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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, 2003                  
|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, ColoradoAddress of principal executive offices) |  | 80202(Zip Code)                               

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

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 INSTRUCTION I(2).

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o.

Indicate by check mark 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 o    No ý.

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.

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 Accountant 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, which we refer to as the Merger, QCII acquired all the operations of U S WEST and its subsidiaries and we became an indirect wholly owned subsidiary of QCII. 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, including risks associated with our outstanding legal matters, see the risk
factors described in "Special Note Regarding Forward-Looking Statements" in Item 7 of this report.

Recent Developments

As we have previously disclosed, QCII has engaged in preliminary discussions for purposes of resolving certain of the investigations and securities matters to
which QCII is subject. These matters are described in detail in Item 3Legal Proceedings. QCII most recently engaged in these preliminary discussions after it announced its 2003 financial
results on February 19, 2004. These most recent discussions and further analysis have led QCII to conclude that a reserve should be provided. Accordingly, QCII has recorded a reserve in its
consolidated financial statements for the estimated minimum liability associated with these matters. However, the ultimate outcomes of these matters are still uncertain and there is a significant
possibility that the amount of loss QCII ultimately incurs could be substantially more than the reserve QCII has provided. At this time, QCII believes that it is probable that all but
$100 million of the recorded reserve will be recoverable out of a portion of insurance proceeds, but the use and allocation of these proceeds has yet to be resolved between QCII and individual
insureds.

The
securities actions are in a preliminary phase and QCII continues to defend against these matters vigorously. None of the plaintiffs or the defendants in the securities actions has
advanced evidence concerning possible recoverable damages and we have not yet conducted discovery on these and other relevant issues. QCII is currently unable to provide any estimate as to the timing
of the resolution of any of these matters. Any settlement of or judgment on one or more of these matters in excess of QCII's recorded reserves could be significant, and QCII can give no assurance that
it will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial
condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

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

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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. We seek to distinguish ourselves from our competitors through our recent and continuing customer service initiatives.

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. Our 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 16.2 million access lines. Access lines
are telephone lines reaching from a central office to customers' premises.

Wireline Products and Services

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:



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, business and wholesale.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 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 2.5 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.

Distribution Channels

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. In August 2003, we entered into a service agreement with a
subsidiary of Sprint Corporation that

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allows
us to resell Sprint wireless services, including access to Sprint's nationwide personal communication service, or PCS, wireless network, to consumer and business customers, primarily within our
local service area. We began offering these Sprint services under our brand name in March 2004. Under the service 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 service 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). Through Qwest Wireless, we also continue to
operate a 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. Our
wireless customers who are currently being serviced through our proprietary wireless network will be transitioned onto Sprint's network over time.

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 second quarter of 2004.

Other Services

We provide other services that primarily involve the sublease of some of our unused 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.

Customer Service Initiatives

With increased levels of competition in the telecommunications industry resulting from statutory and regulatory developments and technology advancements, we
believe competitive providers are no longer hindered by historical barriers to entry. As a result, we are seeking to distinguish ourselves from our competitors through a number of customer service
initiatives supporting our Qwest Spirit of Servicebrand commitment. These initiatives include expanded product bundling, simplified
billing, improved customer support and other ongoing measures. For example, we have entered into a strategic relationship with a provider of wireless services to improve our product offerings, we are
restructuring our pricing packages and we are investing in improved billing and customer communication systems.

Importance, Duration and Effect of Patents, Trade names and Copyrights

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

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telephony
providers, 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 2003. 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 Federal Communications Commission, or FCC, is another
competitive factor that may increase access line losses. Also, revenue for local voice services may be affected adversely should providers of Internet protocol telephony (sometimes referred to as
voice over Internet protocol, or VoIP) services attract a sizable base of customers who use VoIP to bypass traditional local exchange carriers. A related concern is the risk that access charge fees we
receive from either IXCs or CLECs will be reduced if phone-to-phone VoIP calls remain unregulated and are not 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 service, which we are required to
provide at wholesale rates as a matter of current federal and state laws and regulations, 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 CLECs and CLEC/IXC combinations 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 UNEs 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, Inc. (formerly known as WorldCom, Inc.) compete with us in providing IntraLATA long-distance services in our local service area. Wireless providers also
market both IntraLATA and InterLATA long-distance services as a substitute to traditional wireline service.

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.

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

Access services.Within our local service area, 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 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

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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 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, International Business Machines Corporation and Electronic Data Systems Corporation. Large integrators 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 with cable operators who offer high-speed broadband facilities over cable modem, a technology
directly competitive with the DSL services we employ. Cable operators who sell data or Internet services via broadband 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 the obligation 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, Cingular Wireless, LLC, Sprint and Nextel Communications, among others. Although we expect our competitive position to improve through
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 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 rates, terms and conditions 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

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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 of 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. The D.C. Circuit stayed its order vacating the FCC's rules to permit the FCC to complete an ongoing rulemaking to determine what elements should be unbundled.

On
August 21, 2003, the FCC issued the triennial review order in response to the court's decision. The triennial review order addressed the regulatory status of 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 were: (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 are allowed to initiate
and conclude proceedings within 90 days of October 2, 2003, to rebut this presumption of no impairment and petition the FCC for a waiver; the Colorado, Minnesota and Oregon PUCs
initiated such proceedings but did not petition the FCC for a waiver of the no impairment finding; (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 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
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 argued that the
FCC did not comply with the May, 2002, ruling by the D.C. Circuit because it failed to properly apply the

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"necessary
and impair" standard and that the FCC impermissibly, and without adequate guidance, delegated to state PUCs its responsibilities under the Telecommunications Act. Other parties challenged
various aspects of the triennial review order. On March 2, 2004, consistent with the ILECs' arguments, a three-judge panel of the D.C. Circuit issued a decision vacating and remanding back to
the FCC significant portions of the triennial review order. By its terms, the court's mandate will be stayed for 60 days. If the FCC seeks further review of the decision by the D.C. Circuit or
U.S. Supreme Court, the decision may be stayed for a longer period of time.

In
addition to proceedings before the D.C. Circuit relating to the triennial review order, we are also participating in proceedings in all of our in-region states, except
Wyoming, Montana, Idaho and South Dakota, that were authorized by the FCC's triennial review order. In these proceedings, we are attempting to demonstrate both the adequacy of our batch hot cut
migration process as well as that CLECs would not be impaired in their attempts to compete in the mass market if switching were removed as a UNE. The continued viability and necessity for these state
proceedings will likely be affected by the ruling of the D.C. Circuit on the matters pending before it. In light of the D.C. Circuit appeal, Arizona, Colorado, Minnesota, Nebraska, North Dakota,
Oregon, Utah and Washington have temporarily suspended their triennial review proceedings.

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 on how the discounts
to CLECs are established for their intended resale of our services. In particular, the FCC indicated that it will re-evaluate the rules and principles surrounding Total Element Long Run
Incremental Cost, which is the basis upon which UNE prices are set. The outcome of this rulemaking
could have a material effect on the revenue 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 that are inter-related, and because 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 our network to 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 PUCs 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; (iv) the removal of certain implicit
universal service support from access charges and direct recovery from end-users; and (v) 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

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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 obligated 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 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 our access-line losses.

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Voice Over Internet Protocol

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. Furthermore, on March 10, 2004, the FCC issued its
Notice of Proposed Rulemaking, or NPR, instituting a formal rulemaking proceeding addressing many issues related to VoIP. This rulemaking raises 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 any exemption or immunity from either federal or state regulation and if so, what should be the parameters of this exemption or immunity. 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 an IP-addressed packet format. VoIP
offerings are likely to grow as the technology matures and the regulatory situation is clarified and such growth in VoIP could contribute to further declines in our sales of local exchange access
lines.

Employees

As of December 31, 2003, we employed approximately 32,000 employees. We continue to reduce employees in accordance with the plans that QCII approved in the
third quarter of 2003. There is additional information regarding this restructuring in Note 7Restructuring and Merger-related 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. In August 2003, we entered into new two-year collective bargaining agreements with the CWA and the IBEW. Each of these agreements was ratified by union
members 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 31,2003

2002Land and buildings

7
%
7
%Communications equipment

43
%
44
%Other network equipment

44
%
43
%General-purpose computers and other

6
%
6
%Construction in progress

0
%
0
%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
$42.7 billion and $42.4 billion at December 31, 2003 and 2002, respectively, 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
Securities Act. The complaint seeks unspecified monetary damages, disgorgement of illegal gains and other relief. On July 31, 2002, the defendants removed this state court action to federal
district court in Colorado and subsequently moved to consolidate this action with the consolidated securities action identified below. The plaintiffs have moved to remand the lawsuit back to state
court. Defendants have opposed that motion, which is pending before the court.

Regulatory Matters

On February 14, 2002, the Minnesota Department of Commerce filed a formal complaint against us with the Minnesota Public Utilities Commission, or the
Minnesota Commission, alleging that we, in contravention of federal and state law, failed to file interconnection agreements with the Minnesota Commission relating to certain of our wholesale
customers, and thereby allegedly discriminated against

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other
CLECs. On November 1, 2002, the Minnesota Commission issued a written order adopting in full a proposal by an administrative law judge that we committed 26 individual violations of
federal law by failing to file, as required under section 252 of the Telecommunications Act, 26 distinct provisions found in 12 separate agreements with individual CLECs for regulated services
in Minnesota. The order also found that we agreed to provide and did provide to McLeodUSA 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 and credits 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, or the Arizona 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 sales of wholesale intrastate services provided by us. We filed 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, and on February 27, 2004, the Staff of the
Colorado PUC submitted its Initial Comments. The Colorado Staff's Initial Comments recommended that the PUC open a show cause proceeding based upon the Staff's view that Qwest and CLECs had willfully
and intentionally violated federal and state law and Commission rules. The Staff also detailed a range of remedies available to the Commission, including but not limited to an assessment of penalties
and an obligation to extend credits to CLECs. The proceedings and investigations in New Mexico, Colorado and Washington could result in the imposition of fines and

14

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other
penalties against us that could be material. Iowa and South Dakota have concluded their inquiries resulting in no imposition of penalties or obligations to issue credits to CLECs in those
states. Also, some telecommunications providers have filed private actions based on facts similar to those underlying these administrative proceedings. These private actions, together with any
similar, future actions, could result in additional damages and awards that could be significant.

On
June 26, 2003, we received from the FCC a letter of inquiry seeking information related to certain agreements with CLECs covering the provision of a variety of ancillary
services including signaling functions and database access, directory and operator assistance. We submitted our initial response to this inquiry on July 31, 2003. We took the position that we
were not in violation of our filing obligations under Section 252 of the Telecommunications Act. On March 12, 2004 the FCC released its Notice of Apparent Liability for Forfeiture in the
amount of $9 million for allegedly not meeting our filing obligations under the Telecommunications Act and the Commission's rules. We have thirty days to pay
the proposed forfeiture or file a written statement seeking reduction or cancellation of the proposed forfeiture. We continue to work cooperatively with the Commission to finally resolve this issue.

