees, consolidate and sublease facilities, abandon certain capital projects and terminate certain operating leases. We participated in
this restructuring and incurred restructuring and other charges totaling $49 million in 2002 and $212 million in 2001, detailed as follows:

Year ended December 31,2002

2001(As restated)(Dollars in millions)Severance and employee-related chargesnet

$
10

$
188Contractual settlements, legal contingencies and lease lossesnet


29


24Other chargesnet


10


Total restructuring and other chargesnet

$
49

$
212




During 2002, in response to shortfalls in employee reductions planned as part of the 2001 restructuring plan (as discussed below), and due to the continued
declines in our revenue and general economic conditions, QCII identified reductions in the number of employees from various functional areas and permanently abandoned a number of operating and
administrative facilities. These activities

34

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resulted
in a restructuring reserve of $74 million for severance benefits and employee-related matters which we recorded directly to restructuring and other charges in our consolidated
statement of operations. QCII identified approximately 2,400 of our employees from various functional areas to be separated from the company as part of the staffing reduction. The affected employees
are entitled to receive severance benefits pursuant to established severance policies. As of December 31, 2002, approximately 1,800 of the reductions were accomplished resulting in the
utilization of $37 million of the restructuring reserve for severance payments and enhanced pension benefits. We expect the remaining employee reductions to be completed by December 31, 2003.
The 2002 provisions were offset by a reversal of $64 million of accruals established in 2001 as part of the restructuring plan discussed below.

In
conjunction with the staffing reductions, we permanently abandoned 25 real estate facilities and recorded a charge of $25 million related to the rental payments due under the
leases, net of estimated sublease rentals, and estimates of amounts to terminate the leases. In addition to the $25 million charge, an additional $4 million charge was accrued relative
to the plan established in 2001. During 2002, we utilized $2 million of the 2001 restructuring reserves primarily for payments of amounts owed in accordance with the abandoned leases. We expect
that the remaining reserve will be utilized over the remaining terms of the abandoned leases, which are up to five years.

Other
severance related charges not associated with the specific restructuring plans totaled $10 million for the year ended December 31, 2002.

As
a result of these restructuring activities, we expect to realize annual cost savings of approximately $39 million.



During the fourth quarter of 2001, a plan was approved by QCII to reduce our current employee levels, consolidate and sublease facilities, abandon certain capital
projects and terminate certain operating leases. As a result, we recorded a restructuring charge of $212 million to cover the costs associated with these actions as more fully described below.

In
order to streamline our business and consolidate operations to meet lower customer demand resulting from a decline in economic conditions, QCII identified 4,800 of our employees, in
various functional areas, to be terminated and we accrued restructuring charges of $188 million for severance benefits to be made to those employees. As of December 31, 2002, our restructuring
activities under this plan were substantially complete, and we had terminated approximately 3,700 employees and made payments of $114 million in cash severance, enhanced pension benefits and
employee-related payments. As a result of the shortfall in actual terminations, during 2002 we reversed $64 million of the accruals established in 2001, which is recorded as a reduction in
restructuring charges in our 2002 consolidated statement of operations.

Due
to the reduction in employees and the consolidation of operations, we recognized a restructuring charge to our consolidated statement of operations in 2001 of $24 million for
estimated costs associated with the termination of nine abandoned operating lease agreements. By December 31, 2002, we had made payments of $17 million associated with the sublease losses and
contract termination costs. As a result of these restructuring activities, we expect to realize annual cost savings of approximately $195 million.



During the fourth quarter of 2003, as part of an ongoing effort of evaluating costs of operations, QCII further reduced employee levels in certain areas of our
business. As a result, we plan to record a

35

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charge
to our consolidated statement of operations during the fourth quarter of 2003, primarily for estimated severance costs ranging from $35 million to $55 million.



In 2000, we recorded Merger-related and other charges of $813 million. We recorded additional charges of $120 million related to the Merger in 2001,
net of reversals discussed below. The following table details the amounts charged to operations:

Year ended December 31,2002

2001

2000(As restated)(Dollars in millions)Contractual settlements and legal contingenciesnet

$
(30
)
$
73

$
477Severance and employee-related chargesnet





6


250Other Merger-related chargesnet





41


86Total Merger-related (credits) chargesnet

$
(30
)
$
120

$
813


We recorded charges to our consolidated statement of operations of $133 million and $477 million for 2001 and 2000, respectively, associated with
various contractual settlements and legal contingencies. The charges were accrued to cancel various commitments no longer deemed necessary as a result of the Merger and to settle various claims
related to the Merger. In 2002 and 2001, we reversed $30 million and $60 million of the originally established reserves, respectively, in our consolidated statements of operations. The
reversals resulted from favorable developments in the matters underlying contractual settlements and legal contingencies.

In
connection with the Merger and prior to December 31, 2001, we reduced employee levels by over 3,200 people. The 2001 and 2000 severance and employee-related charges of
$35 million and $250 million, respectively, consist of costs associated with payments to employees who involuntarily left the business as a result of the Merger and, for 2000,
$38 million in bonus payments that were subject to the successful completion of the Merger. Upon the completion of our Merger-related plans in this area, and having achieved a reduction of
3,200 people in 2001, we reversed $29 million of the severance and employee-related reserves established that were in excess of our actual costs.

Other
net Merger-related charges of $41 million and $86 million were incurred in 2001 and 2000, respectively, for professional fees, re-branding costs and other incremental
costs directly related to the Merger.

36

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Other expensenet includes interest expense, net of capitalized interest; (gain) loss on sales of rural exchanges and other fixed assets; interest
income and other incomenet.

|                                                              |                         |   |     |     |   |     |     |   |     |     |   | Percentage Change |    
|------------------------------------------------------------- | ----------------------- | - | --- | --- | - | --- | --- | - | --- | --- | - | ----------------- | ---
|
|
|
|
|
|
|Interest expensenet                                          |                         | $ | 699 |     | $ | 613 |     | $ | 549 |     | $ | 86                |    
|(Gain) loss on sale of rural exchanges and other fixed assets |                         |   |    |     |   | (51 | )   |   | 11  |     |   | 51                |    
|Other expense (income)net                                    |                         |   | 9   |     |   | (18 | )   |   | 6   |     |   | 27                |    
|                                                              |                         |   |     |     |   |     |     |   |     |     |   |                   |    
|                                                              | Total other expensenet |   | $   | 708 |   | $   | 544 |   | $   | 566 |   | $                 | 164
|                                                              |                         |   |     |     |   |     |     |   |     |     |   |                   |    

---

nmnot meaningful

Interest expensenet.Interest expensenet was $699 million for 2002, compared
to $613 million for 2001. The increase in interest expense was primarily attributable to the issuance of $1.5 billion of 10-year bonds in March 2002 at an 8.875% interest rate. These
bonds ultimately replaced short-term debt which in 2001 consisted primarily of commercial paper that had a weighted average interest rate of 2.59% at December 31, 2001. We are currently
incurring penalty interest of 0.25% on the $1.5 billion due to our failure to register these securities by October 8, 2002. We will continue to incur this penalty interest until we register
these securities, which is expected to occur in 2004. Also contributing to the increase was a decrease of $21 million in the amount of capitalized interest in 2002 as a result of lower capital
expenditures.

Interest
expense was $613 million for 2001, compared to $549 million for 2000. The increase in interest expense was primarily attributable to increased borrowings required
to fund capital improvements to our network.

(Gain) loss on sale of rural exchanges and other fixed assets.In 2001, we sold approximately 41,000 access lines in Utah and
Arizona resulting in $94 million in proceeds and a gain of $51 million. In 2000, we completed the sale of approximately 20,000 access lines in North Dakota and South Dakota resulting in
proceeds of $46 million and a gain of $28 million. In addition, we recorded a net loss of $39 million relating to the disposal of other non-strategic assets in 2000.

Other expense (income)net.Other expense (income)net decreased $27 million and increased
$24 million in 2002 and 2001, respectively. The 2002 decrease includes an $8 million drop in income from our minority interest in consolidated subsidiaries and a $33 million
increase in write-offs and abandonments of various assets, partially offset by a $14 million increase in interest income.

Income Tax Provision

The effective income tax rate increased to 37.8% in 2002 from 37.3% in 2001. The increase was primarily attributable to various adjustments made for prior periods
and for increases in other non-deductible expenditures made in 2002. The adjustments for prior periods were due to income tax audit settlements and to modifications made to accruals for the prior
year.

The
2001 effective tax rate of 37.3% was a decrease from the 2000 rate of 42.7% as the 2000 income tax provision includes $82 million of income taxes resulting from the transfer
of an appreciated investment to QSC.

37

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Liquidity and Capital Resources

We are a wholly owned subsidiary of 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 and impacts on our credit ratings.

Financial Position

QCII has cash management arrangements between certain of its subsidiaries that include lines of credit, intercompany 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 intercompany obligations
vary from time to time and are classified as short-term borrowings.

Our
working capital deficit, or current assets less current liabilities, was $1.8 billion, $3.8 billion and $5.8 billion as of September 30, 2003 and
December 31, 2002 and 2001, respectively. Our current working capital deficit is primarily due to short-term borrowings from affiliates by our wholly owned subsidiary, Qwest Wireless, amounting
to $2.079 billion as of September 30, 2003. These borrowings mature in January 2005. We expect that the maturities of the borrowings will be extended by our affiliates as necessary.

The
improvement in the working capital deficit during 2002 of $2.0 billion was due to a combination of our decision to reduce capital expenditures and our refinancing of current
borrowings to long-term. This trend continued during 2003 with another $2.0 billion improvement in the working capital deficit through September 30, 2003. In addition, contributing to
the improvement in 2003, we entered into a senior term loan for $1.75 billion principal amount of indebtedness of which a significant portion was used to refinance short-term borrowings into
long-term. For more information about this loan, see Recent Developments Impacting Liquidity and Capital Resources below.

As
of September 30, 2003, QCII and its consolidated subsidiaries had total borrowings of $21.3 billion. Some of the borrowings issued by QCII and QSC are secured by liens
on the stock of the Company.
As a result, ownership of the stock of the Company could transfer if either QCII or QSC were to default on its debt obligations.

At
December 31, 2002, we were in compliance with all provisions and covenants of our borrowings. Some of QSC's loan documents contain financial reporting covenants that require
delivery of our annual and quarterly periodic reports. A waiver has been obtained for non-compliance to provide certain annual and quarterly financial information to the lenders. The waiver extended
the compliance date to provide the financial information to January 31, 2004.

As
of September 30, 2003 and December 31, 2002, 2001 and 2000, our consolidated debt was approximately $9.8 billion, $9.2 billion, $9.6 billion and
$8.7 billion, respectively, including borrowings from affiliates. In addition, our unrestricted cash balances were approximately $1.4 billion, $232 million, $150 million
and $112 million as of the same dates. We expect to use our cash primarily to invest in telecommunications assets, redeem indebtedness and pay dividends to QSC. We have recently taken the
following measures to improve our near-term liquidity and our capital structure and generally reduce financial risk:



38

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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.

Operating activities.We generated cash from operating activities of $4.253 billion, $3.662 billion and
$4.019 billion, in 2002, 2001 and 2000, respectively.

The
$591 million increase in cash provided by operating activities in 2002 as compared to 2001 was primarily the result of cash management improvements of $1.3 billion offset by reduced
cash flows directly related to a $602 million decrease in net income. The cash management improvements between 2002 and 2001 were primarily a result of increases in collections of revenues and
reductions in cash outlays for operating, benefit and pension expenses, offset by increased cash payments for restructuring and Merger-related expenses. This decrease in net income is primarily a
result of a decrease in revenues in 2002. Revenues decreased in 2002, as compared to 2001, primarily as a result of access line losses and a reduction in wholesale switched access revenue.

Investing activities.Cash used for investing activities was $1.818 billion, $4.448 billion and
$4.560 billion in 2002, 2001 and 2000, respectively. Cash used in investing activities during 2002 decreased $2.630 billion compared to 2001 primarily as a result of a
$2.682 billion reduction in capital expenditures in 2002. The decrease in capital expenditures was the result of our decision to reduce our expansion efforts as a result of the general economic
downturn and the completion of many of our major capital projects in 2001. We expect our 2003 capital expenditure levels to remain consistent with 2002.

Capital
expenditures were $1.823 billion, $4.505 billion and $4.600 billion in 2002, 2001 and 2000, respectively. Capital expenditures for the nine months ended
September 30, 2003, were $1.199 billion.

Financing activities.Cash (used for) provided by financing activities was $(2.353) billion in 2002,
$824 million in 2001 and $592 million in 2000.

Until
February 2002, we maintained commercial paper programs to finance our short-term operating cash needs. QCII and we had a $4.0 billion syndicated credit facility, or the
Credit Facility, of which $1.0 billion was designated to us. As a result of reduced demand for our commercial paper programs, we borrowed $1.0 billion under the Credit Facility in the
first quarter of 2002. During the first quarter
of 2002, we paid down approximately $1.0 billion of our current borrowings including substantially all of our outstanding commercial paper.

In
March 2002, we issued $1.5 billion in bonds with a 10-year maturity and an 8.875% stated interest rate. At December 31, 2002 the interest rate was 9.125%. Once we have
registered the notes, the interest rate will return to 8.875%, the originally stated rate. The proceeds from the sale of the bonds were used to pay approximately $1.0 billion outstanding under
the Credit Facility, other short-term obligations and currently maturing long-term borrowings. QCII and QSC amended the Credit Facility in August of 2002. Following the amendment, we are no longer a
party to the Credit Facility.

Affiliate
borrowings of our wholly owned subsidiary, Qwest Wireless, in the form of short-term unsecured lines of credit, were $1.888 billion and $2.292 billion at
December 31, 2002 and 2001, respectively. These affiliate borrowings fluctuate based on operating needs of Qwest Wireless and mature on January 15, 2005.

We
paid dividends during the year ended December 31, 2002 of $1.915 billion to QSC.

39

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Payment Obligations and Contingencies

Payment obligations.The following table summarizes our future contractual cash obligations, excluding interest, as of
December 31, 2002:

|                                    |                                           | Payments due by period
|----------------------------------- | ----------------------------------------- | ----------------------
|
|
|
|Borrowings                          |                                           | $                     
|Capital lease obligations and other |                                           |                       
|Operating leases                    |                                           |                       
|Purchase commitment obligations     |                                           |                       
|                                    |                                           |                       
|                                    | Total future contractual cash obligations |                       
|                                    |                                           |                       

We have future purchase commitments with CLECs, IXCs and third-party vendors that require us to make payments to purchase network services, capacity and
telecommunications equipment through December 31, 2006. These commitments require us to maintain minimum monthly and/or annual billings, in certain cases based on usage.

Letters of Credit and Guarantees.At December 31, 2002, we had letters of credit of approximately $3 million
and no guarantees outstanding.

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. Certain of these actions present significant risk to us. We are unable in every case to estimate reasonably a range of loss that we would incur if the plaintiffs in one
or more of these lawsuits were to prevail. While we and QCII intend to defend against these matters 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. QCII has disclosed that it is unable to estimate reasonably a range of loss that it would incur if the
plaintiffs in one or more of these lawsuits were to prevail. QCII has engaged in discussions for the purposes of resolving these matters and continues to evaluate any possible range of loss. Any
settlement of or judgment in one or more of these claims could be material, and QCII cannot give any assurance that it would have the resources available to pay such judgments. Also, in the event of
an adverse outcome of 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. For a description of these legal actions, please see Note 17Commitments and
Contingencies to our consolidated financial statements in Item 8 of this report.

Recent Developments Impacting Liquidity and Capital Resources

On June 9, 2003, we entered into a senior term loan with two tranches for a total of $1.75 billion principal amount of indebtedness. The term loan
consists of a $1.25 billion floating rate tranche, due in 2007, and a $500 million fixed rate tranche, due in 2010. The term loan is unsecured and ranks equally with all of our current
indebtedness. The floating rate tranche cannot be prepaid for two years and thereafter is subject to prepayment premiums through 2006. There are no mandatory prepayment requirements. The covenant and
default terms are substantially the same as those associated with our other debt. The net proceeds were used to refinance our debt due in 2003 and to fund or refinance our investment in
telecommunications assets.

The
floating rate tranche bears interest at London Interbank Offered Rates, or LIBOR, plus 4.75% (with a minimum interest rate of 6.50%) and the fixed rate tranche bears interest at
6.95% per

40

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annum.
The lenders funded the entire principal amount of the loan subject to the original issue discount for the floating rate tranche of 1.00% and for the fixed rate tranche of 1.652%.

For
the nine months ended September 30, 2003, we have declared regular dividends amounting to $1.034 billion. In addition, in August and November of 2003, we declared and
paid dividends in the amount of $360 million and $719 million, respectively, relating to net income from prior periods that had not been declared or paid as dividends in those periods. We intend to
declare and make additional dividend payments in the future until all net income from wireline entities from prior periods has been declared and remitted as dividends. We estimate that the incremental
amount (in addition to the $1.079 billion declared in 2003) of such dividends will be approximately $1.3 billion.

On
December 18, 2003, QCII entered into an agreement to purchase certain telecommunications assets from Allegiance Telecom, Inc. for a purchase price consisting of
$300 million in cash, a convertible promissory note in the amount of $90 million and the assumption of certain liabilities. The agreement is subject to approval by the
U.S. Bankruptcy Court and certain other government regulatory agencies. Allegiance has filed a motion with the Bankruptcy Court to begin a sale process in which QCII will be designated as the
stalking horse bidder and other interested potential bidders will have an opportunity to offer higher bids for the assets of Allegiance. If QCII is successful in the bidding process, it expects to
consummate the transaction sometime in 2004. In that event, it is possible that some portion of the Allegiance assets will be transferred to or purchased by us, although we have not yet determined the
amount or the price we would pay for them.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the
application of these and other significant accounting policies, see Note 2Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 of
this report. These policies are considered "critical" because they have the potential to have a material impact on our financial statements and because they require significant judgments and
estimates. Certain historical accounting policies that were critical have been corrected and clarified in connection with our restatement. These include revenue recognition applicable to termination
fees, installation fees and wireless revenues. Note that our preparation of this annual report on Form 10-K requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the reporting
period. There can be no assurance that actual results will not differ from those estimates.



Revenues from services are recognized when the services are provided. Payments received in advance are deferred until the service is provided. Up-front fees
received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship, generally one
to 10 years. Expected customer relationship periods are estimated using historical data of actual customer retention patterns. Termination fees or other fees on existing contracts that are negotiated
in conjunction with new contracts are deferred and recognized over the new contract term. As the telecommunications market experiences greater competition and customers shift from traditional
land-based telephony services to mobile services, our estimated customer relationship periods will likely decrease.

We
believe that the accounting estimates related to the recognition of revenue and establishment of reserves for uncollectible amounts in the results of operations is a "critical
accounting estimate" because: (1) it requires management to make assumptions about future collections, billing adjustments and unauthorized usage, and (2) the impact of changes in actual performance
versus these estimates on the accounts receivable balance reported on our consolidated balance sheets and the results reported in our consolidated statements of operations could be material. In
selecting these assumptions, we use

41

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historical
trending of write-offs, industry norms, regulatory decisions and recognition of current market indicators about general economic conditions that might impact the collectibility of accounts.



Internally used software, whether purchased or developed, is capitalized and amortized using the straight-line method over an estimated useful life of 18 months
to five years. In accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," we capitalize certain costs associated with
internally developed software such as payroll costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with internally developed software
to be used internally are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only
to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. The
capitalization of software requires judgment in determining when a project has reached the development stage and the period over which we expect to benefit from the use of that software. Further, the
recovery of software projects is periodically reviewed and may result in significant write-offs.



Changes in any of the assumptions QCII made in computing the net of the pension credit and post-retirement benefit cost could have an impact on various components
that are the basis for their allocation to us. Factors to be considered include the strength or weakness of the investment markets, changes in the composition of the employee base, fluctuations in
interest rates, assumptions on discount rates, significant employee hirings or downsizings and medical cost trends. Changes in any of these factors could impact our cost of sales and SG&A in our
consolidated statements of operations as well as the value of the asset or liability on our consolidated balance sheets. If QCII's assumed expected rate of return of 9.4% was 100 basis points lower,
the impact would have been to decrease our allocated pension credit, net of post-retirement expenses, by $77 million, $112 million and $118 million for 2002, 2001 and 2000,
respectively. In response to current market conditions, effective January 1, 2003, QCII lowered its assumed expected long-term rate on plan assets to 9.0%.



Effective June 30, 2002, pursuant to SFAS No. 144, a general deterioration of the telecommunications market, downward revisions to our expected
future results of operations and other factors indicated that our investments in long-lived assets may have been impaired at that date. In accordance with SFAS No. 144, we performed an
evaluation of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. For impairment analysis purposes, we group our property, plant and
equipment and projected cash flows by our traditional telephone network and our wireless network. Based on the gross undiscounted cash flow projections, we determined that our traditional telephone
network was not impaired. However, we determined that our wireless network, which provides PCS in select markets in our local service area, was impaired at June 30, 2002. For our wireless
network, we then estimated the fair value based on replacement cost. Based on our analysis, the estimated fair value of the wireless assets was less than our carrying amounts and we recorded an
impairment charge of $825 million as of June 30, 2002. Replacement cost was determined by using current cost adjusted for physical deterioration, functional obsolescence and economic
obsolescence.

Calculating
the estimated fair value of the asset groups described above involves significant judgments and a variety of assumptions. For calculating the fair value based on replacement
cost, we used current cost and reduced that amount for physical deterioration and functional and economic obsolescence. A hypothetical 10% increase or decrease in the current cost factors would have
changed

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the
impairment charge by $17.1 million. A hypothetical 1% change in the discount factors related to physical deterioration, functional obsolescence and economic obsolescence would have changed
the impairment charge by $10.4 million.

Recently Adopted Accounting Pronouncements and Cumulative Effect of Adoption

On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangibles," or SFAS No. 142, which requires companies to cease amortizing
goodwill and intangible assets, which have indefinite useful lives. SFAS No. 142 also requires that goodwill and indefinite-lived intangible assets be reviewed for impairment upon adoption on
January 1, 2002 and annually thereafter, or more often if events or circumstances warrant. We ceased amortizing our spectrum licenses, which have indefinite lives, on January 1, 2002.

Upon
adoption of SFAS No. 142, we reviewed the useful lives of our amortizable intangible assets, primarily capitalized software and customer lists, and determined that after
restatement they remained appropriate. In accordance with SFAS No. 142, we will continue to perform impairment tests on the remaining indefinite-lived intangible assets on an annual basis, or
more often if events or changes in circumstances indicate the assets may be impaired.

In
August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144. This pronouncement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets other than goodwill and intangible assets with indefinite lives. Under SFAS No. 144, long-lived assets being held or used are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not be recoverable from their expected future undiscounted cash flows ("a triggering event"). The impairment loss is equal to
the difference between the asset's carrying amount and estimated fair value. In addition, SFAS No. 144 requires long-lived assets to be disposed of other than by sale for cash to be accounted
for and reported like assets being held and used. Long-lived assets to be disposed of by sale are to be recorded at the lower of their carrying amount or estimated fair value (less costs to sell) at
the time the plan of disposition has been approved and committed to by the appropriate company management. We adopted SFAS No. 144 effective January 1, 2002. Effective June 30,
2002, a triggering event occurred and we recorded an impairment charge of approximately $825 million. See Note 6Property, Plant and Equipment to our consolidated financial
statements in Item 8 of this report for further information.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement
No. 123," or SFAS No. 148, which is effective for financial statements related to periods ending after December 15, 2002. SFAS No. 148 requires expanded disclosure
regarding stock-based compensation, which we have included in Note 2Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of this report.

FASB
Interpretation, or FIN, No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," was issued in
November 2002. The interpretation provides guidance on the guarantor's accounting and disclosure of guarantees, including indirect guarantees of indebtedness of others. We have adopted the disclosure
requirements of the interpretation as of December 31, 2002. The accounting guidelines are applicable to certain guarantees, excluding affiliate guarantees, issued or modified after
December 31, 2002, and require that
we record a liability for the fair value of such guarantees on our consolidated balance sheet. The adoption of this interpretation had no material effect on our consolidated financial statements.

In
2000, we recorded a cumulative effect of a change in accounting principle of approximately $41 million, net of income taxes, upon our adoption of Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," or SAB No. 101. The $41 million charge relates to the establishment of deferred revenues and costs for certain activation
and installation activities. Previously, installation and activation fees and costs had been recognized in their entirety at the time the

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installation
or activation was completed. Under the rules of SAB No. 101, these installation and activation fees are recognized ratably over the estimated lives of the customer relationships,
which range from one to 10 years. The adjustment to the cumulative effect previously reported is further described in Note 3Restatement of Results to our consolidated financial
statements in Item 8 of this report.

New Accounting Standards

On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," or SFAS No. 143. This statement 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 have 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 (liability of
$12 million net of an asset of $5 million) in 2003.

Prior
to the adoption of SFAS No. 143, we have 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 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 pretax upon adoption of SFAS No. 143 in 2003. The net income impact of the adoption is $219 million ($365 million less the
$7 million charge disclosed above, net of income taxes of $139 million).

On
a going forward basis, the net costs of removal related to these assets will be charged to our consolidated statement of operations in the period in which the costs are incurred. As a
result, the adoption of SFAS No. 143 is expected to decrease our depreciation expense on an annual basis by approximately $33 million and increase operating expenses related to the
accretion of the fair value of our legal asset retirement obligations by approximately $1 million annually beginning January 1, 2003. Based on historical charges and activity, we believe
that recurring removal costs will be approximately $35 million to $45 million annually which will be charged to our consolidated statement of operations as incurred.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," or SFAS No. 146, which is applicable for exit or disposal
activities initiated after December 31, 2002. This statement requires that liabilities for costs that are associated with an exit or disposal activity be recognized and measured initially at
fair value in the period in which the liability is incurred. It nullifies the guidance of Emerging Issues Task Force, or EITF, No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," or EITF No. 94-3. Under EITF No. 94-3, an entity recognized a liability for an exit
cost on the date that the entity committed itself to an exit plan. SFAS No. 146 concludes that an entity's commitment to a plan does not, by itself, create a present obligation to other parties
that meets the definition of a liability. In accordance with SFAS No. 146, our restructuring activities that were recorded prior to 2003 will continue to be accounted for under

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previous
guidance. Our adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on our operating results or financial position.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities," or FIN No. 46, which is effective immediately for all variable interest entities
created after January 31, 2003. FIN No. 46 must be applied for the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003, or the third quarter 2003 for us. FIN No. 46 requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. A primary beneficiary absorbs the majority of the entity's expected losses,
if they occur, receives a majority of the entity's expected residual returns, if they occur, or both. Where it is reasonably possible that the information about our variable interest entity
relationships must be disclosed or consolidated, we must disclose the nature, purpose, size and activity of the variable interest entity and the maximum exposure to loss as a result of our involvement
with the variable interest entity in all financial statements issued after January 31, 2003. We are evaluating whether the adoption of FIN No. 46 will require consolidation of any
previously unconsolidated entities.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," or SFAS No. 150. SFAS
No. 150 provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not believe that the adoption of SFAS No. 150 will have a material
impact on our consolidated financial statements.

Related Party Transactions

We are not party to any related party transactions outside of our affiliates. Intercompany transactions are detailed in Note 16Related Party
Transactions to our consolidated financial statements in Item 8 of this report.

Risk Management

We are exposed to market risks arising from changes in interest rates. 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 exposure. We may also employ financial derivatives to hedge foreign currency
exposures associated with particular debt.

As
of December 31, 2002, there was no floating rate debt that was exposed to changes in interest rates. However in 2001, approximately $900 million of floating rate debt
was exposed to changes in interest rates. This exposure was linked to commercial paper rates. As of December 31, 2002 and 2001, we also had approximately $1.2 billion and
$400 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 approximately $6.1 billion and $5.8 billion of long-term
fixed rate debt at December 31, 2002 and 2001, 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
approximately $300 million at both December 31, 2002 and 2001, respectively. 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 approximately $400 million and $300 million at December 31, 2002 and 2001, respectively.

As
of December 31, 2002, we had $232 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 derived from these accounts.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K 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.

You
are further cautioned that we have determined that in certain cases we misinterpreted or misapplied GAAP in our 2001 and 2000 consolidated financial statements. Accordingly, we have
restated our consolidated financial statements for the two years ended December 31, 2001 and related interim periods, and you should not rely on previously filed information for those periods.
Because this restatement has also impacted our 2002 results, as reflected herein, the information previously filed in
our quarterly report on Form 10-Q for the three months ended March 31, 2002 and any other 2002 information that has been previously disclosed should not be relied upon.

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Risk Factors

Risks Affecting Our Business

Continued downturn in the economy in our local service area could affect our operating results.

Our operations in our local service area of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming have been impacted by the continuing weakness in that region's economy. Because customers have less discretionary income, demand for second lines or additional services has
declined. This economic downturn in our local service area has also led to an increased customer disconnection rate. In addition, several of the companies with which we do business appear to be in
financial difficulty or have filed for bankruptcy protection. Some of these have requested renegotiation of long-term agreements with us because of their financial circumstances and because they
believe the terms of these agreements are no longer appropriate for their needs. Our revenues have been and are likely to continue to be adversely affected by the loss or reduction of business with
many of our customers as a result of this downturn and our continued efforts to accommodate our customers' needs in this changing business environment.

We
believe that our local service area's economy lagged the national economy in entering the downturn and may follow the national economy in recovery by an indeterminate period. This
continued economic slowdown will affect demand for our products and services within our local service area.

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 ourselves), facilities-based providers using their own networks as well as those leasing parts of our network (UNEs) 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.

One
of the primary reasons we continue to experience loss of access lines is the intense competition from cable and wireless providers offering a substitute for our traditional voice and
data services. We are implementing new strategies for enhancing our video and wireless offerings. However, it will be difficult to effectively execute our strategy in the face of increasing
competition. For example, our recently announced wireless strategy of reselling Sprint wireless services to our customers is untested. We may not be able to effectively integrate Sprint's services
into our product offerings and it may require greater resources than we anticipate to operate as a wireless reseller. Also, while we recently entered into strategic marketing arrangements with
Echostar and DIRECTV to bundle their satellite television products and services with our traditional telecommunications, data and Internet offerings, our video offering remains limited to select
markets in our local service area. If we are unable to effectively implement our strategy for improving video and wireless solutions, both our wireless and our traditional telephone businesses may be
adversely affected.

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 that allow us to retain and attract customers. These pressures could adversely affect our operating results and financial performance.

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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, wireless and 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 securities and our ability to service our debt.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of investigations of QCII currently being conducted by the SEC and the U.S. Attorney's Office or the assessment being undertaken by
the 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 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 2002 Form 10-K. 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. 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 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. Such discussions are preliminary and 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 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 a civil penalty, the amount of which could be material, 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. At

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the
date of this filing, no action has 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 would include
allegations concerning the January 24, 2001 earnings release.

Also,
the GSA is conducting a review of all contracts with QCII for purposes of determining present responsibility. On September 12, 2003, we were 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, although QCII cannot predict the outcome of this referral.

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 material and significant adverse
impact upon us.

The breadth of QCII's internal analysis of its accounting policies, practices and procedures, the passage of time and the turnover in accounting
personnel or further review by the SEC could result in additional adjustments.

QCII continues to discuss its periodic filings with the staff of the SEC's Division of Corporation Finance. They have reviewed QCII's 2001 Form 10-K and
its Form 10-Q for the three months ended March 31, 2002. As appropriate, QCII has attempted to address the Staff's comments in its current filings and has provided responses to those
other comments that it could address. Following their review of QCII's 2002 Form 10-K and Form 10-Qs for the three, six and nine months ended March 31, 2003, June 30, 2003
and September 30, 2003, QCII may receive additional comments from the staff of the Division of Corporation Finance and may be required to make further adjustments or additional disclosures. It
is possible that these comments may lead to further investigations from the SEC's Division of Enforcement.

While
QCII has attempted to address all the matters identified in its internal analysis of its accounting policies, practices and procedures, due to the breadth of this analysis, the
passage of time and the turnover in accounting personnel employed by QCII, QCII may have overlooked some matters in its internal analysis.

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 billions
of dollars.

The
consolidated securities action, the consolidated ERISA action and the CalSTRS, New Jersey and SURSI actions described in Item 3 above present material and significant risk to
QCII. Some of the allegations in these lawsuits include many of the same subjects that the SEC and U.S. Attorney's Office are investigating. Moreover, the size, scope and nature of QCII's recent
restatements affect the risk presented by these cases. While QCII intends to defend against these matters vigorously, the ultimate outcomes of these cases are very uncertain, and QCII can give no
assurance as to the impacts on its financial results or financial condition as a result of these matters. Each of these cases is in a preliminary phase. None of the plaintiffs or the defendants has
advanced evidence concerning possible recoverable damages, and QCII has not yet conducted discovery on these and other relevant issues. QCII has disclosed that it is unable to estimate reasonably a
range of loss that it would incur if the plaintiffs in one or more of these lawsuits were to prevail. QCII has engaged in discussions for the purpose of resolving these matters and continues to
evaluate any possible range of loss. Any settlement

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of
or judgment on one or more of these claims could be material, and QCII cannot give any assurance that it would have the resources available to pay such judgments. Also, in the event of an adverse
outcome of 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.

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 and
affect our business opportunities, and any restatement of our earnings as stated in this filing could limit our ability to access the capital markets and could increase litigation risks.

As a result of our and QCII's accounting issues and the increased scrutiny of financial disclosure, investor confidence in us 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 to the SEC investigation discussed earlier, QCII has reported that the SEC has investigated QCII's earnings release for the fourth quarter and full year 2000 and that the
staff of the SEC has decided to recommend an action against QCII alleging that it should also have included in the earnings release a statement of its GAAP earnings. Although all businesses face
uncertainty with respect to how the U.S. financial disclosure regime may impact their financial statements, particular attention has been focused recently on the telecommunications industry.
Congressional hearings held in 2002, for example, related to the telecommunications industry practice of accounting for indefeasible rights of use, or IRUs, as well as the appropriateness and
consistency of pro forma financial information disclosure. Some of our former and current officers and directors have testified at these hearings concerning IRUs and other matters.

The
existence of this heightened scrutiny and these pending investigations could adversely affect investor confidence and cause the trading price for our securities to decline. In
addition, we cannot assure you that we will not have to further restate earnings for prior periods as a result of any formal actions, the SEC's review of QCII's filings or because of our own periodic
internal investigations. Any such restatement could further impact our ability to access the capital markets and the trading price of our securities.

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 PUCs and other state agencies. Federal laws and FCC regulations apply to interstate telecommunications
(including international telecommunications that originate or terminate in the United States), while state regulatory authorities 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 tariffs for our intrastate services in most of these jurisdictions. Our business is 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.

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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.

Risks Affecting Our Liquidity

QCII's high debt levels and the restrictive terms of their debt instruments 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 September 30, 2003, our consolidated debt was $9.8 billion which is
included in QCII's total consolidated debt of $21.3 billion. A significant amount of our and QCII's debt obligations come due over the next few years. While we currently believe we, together
with QCII, will have the financial resources and access to capital markets 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.

We
will likely need to obtain additional financing to meet our debt service and dividend obligations if our and QCII's operations do not improve, if revenue and operating cash flow
declines are worse than expected, if economic conditions do not improve or if we or QCII become subject to significant judgments and/or settlements in connection with the resolution of one or more
matters described in Legal Proceedings in Item 3 of this report. 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.

Additionally,
the degree to which we, together with QCII, are leveraged may have important limiting consequences on us, including the following:



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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. As we will need to maintain the quality of our products and services in the future, we may be unable to further significantly reduce such capital requirements or operating expenses, even if
revenues are decreasing. Such nondiscretionary capital outlays 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.

Our current practice is to distribute to QSC cash dividends in an amount equal to our net income from wireline entities, generally during the same period in which
the net income is earned. We expect to continue this practice for the foreseeable future.

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

The terms of QCII's and our debt instruments permit both 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 Affecting 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 consolidated financial statements and accompanying notes. Our critical accounting policies, which are set forth above, describe the significant accounting policies
and methods used in the preparation of our consolidated financial statements. These accounting policies are considered "critical" because they require judgments, assumptions and estimates that
materially impact our 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 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

52

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significant
disruption of operations, which could have a material adverse effect on our business. We recently reached agreements with the CWA and the IBEW on new two-year labor contracts. Each of
these agreements was ratified by union members, went into effect on August 17, 2003 and expires on August 13, 2005.

ITEM 7A.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 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

53

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Independent Auditors' Report

The
Board of Directors and Stockholder
Qwest Corporation:

We
have audited the accompanying consolidated balance sheets of Qwest Corporation and subsidiaries, a wholly owned subsidiary of Qwest Communications International Inc., as of
December 31, 2002, 2001, and 2000, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qwest Corporation and subsidiaries as of
December 31, 2002, 2001, and 2000, and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United
States of America.

As
discussed in note 2 to the accompanying consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, and Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets. As discussed in note 2, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, and effective January 1, 2000, the Company adopted Staff Accounting Bulletin No. 101,Revenue Recognition in
Financial Statements.

As
discussed in note 3 to the accompanying consolidated financial statements, the Company has restated its consolidated balance sheets as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholder's equity, and cash flows for each of the years then ended, which consolidated financial statements were previously audited by other independent
auditors who have ceased operations.