Illuminet, Inc.,
or 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 we
perfected appeals in both states. The proceedings in the other states and in states where Illuminet has not yet filed complaints could result in agency decisions requiring additional refunds.

As
a part of the approval by the FCC of the Merger, the FCC required QCII to engage an independent auditor to perform an attestation review of our compliance with our divestiture of
in-region InterLATA services and our ongoing compliance with Section 271 of the Telecommunications Act. In 2001, the FCC began an investigation of QCII's compliance with the
divestiture of in-region InterLATA services and our ongoing compliance with Section 271 for the audit years 2000 and 2001. In connection with this investigation, QCII disclosed
certain matters to the FCC that occurred in 2000, 2001, 2002 and 2003. These matters were resolved with the issuance of a consent decree on May 7, 2003, by which the investigation was
concluded. As part of the consent decree, QCII made a voluntary payment to the U.S. Treasury in the amount of $6.5 million, and agreed to a compliance plan for certain future activities.
Separate from this investigation, QCII disclosed matters to the FCC in connection with its 2002 compliance audit, including a change in traffic flow related to wholesale transport for operator
services traffic and certain toll-free traffic, certain bill mis-labeling for commercial credit card bills, and certain billing errors for public telephone services originating
in South Dakota and for toll free services. The FCC has not yet instituted an investigation into the latter categories of matters. If it does so, an investigation could result in the imposition of
fines and other penalties against QCII. The FCC has also instituted an investigation into whether QCII may have impermissibly engaged in the marketing of InterLATA services in Arizona prior to
receiving FCC approval of QCII's application to provide such services in that state.

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

15

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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. We may become subject to other investigations or complaints in the future and any such complaints or investigations could result in further legal action and the imposition of
fines, penalties or damage awards.

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

Legal Proceedings Involving QCII

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

Investigations, Securities Actions and Derivative Actions

The investigations and securities actions described below present material and significant risks to QCII. The size, scope and nature of the recent restatements of
our and QCII's consolidated financial statements for fiscal 2001 and 2000 affect the risks presented by these matters, and we can give no assurance as to the impacts on our and QCII's financial
results or financial condition that may ultimately result from these matters. As QCII has previously disclosed, it has engaged in preliminary discussions for purposes of resolving certain of these
matters. QCII most recently engaged in these preliminary discussions after it announced its 2003 financial results on February 19, 2004. These most recent discussions and further analysis have
led QCII to conclude that a reserve should be provided.
Accordingly, QCII has recorded a reserve in its consolidated financial statements for the estimated minimum liability associated with these matters. However, the ultimate outcomes of these matters are
still uncertain and there is a significant possiblity that the amount of loss it ultimately incurs could be substantially more than the reserve it has provided.

At
this time, QCII believes that it is probable that all but $100 million of the recorded reserve will be recoverable out of a portion of insurance proceeds, consisting of cash
and letters of credit, which were placed in a trust to cover its losses and the losses of individual insureds following its November 12, 2003 settlement of disputes with certain of its
insurance carriers related to, among other things, the investigations and securities and derivative actions described below. However, the use and allocation of these proceeds has yet to be resolved
between QCII and individual insureds.

The
securities actions are in a preliminary phase and QCII continues to defend against these matters vigorously. None of the plaintiffs or the defendants in the securities actions has
advanced evidence concerning possible recoverable damages and QCII has not yet conducted discovery on these and other relevant issues. QCII is currently unable to provide any estimate as to the timing
of the resolution of any of these matters. Any settlement of or judgment in one or more of these matters in excess of QCII's recorded reserves could be significant, and QCII can give no assurance that
it will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial
condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

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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. 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, and QCII continues to evaluate any possible range
of loss. 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 disgorgement and a civil
penalty, the amounts of which could be substantially in excess of QCII's recorded reserve, and the entry of a court order that would require, among other things, that QCII and its officers and
directors comply with provisions of the federal securities laws as to which there have been allegations of prior violations.

In
addition, as previously reported, the SEC has conducted an investigation concerning QCII's earnings release for the fourth quarter and full year 2000 issued on January 24,
2001. The release provided pro forma normalized earnings information that excluded certain nonrecurring expense and income items resulting primarily from the Merger. On November 21, 2001, the
SEC staff informed QCII of its intent to recommend that the SEC authorize an action against QCII that would allege it should have included in the earnings release a statement of its earnings in
accordance with 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 was the February 2003 indictment against four former QCII
employees in connection with a transaction with the Arizona School Facilities Board in June 2001 and a civil complaint also filed in

17

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February 2003
by the SEC against the same former employees and others relating to the Arizona School Facilities Board transaction and a transaction with Genuity Inc., or 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.

Securities Actions and Derivative Actions

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

On
August 21, 2002, plaintiffs in the consolidated securities action filed their Fourth Consolidated Amended Class Action Complaint, or the Fourth Consolidated Complaint, which
defendants moved to dismiss. On January 13, 2004, the United States District Court for the District of Colorado granted the defendants' motions to dismiss in part and denied them in part. In
that order, the court allowed plaintiffs to file a proposed amended complaint seeking to remedy the pleading defects addressed in the court's dismissal order and ordered that discovery, which
previously had been stayed during the pendency of the motions to dismiss, proceed regarding the surviving claims. On February 6, 2004, plaintiffs filed a Fifth Consolidated Amended Class
Complaint, or the Fifth Consolidated Complaint. The Fifth Consolidated Complaint attempts to expand the putative class period previously alleged in the Fourth Consolidated Complaint, seeks to restore
the claims dismissed by the court, including claims against certain individual defendants who were dismissed as defendants by the court's dismissal order, and to add additional individual defendants
who have not been named as defendants in plaintiffs' previous complaints. The Fifth Consolidated Complaint also advances allegations related to a number of matters and transactions that were not
pleaded in the earlier complaints. The Fifth Consolidated Complaint is purportedly brought on behalf of purchasers of publicly traded securities of QCII between May 24, 1999 and July 28,
2002, and names as defendants QCII, QCII's former Chairman and Chief Executive Officer, Joseph P. Nacchio, 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 Fifth Consolidated Complaint alleges, among other things, that during the putative class period, QCII and certain of the individual
defendants made materially false statements regarding the results of QCII's operations in violation of section 10(b) of the Securities Exchange Act of 1934, or the Exchange Act, that certain of
the individual defendants are liable as control persons under section 20(a) of the Exchange Act and that certain of the individual defendants sold some of their shares of QCII's
common stock in violation of section 20(a) of the Exchange Act. The Fifth Consolidated Complaint further alleges that QCII and certain other defendants violated section 11 of the
Securities Act by preparing and disseminating false registration statements and prospectuses for the registration of QCII common stock to be issued to U S WEST shareholders in connection with the
Merger of the two companies, and for the exchange of $3 billion of QCII's notes pursuant to a registration statement dated January 17, 2001, $3.25 billion of QCII's notes pursuant
to a registration statement dated July 12, 2001, and $3.75 billion of QCII's notes pursuant to a registration statement dated October 30, 2001. Additionally, the Fifth
Consolidated Complaint alleges that certain of the individual defendants are liable as control persons under section 15 of the Securities Act by reason of their stock ownership, management
positions and/or membership or representation on the Company's Board of Directors. The Fifth Consolidated Complaint seeks unspecified compensatory damages and other relief. However, counsel for
plaintiffs has indicated that the purported class will seek damages in the tens of billions of dollars. On March 8, 2004, QCII and other defendants filed motions to dismiss the Fifth
Consolidated Complaint.

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

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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, or the Second 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 Second Consolidated Complaint filed on May 21, 2003, names
as defendants, among others, QCII, several former and current directors, officers and employees of QCII, Qwest Asset Management, the QCII Plan Design Committee, the Plan Investment Committee, and the
Plan Administrative Committee of the pre-Merger QCII 401(k) Savings Plan. The consolidated ERISA action, which was 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
December 10, 2002, the California State Teachers' Retirement System, or CalSTRS, filed suit against QCII, certain of QCII's former officers and certain of QCII's current
directors and several other defendants, including Arthur Andersen LLP and several investment banks, in the Superior Court of the State of California in and for the County of San Francisco. CalSTRS
alleged that the defendants
engaged in fraudulent conduct 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 defendants
engaged in a scheme to falsely inflate QCII's revenue and decrease its expenses so that QCII would appear more successful than it actually was during the period in which CalSTRS purchased and sold
QCII securities. The complaint purported to state causes of action against QCII for (i) violation of California Corporations Code section 25400 et seq. (securities laws);
(ii) violation of California Corporations Code section 17200 et seq. (unfair competition); (iii) fraud, deceit and concealment; and (iv) breach of fiduciary duty. Among
other requested relief, CalSTRS sought compensatory, special and punitive damages, restitution, pre-judgment interest and costs. QCII and the individual defendants filed a demurrer,
seeking dismissal of all claims. In response, CalSTRS voluntarily dismissed the unfair competition claim but maintained the balance of the complaint. The court denied the demurrer as to the California
securities law and fraud claims, but dismissed the breach of fiduciary duty claim against QCII with leave to amend. The court also dismissed the claims against Robert S. Woodruff and Robin R. Szeliga
on jurisdictional grounds. On or about July 25, 2003, plaintiff filed a First Amended Complaint. The material allegations and the relief sought remain largely the same, but plaintiff no longer
alleges claims against Mr. Woodruff and Ms. Szeliga following the court's dismissal of the claims against them. CalSTRS reasserted its claim against QCII for breach of fiduciary duty as
a claim of aiding and abetting breach of fiduciary duty. QCII filed a second demurrer to that claim, and on November 17, 2003, the court dismissed that claim without leave to amend. Discovery
is proceeding in the CalSTRS litigation.

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,

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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, revenue and profits. As a result, New Jersey contends that it incurred hundreds of millions of dollars in losses. New Jersey's
complaint purports to state causes of action against QCII for: (i) fraud; (ii) negligent misrepresentation; and (iii) civil conspiracy. Among other requested relief, New Jersey
seeks from the defendants, jointly and severally, compensatory, consequential, incidental and punitive damages. On November 17, 2003, QCII filed a motion to dismiss. That motion is pending
before the court.

On
January 10, 2003, the State Universities Retirement Systems 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 which alleges, among other things, that defendants engaged in fraudulent conduct that caused it to lose in excess of
$12.5 million invested in QCII's common stock and debt and equity securities and that defendants engaged in a scheme to falsely inflate Qwest's revenues and decrease its expenses by improper
conduct related to transactions with the Arizona School Facilities Board, Genuity, Calpoint LLC, KMC Telecom Holdings, Inc., KPNQwest N.V., and Koninklijke KPN, N.V. The second amended
complaint purports to state the following causes of action against QCII: (i) violation of the Illinois Securities Act; (ii) common law fraud; (iii) common law negligent
misrepresentation; and (iv) violation of section 11 of the Securities Act. SURSI seeks, among
other relief, punitive and exemplary damages, costs, equitable relief including an injunction to freeze or prevent disposition of the defendants' assets and disgorgement. All the individual defendants
moved to dismiss the action against them for lack of personal jurisdiction. To date, neither QCII nor the individual defendants have filed a response to the second amended complaint, and the Illinois'
court's schedule does not contemplate that answers or motions to dismiss be filed until after the challenges to jurisdiction have been resolved.

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

On
October 22, 2001, a purported derivative lawsuit was filed in the United States District Court for the District of Colorado, or the Federal Derivative Litigation. On
February 6, 2004, a third amended complaint was filed in the Federal Derivative Litigation, naming as defendants certain of QCII's present and former directors and certain former officers and
naming QCII as a nominal defendant. The Federal Derivative Litigation is based upon the allegations made in the consolidated securities action and alleges, among other things, that the defendants
breached their fiduciary duties to QCII by engaging in self-dealing, insider trading, usurpation of corporate opportunities, failing to oversee implementation of securities laws that
prohibit insider trading, failing to maintain appropriate

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financial
controls within QCII, and causing or permitting QCII to commit alleged securities violations, thus (1) causing QCII to be sued for such violations and (2) subjecting QCII to
adverse publicity, increasing its cost of raising capital and impairing earnings. The Federal Derivative Litigation has been consolidated with the consolidated securities action. Plaintiff seeks,
among other remedies, disgorgement of alleged insider trading profits.

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

On
each of March 6, 2002 and November 22, 2002, a purported derivative action was filed in Denver District Court, which we refer to collectively as the Colorado Derivative
Litigation. On February 5, 2004, plaintiffs in one of these cases filed an amended complaint naming as defendants certain of QCII's current and former officers and directors and Anschutz
Company, and naming QCII as a nominal defendant. The two purported derivative actions were consolidated on February 17, 2004. The amended complaint alleges, among other things, that various of
the individual defendants breached their legal duties to QCII by engaging in various kinds of self-dealings, failing to oversee compliance with laws that prohibit insider trading and
self-dealing, and by causing or permitting QCII to commit alleged securities laws violations, thereby causing QCII to be sued for such violations and subjecting QCII to adverse publicity,
increasing its cost of raising capital and impairing earnings.

Beginning
in May 2003, the parties to the Colorado Derivative Litigation and the Delaware Derivative Litigation participated in a series of mediation sessions with former United
States District Judge Layn R. Phillips. On November 14, 2003, as a result of this process, the parties agreed in principle upon a settlement of the claims asserted in the Colorado Derivative
Litigation and the Delaware Derivative Litigation, subject to approval and execution of formal settlement documents, approval by the Denver District Court and dismissal with prejudice of the Colorado
Derivative Litigation, the Delaware Derivative Litigation and the Federal Derivative Litigation. From November 14, 2003 until February 17, 2004, the parties engaged in complex
negotiations to resolve the remaining issues concerning the potential settlement. On February 17, 2004, the parties reached a formal Stipulation of Settlement, which was filed with the Denver
District Court. The stipulation of settlement provides, among other things, that if approved by the Denver District Court and upon dismissal with prejudice of the Delaware Derivative Litigation and
the Federal Derivative Litigation, $25 million from the insurance settlement with certain of QCII's insurance carriers will be designated for the exclusive use of QCII to pay losses and QCII
will implement a number of corporate governance changes. The Stipulation of Settlement also provides that the Denver District Court may enter awards

21

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of
attorneys' fees and costs to derivative plaintiffs' counsel from the $25 million in amounts not to exceed $7.5 million and $125,000, respectively. On February 17, 2004, the
Denver District Court entered a Preliminary Approval Order and scheduled a hearing to take place on June 15, 2004, to consider final approval of the proposed settlement and derivative
plaintiffs' counsels' request for an award of fees and costs. Pursuant to the Preliminary Approval Order, QCII mailed, on February 27, 2004, notice of the proposed settlement and hearing to
stockholders of its Common stock as of February 17, 2004.

On
or about February 23, 2004, plaintiff in the Federal Derivative Litigation filed a motion in the United States District Court for the District of Colorado to enjoin further
proceedings relating to the proposed settlement of the Colorado Derivative Litigation, or alternatively, to enjoin the enforcement of a provision in the Preliminary Approval Order of the Denver
District Court which plaintiff claims would prevent the Federal Derivative Litigation from being prosecuted pending a final determination of whether the settlement of the Colorado Derivative
Litigation shall be approved. On March 8, 2004, the individual defendants in the Federal Derivative Litigation filed a motion to stay all proceedings in that action pending a determination of
the Denver District Court whether to approve the proposed settlement of the derivative claims asserted in the Colorado Derivative Litigation, which would resolve the derivative claims asserted in the
Federal Derivative Litigation.

Other Matters

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

Several
purported class actions relating to the installation of fiber optic cable in certain rights-of-way were filed in various courts against QCII on behalf of
landowners in Alabama, California, Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas. Class certification was
denied in the Louisiana proceeding and, subsequently, summary judgment was granted in QCII's favor. A new Louisiana class action complaint has recently been filed. Class certification was also denied
in the California proceeding, although plaintiffs have filed a motion for reconsideration. Class certification was granted in the Illinois proceeding. Class certification has not been resolved yet in
the other proceedings. The complaints challenge QCII's right to install its fiber optic cable in railroad rights-of-way and, in Colorado, Illinois and Texas, also challenge
QCII's right to install fiber optic cable in utility and pipeline rights-of-way. In Alabama, the complaint challenges QCII's right to install fiber optic cable in any
right-of-way, including public highways. The complaints allege that the railroads, utilities and pipeline companies own a limited property right-of-way
that did not include the right to permit QCII to install its fiber optic cable on the plaintiffs' property. The Indiana action purports to be on behalf of a national class of landowners adjacent to
railroad rights-of-way over which QCII's network passes. The Alabama, California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South
Carolina, Tennessee and Texas actions purport to be on behalf of a class of such landowners in those states, respectively. The Illinois action purports to be on behalf of landowners adjacent to
railroad rights-of-way over which QCII's network passes in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. Plaintiffs in the Illinois action have
filed a motion to expand the class to a nationwide class. The complaints seek damages on theories of trespass and unjust enrichment, as

22

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well
as punitive damages. Together with some of the other telecommunication carrier defendants, in September 2002, QCII filed a proposed settlement of all these matters (except those in
Louisiana) in the United States District Court for the Northern District of Illinois. On July 25, 2003, the court granted preliminary approval of the settlement and entered an order enjoining
competing class action claims, except those in Louisiana. The settlement and the court's injunction are opposed by some, but not all, of the plaintiffs' counsel and are on appeal before the Seventh
Circuit Court of Appeals. At this time, QCII cannot determine whether such settlement will be ultimately approved or the final cost of the settlement if it is approved.

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

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

Not Applicable.

23

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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 in Item 8 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report. The selected consolidated financial
data for the years ended December 31, 2003, 2002 and 2001 are derived from, and are qualified by reference to, our audited consolidated financial statements included in Item 8 of this report.
The results presented below as of and for the year ended December 31, 1999 were previously audited by independent auditors who have ceased operations.

|                                                                                   |  | Year Ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Operating revenue                                                                  |  | $                       | 11,261
|Operating expenses                                                                 |  |                         | 9,217 
|Operating income                                                                   |  |                         | 2,044 
|Income before income taxes and cumulative effect of change in accounting principle |  |                         | 1,347 
|Net income(1)                                                                      |  | $                       | 1,050 
|Balance sheet data:                                                                |  |                         |       
|Total assets                                                                       |  | $                       | 21,752
|Total debt(2)                                                                      |  |                         | 9,873 
|Debt to total capital ratio(3)                                                     |  |                         | 76    
|Other data:                                                                        |  |                         |       
|Cash provided by operating activities                                              |  | $                       | 4,612 
|Cash used for investing activities                                                 |  |                         | (1,695
|Cash (used for) provided by financing activities                                   |  |                         | (2,228
|Capital expenditures                                                               |  |                         | 1,663 

---



24

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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.

Business Overview and Presentation

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.

The
results for the years 2003, 2002 and 2001 are presented below. 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.

Our
operations are integrated into and are part of the segments of the QCII consolidated group. The chief operating decision maker, or CODM, for us is the same as that for the
consolidated group. The CODM makes resource allocation decisions and assessments of financial performance for the consolidated group based on wireline, wireless and other segmentation. For more
information about QCII's reporting segments, see QCII's annual report on Form 10-K for the year ended December 31, 2003. Our business contributes to the segments reported by
QCII, but the QCII CODM reviews our financial information only in connection with this filing. See further discussion in Note 13Contributions to QCII Segments to our consolidated
financial statements in Item 8 of this report.

Restatement of 2001 and 2000 Consolidated Financial Statements

Our annual report on Form 10-K for the year ended December 31, 2002, or the 2002 Form 10-K, was filed in January 2004
and contains our restated consolidated financial statements for the years ended December 31, 2001 and 2000. QCII filed its annual report for 2002, or the QCII 2002 10-K, in
October 2003. In these filings, we and QCII also attempted to address comments received from the SEC on QCII's previous filings. To date, we have not received comments from the SEC regarding
our restatement, our 2002 Form 10-K, QCII's 2002 Form 10-K or the adequacy of our responses to its previous comments.

Business Trends

Our results continue to be impacted by a number of factors influencing the telecommunications industry and our local service area. First, technology substitution
and competition are expected to continue to cause access line losses. We expect industry-wide competitive factors to continue to impact our results and we have developed new strategies for
offering complementary services such as satellite television and wireless. Second, our results continue to be impacted by regulatory responses to the competitive landscape for both our local and
long-distance services. Third, the weak economy in our local service area has impacted demand from both our consumer and business customers. We believe demand for our products and services
will continue to be affected because of a slow recovery in our local service area.

25

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Revenue Trends

Historically, at least 85% of our revenue comes from our wireline services, including voice services and data and Internet services. In general, we have
experienced a decline in local voice-related revenue as a result of a decrease in access lines and our competitors' accelerated use of UNE-P, to deliver voice services. Access lines are
expected to continue decreasing primarily because of technology substitution, including wireless and cable substitution for wireline telephony, and cable modem substitution for dial-up
Internet access lines. UNE-P rules which require us to sell access to our wireline network to our competitors, at wholesale rates, will continue to impact our results. The use of
UNE-P is expected to cause incremental losses of retail access lines and apply downward pressure on our revenue. Increasingly, however, we expect wireless and DSL revenue within our local
service region to offset some of these revenue declines. Broadband services have been expanded to allow more of our customers to convert from dial-up Internet connections to our DSL
services. We have also bundled QCII's long-distance offering with complementary local service offerings.