/s/
KPMG LLP

Denver,
Colorado
January 8, 2004

54

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                  |                                                                           | Year Ended December 31,  |       
|------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------ | ------
|
|
|
|Operating revenues                                                                                |                                                                           | $                        | 11,505
|Operating revenuesaffiliates                                                                     |                                                                           |                          | 411   
|                                                                                                  |                                                                           |                          |       
|Total operating revenues                                                                          |                                                                           |                          | 11,916
|Operating expenses:                                                                               |                                                                           |                          |       
|                                                                                                  | Cost of sales (exclusive of depreciation and amortization detailed below) |                          |       
|                                                                                                  | Cost of salesaffiliates                                                  |                          |       
|                                                                                                  | Selling, general and administrative                                       |                          |       
|                                                                                                  | Selling, general and administrativeaffiliates                            |                          |       
|                                                                                                  | Depreciation                                                              |                          |       
|                                                                                                  | Intangible assets amortization                                            |                          |       
|                                                                                                  | Asset impairment charges                                                  |                          |       
|                                                                                                  | Restructuring and other chargesnet                                       |                          |       
|                                                                                                  | Merger-related (credits) chargesnet                                      |                          |       
|                                                                                                  |                                                                           |                          |       
|                                                                                                  |                                                                           | Total operating expenses |       
|                                                                                                  |                                                                           |                          |       
|Operating income                                                                                  |                                                                           |                          | 2,002 
|                                                                                                  |                                                                           |                          |       
|Other expense (income):                                                                           |                                                                           |                          |       
|                                                                                                  | Interest expensenet                                                      |                          |       
|                                                                                                  | Interest expensenetaffiliates                                           |                          |       
|                                                                                                  | (Gain) loss on sale of rural exchanges and other fixed assets             |                          |       
|                                                                                                  | Other expense (income)net                                                |                          |       
|                                                                                                  |                                                                           |                          |       
|                                                                                                  |                                                                           | Total other expensenet  |       
|                                                                                                  |                                                                           |                          |       
|Income before income taxes and cumulative effect of change in accounting principle                |                                                                           |                          | 1,294 
|Income tax expense                                                                                |                                                                           |                          | (489  
|                                                                                                  |                                                                           |                          |       
|Income before cumulative effect of change in accounting principle                                 |                                                                           |                          | 805   
|Cumulative effect of change in accounting principle, net of taxes of $0, $0 and $26, respectively |                                                                           |                          |      
|                                                                                                  |                                                                           |                          |       
|Net income                                                                                        |                                                                           | $                        | 805   
|                                                                                                  |                                                                           |                          |       

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

55

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QWEST CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                                                                                                            |                                                        | December 31,                               |       
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | ------
|
|
|
|ASSETS                                                                                                                      |                                                       
|Current assets:                                                                                                             |                                                        |                                            |       
|                                                                                                                            | Cash and cash equivalents                              |                                            | $     
|                                                                                                                            | Restricted cash                                        |                                            |       
|                                                                                                                            | Accounts receivablenet                                |                                            |       
|                                                                                                                            | Accounts receivableaffiliates                         |                                            |       
|                                                                                                                            | Deferred income taxes                                  |                                            |       
|                                                                                                                            | Prepaid and other assets                               |                                            |       
|                                                                                                                            | Prepaid income taxesQSC                               |                                            |       
|                                                                                                                            | Assets held for salenet                               |                                            |       
|                                                                                                                            |                                                        |                                            |       
|Total current assets                                                                                                        |                                                        |                                            | 2,583 
|Property, plant and equipmentnet                                                                                           |                                                        |                                            | 17,311
|Intangible assetsnet                                                                                                       |                                                        |                                            | 1,275 
|Other assets                                                                                                                |                                                        |                                            | 1,356 
|                                                                                                                            |                                                        |                                            |       
|                                                                                                                            | Total assets                                           |                                            | $     
|                                                                                                                            |                                                        |                                            |       
|LIABILITIES AND STOCKHOLDER'S EQUITY                                                                                        |                                                       
|Current liabilities:                                                                                                        |                                                        |                                            |       
|                                                                                                                            | Current borrowings                                     |                                            | $     
|                                                                                                                            | Current borrowingsaffiliates                          |                                            |       
|                                                                                                                            | Accounts payable                                       |                                            |       
|                                                                                                                            | Accounts payableaffiliates                            |                                            |       
|                                                                                                                            | Dividends payableQSC                                  |                                            |       
|                                                                                                                            | Accrued expenses and other current liabilities         |                                            |       
|                                                                                                                            | Income taxes payableQSC                               |                                            |       
|                                                                                                                            | Deferred revenue and customer deposits                 |                                            |       
|                                                                                                                            | Restructuring and Merger-related reserves              |                                            |       
|                                                                                                                            |                                                        |                                            |       
|Total current liabilities                                                                                                   |                                                        |                                            | 6,382 
|Long-term borrowings (net of unamortized debt discount of $142 million, $122 million and $125 million, respectivelyNote 9) |                                                        |                                            | 6,016 
|Post-retirement and other post-employment benefit obligations                                                               |                                                        |                                            | 2,612 
|Deferred income taxes                                                                                                       |                                                        |                                            | 2,181 
|Deferred revenue                                                                                                            |                                                        |                                            | 482   
|Deferred credits and other                                                                                                  |                                                        |                                            | 325   
|Restructuring reserves                                                                                                      |                                                        |                                            | 30    
|                                                                                                                            |                                                        |                                            |       
|                                                                                                                            | Total liabilities                                      |                                            |       
|Commitments and contingencies (Notes 17 and 18)                                                                             |                                                        |                                            |       
|Stockholder's equity:                                                                                                       |                                                        |                                            |       
|                                                                                                                            | Common stockone share without par value, owned by QSC |                                            |       
|                                                                                                                            | Note receivableaffiliate                              |                                            |       
|                                                                                                                            | Accumulated deficit                                    |                                            |       
|                                                                                                                            |                                                        |                                            |       
|                                                                                                                            |                                                        | Total stockholder's equity                 |       
|                                                                                                                            |                                                        |                                            |       
|                                                                                                                            |                                                        | Total liabilities and stockholder's equity |       
|                                                                                                                            |                                                        |                                            |       

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

56

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                          |                                                                    | Year Ended December 31,                                          |                                                 
|------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------
|
|
|
|OPERATING ACTIVITIES      |                                                                    |                                                                  |                                                 
|                          | Net income                                                         |                                                                  | $                                               
|                          | Adjustments to net income:                                         |                                                                  |                                                 
|                          |                                                                    | Depreciation and intangible assets amortization                  |                                                 
|                          |                                                                    | (Gain) loss on sale of assets                                    |                                                 
|                          |                                                                    | Provision for bad debts                                          |                                                 
|                          |                                                                    | Deferred income taxes                                            |                                                 
|                          |                                                                    | Asset impairment charges                                         |                                                 
|                          |                                                                    | Cumulative effect of change in accounting principlenet          |                                                 
|                          |                                                                    | Income tax benefit distributed to QSC                            |                                                 
|                          |                                                                    | Other non-cash items                                             |                                                 
|                          | Changes in operating assets and liabilities:                       |                                                                  |                                                 
|                          |                                                                    | Accounts receivable                                              |                                                 
|                          |                                                                    | Accounts receivableaffiliates                                   |                                                 
|                          |                                                                    | Prepaids and other current assets                                |                                                 
|                          |                                                                    | Prepaid income taxesQSC                                         |                                                 
|                          |                                                                    | Accounts payable, accrued expenses and other current liabilities |                                                 
|                          |                                                                    | Accounts payable and deferred creditsaffiliates                 |                                                 
|                          |                                                                    | Deferred revenue and customer deposits                           |                                                 
|                          |                                                                    | Restructuring and Merger-related reserves                        |                                                 
|                          |                                                                    | Other long-term assets and liabilities                           |                                                 
|                          |                                                                    |                                                                  |                                                 
|                          |                                                                    |                                                                  | Cash provided by operating activities           
|                          |                                                                    |                                                                  |                                                 
|INVESTING ACTIVITIES      |                                                                    |                                                                  |                                                 
|                          | Expenditures for property, plant and equipment                     |                                                                  |                                                 
|                          | Proceeds from sale of property and equipment                       |                                                                  |                                                 
|                          | Other                                                              |                                                                  |                                                 
|                          |                                                                    |                                                                  |                                                 
|                          |                                                                    |                                                                  | Cash used for investing activities              
|                          |                                                                    |                                                                  |                                                 
|FINANCING ACTIVITIES      |                                                                    |                                                                  |                                                 
|                          | Net (repayments of) proceeds from short-term borrowings            |                                                                  |                                                 
|                          | Net (repayments of) proceeds from short-term borrowingsaffiliates |                                                                  |                                                 
|                          | Proceeds from long-term borrowings                                 |                                                                  |                                                 
|                          | Repayments of current portion of long-term borrowings              |                                                                  |                                                 
|                          | Dividends paid to QSC                                              |                                                                  |                                                 
|                          | Debt issuance costs                                                |                                                                  |                                                 
|                          | Other                                                              |                                                                  |                                                 
|                          |                                                                    |                                                                  |                                                 
|                          |                                                                    |                                                                  | Cash (used for) provided by financing activities
|                          |                                                                    |                                                                  |                                                 
|CASH AND CASH EQUIVALENTS |                                                                    |                                                                  |                                                 
|                          | Increase in cash                                                   |                                                                  |                                                 
|                          | Beginning balance                                                  |                                                                  |                                                 
|                          |                                                                    |                                                                  |                                                 
|                          | Ending balance                                                     |                                                                  | $                                               
|                          |                                                                    |                                                                  |                                                 

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

57

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

|                                                                        |                                         | Common Stock |       | Note Receivable affiliate (Note 13) |   | (Accumulated
Deficit) |      | Accumulated
Other
Comprehensive
Income (Loss) |        | Total  |   | Comprehensive
Income |     
|----------------------------------------------------------------------- | --------------------------------------- | ------------ | ----- | ----------------------------------- | - | --------------------- | ---- | --------------------------------------------- | ------ | ------ | - | -------------------- | ----
|
|Balance, January 1, 2000 (unaudited)                                    |                                         | $            | 8,140 |                                     | $ |                      |      | $                                             | (3,617 | )      | $ | 197                  |     
|                                                                        | Net income                              |              |       |                                    |   |                       |     |                                               |        | 902    |   |                      |    
|                                                                        | Mark-to-market adjustment on investment |              |       |                                    |   |                       |     |                                               |        |       |   |                      | (69 
|                                                                        | Income taxes on investment transfer     |              |       |                                    |   |                       |     |                                               |        |       |   |                      | 82  
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Total comprehensive income              |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Dividends declared on common stock      |              |       |                                    |   |                       |     |                                               |        | (902   | ) |                      |    
|                                                                        | Transfer of investments to QSC          |              |       | (23                                 | ) |                       |     |                                               |        |       |   |                      | (210
|                                                                        | Stock compensation                      |              |       | 87                                  |   |                       |     |                                               |        |       |   |                      |    
|                                                                        | Other net asset transfers               |              |       | (6                                  | ) |                       |     |                                               |        |       |   |                      |    
|                                                                        | Contested liability trust               |              |       | 286                                 |   |                       | (286 | )                                             |        |       |   |                      |    
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|Balance, December 31, 2000, as restated (Note 3Restatement of Results) |                                         |              | 8,484 |                                     |   | (286                  | )    |                                               | (3,617 | )      |   |                     |     
|                                                                        | Net income                              |              |       |                                    |   |                       |     |                                               |        | 1,407  |   |                      |    
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Total comprehensive income              |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Dividends declared on common stock      |              |       |                                    |   |                       |     |                                               |        | (1,407 | ) |                      |    
|                                                                        | Stock compensation                      |              |       | 6                                   |   |                       |     |                                               |        |       |   |                      |    
|                                                                        | Other net asset transfers               |              |       | (8                                  | ) |                       |     |                                               |        |       |   |                      |    
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|Balance, December 31, 2001, as restated (Note 3Restatement of Results) |                                         |              | 8,482 |                                     |   | (286                  | )    |                                               | (3,617 | )      |   |                     |     
|                                                                        | Net income                              |              |       |                                    |   |                       |     |                                               |        | 805    |   |                      |    
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Total comprehensive income              |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|                                                                        | Dividends declared on common stock      |              |       |                                    |   |                       |     |                                               |        | (805   | ) |                      |    
|                                                                        | Stock compensation                      |              |       | 2                                   |   |                       |     |                                               |        |       |   |                      |    
|                                                                        | Tax benefit on stock compensation       |              |       | 16                                  |   |                       |     |                                               |        |       |   |                      |    
|                                                                        | Income tax benefit distributed to QSC   |              |       | (110                                | ) |                       |     |                                               |        |       |   |                      |    
|                                                                        | Other net asset transfers               |              |       | 10                                  |   |                       |     |                                               |        |       |   |                      |    
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     
|Balance, December 31, 2002                                              |                                         | $            | 8,400 |                                     | $ | (286                  | )    | $                                             | (3,617 | )      |   |                     |     
|                                                                        |                                         |              |       |                                     |   |                       |      |                                               |        |        |   |                      |     

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

58

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QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2002, 2001 and 2000

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: Business and Background

Description of business

We are wholly owned by Qwest Services Corporation ("QSC"), which is wholly owned by QCII. We provide local telecommunications and related services, IntraLATA
long-distance services and wireless, 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.

On
June 30, 2000, QCII completed its acquisition of U S WEST, Inc. ("U S WEST") (the "Merger"). U S WEST (our pre-Merger parent) was deemed the accounting acquirer
and its historical financial statements, including those of its wholly owned subsidiaries, have been carried forward as the predecessor of the combined company. In connection with the Merger, each
outstanding share of U S WEST common stock was converted into the right to receive 1.72932 shares of QCII common stock (and cash in lieu of fractional shares). In addition, all outstanding U S WEST
stock options were converted into options to acquire QCII common stock.

Restatement

During 2003 and 2002 we performed an internal analysis ("internal analysis") of our previously issued consolidated financial statements for 2001 and 2000. As a
result of the internal analysis, we discovered certain errors in those consolidated financial statements. Our 2001 and 2000 consolidated financial statements and related financial information included
herein have been restated. For further details on the nature of the errors and the related effects on our previously issued consolidated financial statements see Note 3Restatement
of Results. Where appropriate, we have identified all balances that have been restated with the notation "as restated". Throughout these notes, the term "previously reported" will be used to refer to
balances from our previously issued 2001 and 2000 consolidated financial statements.

Note 2: Summary of Significant Accounting Policies

As a part of the restatement of our consolidated financial statements for 2001 and 2000 we have corrected and clarified a number of the accounting policies that
have been disclosed in previous filings.

Basis of presentation.The accompanying consolidated financial statements include our accounts and the accounts of our
subsidiaries over which we exercise control. All intercompany amounts and transactions have been eliminated. All amounts presented for 2001 and 2000 in our consolidated financial statements and
accompanying notes have been restated as discussed in Note 3Restatement of Results.

We
record intercompany charges at the amounts billed to us by our affiliates. Regulatory rules require certain expenses to be billed by affiliates at estimated fair value or fully
distributed cost as more fully described in Note 16Related Party Transactions. Regulators periodically review our compliance with regulations. Adjustments to intercompany charges
that result from these reviews are recorded in the period they become known. We purchase services, such as marketing and advertising,

59

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information
technology, product and technical services as well as general support services from affiliates. We provide to our affiliates telephony and data services, wireless as well as other
services.

Use of estimates.The preparation of consolidated financial statements in conformity with generally accepted accounting
principles in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the amounts and disclosures reported in our consolidated financial statements and
accompanying notes. Estimates are used when accounting for items and
matters such as long-term contracts, customer retention patterns, allowance for bad debts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets,
impairment assessments, employee benefits, taxes, restructuring reserves and other provisions and contingencies. Actual results could differ from those estimates.

Reclassifications.We have revised this presentation to conform to the current year QCII consolidated financial statement
presentation.

Revenue recognition.Revenue for services are recognized when the related services are provided. Payments received in advance
are deferred until the service is provided. Up-front fees received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and
recognized over the expected customer relationship period, generally one to 10 years. Expected customer relationship periods are estimated using historical data of actual customer retention patterns.
Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.

Revenue
related to equipment sales are recognized upon acceptance by the customer and when all the conditions for revenue recognition have been satisfied. Customer arrangements that
include both equipment sales and services are evaluated to determine whether the elements are separable based on objective evidence. If the elements are separable and separate earnings processes
exist, total consideration is allocated to each element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If separate
earnings processes do not exist, total consideration is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period.

Advertising costs.Costs related to advertising are expensed as incurred. Advertising expense was $211 million,
$310 million and $257 million in 2002, 2001 and 2000, respectively, and is included in selling, general and administrative ("SG&A") expense in our consolidated statements of operations.

Income taxes.We are included in the consolidated federal income tax return of QCII. The QCII tax provision allocation policy
treats our consolidated results as if we were a separate taxpayer. The tax funding policy calls for us to pay QCII, through QSC, based upon each subsidiary's separate return taxable income. To the
extent a subsidiary has taxable losses, no funding is received and therefore such benefit is retained by QCII. We are also included in combined state tax returns filed by QCII and the same allocation
policy applies.

The
provision for income taxes consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods. Investment tax credits are accounted for
under the deferral method and are amortized as reductions in income tax expense over the lives of the assets which gave rise to the credits and are included in deferred credits and other on our
consolidated balance sheets. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates expected to apply to the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of
a change in tax rate is recognized in operations in the period that includes the enactment date. Deferred tax assets are reviewed to determine if they are more likely than not to be realized and, if
not, then valuation

60

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allowances
are established to reduce deferred income tax assets to the amounts expected to be recovered.

We
use the deferral method of accounting for investment tax credits earned prior to the repeal of such credits in 1986. We also defer certain transitional investment tax credits earned
after the repeal, as well as investment tax credits earned in certain states. We amortize these credits over the estimated service lives of the related assets as a decrease to our income tax expense
in our consolidated statements of operations.

Cash and cash equivalents.We utilize the cash management services of QCII. QCII manages our cash in accordance with its cash
investment policy, which restricts investments to ensure preservation of principal and maintenance of liquidity. Although cash and cash equivalents balances are generally unsecured, our balances are
maintained with financial institutions that QCII and we believe are creditworthy. We consider cash on hand, deposits in banks and investments purchased with original maturities of three months or less
to be cash and cash equivalents. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to
credit worthiness of any particular financial institution.

Restricted cash.Restricted cash primarily relates to escrow accounts we established to fund certain construction activities
and our compensation plans.

Assets held for sale.Assets to be disposed of that meet all of the criteria to be classified as held for sale are reported
at the lower of their carrying amounts or fair values less cost to sell. Assets are not depreciated while they are classified as held for sale. Assets held for sale that have operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of our assets are reported in discontinued operations when (a) it is determined that the
operations and cash flows of the assets will be eliminated from our on-going operations and (b) we will not have any significant continuing involvement in the operations of the assets after the
disposal transaction.

Property, plant and equipment.Property, plant and equipment is carried at cost and is depreciated using the straight-line
group method. Under the straight-line group method, assets dedicated to providing regulated telecommunications services that have similar physical characteristics, use and expected useful lives are
categorized on the basis of equal life groups of similar assets acquired in a given year for purposes of depreciation and tracking. Generally, under the straight-line group method, when an asset is
sold or retired the cost, net of sale proceeds, is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is
recognized in our consolidated statements of operations only if a disposal is abnormal or unusual or when a sale involves land, artwork, assets associated with the sale of customer contracts or assets
constructed or acquired for sale. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed as
incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Direct labor costs related to construction of internal use assets are also
capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on
specific identification.

Software capitalization policy.Internally used software, whether purchased or developed, is capitalized and amortized using
the straight-line method over an estimated useful life of 18 months to five years. In accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," we capitalize certain costs associated with internally developed software such as payroll costs of employees devoting time to the projects and external direct costs for
materials and services. Costs associated with internally developed software to be used internally are expensed until the point at which the project has reached the development stage. Subsequent
additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software

61

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maintenance
and training costs are expensed in the period in which they are incurred. The capitalization of software requires judgment in determining when a project has reached the development stage
and the period over which we expect to benefit from the use of that software.

Intangible assets.Intangible assets, such as wireless spectrum licenses and capitalized software, are recorded at cost.

Intangible
assets with finite lives are amortized on a straight-line basis over that life. Where there are no legal, regulatory, contractual or other factors that would reasonably limit
the useful life of the intangible asset we have determined that the intangible asset has an indefinite life. In accordance with the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), on January 1, 2002, these intangible assets were no longer amortized. Prior to the adoption of SFAS
No. 142, these intangible assets were amortized on a straight-line basis over their estimated useful lives.

Impairment of indefinite-lived intangible assets.Intangible assets with indefinite lives are reviewed for impairment
annually or whenever an event occurs or circumstances change that would more likely than not reduce fair value below carrying value. These assets are carried at historical cost if their estimated fair
value is greater than their carrying amounts. However, if their estimated fair value is less than the carrying amount, indefinite-lived intangible assets are reduced to their estimated fair value
through an impairment charge to our consolidated statements of operations.