We
have also begun to experience and expect increased competitive pressure from telecommunications providers either emerging from bankruptcy protection or reorganizing their capital
structure to more effectively compete against us. As a result of 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.

Our
wireless revenue has declined as a result of reduced marketing efforts, intense industry competition and the impact of the economic slowdown. Starting in late 2003, we have expanded
our consumer and small business product offerings to bundle wireless with our local voice services, broadband and long-distance services. By offering our customers a complete
telecommunications solution, we may experience a decrease in the rate of our wireline access line losses. We have redesigned our local services package to provide customers with choice and
simplification. Wireless offerings are being expanded through a new arrangement with Sprint. This arrangement will enable utilization of Sprint's nationwide digital wireless network to offer our
customers new voice and data capabilities.

Expense Trends

Our expenses continue to be impacted by shifting demand due to increased competition and the expansion of our product offerings. Expenses associated with our new
product offerings tend to be more variable in nature. While existing products tend to rely upon our embedded cost structure, the mix of products we expect to sell, combined with regulatory and market
pricing stresses may pressure operating margins.

In
order to improve operational efficiencies, and in response to the decline in revenue, we have implemented restructuring plans in which we reduced the number of employees and
consolidated and subleased idle real estate properties. We have also reduced capital expenditures and expect to continue at this reduced level for the foreseeable future. We will continue to evaluate
our staffing levels and cost structure and adjust these areas as deemed necessary.

Results of Operations

Overview

We generate revenue from the provision of voice services, data and Internet services, wireless services, other services and services to our affiliates. Certain
prior year revenue amounts have been reclassified to conform to the current year presentation. Depending on the product or service

26

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purchased,
a customer may pay an up-front fee, a monthly fee, a usage charge or a combination of these. The following is a description of the sources of our revenue:



27

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The
following table summarizes our results of operations:

|                                                                                   |  | Year ended December 31, |        | Increase/Decrease |   | Percentage Change |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ------ | ----------------- | - | ----------------- | -
|
|
|Operating revenue                                                                  |  | $                       | 11,261 |                   | $ | 11,916            |  
|Operating expenses:                                                                |  |                         |        |                   |   |                   |  
|Cost of sales (exclusive of depreciation and amortization detailed below)          |  |                         | 2,872  |                   |   | 2,696             |  
|Selling, general and administrative                                                |  |                         | 3,252  |                   |   | 3,451             |  
|Depreciation                                                                       |  |                         | 2,453  |                   |   | 2,655             |  
|Intangible assets amortization                                                     |  |                         | 353    |                   |   | 302               |  
|Asset impairment charges                                                           |  |                         | 230    |                   |   | 829               |  
|Restructuring and other chargesnet                                                |  |                         | 57     |                   |   | 49                |  
|Merger-related (credits) chargesnet                                               |  |                         |       |                   |   | (30               | )
|                                                                                   |  |                         |        |                   |   |                   |  
|Operating income                                                                   |  |                         | 2,044  |                   |   | 1,964             |  
|Other expense:                                                                     |  |                         |        |                   |   |                   |  
|Interest expensenet                                                               |  |                         | 726    |                   |   | 699               |  
|Gain on sale of rural exchanges and other fixed assets                             |  |                         |       |                   |   |                  |  
|Other incomenet                                                                   |  |                         | (29    | )                 |   | (29               | )
|                                                                                   |  |                         |        |                   |   |                   |  
|Total other expensenet                                                            |  |                         | 697    |                   |   | 670               |  
|Income before income taxes and cumulative effect of change in accounting principle |  |                         | 1,347  |                   |   | 1,294             |  
|Income tax expense                                                                 |  |                         | (516   | )                 |   | (489              | )
|                                                                                   |  |                         |        |                   |   |                   |  
|Income before cumulative effect of change in accounting principle                  |  |                         | 831    |                   |   | 805               |  
|Cumulative effect of change in accounting principle, net of tax                    |  |                         | 219    |                   |   |                  |  
|                                                                                   |  |                         |        |                   |   |                   |  
|Net income                                                                         |  | $                       | 1,050  |                   | $ | 805               |  
|                                                                                   |  |                         |        |                   |   |                   |  

---

nmnot
meaningful

Operating Revenue

The following table compares operating revenue for 2003, 2002 and 2001:

|                           |                         | Year ended December 31, |       | Increase/Decrease |   | Percentage Change |       
|-------------------------- | ----------------------- | ----------------------- | ----- | ----------------- | - | ----------------- | ------
|
|
|Voice services             |                         | $                       | 7,884 |                   | $ | 8,602             |       
|Data and Internet services |                         |                         | 2,125 |                   |   | 2,189             |       
|Wireless services          |                         |                         | 594   |                   |   | 694               |       
|Other services             |                         |                         | 19    |                   |   | 20                |       
|Affiliate services         |                         |                         | 639   |                   |   | 411               |       
|                           |                         |                         |       |                   |   |                   |       
|                           | Total operating revenue |                         | $     | 11,261            |   | $                 | 11,916
|                           |                         |                         |       |                   |   |                   |       

28

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

Voice Services

Voice services revenue decreased $718 million, or 8%, in 2003 and decreased $692 million, or 7%, in 2002.

The
voice services revenue decrease in both years was primarily the result of access line losses, pricing declines and a reduction in access services revenue. Additional reasons include
feature losses and lower long-distance volumes. We have experienced competition from technology substitution and CLECs and other telecommunications providers reselling our services by
using UNE-Ps.

Local
voice services revenue and other voice services revenue declined $589 million for 2003 and $390 million in 2002. The declines were primarily associated with the
losses of access lines, as we have experienced competition from both technology substitution and other telecommunications providers reselling our services by using UNE-Ps. Access lines
declined by approximately 797,000, or 5%, in 2003 and by 781,000, or 4%, in 2002. During 2003, UNE-P lines, which are sold at lower wholesale rates, increased by 543,000, or 52%, partially
offset by the consumer and business retail access line declines of 1,340,000 (which included 145,000 lines lost due to the impact of the MCI bankruptcy), or 8%. In 2002, we experienced consumer and
business retail access line declines of 901,000, or 5%, while UNE-Ps increased by 120,000, or 13%. Local voice revenue also decreased in both years due to reductions in demand for services
such as collocation, public telephone services and directory assistance.

In
addition to the revenue decreases described above, long-distance voice services revenue declined $52 million in 2003 and $95 million in 2002. These decreases
were primarily due to declines in IntraLATA long-distance services driven by the soft telecommunications market and competitive pricing. Throughout 2003 and 2002, we evaluated specific
long-distance products. Based upon this evaluation, we de-emphasized and stopped promoting certain products, including IntraLATA long-distance.

We
also experienced a revenue decline of $77 million in access services revenue for 2003 and $207 million in 2002. This was primarily due to the access line losses
described above and pricing declines. Pricing declines were driven by state regulatory actions and the CALLS order. The CALLS order capped prices for certain services, including reductions in usage
rates for access services. Additionally, in 2003 we recorded a reserve of $34 million against revenue for anticipated customer credits resulting from regulatory rulings that redefined tariffs
on local calls.

Data and Internet Services

Data and Internet services revenue had a small decrease of $64 million, or 3%, in 2003 and remained relatively flat during 2002. The 2003 decline is
primarily due to the loss of revenue from the bankruptcies of large customers, primarily in 2002, such as Touch America, Inc., MCI and Genuity. Pursuant to the amendment of our agreement with
Microsoft in July 2003, we became responsible for providing broadband services to end-user customers, while we previously provided related services to Microsoft on a wholesale
basis. As a result, we are recognizing revenue at higher retail rates rather than the lower wholesale rates we charged Microsoft. We have also increased our DSL subscriber base by 25%.

In
2002, data and Internet services revenue increased $21 million, or 1%. Internet dial access revenue increased primarily from sales to large ISPs and businesses for use in their
internal telecommunications networks, while DSL and dedicated internet access grew in response to increased demand for access to the Internet. These increases were partially offset by declines in data
services such as wholesale private line and ISDN, precipitated in part by the weakened economy.

29

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Wireless Services

Wireless services revenue decreased $100 million, or 14%, in 2003 and remained relatively flat in 2002. The decrease in wireless revenue in 2003 was due to
our strategic decision to de-emphasize marketing of wireless services on a stand-alone basis coupled with tightened credit policies and intense industry competition. Although the wireless
industry grew in total in 2002, our wireless revenue was relatively flat in 2002, due in part to our limited ability to offer a competitive wireless product. Our wireless offerings, which were
expanded to allow the bundling of wireless and local voice services, will be further enhanced in 2004 through our aforementioned arrangement with Sprint.

Affiliate Services

Affiliate services revenue consists of telecommunications services provided to affiliated enterprises. Affiliate services revenue increased $228 million,
or 55%, in 2003 and increased $43 million, or 12%, in 2002. In 2003, the increases in affiliate services revenue were primarily caused by a migration of
telecommunications services from third-party providers onto our network and by QCII's entrance into InterLATA long-distance business with FCC's authorization of its Section 271
filings. A new affiliate, Qwest Long Distance Corporation, or QLDC, was established to provide long-distance services to in-region customers. These services and related revenue
increases were related primarily to increases in private line services, and increases in marketing, sales and billing and collection services provided to QLDC.

In
2002, the increases in affiliate services revenue were caused by a migration of telecommunications traffic from third-party providers onto our network.