Impairment of long-lived assets.We review long-lived assets and other intangible assets with long lives for impairment
whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable
and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be
generated by the asset. If the asset's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. We
determine fair values by reference to replacement cost or discounted cash flows, as appropriate.

Prior
to the adoption of SFAS No. 142 and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") on January 1, 2002, we
reviewed our long-lived assets, such as intangible assets and property, plant and equipment for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). Under SFAS No. 121, we reviewed our long-lived assets for impairment whenever events or changes in circumstances indicated
that the carrying amount of an asset might not be recoverable. We evaluated the recoverability of our long-lived assets based on estimated undiscounted future cash flows and provided for impairment
when such undiscounted cash flows were insufficient to recover the carrying amount of the long-lived asset.

Derivative instruments.Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivatives be measured at fair value and recognized as either assets or liabilities on our
consolidated balance sheets. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or loss in our
consolidated statement of operations in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with the change
in the value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in other comprehensive income (loss) and recognized in income (loss) when the
hedged item is recognized in income (loss).

Restructuring and Merger-related charges.Periodically QCII commits to exit certain business activities, eliminate office or
facility locations and/or reduce our number of employees. At the time a

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restructuring
plan is approved and communicated, we record a charge to our consolidated statement of operations for the estimated costs associated with the plan. Charges associated with these exit or
restructuring plans incorporate various estimates, including severance costs, sublease income and costs, disposal costs, length of time on market for abandoned rented facilities and contractual
termination costs. We also record a charge when we permanently cease use of a leased facility. Estimates of charges associated with abandoned operating leases, some of which entail long-term lease
obligations, are based on existing market conditions and undiscounted net amounts that are expected to be paid in the future. We utilize real estate brokers to assist in assessing market conditions
and net amounts that we expect to pay.

Fair value of financial instruments.Our financial instruments consist of cash and cash equivalents, restricted cash,
accounts receivable, accounts payable and borrowings. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate their fair values
because of their short-term nature. Our long-term borrowings had a fair value of approximately $5.4 billion, $5.6 billion and $5.9 billion at December 31, 2002, 2001 and
2000, respectively. The fair values of our borrowings are based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.

Stock options.Prior to the Merger, our employees participated in the U S WEST stock plans under which U S WEST
could grant awards in the form of stock options, stock appreciation rights, restricted stock and phantom units, as well as substitute stock options and restricted stock awards. In connection with the
Merger, all U S WEST options outstanding prior to the Merger announcement became fully vested. Options granted after that date and prior to June 30, 2000 continue to vest according to
the vesting requirements in the plan. Subsequent to the Merger, our employees began participation in the Qwest Equity Incentive Plan. These QCII stock incentive plans are described more fully in
Item 8 of QCII's annual report on Form 10-K for the year ended December 31, 2002 (the "QCII 2002 Form 10-K").

QCII
accounts for its stock incentive plans using the intrinsic-value method under which no compensation expense is recognized for options granted to employees when the strike price of
those options equals or 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
("FIN") No. 28, "Accounting for Stock Appreciation Rights, 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 incentive plans been determined under the fair value method in accordance with the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," our net income would have been changed to the pro forma amounts indicated below:

|            |                                                                                                                                                    | Year Ended December 31, |  
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -
|
|
|
|Net income: |                                                                                                                                                    |                         |  
|            | As reported                                                                                                                                        |                         | $
|            | Add: Stock-option-based employee compensation expense included in reported net income, net of related tax effects                                  |                         |  
|            | Deduct: Total stock-option-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |                         |  
|            |                                                                                                                                                    |                         |  
|            | Pro forma                                                                                                                                          |                         | $
|            |                                                                                                                                                    |                         |  

63

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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. Following are the weighted average assumptions used with the
Black-Scholes option-pricing model to estimate the fair value of all QCII options granted to our employees in 2002, 2001 and 2000:

Year Ended December 31,2002

2001

2000Risk-free interest rate


4.1
%

4.1
%

5.9
%Expected dividend yield


0.0
%

0.2
%

1.4
%Expected option life (years)


4.4


4.4


5.3Expected stock price volatility


57.6
%

41.4
%

29.5
%Weighted average grant date fair value

$
2.25

$
9.40

$
14.60


Two of the more significant assumptions used in this estimate are the expected option life and the expected volatility, both of which we estimated based on
historical information.

Stockholder's equity.In the normal course of business we transfer assets to and from our parent, QSC. It is QCII's and our
policy to record asset transfers to and from QSC based on carrying values.

Recently adopted accounting pronouncements and cumulative effect of adoption

On January 1, 2002, we adopted SFAS No. 142, which requires companies to cease amortizing goodwill and intangible assets with indefinite useful
lives. SFAS No. 142 also requires that goodwill and indefinite-lived intangible assets be reviewed for impairment upon adoption on January 1, 2002 and annually thereafter, or more often
if events or circumstances warrant. We ceased amortizing our intangible assets, primarily spectrum licenses, with indefinite lives on January 1, 2002.

Upon
adoption of SFAS No. 142, we reviewed the useful lives of our amortizable intangible assets, primarily capitalized software and customer lists, and determined they remained
appropriate. In accordance with SFAS No. 142, we will continue to perform impairment tests on the remaining indefinite-lived intangible assets on an annual basis, or more often if events or
changes in circumstances indicate the assets may be impaired.

In
August 2001, the FASB issued SFAS No. 144, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill and
intangible assets with indefinite lives. Under SFAS No. 144, long-lived assets being held or used are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable from their expected future undiscounted cash flows ("a triggering event"). The impairment loss is equal to the difference between the asset's carrying amount and
estimated fair value. In addition, SFAS No. 144 requires long-lived assets to be disposed of other than by sale for cash to be accounted for and reported like assets being held and used.
Long-lived assets to be disposed of by sale are to be recorded at the lower of their carrying amount or estimated fair value (less costs to sell) at the time the plan of disposition has been approved
and committed to by the appropriate company management. See Note 6Property, Plant and Equipment for further information.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement
No. 123" ("SFAS No. 148"), which is effective for financial statements related to periods ending after December 15, 2002. We have included the expanded disclosure required by SFAS
No. 148 regarding stock-based compensation.

FIN
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," was issued by the FASB in November 2002.
The interpretation provides guidance on the guarantor's accounting and disclosure of guarantees, including indirect guarantees of indebtedness of others. We have adopted the disclosure requirements of
the

64

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interpretation
as of December 31, 2002. The accounting guidelines are applicable to certain guarantees, excluding affiliate guarantees, issued or modified after December 31, 2002, and
require that we record a liability for the fair value of such guarantees on our consolidated balance sheet. The adoption of this interpretation had no material effect on our consolidated financial
statements.

In
2000, we recorded a cumulative effect of a change in accounting principle of $41 million, net of income taxes, upon our adoption of Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). The $41 million charge relates to the establishment of deferred revenues and costs for certain activation
and installation activities. Previously, installation and activation fees and costs had been recognized in their entirety at the time the installation or activation was completed. Under the rules of
SAB No. 101, these installation and activation fees are recognized
ratably over the estimated lives of the customer relationships, which range from one to 10 years. The adjustment to the cumulative effect previously reported is further described in
Note 3Restatement of Results.

New accounting standards

On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This statement 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 will 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 have 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 (liability of
$12 million net of an asset of $5 million) in 2003.

Prior
to the adoption of SFAS No. 143, we have 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 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 pretax upon adoption of SFAS No. 143 in 2003. The net income impact of the adoption is $219 million ($365 million
less the $7 million charge disclosed above, net of income taxes of $139 million).

On
a going forward basis, the net costs of removal related to these assets will be charged to our consolidated statement of operations in the period in which the costs are incurred. As a
result, the adoption of SFAS No. 143 is expected to decrease our depreciation expense on an annual basis by approximately $33 million and increase operating expenses related to the
accretion of the fair value of our legal asset retirement obligations by approximately $1 million annually beginning January 1, 2003. Based on historical charges and activity, we believe
that recurring removal costs will be approximately $35 million to $45 million annually which will be charged to our consolidated statement of operations as incurred.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), which is applicable for exit or disposal
activities initiated after

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December 31,
2002. This statement requires that liabilities for costs that are associated with an exit or disposal activity be recognized and measured initially at fair value in the period in
which the liability is incurred. It nullifies the guidance of Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF Issue No. 94-3"). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date
that the entity committed itself to an exit plan. SFAS No. 146 concludes that an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the
definition of a liability. In accordance with SFAS No. 146, our restructuring activities that were recorded prior to 2003 will continue to be accounted for under previous guidance. Our adoption
of SFAS No. 146 on January 1, 2003 did not have a material effect on our operating results or financial position.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"), which is effective immediately for all variable interest entities
created after January 31, 2003. FIN No. 46 must be applied for the first fiscal year or interim period ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003, or the fourth quarter 2003 for us. FIN No. 46 requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. A primary beneficiary absorbs the majority of the entity's expected
losses, if they occur, receives a majority of the entity's expected residual returns, if they occur, or both. Where it is reasonably possible that the information about our variable interest entity
relationships must be disclosed or consolidated, we must disclose the nature, purpose, size and activity of the variable interest entity and the maximum exposure to loss as a result of our involvement
with the variable interest entity in all financial statements issued after January 31, 2003. We are evaluating whether the adoption of FIN No. 46 will require consolidation of any
previously unconsolidated entities.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS
No. 150 provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not
believe that the adoption of SFAS No. 150 will have a material impact on our consolidated financial statements.

Note 3: Restatement of Results

We have determined that, in certain cases, we misinterpreted or misapplied GAAP in our 2001 and 2000 consolidated financial statements and, accordingly, we have
restated our consolidated financial
statements for each of the years in the two year period ended December 31, 2001 and related interim periods.

As
discussed more fully below, the restatements involve, among other matters, revenue recognition issues related to termination fees, installation fees and wireless revenue. In making
these restatements, we have performed an internal analysis of our accounting policies, practices, procedures and disclosures for the affected periods.

Summary of restatement items

The following tables set forth the effects of the restatement adjustments discussed below on revenue; pre-tax income (i.e., income before income taxes and
cumulative effect of change in accounting principle); and net income as presented in our consolidated statements of operations for the

66

---

years
ended December 31, 2001 and 2000. The restatement adjustments are discussed in the paragraphs following the tables.

Year ended December 31, 2001Revenue

Pre-tax
Income

Net
Income(Dollars in millions)Previously reported

$
12,675

$
2,778

$
1,737Restatement Adjustments, net:Termination fees


(75
)

(75
)

(46
)Wireless revenue


(46
)

(46
)

(28
)Transactions with affiliates


20


30


18Installation fees


19


19


12Balance sheet reconciliations


(14
)

(11
)

(7
)Out-of-period expenses





(114
)

(70
)Network labor costs





(84
)

(51
)Compensated absences





(73
)

(44
)Cost of removal





(40
)

(24
)Contested liability trust





(22
)

(13
)Stock compensation





(1
)

Curtailment gain





7


5Other


(42
)

(123
)

(82
)Net restatements


(138
)

(533
)

(330
)As restated

$
12,537

$
2,245

$
1,407


Year ended December 31, 2000Revenue

Pre-tax
Income

Net
Income(Dollars in millions)Previously reported

$
12,300

$
1,904

$
1,196Restatement Adjustments, net:Termination fees


(50
)

(50
)

(30
)Wireless revenue


(57
)

(57
)

(34
)Transactions with affiliates


17


(40
)

(24
)Installation fees


(90
)

(90
)

(96
)Balance sheet reconciliations





24


15Investment transfer








(82
)Out-of-period expenses





169


103Network labor costs





(100
)

(61
)Compensated absences





(14
)

(9
)Stock compensation





(51
)

(31
)Curtailment gain





(47
)

(29
)Other


(36
)

(2
)

(16
)Net restatements


(216
)

(258
)

(294
)As restated

$
12,084

$
1,646

$
902


Termination fees

In 2001, we recognized revenue related to contractual termination fees that were assessed to several customers. At or about the same time, we entered into new
arrangements with these customers

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to
provide services in the future. In connection with our internal analysis, we have determined that the revenue recognized in these instances should have been deferred and recognized as revenue
ratably over the term of the new arrangements.

In
our restated consolidated financial statements, we have reduced our previously reported revenue and decreased our pre-tax income by $75 million and $50 million for the
years ended December 31, 2001 and 2000, respectively.

Wireless revenue

In our previously issued consolidated financial statements, we erroneously recognized revenue associated with products that were given away through promotions in
our wireless business. We also
erroneously recognized excess revenue as a result of not reconciling or adjusting our estimates of unbilled and deferred service revenues.

In
our restated consolidated financial statements, we have reduced our previously reported wireless revenue and decreased our pre-tax income by $46 million and $57 million
for the years ended December 31, 2001 and 2000, respectively.

Transactions with affiliates

In 2001 and 2000, we inaccurately recorded revenue and expenses related to transactions with affiliated companies within the QCII group of companies. These
transactions included billings for data processing services, allocations of corporate overhead costs and payments made on behalf of affiliated companies, among other items.

In
our restated consolidated financial statements, we have increased our previously reported revenue by $20 million and $17 million for the years ended December 31,
2001 and 2000, respectively, and increased our pre-tax income by $30 million and decreased our pre-tax income by $40 million for the years ended December 31, 2001 and 2000,
respectively.

Installation fees

In 2001 and 2000, we recognized revenue for certain up-front fees charged to customers in connection with special plant construction or relocation. These fees
were recognized as revenue in full at the time the construction or relocation was completed. Under SAB No. 101, these fees should have been initially deferred and recognized over the estimated
life of the customer relationship.

In
our restated consolidated financial statements, we have increased our previously reported revenue by $19 million and decreased previously reported revenue by $90 million
for the years ended December 31, 2001 and 2000, respectively, resulting in an increase in our pre-tax income for 2001 and a decrease in our pre-tax income for 2000 of corresponding amounts. In
addition, as a result of this change, our restated net income for the year ended December 31, 2000 includes a $41 million charge, net of the income tax effect of $26 million,
presented as the cumulative effect of change in accounting principle resulting from the adoption of SAB No. 101.

Balance sheet reconciliations

During our internal analysis, we were unable to support the balances of certain asset and liability accounts through the reconciliation process that we performed.
As a result, we have adjusted certain balance sheet accounts resulting in an aggregate decrease in previously reported revenue of $14 million for the year ended December 31, 2001. The
adjustments also reduced our previously reported pre-tax income by $11 million for the year ended December 31, 2001 and increased our pre-tax income by $24 million for the year
ended December 31, 2000.

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Investment transfer

In 2000, we transferred an appreciated investment with a carrying value of $220 million to QSC at our original cost of $10 million. This investment
was subsequently sold by a QSC subsidiary later in that year. As part of our internal analysis, we determined that tax expense should have been recorded by us relative to the transfer. As a result, we
have increased the income tax expense by $82 million in our restated consolidated financial statements for the year ended December 31, 2000.

Out-of-period expenses

We recorded certain charges in 2000 as expenses for contractual sponsorships. We have since determined that we recorded these charges in the wrong period. As a
result, in our restated consolidated financial statements, we have decreased our previously reported pre-tax income by $114 million in 2001 and increased our previously reported pre-tax income
by $169 million in 2000.

Network labor costs

In 2000, we began capitalizing certain labor costs that were associated with designing, deploying and testing facilities. During our internal analysis, we
determined that certain of these costs should have been expensed as incurred. As a result, we have recorded adjustments in our restated consolidated financial statements to increase operating expenses
and decrease net property, plant and equipment by $84 million and $100 million in 2001 and 2000, respectively.

Compensated absences

During 2001 and 2000, we recorded entries that reduced our liabilities for compensated absences associated with non-management employees. We have since determined
that these adjustments were not in compliance with SFAS No. 43, "Accounting for Compensated Absences". As a result, we have decreased our previously reported pre-tax income by
$73 million and $14 million for the years ended December 31, 2001 and 2000, respectively.

Cost of removal

In 2001, we recorded costs associated with the reconditioning of certain cable lines against a cost of removal reserve. This reserve is a component of accumulated
depreciation that was established specifically for costs of removal related to portions of our telecommunications network. During our internal analysis, we determined that these reconditioning costs
are not costs of removal and should not have been charged against the reserve in accumulated depreciation. As a result, in our restated consolidated financial statements we have decreased our
previously reported pre-tax income by $40 million for the year ended December 31, 2001.

Contested liability trust (Grantor trust)

In 2000, we recorded a $286 million asset transfer from an affiliate as a note receivable related to the contested liability trust. We subsequently
recognized affiliate interest income of $22 million on this note receivable in the year ended December 31, 2001. As part of our internal analysis we determined that the note receivable
due from an affiliate should have been classified in equity. In our restated consolidated financial statements, we have decreased our previously reported pre-tax income for 2001 by
$22 million relative to the reversal of the interest income.

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Stock compensation

During 2001 and 2000, the terms of certain outstanding stock options were modified to allow the extension of the exercise period upon the employee's separation
from the Company. In our previously issued consolidated financial statements, we did not record compensation expense in connection with these modifications or with regard to certain other awards where
the fair value of the underlying stock at the measurement date was greater than the strike price of the award. As part of our internal analysis, we determined that compensation expense should have
been recorded for these matters in accordance with Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and FIN No. 44, "Accounting for Certain
Transactions involving Stock Compensation" (an interpretation of APB Opinion No. 25). As a result, in our restated consolidated financial statements we have decreased our previously reported
pre-tax income by $1 million and $51 million for the years ended December 31, 2001 and 2000, respectively.

Curtailment gain

During the third quarter of 2000, and in conjunction with the Merger, QCII changed certain post-retirement benefits as discussed in
Note 11Employee Benefits. The reduction in the accumulated post-retirement benefit obligation was originally accounted for as a plan curtailment, resulting in a one-time gain in
our previously issued consolidated financial statements. Based on our internal analysis, and in consideration of SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions"
("SFAS No. 106"), and the FASB Staff Implementation Guide for SFAS No. 106, we determined that the elimination of benefits should have been recorded as a negative plan amendment. Negative plan
amendments are amortized as a reduction of benefit expense over the expected remaining service period or life expectancy of the participants, as appropriate, or approximately seven years in our case.
As a result, in our restated consolidated financial statements we have increased our previously reported pre-tax income by $7 million in 2001 and decreased our previously reported pre-tax
income by $47 million in 2000.

Other

We reduced our previously reported revenue by $42 million and $36 million and decreased our pre-tax income by $123 million and
$2 million for the years ended December 31, 2001 and 2000, respectively, for other adjustments discovered as a result of our internal analysis. These adjustments have been aggregated in
our presentation. The individual adjustments ranged from $100,000 to $15 million for
revenues and from $100,000 to $16 million for pre-tax income in the periods presented and had an average impact of $6 million to revenues and $7 million to pre-tax income.

Balance sheet impacts

In addition to the effects on our 2001 and 2000 consolidated statements of operations discussed above, the restatement affected our consolidated balance sheets as
of December 31, 2001 and 2000.