Operating Expenses

The following table shows a breakdown of operating expenses:

|                    |                                      | Year ended December 31, |   | Increase/Decrease |  | Percentage Change |      
|------------------- | ------------------------------------ | ----------------------- | - | ----------------- |  | ----------------- | -----
|
|
|Operating expenses: |                                      |                         |   |                   |  |                   |      
|                    | Cost of sales                        |                         | $ | 2,872             |  | $                 | 2,696
|                    | Selling, general and administrative  |                         |   | 3,252             |  |                   | 3,451
|                    | Depreciation                         |                         |   | 2,453             |  |                   | 2,655
|                    | Intangible assets amortization       |                         |   | 353               |  |                   | 302  
|                    | Asset impairment charges             |                         |   | 230               |  |                   | 829  
|                    | Restructuring and other chargesnet  |                         |   | 57                |  |                   | 49   
|                    | Merger-related (credits) chargesnet |                         |   |                  |  |                   | (30  
|                    |                                      |                         |   |                   |  |                   |      
|                    | Total operating expenses             |                         | $ | 9,217             |  | $                 | 9,952
|                    |                                      |                         |   |                   |  |                   |      

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meaningful

30

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Cost of Sales

The following table details cost of sales by major component:

|                                   |                     | Year ended December 31, |       | Increase/Decrease |   | Percentage Change |      
|---------------------------------- | ------------------- | ----------------------- | ----- | ----------------- | - | ----------------- | -----
|
|
|Employee and service-related costs |                     | $                       | 1,709 |                   | $ | 1,611             |      
|Network costs                      |                     |                         | 327   |                   |   | 331               |      
|Non-employee related costs         |                     |                         | 394   |                   |   | 374               |      
|Affiliate costs                    |                     |                         | 442   |                   |   | 380               |      
|                                   |                     |                         |       |                   |   |                   |      
|                                   | Total cost of sales |                         | $     | 2,872             |   | $                 | 2,696
|                                   |                     |                         |       |                   |   |                   |      

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 26% for 2003, 23% for 2002 and 24% for 2001. Total cost of sales increased $176 million, or 7%, in 2003 and decreased
$369 million, or 12%, in 2002. The increases in cost of sales as a percentage of revenue in 2003 were caused in part by the deterioration in product margins as retail access line losses are
partially offset by lower margin UNE-Ps sold to our competitors at regulated rates. Also during 2003, our expenses increased due to higher employee and service-related costs, investment in
DSL line conditioning expense, higher retiree healthcare costs and regulatory fees. During 2002, our expenses declined primarily due to lower staffing requirements and lower sales volumes. More
discussion of these changes is provided below.

Employee
and service-related costs, such as salaries and wages, benefits, commissions and third-party customer service costs increased $98 million, or 6%, in 2003 and decreased
$87 million, or 5%, in 2002. While we have realized savings due to reduction in salaries and wages and professional fees resulting
from our restructuring efforts, we continue to experience offsetting increases in costs related to our pension and post-retirement benefit plans, as described more fully below. The net
pension expense allocated to cost of sales was $127 million in 2003 and the net pension credit allocated to cost of sales was $34 million and $190 million, for 2002 and 2001,
respectively. Additionally, in 2003 we experienced increased incentive compensation and increased information technology costs as resources were partially shifted to system maintenance activities from
development activities, which are generally capitalized. Partially offsetting the increases were lower staffing costs and other employee costs resulting from prior restructuring efficiencies, the
reductions described above and lower professional fees due to decreased use of third-party vendors. 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. Also in 2002, we
significantly reduced our employee incentive compensation.

Our
network costs, which include third-party expenses to repair and maintain our network and supplies to provide services to customers, were essentially unchanged in 2003 and decreased
$165 million, or 33%, in 2002. In 2003, we experienced reduced contracted engineering costs and lower costs associated with fewer wireless handset sales. Additionally, the July 2003
amendment of our agreement with Microsoft required that we become responsible for all costs associated with providing broadband services to end-user customers. As a result, the revenue and
costs associated with this expanded service offering increased. 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

31

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number
of new wireless subscribers. We have estimated the cost to transition all of our wireless customers to Sprint's network is estimated to be $55 million, of which $10 million had
been incurred as of December 31, 2003. Some of these costs may be capitalized.

Non-employee
related costs, such as real estate costs and reciprocal compensation payments (fees for terminating our customers' local calls onto other networks), increased
$20 million, or 5%, in 2003 and decreased $160 million, or 30%, in 2002. The increase in 2003 is primarily due to increases in regulatory fees. Reciprocal compensation costs, declined in
2003 and 2002 due to the decline in local voice services, and also as a result of regulatory action, which limited the amount of charges. The decrease in 2002 is also attributable to lower postage and
shipping costs associated with improved management expense controls and lower cost of sales for data and Internet CPE associated with lower CPE sales.

Affiliate
costs, such as services for corporate administration, information technology, advertising and technical support increased $62 million, or 16%, in 2003 and increased
$43 million, or 13%, in 2002. The increases in 2003 were due to higher costs for technical support and sales and affiliate employee and related charges that are allocated to us. We replaced old
equipment with new equipment and entered into maintenance contracts with an affiliate in the technology area. The affiliate increased its technical support personnel by 85 and accordingly, the
software support and other technical assistance costs that
are allocated to us increased. 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.

Selling, General and Administrative (SG&A) Expense

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

|                                   |            | Year ended December 31, |       | Increase/Decrease |   | Percentage Change |      
|---------------------------------- | ---------- | ----------------------- | ----- | ----------------- | - | ----------------- | -----
|
|
|Employee and service-related costs |            | $                       | 840   |                   | $ | 884               |      
|Bad debt                           |            |                         | 175   |                   |   | 331               |      
|Property and other taxes           |            |                         | 412   |                   |   | 428               |      
|Non-employee-related costs         |            |                         | 435   |                   |   | 518               |      
|Affiliate costs                    |            |                         | 1,390 |                   |   | 1,290             |      
|                                   |            |                         |       |                   |   |                   |      
|                                   | Total SG&A |                         | $     | 3,252             |   | $                 | 3,451
|                                   |            |                         |       |                   |   |                   |      

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 2003, 29% for 2002 and 26% for 2001. The variances driving the percentage changes are described below. Total SG&A decreased
$199 million, or 6%, in 2003 and increased $235 million, or 7%, in 2002. The 2003 decrease primarily results from decreases in professional fees, bad debt expense and other factors
described in more detail below.

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
$44 million, or 5%, in 2003 and decreased $294 million, or 25%, in 2002. The decrease in 2003 was due to reduced salaries and wages resulting from staffing reductions implemented in 2003
and 2002, reduced professional fees to third-party vendors as we re-incorporated certain previously outsourced customer service functions in our operations and reduced sales commissions
due to lower revenue and

32

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a
revision to our sales compensation plan. These cost reductions were partially offset by increases in incentive compensation and our pension and post-retirement benefit plan expenses. The
net pension expense allocated to SG&A was $62 million in 2003, and the net pension credit allocated to SG&A was $19 million and $77 million for 2002 and 2001, respectively. The
decrease in 2002 was due to reduced salaries and wages resulting from staffing reductions implemented in 2002 and 2001, reduced professional fees, reduced incentive compensation and reduced sales
commissions. Partially offsetting these decreases were expenses associated with the establishing reserves for outstanding litigation and increases in our pension and post-retirement
benefit plan expenses.

Bad
debt expense decreased $156 million, or 47%, in 2003 and increased $53 million, or 19%, in 2002. Bad debt expense decreased as a percentage of revenue to 1.6% in 2003
from 2.8% in 2002. The decrease in our 2003 expense as compared to 2002 was primarily caused by large provisions associated with uncollectible receivables from MCI, Touch America and others that we
recorded in 2002 and improved collection practices and tighter credit policies in 2003. The 2002 increase was due primarily to bankruptcies of wholesale customers and weak economic conditions offset
by improved collections practices and tighter credit policies.

Property
and other taxes, such as taxes on owned or leased assets and real estate, and transactional items such as certain sales, use and excise taxes, decreased $16 million, or
4%, in 2003 and increased $42 million, or 11%, in 2002. The decrease in 2003 resulted from reduced property and other taxes, which resulted from lower asset valuations related to our
impairments. The increase in 2002 is attributable to capital expansion for the traditional telephone network that took place during 2001 and 2000.

Non-employee
related costs, such as marketing and advertising, rent for administrative space and software expenses, decreased $83 million, or 16%, in 2003 and
increased $162 million, or 46%, in 2002. The decrease in 2003 was driven by lower marketing and advertising spending which decreased due to increased management of these costs by an affiliate,
and a decrease from prior year reserves for outstanding litigation. In 2002, non-employee expense increases were driven by a shift in information technology resources to maintenance
activities from development activities that were eligible for capitalization, and establishing reserves for outstanding litigation.

Affiliate
expenses, such as services for corporate administration, information technology, advertising and technical support, increased $100 million, or 8%, in 2003 and
$272 million, or 27%, in 2002. The 2003 increases were due to higher administrative costs described in more detail as follows: increases in
the allocations to us of marketing, advertising and public relations resulting from ourSpirit of Servicecampaign; allocated legal
expenses grew as the legal department in one of our affiliates had a net increase in personnel; and billing and allocation rates from the affiliate entities were increased. Partially offsetting the
increases in 2003 were decreases in software support costs and decreases in self-insurance due to lower premiums and claims. The 2002 increase was primarily due to an increase in
marketing, advertising, and administrative costs 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 the costs are charged back to us.

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
provided 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.

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 revenue from the sale of our products
relative to the revenue generated from the sale of our affiliates' products.

33

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Pension and Post-Retirement Benefits

Our results include an allocation by QCII of pension credits and post-retirement benefit expenses, which we refer to on a combined basis as a net
pension expense or credit. We recorded a net pension expense of $189 million in 2003, a net pension credit of $53 million in 2002 and a net pension credit of $267 million in 2001.
The net pension expense or credit is a function of the amount of pension and post-retirement benefits earned, interest on projected benefit obligations, amortization of costs and credits
from prior benefit changes and the expected return on the assets held in the various plans. The net pension expense or credit is allocated primarily to cost of sales and the remaining balance to SG&A.

The
change to a net expense for 2003 from a net credit in prior years is primarily due to a reduction in the expected return on plan assets, a reduction in recognized actuarial gains and
an increase in interest costs. These changes are due to lower expected returns on plans assets, lower discount rates and increased medical costs for plan participants.

We
expect that our 2004 net pension expense will be higher than 2003 due to a reduction in the expected rate of return on plan assets, the effect of amortizing losses incurred in the
volatile equity market of 2000 through 2002, a lower discount rate and rising healthcare rates.

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

For
additional information on our pension and post-retirement plans see Note 9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 below.

Depreciation

Depreciation expense decreased $202 million, or 8%, in 2003 and decreased $247 million, or 9%, in 2002. The decrease in 2003 was the result of the
asset impairment charges we recorded as of June 30, 2002 and September 30, 2003 and the resulting decreases in the depreciable basis of our fixed assets, certain assets becoming fully
depreciated in 2002 and the completion of certain capitalized lease agreements in 2002. The decrease in 2002 was primarily the result of higher depreciation in 2001 due to a one-time
"catch-up" adjustment of $222 million related to the termination of plans to sell access lines. During 2002, we also recorded an impairment charge, as discussed below. The impact of
the June 30, 2002 impairment reduced our annual depreciation expense by approximately $125 million, beginning July 1, 2002. The impact of the September 30, 2003 impairment
further reduced our annual depreciation expense by approximately $30 million, beginning October 1, 2003.