70

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The
following tables set forth the effects of our restatement adjustments on our condensed 2001 and 2000 consolidated balance sheets:

|                                      |                                             | Previously
Reported |   | Increase/
(Decrease) |  | As Restated
|------------------------------------- | ------------------------------------------- | ------------------- | - | -------------------- |  | -----------
|
|As of December 31, 2001:              |                                             |                     |   |                      |  |            
|Assets:                               |                                             |                     |   |                      |  |            
|                                      | Total current assets                        |                     | $ | 2,945                |  | $          
|                                      | Property, plant and equipmentnet           |                     |   | 19,431               |  |            
|                                      | Other and intangible assetsnet             |                     |   | 2,690                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total assets                                |                     | $ | 25,066               |  | $          
|                                      |                                             |                     |   |                      |  |            
|Liabilities and stockholder's equity: |                                             |                     |   |                      |  |            
|                                      | Total current liabilities                   |                     | $ | 6,295                |  | $          
|                                      | Long-term borrowings                        |                     |   | 5,781                |  |            
|                                      | Deferred income taxes and other liabilities |                     |   | 5,699                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total liabilities                           |                     |   | 17,775               |  |            
|                                      | Total stockholder's equity                  |                     |   | 7,291                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total liabilities and stockholder's equity  |                     | $ | 25,066               |  | $          
|                                      |                                             |                     |   |                      |  |            

|                                      |                                             | Previously
Reported |   | Increase/
(Decrease) |  | As Restated
|------------------------------------- | ------------------------------------------- | ------------------- | - | -------------------- |  | -----------
|
|As of December 31, 2000:              |                                             |                     |   |                      |  |            
|Assets:                               |                                             |                     |   |                      |  |            
|                                      | Total current assets                        |                     | $ | 2,444                |  | $          
|                                      | Property, plant and equipmentnet           |                     |   | 18,100               |  |            
|                                      | Other and intangible assetsnet             |                     |   | 2,298                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total assets                                |                     | $ | 22,842               |  | $          
|                                      |                                             |                     |   |                      |  |            
|Liabilities and stockholder's equity: |                                             |                     |   |                      |  |            
|                                      | Total current liabilities                   |                     | $ | 6,156                |  | $          
|                                      | Long-term borrowings                        |                     |   | 6,247                |  |            
|                                      | Deferred income taxes and other liabilities |                     |   | 5,174                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total liabilities                           |                     |   | 17,577               |  |            
|                                      | Total stockholder's equity                  |                     |   | 5,265                |  |            
|                                      |                                             |                     |   |                      |  |            
|                                      | Total liabilities and stockholder's equity  |                     | $ | 22,842               |  | $          
|                                      |                                             |                     |   |                      |  |            

Stockholder's equity has been restated for items other than the adjustments to net income discussed in the summary of restatement items section above. Among other
restatements, it has also been restated for adjustments to dividends declared and for the contested liability trust. The adjustments to dividends declared are attributed to our failure to record
dividends that were declared

71

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in
2000 and 2001 under a standing declaration policy. A reconciliation of stockholder's equity between "Previously Reported" and "As Restated" is as follows:

|                                             |                                                            | December 31, |      
|-------------------------------------------- | ---------------------------------------------------------- | ------------ | -----
|
|
|Stockholder's equity, as previously reported |                                                            | $            | 7,291
|                                             | Cumulative effect of restatement adjustments on net income |              |      
|                                             | Adjustments to dividends declared                          |              |      
|                                             | Note receivablecontested liability trust                  |              |      
|                                             | Stock compensation                                         |              |      
|                                             | Other consolidation and reconciliation adjustments         |              |      
|                                             |                                                            |              |      
|Stockholder's equity, as restated            |                                                            | $            | 4,579
|                                             |                                                            |              |      

Note 4: Restructuring and Merger-related (Credits) Charges

Restructuring and other charges



During 2002, in response to shortfalls in employee reductions planned as part of the 2001 restructuring plan (as discussed below), and due to continued declines
in our revenues and general economic conditions, QCII identified employee reductions in various functional areas and permanently abandoned a number of operating and administrative facilities. In
connection with that restructuring, we recorded a restructuring reserve and recorded a charge to our consolidated statement of operations of $99 million to cover the costs associated with these
actions as more fully described below.

An
analysis of activity associated with our 2002 restructuring plan for the year ended December 31, 2002 is as follows:



2002
Provision

2002
Utilization

December 31,
2002
Balance(Dollars in millions)Severance and employee-related charges

$
74

$
37

$
37Contractual settlements, legal contingencies and lease losses


25


2


23Total

$
99

$
39

$
60


The 2002 activities included charges of $74 million for severance benefits and employee-related matters pursuant to established severance policies
associated with a reduction in the number of employees. QCII identified approximately 2,400 of our employees from various functional areas to be terminated as part of this reduction. As of
December 31, 2002, approximately 1,800 of the reductions had been accomplished and $37 million of the restructuring reserve had been used for severance payments and enhanced pension
benefits. We expect the remaining employee reductions to be essentially complete by December 31, 2003. The 2002 provisions were offset in our 2002 consolidated statement of operations by a
reversal of $64 million of accruals established in 2001 as part of the restructuring plan as discussed below.

Also
as part of the 2002 restructuring, we permanently abandoned 25 leased facilities and recorded a charge of $25 million to restructuring and other charges in our consolidated
statement of operations.

72

---

The
abandonment costs include rental payments due over the remaining terms of the leases, net of estimated sublease rentals, and estimated costs to terminate the leases. We recorded this charge
directly to our consolidated statement of operations. As of December 31, 2002 we had utilized $2 million of the established reserves primarily for payments of amounts due under the leases. We
expect the balance of the reserve to be utilized over the remaining terms of the leases, which are up to five years.

For
the year ended December 31, 2002 other severance-related charges not associated with the specific plans were $10 million.



During the fourth quarter of 2001, a plan was approved by QCII to reduce employee levels, consolidate and sublease facilities and abandon certain capital projects
and terminate certain operating leases. In connection with this restructuring, we established a restructuring reserve and recorded a restructuring charge to our consolidated statement of operations of
$212 million to cover the costs associated with these actions as more fully described below.

In
order to streamline our business and consolidate operations to meet lower customer demand resulting from declining economic conditions, QCII implemented a plan to reduce employees,
consolidate and sublease facilities, abandon certain capital projects, terminate certain operating leases and recognize associated asset impairments. An analysis of activity associated with the 2001
plan for the years ended December 31, 2002 and 2001 is as follows:



|                                                              |       | January 1,
2002
Balance |     | 2002
Provision |   | 2002
Utilization |   | 2002
Reversal |     | December 31,
2002
Balance
|------------------------------------------------------------- | ----- | ----------------------- | --- | -------------- | - | ---------------- | - | ------------- | --- | -------------------------
|
|Severance and employee-related charges                        |       | $                       | 184 |                | $ |                 |   | $             | 110 |                          
|Contractual settlements, legal contingencies and lease losses |       |                         | 24  |                |   | 4                |   |               | 17  |                          
|                                                              |       |                         |     |                |   |                  |   |               |     |                          
|                                                              | Total |                         | $   | 208            |   | $                | 4 |               | $   | 127                      
|                                                              |       |                         |     |                |   |                  |   |               |     |                          



2001
Provision

2001
Utilization

December 31,
2001
Balance(As restated, see Note 3)
(Dollars in millions)Severance and employee-related charges

$
188

$
4

$
184Contractual settlements, legal contingencies and lease losses


24





24Total

$
212

$
4

$
208


In 2001, QCII identified approximately 4,800 of our employees from various functional areas to be terminated as part of an employee reduction and we accrued a
restructuring reserve of $188 million for severance benefits for those employees. As of December 31, 2002, our restructuring activities under this plan were substantially complete.
Approximately 3,700 employees had been terminated and $114 million of the restructuring reserve had been used for severance payments, enhanced pension benefits and other employee-related
outlays. As a result of actual terminations falling short of our original plan, we reversed $64 million of the severance reserve established in 2001. This reversal was

73

---

recorded
as a reduction of restructuring and other charges in our 2002 consolidated statement of operations. In 2002, in response to this shortfall in planned employee terminations, QCII reviewed our
manpower complement in other functional areas and identified employees to be terminated as part of another staffing reduction. These planned reductions are discussed above in connection with our 2002
restructuring activities.

Until
the fourth quarter of 2001, we occupied certain administrative and network operations buildings under operating leases with varying terms. Due to our staffing reduction and
consolidation of our operations, we accrued a restructuring reserve and recorded a charge to our 2001 consolidated
statement of operations of $24 million. This restructuring reserve was associated with the termination of nine operating lease agreements. As of December 31, 2002 we had utilized
$17 million of the established reserve for payments associated with leases and losses on subleases and contract termination costs related to exiting these buildings.



During the fourth quarter of 2003, as part of an ongoing effort of evaluating costs of operations, QCII further reduced employee levels in certain areas of our
business. As a result, we plan to record a charge to our consolidated statement of operations during the fourth quarter of 2003, primarily for estimated severance costs, ranging from
$35 million to $55 million.

Merger-related (credits) charges

An analysis of activity associated with the Merger-related accruals which were established as a result of the Merger as described above for the years ended
December 31, 2002, 2001 and 2000 is as follows:



|                                                |                              | January 1,
2002
Balance |    | 2002
Provision |   | 2002
Utilization |   | 2002
Reversals |   | December 31,
2002
Balance
|----------------------------------------------- | ---------------------------- | ----------------------- | -- | -------------- | - | ---------------- | - | -------------- | - | -------------------------
|
|Severance and employee-related charges          |                              | $                       | 6  |                | $ |                 |   | $              | 4 |                          
|Contractual settlements and legal contingencies |                              |                         | 32 |                |   |                 |   |                | 2 |                          
|                                                |                              |                         |    |                |   |                  |   |                |   |                          
|                                                | Total Merger-related charges |                         | $  | 38             |   | $                |  |                | $ | 6                        
|                                                |                              |                         |    |                |   |                  |   |                |   |                          



|                                                |                              | January 1,
2001
Balance |     | 2001
Provision |   | 2001
Utilization |     | 2001
Reversals |     | December 31,
2001
Balance
|----------------------------------------------- | ---------------------------- | ----------------------- | --- | -------------- | - | ---------------- | --- | -------------- | --- | -------------------------
|
|Contractual settlements and legal contingencies |                              | $                       | 182 |                | $ | 133              |     | $              | 223 |                          
|Severance and employee-related charges          |                              |                         | 100 |                |   | 35               |     |                | 100 |                          
|Other Merger-related charges                    |                              |                         | 17  |                |   | 44               |     |                | 58  |                          
|                                                |                              |                         |     |                |   |                  |     |                |     |                          
|                                                | Total Merger-related charges |                         | $   | 299            |   | $                | 212 |                | $   | 381                      
|                                                |                              |                         |     |                |   |                  |     |                |     |                          

74

---



2000
Provision

2000
Utilization

December 31,
2000
Balance(As restated, see Note 3)
(Dollars in millions)Contractual settlements and legal contingencies

$
477

$
295

$
182Severance and employee-related charges


250


150


100Other Merger-related charges


86


69


17Total Merger-related charges

$
813

$
514

$
299


In 2000, in connection with the Merger, QCII established a Merger-related accrual and recorded a charge of $477 million to cover various contractual
settlements and legal contingencies. In 2001, in connection with finalizing our Merger-related activities, we increased this reserve by $133 million related to these matters and recognized this
additional charge. The amounts accrued relate to the cancellation of various commitments no longer deemed necessary as a result of the Merger and the settlement of various claims related to the
Merger. In 2001 we reversed $60 million of this accrual and in 2002 we reversed an additional $30 million of the accrual. The reversals resulted from favorable developments in the
matters underlying contractual settlements and legal contingencies. The reversals were credited to Merger-related (credits) charges in our consolidated statement of operations for the applicable year.

In
connection with the Merger, we reduced employee levels by over 3,200 people, primarily by eliminating duplicate functions. QCII initially identified approximately 2,500 of our
employees in the third quarter of 2000. At various times throughout the fourth quarter of 2000 and the first and second quarters of 2001 QCII identified approximately 1,100 additional employees to
arrive at the total reduction of approximately 3,600 employees. In 2000, we established a Merger-related accrual of $250 million related to this staffing reduction and in 2001 we increased the
reserve by $35 million. All of the identified employees were terminated prior to December 31, 2001. Included in the severance and employee-related accrual in 2000 were $38 million
of bonus payments that were payable subject to the successful completion of the Merger. The remainder of the 2000 accrual for severance and employee-related charges related to expected payments to
employees expected to leave the Company under planned reductions subsequent to the consummation of the Merger. As of December 31, 2002, $254 million, including the payment of
$38 million in bonuses, of the reserve had been paid for severance and enhanced pension payments. In 2001, upon completion of our Merger-related activities in this area and having achieved a
reduction of 3,200 people, we reversed $29 million of the accrual into income for the difference between our original estimates and the actual payments.

Other
net Merger-related charges were $41 million for 2001 and $86 million for 2000. These other charges were comprised of professional fees, re-branding costs and other
incremental costs directly associated with the Merger.

75

---

Note 5: Accounts Receivable

The following table presents a breakdown of our accounts receivable balances:

December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Trade receivables

$
1,279

$
1,380

$
1,255Earned and unbilled receivables


250


270


276Purchased receivables


104


148


213Notes receivable and other


1


86


1Total accounts receivable


1,634


1,884


1,745Less: Allowance for bad debts


(140
)

(155
)

(81
)Accounts receivablenet


1,494


1,729


1,664Accounts receivableaffiliates


120


77


90Total accounts receivable

$
1,614

$
1,806

$
1,754


The fair value of accounts receivable balances approximates their carrying value because of their short-term nature. We are exposed to concentrations of credit
risk from customers within our local service area and from other telecommunications service providers. We generally do not require collateral to secure our receivable balances.

We
have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within
our local service area. We purchase these accounts receivable from the other telecommunications service providers on a full-recourse basis and include these amounts in our accounts receivable balance.
As identified in the table above, purchased receivables included in our accounts receivable balances were $104 million, $148 million and $213 million at December 31, 2002,
2001 and 2000, respectively. We have not experienced any significant losses under the recourse provisions related to these purchased receivables.

In
addition, we also have billing and collection arrangements with other telecommunications service providers for certain services we provide to our customers outside our local service
area. While these amounts are billed by the other telecommunications service providers on our behalf, we continue to include the receivables in our accounts receivable balances due to the
full-recourse provisions of the billing and collection agreements.

Our
restated accounts receivable balances reflect the reclassification of the contested liability trust from note receivable to equity during the year ended December 31, 2001. For
details see Note 3Restatement of Results.

76

---

Note 6: Property, Plant and Equipment

The components of property, plant and equipment are as follows:

December 31,Depreciable
Lives2002

2001

2000(As restated, see Note 3)(Dollars in millions)Land



$
103

$
102

$
100Buildings

38 years


2,904


2,866


2,699Communications equipment

7-10 years


18,506


18,916


16,698Other network equipment

8-57 years


18,211


17,610


16,475General purpose computers and other

5-11 years


2,515


2,935


3,075Construction in progress




173


523


1,02042,412


42,952


40,067Less: accumulated depreciation




(25,101
)

(23,765
)

(21,984
)Property, plant and equipmentnet



$
17,311

$
19,187

$
18,083


Asset impairments

A summary of asset impairments recognized is as follows:

Year Ended December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Impairment of property, plant and equipment

$
825

$


$
Special purpose access lines








191Capitalized software due to restructuring activities (Note 7Intangible Assets)


4


29


Impairment, capitalized software and other due to Merger (Note 7Intangible Assets)





20


144Total asset impairments

$
829

$
49

$
335


Effective June 30, 2002, pursuant to SFAS No. 144, a general deterioration of the telecommunications market, downward revisions to
our expected future results of operations and other factors indicated that our investments in long-lived assets may have been impaired at that date. In accordance with SFAS No. 144 we performed
an evaluation of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. For impairment analysis purposes, we grouped our property, plant and
equipment and projected cash flows by our traditional telephone network and our wireless network. Based on the gross undiscounted cash flow projections, we determined that our traditional telephone
network was not impaired. However, we determined that our wireless network, which provides personal communications service ("PCS") in select markets in our local service area, was impaired at
June 30, 2002. For our wireless network, we then estimated the fair value using replacement cost. Based on our analysis, the estimated fair value of the wireless assets was less than our
carrying amounts and we recorded an impairment charge of $825 million as of June 30, 2002. Replacement cost was determined by using current cost adjusted for physical deterioration, functional
obsolescence and economic obsolescence.

In
accordance with SFAS No. 144, the fair value of the impaired assets becomes the new basis for accounting purposes. As such, approximately $410 million in accumulated depreciation was
eliminated in connection with the accounting for the wireless assets impairment. The impact of the impairments will reduce our annual depreciation and amortization expense by approximately $135
million, effective July 1, 2002.

77

---

Other asset impairments

Subsequent to the Merger, we also re-evaluated all of our assets for potential impairment and, in certain instances, we concluded that the fair value of some of
our assets were below their carrying value. As a result, we recorded an impairment charge during the year ended December 31, 2000 of $30 million, writing off the full carrying value of certain
internal use software projects that were abandoned as a result of the merger.

In
connection with the Merger, we evaluated our dedicated special-purpose access lines that we lease to competitive local exchange carriers ("CLECs") for potential impairment. After
considering the declining industry conditions and regulatory changes affecting CLECs in 2000, as well as the fact that these access lines would no longer generate cash flows, had no alternative use,
and could not be sold or re-deployed, we concluded that the fair value of these assets was zero and we recorded an impairment charge of $191 million in our consolidated statements of operations, for
the year ended December 31, 2000.

Note 7: Intangible Assets

The components of intangible assets is as follows:

|                                   |                                |  |          | December 31, |      
|---------------------------------- | ------------------------------ |  | -------- | ------------ | -----
|
|
|
|
|
|Intangibles with indefinite lives: |                                |  |          |              |      
|                                   | Spectrum licenses              |  | 40 years |              | $    
|Intangibles with finite lives:     |                                |  |          |              |      
|                                   | Capitalized software and other |  | 5 years  |              |      
|                                   |                                |  |          |              |      
|Total intangible assets            |                                |  |          | $            | 1,817
|                                   |                                |  |          |              |      

We recorded amortization expense of $302 million in 2002 for intangibles with finite lives. Based on the current amount of intangible assets subject to
amortization, the estimated amortization for each of the succeeding five years is as follows:

(Dollars in millions)2003

$
3612004


3312005


2622006


1612007


47$
1,162


Adoption of SFAS No. 142

On January 1, 2002, we adopted SFAS No. 142, which requires companies to cease amortizing goodwill and intangible assets which have indefinite
useful lives. SFAS No. 142 also requires that goodwill and indefinite-lived intangible assets be reviewed for impairment upon adoption on January 1, 2002 and annually thereafter, or more
often if events or circumstances warrant. We performed a transitional impairment test on our wireless spectrum licenses and determined their carrying values are appropriate, and we ceased amortizing
our intangible assets with indefinite lives on January 1, 2002. We

78

---

have
not presented net income for restated periods pre-and-post SFAS No. 142 adoption as differences are insignificant.

Upon
adoption of SFAS No. 142, we reviewed the useful lives of our amortizable intangible assets, primarily capitalized software and other, and determined that after restatement,
they remained appropriate. In accordance with SFAS No. 142, we will continue to perform impairment tests on the remaining indefinite-lived intangible assets on an annual basis, or more often if
events or changes in circumstances indicate the assets may be impaired.

Other intangible information

In June 2002, pursuant to SFAS No. 144 as discussed in Note 6Property, Plant and Equipment, we recorded an asset impairment charge to
other intangible assets with finite lives. These include impairments related to capitalized computer software of $34 million, which is included in the $825 million wireless asset
impairment charge.

We
recorded asset impairment charges of $4 million and $29 million in 2002 and 2001, respectively, related to internal software projects that we terminated, including
customer database system projects.

Following
the Merger, we reviewed all internal use software projects in process and determined that certain projects should no longer be pursued. Because the projects were incomplete and
abandoned, the fair value of such software was determined to be zero. Capitalized software costs of $20 million and $114 million were written off in 2001 and 2000, respectively, and
reported as asset impairment charges on our consolidated statements of operations at the time they were abandoned. The abandoned projects primarily included a significant billing system replacement.

Note 8: Assets Held for SaleNet

We had net assets held for sale of $43 million as of December 31, 2000. Prior to and during 2000, U S WEST agreed to sell
approximately 800,000 access lines to third-party telecommunications services providers, including approximately 570,000 access lines in nine states to Citizens Communications Company ("Citizens").
Because these access lines were "held for sale", U S WEST stopped recognizing depreciation expense on the related assets and carried them at the lower of their cost or fair value, less
estimated cost to sell.

On
July, 20, 2001, we terminated the agreement with Citizens under which the majority of the remaining access lines in eight states were to have been sold and ceased actively
marketing the remaining access lines. As a result, the remaining access lines and related assets were reclassified to "held and used" as of June 30, 2001. In connection with the change in use
and this reclassification, the access lines and related assets were measured individually at the lower of their (a) carrying value before they were classified as held for sale, adjusted for any
depreciation expense or impairment losses that would have been recognized had the assets been continuously classified as held and used, or (b) their fair value at June 30, 2001. This
resulted in a charge to depreciation expense in 2001 of $222 million to "catch up" the depreciation on these access lines and related assets for the period they were classified as held for
sale. The required depreciation adjustments to the carrying value of the individual access lines and related assets were included in our 2001 consolidated statement of operations.

In
2001, we sold approximately 41,000 access lines in Utah and Arizona resulting in $94 million in proceeds and a gain of $51 million. In 2000, we completed the sale of
approximately 20,000 access lines in North Dakota and South Dakota resulting in proceeds of $46 million and a gain of $28 million. In addition, we recorded a net loss of
$39 million relating to the disposal of other non-strategic assets.

79

---

Note 9: Borrowings

Current borrowings

As of December 31, 2002, 2001 and 2000, our current borrowings consisted of:

December 31,2002

2001

2000(Dollars in millions)Commercial paper

$


$
888

$
587Short-term notes





124


Current borrowingsaffiliates


1,888


2,292


1,521Current portion of long-term borrowings


1,179


361


239Current portion of capital lease obligations and other


76


138


144Total current borrowings

$
3,143

$
3,803

$
2,491


Until February 2002, we maintained commercial paper programs to finance our short-term operating cash needs. QCII and we had a $4.0 billion syndicated
credit facility ("Credit Facility"), of which $1.0 billion was designated to us. As a result of reduced demand for our commercial paper programs, we borrowed $1.0 billion under the Credit Facility in
the first quarter of 2002. During the first quarter of 2002, we also paid down approximately $1.0 billion of our current borrowings including substantially all of our outstanding commercial paper. The
weighted average interest rates on outstanding commercial paper borrowings at December 31, 2001 and 2000 were 2.59% and 6.85%, respectively.

In
March 2002, we used approximately $1.0 billion of the proceeds from our March 2002 bond offering, discussed below, to reduce our amount outstanding under the Credit Facility to
zero. QCII and QSC amended the Credit Facility in August of 2002. Following the amendment, we are no longer a party to the Credit Facility.

Current
borrowingsaffiliates represent short-term borrowings on unsecured lines of credit (the "Affiliates Lines of Credit") by our wholly owned subsidiary, Qwest Wireless
LLC ("Qwest Wireless"), from affiliates that are wholly owned by QCII. The Affiliates Lines of Credit mature in January 2005 and have an interest rate of 7.50% per annum. We expect that the maturities
of these lines of credit will be extended by our affiliates as necessary. Qwest Corporation does not guarantee the borrowings of Qwest Wireless.

Long-term borrowings

As of December 31, 2002, 2001 and 2000, our long-term borrowings consisted of the following:

December 31,2002

2001

2000(Dollars in millions)Notes with various rates ranging from 4.375% to 9.125% and maturities from 2002 to 2043

$
6,137

$
5,817

$
6,177Unamortized discount and other


(142
)

(122
)

(125
)Capital lease obligations and other


21


86


195Total long-term borrowings

$
6,016

$
5,781

$
6,247


At December 31, 2002, 2001 and 2000, we had aggregate principal outstanding of $6.137 billion, $5.817 billion and $6.177 billion,
excluding unamortized discounts of $142 million, $122 million and $125 million, respectively, of unsecured notes at interest rates ranging from 4.375% to 9.125% and with

80

---

maturities
from 2002 to 2043. The indentures governing these notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on the assets of Qwest and
(ii) a limitation on mergers or sales of all, or substantially all, of the assets of Qwest, which limitation requires that a successor assume the obligation with regard to these notes. These
indentures do not contain any cross-default provisions. We were in compliance with all of the covenants at December 31, 2002. Included in the amounts listed above are the following issuances:

In
March 2002, we issued $1.5 billion in bonds with a 10-year maturity and an 8.875% interest rate. At December 31, 2002 the interest rate was 9.125%. Once we have
registered the notes, the interest rate will return to 8.875%, the original stated rate. The proceeds from the sale of the bonds were used to repay approximately $1.0 billion on the Credit Facility,
short-term obligations and currently maturing long-term borrowings.

In
June 2000, we issued $1.0 billion in notes with a three-year maturity due 2003 and an interest rate of 7.625%.

Our
borrowings had the following interest rates and maturities at December 31, 2002:

MaturitiesInterest rates2003

2004

2005

2006

2007

Thereafter

Total(Dollars in millions)Up to 5%

$
50

$


$


$


$


$


$
50Above 5% to 6%


24


117


41





70


320


572Above 6% to 7%


43





416





90


1,000


1,549Above 7% to 8%


2,950


750











1,583


5,283Above 8% to 9%

















250


250Above 9%

















1,500


1,500Total borrowings

$
3,067

$
867

$
457

$


$
160

$
4,653

$
9,204Capital leases and other




















97Unamortized discount and other




















(142
)Less current borrowings




















(3,143
)Total long-term debt



















$
6,016


Other debt related matters

At September 30, 2003, QCII and its consolidated subsidiaries had total borrowings of $21.3 billion. Some of these borrowings issued by QCII and QSC are
secured by liens on the stock of the Company. As a result, ownership of the stock of the Company could transfer if either QCII or QSC were to default on its debt obligations.

At
December 31, 2002, we were in compliance with all provisions and covenants of our borrowings. Some of QSC's loan documents contain financial reporting covenants that require
delivery of our annual and quarterly periodic reports. A waiver has been obtained for non-compliance to provide certain annual and quarterly financial information to the lenders. The waiver extended
the compliance date to provide the financial information to January 31, 2004.

81

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Interest

The following table presents the amount of gross interest, capitalized interest and cash interest paid during 2002, 2001 and 2000:

Year Ended December 31,2002

2001

2000(Dollars in millions)Gross interest expense

$
724

$
659

$
601Capitalized interest


(25
)

(46
)

(52
)Net interest expense

$
699

$
613

$
549Cash interest paid

$
633

$
606

$
541


Of the cash interest paid shown above, cash interest paid to affiliates amounted to $162 million, $142 million and $87 million for 2002, 2001
and 2000, respectively.

Cross-currency swaps

We occasionally enter into derivative financial instruments. The objective of our interest rate risk management program is to manage the level and volatility of
our interest expense. We have also employed financial derivatives to hedge foreign currency exposures associated with certain debt.

Prior
to 2000, under a cross-currency swap, we agreed with another party to exchange U.S. dollars for foreign currency based on a notional amount, at specified intervals over a defined
term. We designed this cross-currency swap as a hedge of our borrowings. The cross-currency swap was tied to the Swiss Franc and had a fair value of negative $40 million at December 31,
2000. Upon adoption of SFAS No. 133 on January 1, 2001, the cross-currency swap was carried at fair value on the consolidated balance sheet with changes in fair value included in other
comprehensive income (loss) in the consolidated statement of stockholder's equity. The cross-currency swap expired in November 2001 when the Swiss Franc borrowing matured.

We
were exposed to, but did not incur, losses from non-performance by counter-parties on these derivative financial instruments.

Credit ratings

QCII and Qwest affiliate credit ratings were lowered by Moody's Investor Services ("Moody's"), Standard and Poor's ("S&P") and Fitch Ratings ("Fitch") on multiple
occasions during 2002. The table below summarizes our ratings as of December 31, 2002 and 2001. The December 31, 2002 ratings are still in effect and represent ratings of long-term debt.

December 31,2002

2001Moody's

Ba3

A2S&P

B-

BBB+Fitch

B

A


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.
According to Moody's, 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.

82

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With
respect to S&P, any rating below BBB indicates that the security is speculative in nature. According to S&P, a B- rating indicates that the issuer currently has the capacity to meet
its financial commitment on the obligation, but adverse business, financial or economic conditions will likely impair the issuer's capacity or willingness to meet its financial commitment on the
obligation.

With
respect to Fitch, any rating below BBB is considered speculative in nature. According to Fitch, a B rating is considered below BBB and is highly speculative, meaning that
significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.

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. In addition, changes to
QCII's ratings would likely affect our credit ratings.

Note 10: Other Financial Information

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following:

December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Accrued interest

$
140

$
87

$
77Employee compensation


165


188


245Current portion of state regulatory and legal liabilities


182


156


193Accrued property taxes and other operating taxes


357


358


359Other


55


43


57Total accrued expenses and other current liabilities

$
899

$
832

$
931


Note 11: Employee Benefits

Pension, post-retirement and other post-employment benefits

Our employees participate in the QCII pension, post-retirement and other post-employment benefit plans. The amounts contributed by us are not segregated or
restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII or its affiliates. The plan administrator allocates the cost of pension and
post-retirement health care and life insurance benefits and required contributions to us. The allocation is based upon employee demographics of our employees compared to all the remaining
participants. For further discussion of the QCII pension, post-retirement and other post-employment benefit plans please see the 2002 QCII Form 10-K.

In
accordance with SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," we are required to disclose the amount of our contributions to QCII relative
to the QCII pension, post-retirement and other post-employment benefit plans. No pension funding was required in 2002, 2001 or 2000 and as of December 31, 2002, as the fair value of the assets
in the qualified Pension Trust exceeded the accumulated benefit obligation of the qualified Pension Plan. In

83

---

addition,
we did not make any contributions to the post-retirement healthcare or life trusts in 2002 or 2001; however, we did contribute $16 million to the post-retirement healthcare trust in 2000.

Our
allocated pension credits for 2002, 2001 and 2000 were $160 million, $279 million and $259 million, respectively. Our allocated post-retirement benefit costs for
2002, 2001 and 2000 were $107 million, $12 million and $14 million, respectively. These allocated amounts represent our share of the pension credits and post-retirement benefit
costs based on the actuarially determined amounts.

For
2002, 2001 and 2000, the net pension credit allocated to cost of sales was $30 million, $186 million and $166 million, respectively. For 2002, 2001 and 2000, the
net pension credit allocated to SG&A was $23 million, $81 million and $79 million, respectively.

Other benefit plans



QCII currently sponsors a defined contribution benefit plan covering substantially all management and occupational (union) employees. Under this plan, employees
may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan, and by the Internal Revenue Service. Currently, we match a percentage of employee
contributions in QCII common stock. As of December 31, 2002, the assets of the plan included approximately 84 million shares of QCII common stock as a result of the combination of our
employer match and participant directed contributions. We made cash contributions in connection with our 401(k) plans of $5 million, $59 million and $77 million for 2002, 2001 and
2000, respectively. In addition, QCII, on our behalf, made contributions of QCII common stock valued at $44 million in 2002. QCII did not make any contributions of QCII common stock on our
behalf in 2001 or 2000.



QCII sponsors several deferred compensation plans for a select group that includes certain of our current and former management and highly compensated employees,
certain of which are open to new participants. Participants in these plans may, at their discretion, invest their deferred compensation in various investment choices including QCII's common stock.

Our
portion of QCII's deferred compensation obligation is included on our consolidated balance sheet in deferred credits and other. The allocation of deferred compensation by QCII is
based on our participant balances. Investment earnings, administrative expenses, changes in investment values and increases or decreases in the deferred compensation liability resulting from changes
in the investment values are recorded in our consolidated statement of operations. Our portion of QCII's deferred compensation liability as of December 31, 2002, 2001 and 2000 was
$6 million, $12 million and $18 million, respectively. Our portion of QCII's deferred compensation plans' assets were $4 million and $13 million at
December 31, 2001 and 2000, respectively, and are included in other long-term assets on the consolidated balance sheets.

Note 12: Stock Incentive Plans

Stock options

Our employees participate in the QCII employee stock incentive plans. Prior to the Merger, we adopted stock plans under which we could grant awards in the form of
stock options, stock appreciation rights, restricted stock and phantom units, as well as substitute stock options and restricted stock awards. In connection with the Merger, all outstanding options of
U S WEST issued prior to the Merger announcement were immediately vested. Options granted after the Merger announcement date continue to vest according to the vesting requirements in the
plan.

84

---

QCII's
stock incentive plans, in which our employees participate, are accounted for using the intrinsic-value method under which no compensation expense is recognized for options granted
to employees with a strike price that equals or exceeds the value of the underlying security on the measurement date. In certain instances, the strike price has been established prior to the
measurement date, in which event 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, in accordance with FIN No. 28. We recorded stock-based compensation expense of $2 million, $6 million and $87 million in the years ended
December 31, 2002, 2001 and 2000, respectively. For further discussion of QCII employee stock incentive plans see the QCII 2002 Form 10-K.

QCII
charges us for stock option compensation expense through a contribution to common stock for our share of the deferred compensation expense.

Employee stock purchase plan

Our employees participate in the QCII Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, eligible employees may authorize payroll deductions of
up to 15% of their base compensation, as defined, to purchase QCII's common stock at a price of 85% of the fair market value of the stock on the last trading day of the month in which the stock is
purchased.

Note 13: Stockholder's Equity

Common stock (no par value)

We have one share of issued and outstanding common stock owned by QSC.

Transfer of assets and other transfers with QSC

In the normal course of business, we transfer assets to and from QSC. It is our policy to record these asset transfers as contributions or distributions, based on
carrying values. During the year ended December 31, 2000, net assets were transferred to QSC with a combined carrying value of $233 million, including an investment carried at
$220 million, which had associated accumulated comprehensive income of $210 million. QSC transferred to us $87 million related to stock compensation as well as pension credits of
$6 million during 2000. We transferred net assets to QSC of $8 million in 2001. During 2002 QSC transferred to us $10 million of net assets, $16 million of tax benefits on
stock options, and $2 million for stock compensation.

Dividends

We declared cash dividends to QSC of $805 million, $1.407 billion and $902 million during 2002, 2001 and 2000, respectively. We paid cash
dividends of $1.915 billion and $821 million in 2002 and 2000 respectively. The dividend payments made during 2000 include $396 million from 1999. At December 31, 2002 we
had $774 million in dividends payable.

Accumulated other comprehensive income (loss)

During the year ended December 31, 2000 we transferred, at our carrying value, marketable securities designated as available-for-sale to QSC.

Contested liability trust

We have established a contested liability trust, or grantor trust, related to the payment of certain contingent obligations. The assets in the trust set aside for
payments of these contingencies are not

85

---

legally
restricted. During 2000, the trust was funded with a contribution of a note receivable of $286 million.

Note 14: Income Taxes

The components of the income tax provision are as follows:

Year Ended December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Current tax provision:Federal

$
464

$
153

$
305State and local


51


16


31515


169


336Deferred tax (benefit) provision:Federal


(20
)

570


313State and local


(6
)

99


54(26
)

669


367Provision for income taxes

$
489

$
838

$
703


The effective tax rate differs from the statutory tax rate as follows:

Year Ended December 31,2002

2001

2000(As restated, see Note 3)(in percent)Federal statutory income tax rate

35.0
%
35.0
%
35.0
%State and local income taxesnet of federal effect

2.3

3.3

3.4Tax on sale of appreciated investment transferred to QSC





4.5Other

0.5

(1.0
)
(0.2
)Effective income tax rate

37.8
%
37.3
%
42.7
%


The components of the net deferred tax liabilities are as follows:

December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Property, plant and equipment

$
(2,622
)
$
(2,542
)
$
(2,025
)State deferred taxesnet of federal effect


(320
)

(308
)

(249
)Other


(119
)

(91
)

(100
)Total deferred tax liabilities


(3,061
)

(2,941
)

(2,374
)Post-retirement benefits, net of pension


660


573


633Unamortized investment tax credit


44


47


54State deferred taxesnet of federal effect


106


92


104Bad debt


77


28


16Other


126


137


191Total deferred tax assets

$
1,013

$
877

$
998Net deferred tax liabilities

$
(2,048
)
$
(2,064
)
$
(1,376
)


86

---

In 2000, we transferred an appreciated investment at its carrying value of $220 million net of accumulated other comprehensive income of
$210 million to QSC. The taxable unrealized gain on transfer of $210 million triggered additional income tax expense of $82 million which is recorded in our consolidated statement
of operations.

We
paid $646 million, $523 million and $395 million to QCII, through QSC, for income taxes in 2002, 2001 and 2000, respectively. At December 31, 2002 and
2001, we had prepaid taxes of $255 million and $219 million to QCII, through QSC, respectively.

We
had unamortized investment tax credits of $125 million, $135 million and $154 million as of December 31, 2002, 2001 and 2000, respectively, included in
Deferred Credits and Other on our consolidated balance sheets. These credits are amortized over the life of the related asset. Amortization of investment tax credits of $10 million,
$19 million and $7 million are included in the provision for income taxes for the years ended December 31, 2002, 2001 and 2000, respectively. At the end of 2002, we had
$13 million ($8 million, net of federal income tax) of state investment tax credit carryforwards that will expire between 2009 and 2016, if not utilized. The carryforwards do not include
approximately $1 million of state investment tax credit carryforwards that were sold in 2003, as allowed by state law.

In
accordance with SFAS No. 109, "Accounting for Income Taxes", we have performed an evaluation of our deferred tax assets. It is our opinion that it is more likely than not that
the deferred tax assets will be realized and should not be reduced by a valuation allowance.

Note 15: Contributions to QCII Segments

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 the QCII 2002
Form 10-K. 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 Qwest Corporation to a CODM on a regular basis. However, for reporting purposes only, we have separated our operating activities for all periods
presented, into segments in a manner consistent with the consolidated segment results regularly reviewed by QCII's CODM. This segment presentation excludes affiliate revenue and expenses that are
eliminated in consolidation by QCII.

Revenue
and expenses are based on the types of products and services described below. Network infrastructure is designed to be scalable and flexible to handle multiple products and
services. As a result, QCII does not allocate network infrastructure costs to individual products. Direct administrative costs include sales, customer support, collections and marketing. Indirect
administrative costs such as finance, information technology, real estate, legal, marketing services and human resources are included in the other services operating expenses. QCII manages indirect
administrative services costs centrally; consequently, these costs are not allocated to wireline or wireless services. Similarly, depreciation, amortization, interest expense, interest income and
other income (expense) are not allocated to either wireline or wireless services operating expenses.