Intangible Assets Amortization

Amortization expense increased $51 million, or 17%, in 2003 and increased $111 million, or 58%, in 2002. The increase in both 2003 and 2002 is
attributable to increases in capitalized software costs

34

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due
in part to improvements in our customer support information technology systems as well as other product development and DSL deployment.

Asset Impairment Charges

During 2003, 2002 and 2001, we recorded asset impairment charges of $230 million, $829 million and $49 million, respectively, detailed as
follows:

Year ended December 31,2003

2002

2001(Dollars in millions)Property, plant and equipment and internal use software projects

$
230

$
825

$
Capitalized software





4


49Total asset impairment charges

$
230

$
829

$
49


Pursuant
to the agreement with Sprint that allows us to resell Sprint wireless services, 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 Statement of Financial Accounting Standard, or SFAS No. 144 "Accounting for Impairment or Disposal of Long-lived Assets", we compared gross
undiscounted cash flow projections to the carrying value of the wireless network assets and determined that the carrying value of those assets was not expected to be recovered through future projected
cash flows. We then estimated the fair value using recent selling prices for comparable assets and determined that our cell sites, switches, related tools and equipment inventory and certain
information technology systems that support the wireless network were determined to be impaired by an aggregate amount of $230 million.

The
fair value of the impaired assets becomes the new basis for accounting purposes. Approximately $25 million in accumulated depreciation was eliminated in connection with the
accounting for the impairments. The impact of the impairments is expected to reduce our annual depreciation and amortization expense by approximately $40 million, beginning October 1,
2003.

Effective
June 30, 2002, 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. 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, capitalized software and customer lists and then 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.

35

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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, beginning July 1, 2002.

We
also recorded asset impairment charges of $4 million and $49 million in 2002 and 2001, respectively, related to internal software projects that we terminated.

Restructuring and Merger-related Charges

During the year ended December 31, 2003, as part of an ongoing effort of evaluating costs of operations, QCII reviewed our employee levels in certain areas
of our business. As a result, we established a reserve and recorded a charge to our 2003 consolidated statement of operations for $71 million to cover the related costs of this plan. The 2003
activities include charges of $65 million for severance benefits and other charges pursuant to established severance policies. As part of this plan, QCII identified approximately 1,600
employees from various functional areas to be terminated. Through December 31, 2003, approximately 1,100 of the planned reductions had been completed. The remaining 500 reductions will occur
over the next year. Severance payments generally extend for two to 12 months. In addition, we established a reserve of $6 million for real estate obligations, which primarily include
estimated future net payments on abandoned operating leases. As a result of these restructuring activities, we expect to realize annual cost savings of approximately $105 million. Also during
2003, we reversed $14 million of the 2001 and 2002 restructuring plan reserves as those plans were complete, and the actual cumulative costs associated with those plans were less than had been
anticipated.

In
response to shortfalls in employee reductions as part of the 2001 restructuring plan (as discussed below), during 2002 QCII identified employee reductions in several functional areas.
As a result, we established a reserve and recorded to our 2002 consolidated statement of operations $109 million for these restructuring activities. This reserve was comprised of
$79 million for severance costs and $30 million for real estate exit costs. The 2002 restructuring plan included the anticipated termination of 2,400 employees. During 2002 we recorded
an additional charge of $75 million relative to the 2001 restructuring plan, which was associated with higher than originally anticipated real estate exit costs. In addition, during 2002 we
reversed $135 million of severance and real estate exit related accruals relative to the 2001 restructuring plan, as actual terminations and real estate exit costs were lower than had been
planned. The 2001 plan reversal was comprised of $113 million of severance and $22 million of real estate exit costs. Also, during the year ended December 31, 2002, in relation to
the Merger, we reversed $30 million of reserves that were originally recorded in 2000. The reversals resulted from favorable developments relative to matters underlying the related contractual
settlements.

During
the fourth quarter of 2001, a plan was approved by QCII to reduce our employee levels and consolidate or abandon certain real estate locations and projects. As a result, we
established a reserve and recorded a charge to our 2001 consolidated statement of operations of $212 million for these restructuring activities. This reserve was comprised of
$188 million for severance costs and $24 million for real estate exit costs. The 2001 restructuring plan included the anticipated termination of 4,800 employees. In relation to the
Merger as earlier described, during 2001,we charged to our consolidated statement of operations $114 million for additional contractual settlements, legal contingencies and other related costs,
and $6 million for additional severance charges, net of Merger reversals. The additional provisions and reversals of Merger-related costs were due to additional Merger-related activities and
modification to the previously accrued Merger-related activities.

36

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Total Other ExpenseNet

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

|                                                       |                         | Year ended December 31, |     | Absolute Change |   | Percentage Change |    
|------------------------------------------------------ | ----------------------- | ----------------------- | --- | --------------- | - | ----------------- | ---
|
|
|Interest expensenet                                   |                         | $                       | 726 |                 | $ | 699               |    
|Gain on sale of rural exchanges and other fixed assets |                         |                         |    |                 |   |                  |    
|Other incomenet                                       |                         |                         | (29 | )               |   | (29               | )  
|                                                       |                         |                         |     |                 |   |                   |    
|                                                       | Total other expensenet |                         | $   | 697             |   | $                 | 670
|                                                       |                         |                         |     |                 |   |                   |    

---

nmnot
meaningful

Interest expensenet.Interest expensenet was $726 million for 2003, compared to
$699 million for 2002. The increase in interest expense was primarily due to an increase in aggregate debt of $714 million during 2003. This increase in total debt was primarily due to a
$1.75 billion term loan entered into in June 2003, the proceeds of which were used to retire approximately $1.1 billion in debt. In addition, affiliate borrowings increased
$230 million during 2003. Interest expense was $699 million for 2002, compared to $613 million for 2001. The increase in interest expense was primarily attributable to the
issuance of new indebtedness in 2002. In March 2002, we issued $1.5 billion of 10-year bonds at an 8.875% interest rate.

Income Tax Provision

The effective income tax rate increased to 38.3% in 2003 from 37.8% in 2002 because 2002 contained beneficial state audit and accrual adjustments. The 2002
effective tax rate of 37.8% also increased as compared to the 2001 rate of 37.3% because of prior year Federal audit adjustments reflected in 2001.

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.

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

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

Near-Term View

Our working capital deficit, or the amount by which our current liabilities exceed our current assets, was $3.001 billion, $3.825 billion and
$5.847 billion as of December 31, 2003, 2002 and 2001,

37

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respectively.
Our working capital deficit decreased $824 million in 2003 compared to 2002 and decreased by $2.022 billion in 2002 compared to 2001. Our working capital position improved
during 2003 and 2002 primarily due to refinancing of current borrowings to long term.

The
current working capital deficit is primarily due to short-term borrowings from affiliates, dividends that we declare to QSC and the current portion of
long-term debt. Borrowings from affiliates by our wholly owned subsidiary, Qwest Wireless, amounted to $2.118 billion as of December 31, 2003. The affiliate borrowings mature
in January 2005; although we expect that the maturities of the borrowings will be extended by our affiliates as necessary. As discussed below, we continue to produce significant cash from
operating activities. We believe that our financial resources together with our cash flows from operations will be sufficient to meet our cash needs for the remainder of 2004. However, if we or QCII
become subject to significant judgments and/or settlements as further discussed in "Legal Proceedings" in Item 3 of this report, we may need to obtain additional financing or explore other methods to
generate cash. Therefore, in the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial condition could be materially and
adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

We
have historically declared and paid regular dividends to our parent, QSC, based on our consolidated net income. In August 2003, we modified our dividend practice to exclude the
impact of our wireless subsidiary's net income (loss) on our consolidated earnings for purposes of determining the amount of regular dividends we declare and pay. As a result, we now declare and pay
regular dividends based only on the earnings of our wireline operations. We also plan to declare and make additional dividend payments in the future relating to net income from prior periods that was
not declared or paid as dividends in those periods. We estimate that the amount of such additional dividend payments will be approximately $1.360 billion.

Long-Term View

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

In
addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods
to generate cash (such as further cost reductions or the sale of non-strategic assets) if cash provided by our and QCII's operations does not improve, if revenue and cash provided by operations
continue to decline, if economic conditions do not improve or if we or QCII become subject to significant judgments and/or settlements as further discussed in Item 3 of this report. Therefore, in the
event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial condition could be materially and adversely affected. As a wholly
owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

38

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Payment Obligations and Contingencies

Payment obligations

The following table summarizes our future contractual cash obligations, as of December 31, 2003:

|                                     |                                           | Payments Due by Period
|------------------------------------ | ----------------------------------------- | ----------------------
|
|
|Future Contractual Obligations(1)(2) |                                           |                       
|Long-term debt                       |                                           | $                     
|Interest on debt(3)                  |                                           |                       
|Capital lease and other obligations  |                                           |                       
|Operating leases                     |                                           |                       
|Purchase commitment obligations      |                                           |                       
|                                     |                                           |                       
|                                     | Total future contractual cash obligations |                       
|                                     |                                           |                       

---

Purchase Commitment 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. 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, 2003, 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. 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. For a description of these legal actions and the potential impact on our liquidity, please see "Legal Proceedings" in Item 3 of this report and the "Near-Term
View" and the "Long-Term View" above.

39

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Historical View

Operating Activities

We generated cash from operating activities of $4.612 billion, $4.253 billion and $3.662 billion in 2003, 2002 and 2001, respectively.

The
$359 million increase in cash provided by operating activities in 2003 as compared to 2002 was primarily the result of favorable changes in certain operating asset and
liability accounts of $1.054 billion, partially offset by a decrease in income from operations of $695 million after adjusting for non-cash items including depreciation,
amortization, cumulative effect of changes in accounting principles and asset impairments. This decrease in adjusted income from operations is a direct result of the continuing decline in operating
revenues. The 5% annualized decrease in revenue over the last three years is attributed to increasing competition, product substitution and general downturn in the economy and telecommunications
industry evidenced by access line losses and pricing declines. We expect continued downward pressure on revenues and profit margins regardless of improvements in the economy or telecommunications
sector. These factors may negatively impact cash provided by operations. The increase in cash provided by operations over the last three years has been primarily driven by favorable changes in certain
operating assets and liability accounts. We do not expect this trend to continue.

The
$591 million increase in cash provided by operating activities in 2002 as compared to 2001 was primarily the result of favorable changes in certain operating asset and
liability accounts of $1.283 billion, partially offset by a decrease in income from operations of $692 million after adjusting for non-cash items including depreciation,
amortization and asset impairments. This decrease in adjusted income from operations is also a direct result of the continuing decline in operating revenues evidenced by access line losses and pricing
declines.

We
continue to produce significant operating cash flows regardless of the decline in operating revenue. We expect that the cash flow from operations along with continued access to
capital markets will be sufficient to cover our operating expenses, general corporate overhead, capital expenditures and debt service.