Wireline
services include revenue from the provision of voice services and data and Internet services. Voice services consist of local voice services (such as basic local exchange
services, switching services, custom calling features, enhanced voice services, operator services, public telephone services, collocation services and revenues from the sales of customer premises
equipment ("CPE")); IntraLATA long-distance voice services (long-distance services within our local service area); and access services (which are primarily wholesale switched
access services). Access services revenue is generated principally from charges to interexchange carriers ("IXCs"), for use of our local network to connect their customers to their
long-distance networks. An IXC is a telecommunications company that provides long-distance services to end-users by handling calls that are made from a phone
exchange in

87

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one
local access transport area ("LATA"), to an exchange in another LATA or between exchanges within a LATA. Data and Internet services include data services (such as traditional private lines,
wholesale private lines, integrated services digital network, frame relay, asynchronous transfer mode and related CPE) and Internet services (such as digital subscriber line, Internet dial access,
professional services and related CPE). 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 fees and
charges.

Our
wireless services are provided through our wholly owned subsidiary, Qwest Wireless, which holds 10 Megahertz licenses to provide PCS in most markets in our local service area. We
offer wireless services to residential and business customers providing them the ability to use the same telephone number for their wireless phone as for their home or business phone. In
August 2003, we entered into a services agreement with a subsidiary of Sprint Corporation ("Sprint") that allows us to resell Sprint wireless services, including access to Sprint's nationwide
PCS wireless network, to consumer and business customers, primarily within our local service area. In the third quarter of 2003 we reviewed the carrying value of our wireless assets and determined
that they were impaired. Accordingly, we recorded
a charge of $230 million to our consolidated statements of operations. See Note 18Subsequent Events.

We
intend to transfer ownership of Qwest Wireless to an affiliate in the near future. After this transfer, we will no longer have significant wireless operations. This transfer will take
place as soon as we have received all necessary regulatory approvals, perhaps as early as the first quarter of 2004.

Other
services revenue is predominately derived from subleases of some of our unused real estate assets, such as space in our office buildings, warehouses and other properties. Our other
services expenses include unallocated corporate expenses for functions such as finance, information technology, real estate, legal, marketing services and human resources.

88

---

The revenue and expenses shown below are derived from transactions with external customers.

|                                            |                               | For the Year Ended December 31,                      |  
|------------------------------------------- | ----------------------------- | ---------------------------------------------------- | -
|
|
|
|Operating revenue:                          |                               |                                                      |  
|                                            | Wireline services             |                                                      | $
|                                            | Wireless services             |                                                      |  
|                                            | Other services                |                                                      |  
|                                            |                               |                                                      |  
|                                            |                               | Total contribution to QCII segment revenue           |  
|                                            |                               |                                                      |  
|Operating expenses:                         |                               |                                                      |  
|                                            | Wireline services             |                                                      | $
|                                            | Wireless services             |                                                      |  
|                                            | Other Services                |                                                      |  
|                                            |                               |                                                      |  
|                                            |                               | Total contribution to QCII segment expenses          |  
|                                            |                               |                                                      |  
|Contribution to QCII segment income (loss): |                               |                                                      |  
|                                            | Wireline services             |                                                      | $
|                                            | Wireless services             |                                                      |  
|                                            | Other services                |                                                      |  
|                                            |                               |                                                      |  
|                                            |                               | Total contribution to QCII segment income            |  
|                                            |                               |                                                      |  
|Capital expenditures:                       |                               |                                                      |  
|                                            | Wireline                      |                                                      | $
|                                            | Wireless                      |                                                      |  
|                                            | Other                         |                                                      |  
|                                            |                               |                                                      |  
|                                            |                               | Total contribution to QCII capital expenditures      |  
|                                            | Non-cash investing activities |                                                      |  
|                                            |                               |                                                      |  
|                                            |                               | Total contribution to QCII cash capital expenditures |  
|                                            |                               |                                                      |  

89

---

The following table reconciles the segment information to net income for the years ended December 31, 2002, 2001 and 2000:

|                                          |         | For the Year Ended December 31,                                  
|----------------------------------------- | ------- | -----------------------------------------------------------------
|
|
|
|Total contribution to QCII segment income |         | $                                                                
|                                          | Add:    |                                                                  
|                                          |         | Affiliate revenue                                                
|                                          | Deduct: |                                                                  
|                                          |         | Affiliate expenses                                               
|                                          |         | Depreciation                                                     
|                                          |         | Intangible assets amortization                                   
|                                          |         | Asset impairment charges                                         
|                                          |         | Restructuring and other chargesnet                              
|                                          |         | Merger-related credits (charges)net                             
|                                          |         | Total other expensenet                                          
|                                          |         | Income tax provision                                             
|                                          |         | Cumulative effect of change in accounting principle, net of taxes
|                                          |         |                                                                  
|Net income                                |         | $                                                                
|                                          |         |                                                                  

Note 16: Related Party Transactions

We purchase services from our affiliates, such as marketing and advertising, information technology, product and technical services as well as general support
services. We provide to our affiliates telephony and data services, wireless and other services.

Our
affiliates provide services and also contract services from third parties on our behalf. In the latter case the third parties bill our affiliates who in turn charge us for our
respective share of these third party expenses. Our affiliates charge us for services rendered by their employees applying a fully distributed costs ("FDC") methodology. FDC rates are determined using
current salary rates including factors for taxes, employee benefits, including stock based compensation, facilities and overhead costs. These salary rates are charged to us based on hours worked or
charges are allocated to us based on estimates.

We
charge our affiliates based on tariffed rates for telephony and data services. We bill prevailing third party rates for wireless services and for other services we bill either FDC or
market rates.

We
describe in further detail below the services provided by our affiliates.

Marketing, Sales and Advertising

Marketing, sales and advertising, which support preparation for joint marketing of our services, include the development of marketing and advertising plans, sales
unit forecasts, market research, sales training and compensation plans.

Information Technology Services

Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry,
provisioning and billing of services, as well as the cost of improving, maintaining and operating our shared internal communications networks.

90

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Product and Technical Services

Product and technical services related to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing
plans for overall product development, provisioning and customer care.

General Support Services

General support services include legal, regulatory, general finance and accounting, tax, human resources and executive support.

Other

This category includes the costs of miscellaneous services such as rental of office space, procurement and communications services.

Included
in our consolidated statement of operations and balance sheets are the following:

Year Ended December 31,2002

2001

2000(As restated, see Note 3)(Dollars in millions)Revenuesaffiliates

$
411

$
368

$
337Cost of salesaffiliates

$
380

$
337

$
356SG&Aaffiliates

$
1,290

$
1,018

$
757Interest expensenetaffiliates

$
158

$
147

$
92Accounts receivableaffiliates

$
120

$
77

$
90Prepaid income taxesQSC

$
255

$
219


Current borrowingsaffiliates

$
1,888

$
2,292

$
1,521Accounts payableaffiliates

$
331

$
271

$
311Income taxes payableQSC







$
132


Note 17: Commitments and Contingencies

Commitments

Future contractual obligations

The following table summarizes our future contractual cash obligations, excluding interest, as of December 31, 2002:

|                                    |                                           | Payments due by period
|----------------------------------- | ----------------------------------------- | ----------------------
|
|
|
|Borrowings (Note 9Borrowings)      |                                           | $                     
|Capital lease obligations and other |                                           |                       
|Operating leases                    |                                           |                       
|Purchase commitment obligations     |                                           |                       
|                                    |                                           |                       
|                                    | Total future contractual cash obligations |                       
|                                    |                                           |                       

91

---

Capital leases

We lease certain office facilities and equipment under various capital lease arrangements. Assets acquired through capital leases during 2002, 2001 and 2000 were
$16 million, $58 million and $263 million, respectively. Assets recorded under capitalized lease agreements included in property, plant and equipment consisted of
$243 million, $454 million and $565 million of cost less accumulated amortization of $153 million, $260 million and $243 million at December 31, 2002,
2001 and 2000, respectively.

The
future minimum payments under capital leases as of December 31, 2002 are reconciled to our consolidated balance sheet as follows:

(Dollars in millions)Total minimum payments

$
110Less: amount representing interest


(13
)Present value of minimum payments


97Less: current portion


(76
)Long-term portion

$
21


Operating leases

Certain office facilities, real estate and equipment are subject to operating leases. We also have easement (or right-of-way) agreements with railroads and public
transportation authorities that are accounted for as operating leases. Rent expense, net of sublease rentals, under these operating leases was $287 million, $318 million and
$323 million during 2002, 2001 and 2000, respectively. Minimum operating lease payments have not been reduced by minimum sublease rentals of $44 million due in the future under
non-cancelable subleases. In 2002, 2001 and 2000, contingent rentals representing the difference between the fixed and variable rental payments were not material.

Purchase commitment obligations

We have purchase commitments with CLECs, IXCs and third-party vendors that require us to make payments to purchase network services, capacity and
telecommunications equipment primarily through December 31, 2006. These commitments require us to maintain minimum monthly and/or annual billings, in certain cases based on usage. We believe we
will meet all minimum payment commitments. In the unlikely event that the requirements are not met, we will record the appropriate charges.

Letters of credit

At December 31, 2002, the amount of letters of credit outstanding was $3 million and we did not have any outstanding guarantees.

Contingencies

Legal proceedings involving Qwest



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

92

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accounting
practices in order to accomplish the U S WEST 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 of 1933, as amended (the "1933 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.



On February 14, 2002, the Minnesota Department of Commerce filed a formal complaint against us with the Minnesota Public Utilities 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 October 21, 2002, the Minnesota Commission adopted 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 of 1996, 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 Incorporated ("McLeod") and Eschelon Telecom, Inc. ("Eschelon") 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.

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 setting forth the penalties described above on May 21, 2003. On June 19, 2003, we appealed the Minnesota
Commission's orders to the United States District Court for the District of Minnesota. 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. On
July 25, 2003, we entered into a settlement with the staff of the Arizona Corporation Commission to settle this and several other proceedings. The proposed settlement, which must be approved by
the Arizona Commission, requires that we provide approximately $21 million in consideration in the form of a voluntary contribution to the Arizona State Treasury, contributions to certain
organizations and/or infrastructure investments and refunds in the form of bill credits to CLECs. On December 1, 2003, an administrative law judge issued a recommended decision denying the
proposed settlement. The judge also recommended final orders requiring us to pay approximately $11 million in penalties and to issue credits to CLECs for a 24-month period from
October 2000 to September 2002 equal to 10% of all

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wholesale
intrastate services performed by us. We plan to file exceptions to the recommended decisions with the full Arizona Commission. 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. Colorado has also opened an
investigation into these matters. On June 26, 2003, we received from the Federal Communications Commission ("FCC") a letter of inquiry seeking information about these matters. We submitted our
initial response to this inquiry on July 31, 2003. The proceedings and investigations in New Mexico, Colorado and Washington and at the FCC 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.

Illuminet,
Inc. ("Illuminet"), 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 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
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.

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. Through December 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. On December 11, 2003, we received a request for information from
the FCC related to changes in certain customers' preferred carriers for interLATA or intraLATA long distance service. 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.



On April 3, 2002, the Securities and Exchange Commission ("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

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and
related disclosures that are the subject of the various adjustments and restatements described in the QCII 2002 Form 10-K. Some of those accounting practices and transactions and related
disclosures also are the subject of various adjustments and restatements described in this Form 10-K. 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. Such discussions are preliminary and 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 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 a civil penalty, the amount of which could be material, 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 QCII's merger with U S 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 GAAP. At the date of this filing, no action has 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.

Also,
as previously announced in July 2002 by the General Services Administration ("GSA"), the GSA is conducting a review of all contracts with QCII for purposes of determining
present responsibility. On September 12, 2003, we were 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 is last February's indictment against four former QCII employees in
connection with a transaction with the Arizona School Facilities Board in June 2001 and a civil complaint filed the same day by the SEC against the same former employees and others relating to the
Arizona School Facilities Board transaction and a transaction with Genuity Inc. ("Genuity") in 2000. QCII is cooperating fully with the GSA and believes that it and we will remain suppliers of the
government, although QCII cannot predict the outcome of this referral.

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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". Plaintiffs in the consolidated securities action name as defendants in the Fourth Consolidated Amended Class Action Complaint ("the Fourth Consolidated Complaint"),
which was filed on or about August 21, 2002, QCII, its former Chairman and Chief Executive Officer, Joseph P. Nacchio, its former Chief Financial Officers, Robin R. Szeliga and
Robert S. Woodruff, other of its former officers and current directors and Arthur Andersen LLP. The Fourth Consolidated Complaint is purportedly brought on behalf of purchasers of QCII's
publicly traded securities between May 24, 1999 and February 14, 2002, and 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 ("Exchange Act") that certain of the
individual defendants are liable as control persons under section 20(a) of the Exchange Act, and that during the putative class period, 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 Fourth Consolidated Complaint also alleges that QCII's financial results during the putative class period and
statements regarding those results were false and misleading due to the alleged: (i) overstatement of revenue, (ii) understatement of costs, (iii) manipulation of employee
benefits in order to increase profitability and (iv) misstatement of certain assets and liabilities. The Fourth Consolidated Complaint further alleges that QCII and certain of the individual
defendants violated Section 11 of the 1933 Act, and that certain of the individual defendants are liable as control persons under Section 15 of the 1933 Act by preparing and
disseminating false registration statements and prospectuses for: (1) the registration of 897,907,706 shares of QCII's common stock to be issued to U S WEST shareholders dated
June 21, 1999, as amended August 13, 1999 and September 17, 1999; (2) the exchange of $3.25 billion of QCII's notes dated July 12, 2001; and (3) the
exchange of $3.75 billion of QCII's notes dated October 30, 2001. The Fourth Consolidated Complaint seeks unspecified compensatory damages and other relief. However, lead counsel for the
plaintiffs has indicated that plaintiffs will seek damages in the billions of dollars. On September 20, 2002, both QCII and the individual defendants filed motions to dismiss the Fourth
Consolidated Complaint. Those motions are currently pending before the court. On November 4, 2002, lead plaintiffs in the consolidated securities action filed a motion for a temporary
restraining order and preliminary injunction seeking to enjoin QCII's sale of Qwest Dex, Inc. or, in the alternative, to place the proceeds of such sale in a constructive trust for the benefit of the
plaintiffs. The court denied both motions.

On
October 22, 2001, an alleged derivative lawsuit was filed in the United States District Court for the District of Colorado, naming as defendants each of the then members of
QCII's Board of Directors ("the Board"), and naming QCII as a nominal defendant. The derivative complaint is based upon the allegations made in the consolidated securities action and alleges, among
other things, that the Board members intentionally or negligently breached their fiduciary duties to QCII by failing to oversee implementation of securities laws that prohibit insider trading. The
derivative complaint also alleges that the Board members breached their fiduciary duties to QCII by causing or permitting it to commit alleged securities violations, thus (i) causing it to be
sued for such violations, and (ii) subjecting it to adverse publicity, increasing its cost of raising capital and impairing earnings. The derivative complaint further alleges that certain
directors sold shares between April 26, 2001 and May 15, 2001 using non-public information about QCII. On or about October 31, 2001, the court filed an order consolidating this
derivative lawsuit with the consolidated securities action. In December 2001, the derivative lawsuit was stayed, pending further order of the court, based on the fact that the merits of the
derivative lawsuit are intertwined with the resolution of the consolidated securities action. In March 2002, plaintiffs filed a first amended derivative complaint. The first amended derivative
complaint adds

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allegations
relating to the disclosures of QCII's consolidated financial results from April 2000 through February 2002. On or about November 5, 2002, plaintiffs filed a second amended
derivative complaint. The second amended complaint adds as defendants to the lawsuit certain former officers, including Robin R. Szeliga, Robert S. Woodruff and others. The second amended complaint
contains allegations in addition to those set forth in the prior complaints, stating, among other things, that (i) certain officers and/or directors traded QCII's stock while in the possession
of inside information, and (ii) certain officers and/or directors caused the restatement of more than $1 billion in revenue by concealing improper accounting practices. Plaintiffs seek, among
other remedies, disgorgement of alleged insider trading profits. The lawsuit remains stayed.

On
March 6, 2002, an alleged derivative lawsuit was filed in the District Court for the City and County of Denver, naming as defendants each of the then members of QCII's Board of
Directors, certain former officers of QCII and Arthur Andersen LLP. QCII is named as a nominal defendant. The derivative complaint is based upon the allegations made in the consolidated securities
action and
alleges that the Board members intentionally or recklessly breached their fiduciary duties to QCII by causing or allowing it to issue financial disclosures that were false or misleading. Plaintiffs
seek unspecified damages on QCII's behalf against the defendants. On July 2, 2002, this state court derivative lawsuit was stayed pending further order of the court. On or about
August 1, 2003, the plaintiffs filed an amended derivative complaint, which does not contain claims against QCII's former officers and Arthur Andersen LLP, but continues to assert claims
against the Board defendants. In the amended complaint, the plaintiffs allege, among other things, that the individual defendants abdicated their duty to implement and maintain an adequate internal
accounting control system and thus allegedly violated (i) their fiduciary duties of loyalty and good faith; (ii) GAAP; and (iii) QCII's Audit Committee's charter (which requires,
among other things, that QCII's Audit Committee serve as an independent and objective party to monitor QCII's financial reporting and internal control system). The amended complaint also states new
claims against Mr. Nacchio for his alleged breach of fiduciary duties. Plaintiffs seek a court order requiring that Mr. Nacchio disgorge to QCII all of his 2001 compensation, including salary, bonus,
long-term incentive payouts and stock options. In addition, the plaintiffs contend that Mr. Nacchio breached his fiduciary duties to QCII by virtue of his sales of its stock allegedly made using his
knowledge of material non-public information. The plaintiffs seek the imposition of a constructive trust on any profits Mr. Nacchio obtained by virtue of these sales.

Since
March 2002, seven putative class action suits 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 ("Plan"), from March 7, 1999 until the present. 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 described below and referred to as the "consolidated ERISA action". QCII expect the seventh
putative class action to be consolidated with the other cases since it asserts substantially the same claims. The consolidated amended complaint filed on July 5, 2002, names as defendants,
among others, QCII, several former and current directors, officers and employees of QCII, Qwest Asset Management, the Plan's Investment Committee, and the Plan Administrative Committee of the
pre-Merger QCII 401(k) Savings Plan. Plaintiffs filed a Second Amended and Consolidated Complaint on May 21, 2003, naming as additional defendants a former employee and QCII's Plan Design
Committee. The consolidated ERISA action, which is brought under the Employee Retirement Income Security Act ("ERISA"), alleges, among other things, that the defendants breached fiduciary duties to
the Plan members 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 stock, continuing to offer QCII's stock as an investment option under the Plan, failing to investigate the effect of the U S WEST merger on Plan assets and then failing to
vote the Plan's shares against it, preventing plan participants from

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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 on August 22, 2002. Those motions are also pending before the court.

On
August 9, 2002, an alleged derivative lawsuit was filed in the Court of Chancery of the State of Delaware, naming as defendants each of the then members of QCII's Board of
Directors and QCII current Chief Financial Officer, Oren G. Shaffer, and naming QCII as a nominal defendant. On or about September 16, 2002, an amended complaint was filed in the action, naming
the same defendants except Mr. Shaffer, who is no longer a defendant in the action. A separate alleged derivative lawsuit was filed in the Court of Chancery of the State of Delaware on or about
August 28, 2002. That lawsuit names as defendants QCII's former Chairman and Chief Executive Officer, Joseph P. Nacchio, QCII's former Chief Financial Officer, Robert S. Woodruff, former Board
member, Marilyn Carlson Nelson, and each of the then members of QCII's Board of Directors and names QCII as a nominal defendant. On October 30, 2002, these two alleged derivative lawsuits were
consolidated, and an amended complaint (the "Second Amended Complaint") was later filed on or about January 23, 2003, and names as defendants the current members of QCII's Board of Directors,
former Board member Hank Brown, QCII's former Chief Executive Officer, Joseph P. Nacchio, and QCII's former Chief Financial Officer, Robert Woodruff, and names 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 of $13 million to QCII's former Chief Executive Officer, Mr. Nacchio. The plaintiffs seek recovery of incentive compensation allegedly wrongfully paid to certain
defendants, all severance payments made to Messrs. Nacchio and Woodruff, and all costs including legal and accounting fees. Plaintiffs have also requested, among other things, that the individual
defendants compensate QCII for any insider trading profits. Plaintiffs likewise allege that QCII is entitled to contribution and indemnification by each of the individual defendants. Plaintiffs
request that the court cancel all unexercised stock options awarded to Messrs. Nacchio and Woodruff to which they were not entitled, that the defendants return to QCII all salaries and other
remuneration paid to them by it during the time they breached their fiduciary duties, and that the court order the defendants to enforce policies, practices and procedures on behalf of QCII designed
to detect and prevent illegal conduct by its employees and representatives. On March 17, 2003, defendants moved to dismiss the Second Amended Complaint, or, in the alternative, to stay the
action. That motion is pending before the court.

On
November 22, 2002, plaintiff Stephen Weseley IRA Rollover filed a purported derivative lawsuit in Denver District Court, naming as defendants each of the then members of QCII's
Board of Directors, certain of QCII's former officers, Anschutz Company and QCII as a nominal defendant. Plaintiff alleges, among other things, that the director defendants breached their fiduciary
duties to QCII and damaged QCII by deliberately in bad faith or recklessly (i) implementing a sham system of internal controls completely inadequate to ensure proper recognition of revenue;
(ii) causing QCII to issue false and misleading statements and financial results to the market regarding its earnings, revenues, business and investments; (iii) exposing QCII to massive
liability for securities fraud; (iv) damaging QCII's reputation; and (v) trading QCII's shares while in possession of material, non-public information regarding its true financial
condition. The complaint purports to state causes of action for breach of fiduciary duty, gross negligence and unjust enrichment against some of QCII's former officers and breach of contract and
breach of the duty of loyalty/insider trader trading against several of QCII's former officers and former and current directors. On or about January 7, 2003,

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plaintiff's
counsel filed a proposed amended complaint, which substitutes a new plaintiff, Thomas R. Strauss, and adds another former officer as a defendant. In the amended complaint, plaintiff seeks
(i) disgorgement of bonuses and other incentive compensation paid to certain defendants; (ii) disgorgement of any profits that certain defendants made by virtue of their alleged trading
on material, inside information; and (iii) other damages. By order dated January 9, 2003, the court permitted the substitution and Strauss became the plaintiff in this lawsuit under the
amended complaint.

On
December 10, 2002, the California State Teachers' Retirement System ("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
alleges that the defendants engaged in fraudulent conduct that caused CalSTRS to lose in excess of $150 million invested in QCII's equity and debt securities. The complaint alleges, among other
things, that in press releases and other public statements, defendants represented that QCII was one of the highest revenue producing telecommunications companies in the world, with highly favorable
results and prospects. CalSTRS alleges that defendants were engaged, however, "in a scheme to falsely inflate Qwest's revenues and decrease its expenses so that Qwest would appear more successful than
it actually was." The complaint purported to state causes of action against QCII for (i) violation of California Corporations Code Section 25400 et seq. (securities laws) (seeking, among other
damages, the difference between the price at which CalSTRS sold QCII's notes and stock and their true value); (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 seeks 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, the plaintiff 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 remain largely the same, but plaintiff no longer alleged claims against Mr. Woodruff and Ms. Szeliga following the court's dismissal of the claims against them, and
reasserted its claim against QCII for breach of fiduciary duty as an allegation of aiding and abetting breach of fiduciary duty. QCII filed a second demurrer to that claim, and on November 7,
2003, the court dismissed that claim without leave to amend.

On
November 27, 2002, the State of New Jersey (Treasury Department, Division of Investment) ("New Jersey"), filed a lawsuit similar to the CalSTRS action 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 tens 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.

The
consolidated securities action, the consolidated ERISA action and the CalSTRS and New Jersey actions described above and the State Universities Retirement System of Illinois
("SURSI") action described in Note 18Subsequent Events present material and significant risk to QCII. Some of the allegations in these lawsuits include many of the same subjects
that the SEC and U.S. Attorney's Office are investigating. Moreover, the size, scope and nature of QCII's recent restatements of its

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financial
statements for fiscal 2001 and 2000 affect the risks presented by these cases. While QCII intends to defend against these matters vigorously, the ultimate outcomes of these cases are very
uncertain, and QCII can give no assurance as to the impacts on its financial results or financial condition as a result of these matters. Each of these cases is in a preliminary phase. None of the
plaintiffs or the defendants has advanced evidence concerning possible recoverable damages, and QCII has not yet conducted discovery on these and other relevant issues. QCII has disclosed that it is
unable to estimate reasonably a range of loss that it would incur if the plaintiffs in one or more of these lawsuits were to prevail. QCII has engaged in discussions for the purpose of resolving these
matters and continues to evaluate any possible range of loss. Any settlement of or judgment on one or more of these claims could be material, and QCII cannot give any assurance that it would have the
resources available to pay such judgments. Also, in the event of an adverse outcome of 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.

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 has 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. 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.

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 our 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 plaintiff's 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 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. The
settlement and the court's injunction are opposed by some, but not all, of the plaintiffs' counsel

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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.

Note 18: Subsequent Events

Contingencies

On January 10, 2003, SURSI filed a lawsuit similar to the CalSTRS and New Jersey lawsuits 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, dropping
(i) certain individual and corporate defendants and (ii) its claim under the Illinois Consumer Fraud and Deceptive Business Practices Act. The second amended complaint alleges 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. The complaint alleges, among other
things that in press releases and other public statements, defendants represented that QCII was one of the highest revenue producing telecommunications companies in the world, with highly favorable
results and prospects. SURSI alleges that defendants were engaged, however, in a scheme to falsely inflate QCII's revenues and decrease its expenses by, among other allegations, improper conduct
related to transactions with the Arizona School Facilities Board, Genuity, Calpoint, KMC, KPNQwest and Koninklijke KPN, N.V. The complaint purports to state causes of action against QCII under:
(i) the Illinois Securities Act; (ii) common law fraud; (iii) common law negligent misrepresentation; and (iv) Section 11 of the 1933 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.

Debt-related matters

On June 9, 2003, we completed a senior term loan in two tranches for a total of $1.75 billion principal amount of indebtedness. The term loan
consists of a $1.25 billion floating rate tranche, due in 2007, and a $500 million fixed rate tranche, due in 2010. The term loan is unsecured and ranks equally with all of our current
indebtedness. The floating rate tranche cannot be prepaid for two years and thereafter is subject to prepayment premiums through 2006. There are no mandatory prepayment requirements. The covenant and
default terms are substantially the same as our other long-term debt. The net proceeds were used to refinance our debt due in 2003 and to fund or refinance our investment in telecommunications assets.

The
floating rate tranche bears interest at London Interbank Offered Rates plus 4.75% (with a minimum interest rate of 6.50%) per annum and the fixed rate tranche bears interest at 6.95%
per annum. The lenders funded the entire principal amount of the loan subject to original issue discount for the floating rate tranche of 1.00% and for the fixed rate tranche of 1.652%.

Asset impairment

In August 2003, we entered into a services agreement with a subsidiary of Sprint that allows us to resell Sprint wireless services, including access to
Sprint's nationwide PCS wireless network, to consumer and business customers, primarily within our local service area. We plan to begin offering these Sprint services under our brand name in early
2004. Our wireless customers who are currently being serviced through our proprietary wireless network will be transitioned onto Sprint's network. Due to the anticipated decrease in usage of our own
wireless network following the transition of our customers onto Sprint's network, in the third quarter of 2003 we performed an evaluation of the recoverability of the carrying value of our long-lived
wireless network assets.

In
accordance with SFAS No. 144, we compared gross undiscounted cash flow projections to the carrying value of the long-lived wireless network assets and determined that certain
asset groups were

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not
expected to be recovered through future projected cash flows. For those asset groups that were not recoverable, we then estimated the fair value using recent selling prices for comparable assets.
Our cell sites, switches, related tools and equipment inventory and certain information technology systems that support the wireless network were determined to be impaired by $230 million.
Estimating the fair value of the asset groups involved significant judgment and a variety of assumptions.

In
accordance with SFAS No. 144, the fair value of the impaired assets becomes the new basis for accounting purposes. As such, approximately $25 million in accumulated
depreciation will be eliminated in connection with the accounting for the impairments. The impact of the impairments will reduce our annual depreciation and amortization expense by approximately
$40 million, effective October 1, 2003.

QCII purchase agreement

On December 18, 2003, QCII entered into an agreement to purchase certain telecommunications assets from Allegiance Telecom, Inc. ("Allegiance") for
a purchase price consisting of $300 million in cash, a convertible promissory note in the amount of $90 million and the assumption of certain liabilities. The agreement is subject to
approval by the U.S. Bankruptcy Court and certain other government regulatory agencies. The Bankruptcy Court has designated QCII as the stalking horse bidder in the sale process. Other
interested potential bidders will have an opportunity to offer higher bids for the assets of Allegiance. If QCII is successful in the bidding process, it expects to consummate the transaction sometime
in 2004. In that event, it is possible that some portion of the Allegiance assets will be transferred to or purchased by us, although we have not yet determined the amount or the price we would pay
for them.

Dividends

For the nine months ended September 30, 2003, we have declared regular dividends amounting to $1.034 billion. In addition, in August and November of
2003, we declared and paid dividends in the amount of $360 million and $719 million, respectively, relating to net income from prior periods that had not been declared or paid as
dividends in those periods. We plan to declare and make additional dividend payments in the future until all net income from wireline entities from prior periods has been declared and remitted as
dividends. We estimate that the incremental amount (in addition to the $1.079 billion declared in 2003) of such dividends will be approximately $1.3 billion.

Note 19: Quarterly Financial Data (Unaudited)

|                        |  | Quarterly Financial Data
|----------------------- |  | ------------------------
|
|
|2002(1)                 |  |                         
|Revenues                |  | $                       
|Operating income (loss) |  |                         
|Net income (loss)       |  | $                       
|2001                    |  |                         
|Revenues                |  | $                       
|Operating income        |  |                         
|Net income              |  | $                       

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102

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The
table below reconciles the quarterly information as previously reported to the restated amounts.

|                                         |                         | Quarterly Financial Data |      
|---------------------------------------- | ----------------------- | ------------------------ | -----
|
|
|Revenues, as previously reported         |                         | $                        | 3,049
|Restatement adjustments                  |                         |                          | 19   
|                                         | Revenues                |                          |      
|Operating income, as previously reported |                         |                          | 817  
|Restatement adjustments                  |                         |                          | (59  
|                                         | Operating income (loss) |                          |      
|Net income as previously reported        |                         |                          | 391  
|Restatement adjustments                  |                         |                          | (21  
|                                         | Net income (loss)       |                          | $    
|2001                                     |                         |                          |      
|Revenues, as previously reported         |                         | $                        | 3,119
|Restatement adjustments                  |                         |                          | (8   
|                                         | Revenues                |                          |      
|Operating income, as previously reported |                         |                          | 846  
|Restatement adjustments                  |                         |                          | (89  
|                                         | Operating income        |                          |      
|Net income as previously reported        |                         |                          | 441  
|Restatement adjustments                  |                         |                          | (64  
|                                         | Net income              |                          | $    

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Prior to May 29, 2002, QCII had not engaged independent auditors for 2002. Based on the recommendation of the Audit Committee of the Board of Directors of QCII,
on May 29, 2002 the Board of Directors of QCII decided, effective immediately, not to re-engage Arthur Andersen LLP as our independent auditor.

Effective
May 29, 2002, QCII's Board of Directors engaged KPMG LLP ("KPMG") to serve as our independent auditor for 2002.

Arthur
Andersen LLP's reports on our consolidated financial statements for the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001 and 2000 and through May 29, 2002, there were (1) no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen LLP's
satisfaction, would have caused it to make reference to the subject matter in connection with its report on our consolidated financial statements and (2) no reportable events, as listed in Item
304(a)(1)(v) of Regulation S-K.

During
the years ended December 31, 2001 and 2000 and prior to May 29, 2002, we did not consult KPMG with respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements or any other matters or reportable events listed in Items 304(a)(2)(i) and
(ii) of Regulation S-K.

Following
our decision not to re-engage Arthur Andersen LLP and the engagement of KPMG, we decided to revise certain of our previous accounting practices and policies. Prior to making
these revisions, we sought Arthur Andersen LLP's input and cooperation and notified Arthur Andersen LLP of our determinations prior to their public announcement. During August 2002, QCII received a
letter from Arthur Andersen LLP, indicating its disagreement with QCII's proposed restatement as to certain issues not relevant to our financial statements. Although QCII has continued to seek Arthur
Andersen LLP's input following Arthur Andersen LLP's letter as it made further determinations about the restatement of other issues, QCII has not responded to the August correspondence from Arthur
Andersen LLP. Following QCII's notification to Arthur Andersen LLP of certain restatement issues it
contemplated discussing with the staff of the SEC during February 2003, QCII received a second letter from Arthur Andersen LLP indicating it had not received a response to its positions and expressing
Arthur Andersen LLP's disagreement with the other restatement issues that QCII had identified. Arthur Andersen LLP has not withdrawn its previously issued opinion related to our financial statements
for the three years ended December 31, 2001.

ITEM 9A.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 prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely
fashion.

We
have completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. This evaluation

104

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has
allowed us to make conclusions in 2003, as set forth below, regarding the state of our disclosure controls and procedures as of December 31, 2002. This evaluation included the following actions:



As
a result of our efforts in 2003 and 2002 to evaluate the effectiveness of the design and operation of our disclosure controls and procedures, we have now concluded that the following
internal control deficiencies constituted "material weaknesses" or "significant deficiencies," as defined under standards established by the American Institute of Certified Public Accountants, during
the three fiscal years that were the subject of the audit:



105

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In
October 2003, in connection with the delivery of the Statement on Auditing Standards No. 61 report on the audit of QCII's consolidated financial statements for 2002 and
restated financial statements for 2001 and 2000, KPMG reported to QCII's management and its Audit Committee reportable conditions consistent with the items described above and characterized them as
material weaknesses. The Company, in performing its evaluation, also considered KPMG's findings.

We
believe that many of the restatement adjustments are the result of the ineffective internal control policies and procedures, as indicated above. We also believe that, in some cases,
certain of our employees did not follow our policies, processes and procedures. We have taken these cases into account when evaluating our responsibilities to restate certain matters that otherwise
may not have met quantitative standards of materiality.

While
performing our internal analysis, we identified various transactions in which employees misapplied policies or procedures in a manner that permitted us to prematurely recognize
revenue. Several employees were disciplined after we determined that they had engaged in misconduct in transactions that allowed us to prematurely recognize revenue.

In
our review of the matters leading to the restatement of our wireless revenue, we determined that some of our employees violated our policies by failing to report known errors to
proper management personnel and attempting to correct the errors only prospectively. We have taken disciplinary action against the employees who did not follow our policies.

Since
mid-2002, we or QCII have taken a number of steps that will impact the effectiveness of our internal controls, including the following:



106

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We
believe that these efforts have addressed the material weaknesses and significant deficiencies that affected our internal controls in 2002, 2001 and 2000. The Company continues to
improve and refine its internal controls. This process is ongoing, and the Company seeks to foster an exemplary internal control environment. However, the Company can give no assurances that all
material weaknesses and significant deficiencies have been entirely corrected. Our management, including our CEO and Chief Financial Officer, has concluded that, except for the internal control
deficiencies as described herein and taking into account the efforts to address those deficiencies described herein, as of the evaluation date, our disclosure controls and procedures are designed, and
are effective, to give reasonable assurance that information we must disclose in reports filed with the SEC is properly recorded, processed and summarized, and then reported within the time periods
specified in the rules and forms of the SEC.

Other
than as summarized above, since the evaluation date there have been no significant changes in our internal controls over financial reporting or in other factors that could
significantly affect the internal controls. We will continue to assess our disclosure controls and procedures as we prepare our remaining delinquent filings and will take any further actions that we
deem necessary.

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have omitted this information pursuant to General Instruction I (2).

ITEM 11.EXECUTIVE COMPENSATION

We have omitted this information pursuant to General Instruction I (2).

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

We have omitted this information pursuant to General Instruction I (2).

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have omitted this information pursuant to General Instruction I (2).

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Not applicable.

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PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(1) Independent Auditors' Report(2) Financial Statements covered by the Report of Independent Public Accountants:Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000Consolidated Balance Sheets as of December 31, 2002, 2001 and 2000Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000Consolidated Statements of Stockholder's Equity for the years ended December 31, 2002, 2001 and 2000Notes to the Consolidated Financial Statements for the years ended December 31, 2002, 2001 and 2000






|Exhibit No. |  | 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).                                                                                                            
|3.3         |  | Amended and Restated Bylaws of Qwest.                                                                                                                                                                                                                                                
|(4.1)       |  | No instrument which defines the rights of holders of Qwest's long and intermediate term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, Qwest hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
|4.2         |  | Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago.                                                                                                                                        
|4.3         |  | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago.                                                                                                                                       
|(4.4)       |  | Indenture, dated as of October 15, 1999, by and between U S West Communications, Inc. and Bank One Trust Company, NA, 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).                            
|            |  |                                                                                                                                                                                                                                                                                      

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|(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).                                                                                                                                                                                                   
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10.2) |  | 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. 1-15577).
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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(  )
Previously filed.

109

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on January 12, 2004.

| |  | QWEST CORPORATION,
A COLORADO CORPORATION
| |  | -----------------------------------------
| |  |                                          
| |  | By:                                      

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on January 12, 2004.

|Signature                                   |  | Titles                                                                                          
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|                                            |  |                                                                                                 
|/s/RICHARD C. NOTEBAERTRichard C. Notebaert |  | Director, Chairman, Chief Executive Officer and President (Principal Executive Officer)         
|/s/OREN G. SHAFFEROren G. Shaffer           |  | Director, Vice Chairman and Chief Financial Officer (Principal Financial and Accounting Officer)

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Independent Auditors' Report

The
Board of Directors and Stockholder
Qwest Corporation:

Under
date of January 8, 2004, we reported on the consolidated balance sheets of Qwest Corporation and subsidiaries, a wholly owned subsidiary of Qwest Communications
International Inc., as of December 31, 2002, 2001, and 2000, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years then ended, as
contained in the annual report on the 2002 Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related accompanying consolidated
financial statement schedule, Schedule IIValuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.

In
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.

As
discussed in note 3 to the consolidated financial statements, the Company has restated its consolidated balance sheets as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the years then ended, which consolidated financial statements were previously audited by other independent auditors who have
ceased operations.

/s/
KPMG LLP

Denver,
Colorado
January 8, 2004

S-1

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QWEST CORPORATION  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS  (DOLLARS IN MILLIONS)

|                              |  | Balance at
beginning
of period(1) |     | Charged to
expense |   | Deductions |  | Balance at
end of
period
|----------------------------- |  | --------------------------------- | --- | ------------------ | - | ---------- |  | ------------------------
|Allowance for uncollectibles: |  |                                   |     |                    |   |            |  |                         
|2002                          |  | $                                 | 155 |                    | $ | 331        |  | $                       
|2001                          |  | $                                 | 81  |                    | $ | 278        |  | $                       
|2000                          |  | $                                 | 46  |                    | $ | 187        |  | $                       

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S-2

---