Investing Activities

Cash used for investing activities was $1.695 billion, $1.818 billion and $4.448 billion in 2003, 2002 and 2001, respectively. Cash used in
investing activities in 2003 decreased $123 million compared to 2002 primarily as a result of a $160 million reduction in capital expenditures in 2003. 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. This decrease in capital expenditures during
2002 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.

Capital
expenditures were $1.663 billion, $1.823 billion and $4.505 billion in 2003, 2002 and 2001, respectively. We expect that our 2004 capital expenditures will
approximate 2003 levels.

40

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Financing Activities

Cash (used in) provided by financing activities was ($2.228) billion in 2003, ($2.353) billion in 2002 and $824 million in 2001. At December 31,
2003 we were in compliance with all provisions or covenants of our borrowings. For additional information regarding the covenants of our existing debt instruments, see
Note 6Borrowings to our consolidated financial statements in Item 8 of this report.



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 long-term debt. The net proceeds were used to refinance debt due in 2003 and 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 annum. The interest rate on the floating rate tranche was 6.50% at December 31, 2003. 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%.

Affiliate
borrowings of our wholly owned subsidiary, Qwest Wireless, in the form of short-term unsecured lines of credit, were $2.118 billion and $1.888 billion
at December 31, 2003 and 2002, 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, 2003 of $2.880 billion to QSC.



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, 2003, the interest rate was
9.125%. Once we have registered the notes with the SEC, 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.

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

Credit ratings

Qwest's credit ratings were lowered by Moody's Investor Services, or Moody's, Standard and Poor's, or S&P, and Fitch Ratings, or Fitch, on multiple occasions
during 2002. The table below

41

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summarizes
the ratings for the years ended December 31, 2003 and 2002. The December 31, 2003 ratings are still in effect and represent ratings of long-term debt.

December 31,2003

2002Moody's

Ba3

Ba3S&P

B-

B-Fitch

B

B


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

With
respect to S&P, any rating below BBB indicates that the security is speculative in nature. 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 issuers' capacity or willingness to meet its financial commitment on the
obligation.

With
respect to Fitch, any rating below BBB is considered speculative in nature. A B rating is considered 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.

Critical Accounting Policies and Estimates

We have identified the policies and estimates 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 and estimates 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. 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.

Estimates and Other Reserves

Our consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions made 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, reserves and other provisions and
contingencies are reasonable, based on information

42

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available
at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as
well as the reported amounts of revenue and expenses during the periods presented. We also assess potential losses in relation to pending litigation. If a loss is considered probable and the amount
can be reasonably estimated, we recognize an expense for the estimated loss. See Item 3Legal Proceedings in this report. To the extent there are material differences between these
estimates and actual results, our consolidated financial statements are affected.

Restructuring

Periodically, we commit to exit certain business activities, eliminate office or facility locations and/or reduce our number of employees. The charge to record
such a decision depends upon various
assumptions, including future severance costs, sublease income or disposal costs, length of time on market for abandoned rented facilities, contractual termination costs and so forth. Such estimates
are inherently judgmental and may change materially based upon actual experience. The number of employees and the related estimate of severance costs for employees combined with the estimate of future
losses on sublease income and disposal activity generally has the most significant impact. Due to the estimates and judgments involved in the application of each of these accounting policies, changes
in our plans and these estimates and market conditions could materially impact our financial condition or results of operations.

Revenue Recognition and Related Reserves

Revenue from services is recognized when the services are 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 ten years. Payments received in advance are deferred
until the service is provided. Customer arrangements that include both equipment 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. We believe that the accounting estimates related to customer relationship periods and to the assessment of whether a separate earnings process are "critical accounting estimates"
because: (1) it requires management to make assumptions about how long we will retain customers; (2) the assessment of whether a separate earnings process exists can be subjective;
(3) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (4) the
assessment of whether a separate earnings process exists may result in revenues being reported in different periods than significant portions of the related costs. 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 and when
customers terminate their relationship with us, we may recognize revenue that had previously been deferred under the expectation that services would be provided to that customer over a longer period.

GAAP
requires us to record reserves against our receivable balances based on estimates of future collections and to not record revenue for services provided or equipment sold if
collectibility of the revenue is not reasonably assured. We believe that the accounting estimates related to the 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

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results
reported in our consolidated statements of operations could be material. In selecting these assumptions, we use 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.

Software Capitalization

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 American Institute of Certified Public Accountants 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.

Pension and Post-Retirement Benefits

Pension and post-retirement health care and life insurance benefits earned by employees during the year, as well as interest on projected benefit
obligations, are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive
benefits. Pension and post-retirement costs are recognized over the period in which the employee renders service and becomes eligible to receive benefits as determined using the projected
unit credit method.

In
computing the pension and post-retirement benefit costs, QCII must make numerous assumptions about such things as employee mortality and turnover, expected salary and wage
increases, discount rates, expected rate of return on plan assets and expected future cost increases. Two of these items generally have the most significant impact on the level of
costdiscount rate and expected rate of return on plan assets.

Annually,
QCII sets the discount rate primarily based upon the yields on high-quality fixed-income investments available at the measurement date and expected to be available
during the period to maturity of the pension benefits. In making this determination we consider, among other things, the yields on Moody's AA corporate bonds as of year-end.

The
expected rate of return on plan assets is the long-term rate of return QCII expects to earn on trust assets. QCII establishes the expected rate of return by reviewing the
investment composition of plan assets and the long-term risk and return forecast for each asset category. The forecasts for each asset class are generated using historical information as
well as an analysis of current and expected market conditions. The expected risk and return characteristics for each asset class are reviewed annually and revised, as necessary, to reflect changes in
the financial markets.

To
compute the expected return on pension plan assets, QCII applies an expected rate of return to the market-related value of the plan assets. The market-related asset value is a
computed value that recognizes changes in fair value of pension plan assets over a period of time, not to exceed five years. In accordance with SFAS No. 87, "Employers' Accounting for
Pensions", QCII elected to recognize actual returns on pension plan assets ratably over a five year period when computing market-related

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value
of pension plan assets. This method has the effect of reducing the annual market volatility that may be experienced from year to year. As a result, the expected return is not significantly
impacted by the actual return on pension plan assets experienced in the current year.

Changes
in any of the assumptions QCII made in computing the pension and post-retirement benefit costs could have a material 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,
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 9.0% for 2003 was 100 basis points lower, the impact would have been to increase our
net pension expense by $100 million. In response to current and expected market conditions, effective January 1, 2004, QCII lowered its assumed expected long-term rate on
plan assets to 8.5%. If QCII's assumed discount rate of 6.75% for 2003 was 100 basis points lower, the impact would have been to increase our allocated net pension expense by $51 million in
2003.

Impairment of Long-Lived Assets

Pursuant to the 2003 services agreement with Sprint that allows us to resell Sprint wireless services, 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.

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 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 estimates of market prices for similar assets.
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. Comparable market data was obtained by reviewing recent sales of similar asset
types. However, the market for cell sites and switches is not highly developed or liquid. As such, our estimates of the fair value of such assets are highly subjective and the amounts we might receive
from an orderly liquidation of such assets could differ by $25 million or more from our estimates of the fair value of these assets used to record the impairment.

Effective
June 30, 2002, the general deterioration of the telecommunications market, the 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. 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 assessment of recoverability, we concluded that our traditional telephone network was not impaired. However, we determined that our wireless
network 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. In respect to the wireless assets, a hypothetical 10% increase or decrease in the current cost factors would

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have
changed the impairment charge by $17.1 million. Also relative to the wireless assets, a hypothetical 100 basis point 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

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 did not
have a material effect on our consolidated financial statements.

On
January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations", or SFAS No. 143, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, generally referred to as asset retirement obligations. SFAS
No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation. 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 (an asset retirement obligation of $12 million net of an incremental
adjustment to the historical cost of the underlying assets of $5 million) in 2003.

Prior
to the adoption of SFAS No. 143, we included in our group depreciation rates estimated net removal costs (removal costs less salvage). These costs have historically been
reflected in the calculation of depreciation expense and therefore recognized in accumulated depreciation. When the assets were actually retired and removal costs were expended, the net removal costs
were recorded as a reduction to accumulated depreciation. While SFAS No. 143 requires the recognition of a liability for asset retirement obligations that are legally binding, it precludes the
recognition of a liability for asset retirement obligations that are not legally binding. Therefore, upon adoption of SFAS No. 143, we reversed the net removal costs within accumulated
depreciation for those fixed assets where the removal costs exceeded the estimated salvage value and we did not have a legal removal obligation. This resulted in income from the cumulative effect of a
change in accounting principle of $365 million before taxes upon adoption of SFAS No. 143 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). Beginning January 1, 2003, the net costs of removal related to these assets are being charged to our
consolidated statement of operations in the period in which the costs are incurred.

In
January and December 2003, the FASB issued and then revised 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 ending after March 15, 2004
for variable interest entities, or the first quarter 2004 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

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to
loss as a result of our involvement with the variable interest entity in all financial statements issued after January 31, 2003. We believe it is unlikely that the adoption of FIN
No. 46 will require consolidation of any significant unconsolidated entities.

Risk Management

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

As
of December 31, 2003 and 2002, approximately $1.25 billion and $0, respectively, of floating rate debt was exposed to changes in interest rates. This exposure was linked
to LIBOR. A hypothetical increase of 100 basis points in LIBOR would increase annual pre-tax interest expense by $12 million. As of December 31, 2003 and 2002, we also had
approximately $0.9 billion and $1.2 billion, 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 $5.8 billion and $6.1 billion of long-term fixed rate debt at December 31, 2003 and 2002, respectively. A 100 basis point increase in interest rates
would result in a decrease in the fair value of these instruments of approximately $400 million and $300 million at December 31, 2003 and 2002, respectively. A 100 basis point
decrease in interest rates would result in an increase in the fair value of these instruments of approximately $500 million and $400 million at December 31, 2003 and 2002,
respectively.

As
of December 31, 2003, we had $921 million of cash invested in money market and other short-term investments. Most cash investments are invested at floating
rates. As interest rates change so will the interest income derived from these accounts.

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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.

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RISK FACTORS

Risks Affecting Our Business

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

We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify. We have faced greater competition in our core local
business from cable companies, wireless providers (including 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.

Due
to these and other factors, we believe competitive telecommunications providers are no longer hindered by historical barriers to entry. As a result, we are seeking to distinguish
ourselves from our competitors through a number of customer service initiatives. These initiatives include expanded product bundling, simplified billing, improved customer support and other ongoing
measures. However, these initiatives are new and untested. We may not have sufficient resources to distinguish our service levels from those of our competitors, and we may not be successful in
integrating our product offerings, especially products for which we act as a reseller, such as Sprint's wireless services. Even if we are successful, these initiatives may not be sufficient to offset
our continuing loss of access lines.

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

Continued downturn in the economy in our local service area could adversely 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 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.

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. 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

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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. While QCII's most recent discussions and further analysis
have led it to conclude that a reserve should be provided for this matter and its securities actions (see Item 3Legal Proceedings in this report), 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 disgorgement and a civil penalty, the amounts of which could be
materially in excess of QCII's recorded reserve, and the entry of a court order that would require, among other things, that QCII and its officers and directors comply with provisions of the federal
securities laws as to which there have been allegations of prior violations.

In
addition, the SEC has conducted an investigation concerning QCII's earnings release for the fourth quarter and full year 2000 issued on January 24, 2001. The release provided
pro forma normalized earnings information that excluded certain nonrecurring expense and income items resulting primarily from 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 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.

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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.

Further review by the SEC could result in additional adjustments to our and QCII's annual and quarterly reports.

QCII has engaged in discussions with the staff of the SEC's Division of Corporation Finance regarding its periodic filings. They have reviewed and commented upon
QCII's 2001 Form 10-K and its March 2002 Form 10-Q. 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. It is also possible that these comments may lead to further investigations from the SEC's Division of Enforcement. 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.

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 tens of billions of dollars. For a description of these
legal actions, please see "Legal Proceedings" in Item 3 of this report.

The
consolidated securities action, the consolidated ERISA action, the CalSTRS, New Jersey, SURSI and SPA actions described in "Legal Proceedings" in Item 3 of this report 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. The size, scope and nature
of the recent restatements of our and QCII's consolidated financial statements for fiscal 2001 and 2000 affect the risks presented by these matters, and we can give no assurance as to the impacts on
our or QCII's financial results or financial condition that may ultimately result from these matters. As QCII has previously disclosed, QCII has engaged in preliminary discussions for purposes of
resolving certain of these matters. QCII's most recent preliminary discussions and further analysis have led it to conclude that a reserve should be provided. Accordingly, QCII has recorded a reserve
in its consolidated financial statements for the estimated minimum liability associated with these matters. However, the ultimate outcomes of these matters are still uncertain and there is a
significant possibility that the amount of loss QCII ultimately incurs could be substantially more than the reserve QCII has provided.

The
securities actions are in a preliminary phase and QCII continues to defend against these matters vigorously. None of the plaintiffs or the defendants in the securities actions has
advanced evidence concerning possible recoverable damages and QCII has not yet conducted discovery on these and other relevant issues. QCII is currently unable to provide any estimate as to the timing
of the

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resolution
of any of these matters. Any settlement of or judgment in one or more of these matters in excess of QCII's recorded reserves could be significant, and QCII can give no assurance that it
will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial
condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

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.

As a result of our 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, as discussed earlier, the SEC and the U.S.
Attorney's office are currently conducting investigations including, without limitation, inquiries into several specifically identified accounting practices and transactions and related disclosures
and our earnings release for the fourth quarter and full year 2000.

A
criminal trial of former Qwest executives is taking place in the first quarter of 2004. Additional civil and criminal trials could take place in the future. Evidence that is introduced
at such trials may result in the further scrutiny by governmental authorities and others.

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

Our
2002 Form 10-K was filed in January 2004 and contains our restated consolidated financial statements for the years ended December 31, 2001 and 2000. These restatements
involved, among other matters, revenue recognition issues related to termination fees, installation fees and wireless revenue. We cannot assure you that the information in our 2002 Form 10-K or
in this annual report will not be subject to change upon receipt of any comments from the SEC, and any such changes could be material. 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 or the SEC's review of our filings.

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 generally apply to interstate
telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities generally have jurisdiction over telecommunications
that originate and terminate within the same state. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer intrastate services and must
obtain prior regulatory approval of rates, terms and conditions for our intrastate services in most of these jurisdictions. Our businesses are subject to numerous, and often quite detailed,
requirements under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are always in compliance with all of these requirements at any single point in time.

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

Our ultimate parent, QCII, is highly leveraged on a consolidated basis. As of December 31, 2003, our consolidated debt was $7.8 billion, excluding
affiliate borrowings, which is included in QCII's total consolidated debt of $17.5 billion as of such date. 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 to meet our obligations when they come due, we cannot anticipate what our or QCII's future condition will
be. We may have unexpected costs and liabilities and we may have limited access to financing.

In
addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods
to generate cash (such as further cost reductions or the sale of non-strategic assets) if cash provided by our and QCII's operations does not improve, if revenue and cash provided by operations
continue to decline, if economic conditions do not improve or if we or QCII become subject to significant judgments and/or settlements as further discussed in "Legal Proceedings" in Item 3 of this
report and in "Liquidity and Capital Resources" above. Also, we may be impacted by factors relating to or affecting QCII's liquidity and capital resources due to perception in the market, impacts on
credit ratings, or provisions in our and QCII's financing agreements that may restrict our flexibility under certain conditions.

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 income before extraordinary items from wireline entities, generally during
the quarter subsequent to that in which the 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 Relating to Qwest

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

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that
affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in this Form 10-K, 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

54

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significant
disruption of operations, which could have a material adverse effect on our business. In August 2003 we reached agreements with the CWA and the IBEW on new two-year
labor contracts. Each of these agreements was ratified by union members 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

55

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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, 2003 and 2002, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31,
2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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, 2003, the Company adopted Statement of Financial Accounting Standards
No. 143,Accounting for Asset Retirement Obligations. Also, as discussed in note 2, 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, and effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities.

/s/
KPMG LLP

Denver,
Colorado
March 2, 2004

56

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                   |                                                            | Years Ended December 31, |       
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------ | ------
|
|
|Operating revenue                                                                                  |                                                            | $                        | 10,622
|Operating revenueaffiliates                                                                       |                                                            |                          | 639   
|                                                                                                   |                                                            |                          |       
|Total operating revenue                                                                            |                                                            |                          | 11,261
|Operating expenses:                                                                                |                                                            |                          |       
|                                                                                                   | Cost of sales (exclusive of depreciation and amortization) |                          |       
|                                                                                                   | 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                                                                                   |                                                            |                          | 2,044 
|                                                                                                   |                                                            |                          |       
|Other expense (income):                                                                            |                                                            |                          |       
|                                                                                                   | Interest expensenet                                       |                          |       
|                                                                                                   | Interest expensenetaffiliates                            |                          |       
|                                                                                                   | Gain on sale of rural exchanges and other fixed assets     |                          |       
|                                                                                                   | Other incomenet                                           |                          |       
|                                                                                                   |                                                            |                          |       
|                                                                                                   |                                                            | Total other expensenet  |       
|                                                                                                   |                                                            |                          |       
|Income before income taxes and cumulative effect of change in accounting principle                 |                                                            |                          | 1,347 
|Income tax expense                                                                                 |                                                            |                          | (516  
|                                                                                                   |                                                            |                          |       
|Income before cumulative effect of change in accounting principle                                  |                                                            |                          | 831   
|Cumulative effect of change in accounting principle, net of taxes of $139, $0 and $0, respectively |                                                            |                          | 219   
|                                                                                                   |                                                            |                          |       
|Net income                                                                                         |                                                            | $                        | 1,050 
|                                                                                                   |                                                            |                          |       

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

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QWEST CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                                                                       |                                                        | December 31,                               |       
|-------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | ------
|
|
|ASSETS                                                                                 |                                                        |                                            |       
|Current assets:                                                                        |                                                        |                                            |       
|                                                                                       | Cash and cash equivalents                              |                                            | $     
|                                                                                       | Accounts receivablenet                                |                                            |       
|                                                                                       | Accounts receivableaffiliates                         |                                            |       
|                                                                                       | Deferred income taxes                                  |                                            |       
|                                                                                       | Prepaid and other assets                               |                                            |       
|                                                                                       | Prepaid income taxesQSC                               |                                            |       
|                                                                                       |                                                        |                                            |       
|Total current assets                                                                   |                                                        |                                            | 2,807 
|Property, plant and equipmentnet                                                      |                                                        |                                            | 16,456
|Intangible assetsnet                                                                  |                                                        |                                            | 1,140 
|Other assets                                                                           |                                                        |                                            | 1,349 
|                                                                                       |                                                        |                                            |       
|                                                                                       |                                                        | 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 advance billings                  |                                            |       
|                                                                                       |                                                        |                                            |       
|Total current liabilities                                                              |                                                        |                                            | 5,808 
|Long-term borrowings (net of unamortized debt discount of $157 and $142, respectively) |                                                        |                                            | 6,874 
|Post-retirement and other post-employment benefit obligations                          |                                                        |                                            | 2,785 
|Deferred income taxes                                                                  |                                                        |                                            | 2,544 
|Deferred revenue                                                                       |                                                        |                                            | 376   
|Other long-term liabilities                                                            |                                                        |                                            | 288   
|                                                                                       |                                                        |                                            |       
|                                                                                       |                                                        | Total liabilities                          |       
|Commitments and contingencies (Notes 15 and 16)                                        |                                                        |                                            |       
|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.

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                          |                                                                    | Years Ended December 31,                                           |                                                 
|------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------
|
|
|OPERATING ACTIVITIES      |                                                                    |                                                                    |                                                 
|                          | Net income                                                         |                                                                    | $                                               
|                          | Adjustments to net income:                                         |                                                                    |                                                 
|                          |                                                                    | Depreciation and intangible assets amortization                    |                                                 
|                          |                                                                    | Gain 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 and income taxes payable, and deferred creditsaffiliates |                                                 
|                          |                                                                    | Deferred revenue and customer deposits                             |                                                 
|                          |                                                                    | Other non-current 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      |                                                                    |                                                                    |                                                 
|                          | Repayments of current portion of long-term borrowings              |                                                                    |                                                 
|                          | Net (repayments of) proceeds from short-term borrowings            |                                                                    |                                                 
|                          | Net proceeds from (repayments of) short-term borrowingsaffiliates |                                                                    |                                                 
|                          | Proceeds from 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

59

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QWEST CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

|                           |                                       | Common Stock |       | Note Receivable-
Affiliate (note 11) |   | (Accumulated
Deficit) |   | Total |       
|-------------------------- | ------------------------------------- | ------------ | ----- | ------------------------------------ | - | --------------------- | - | ----- | ------
|
|Balance, December 31, 2000 |                                       | $            | 8,484 |                                      | $ | (286                  | ) | $     | (3,617
|                           | Net income                            |              |       |                                     |   |                       |  |       |       
|                           | Dividends declared on common stock    |              |       |                                     |   |                       |  |       |       
|                           | Stock-based compensation              |              |       | 6                                    |   |                       |  |       |       
|                           | Other net asset transfers             |              |       | (8                                   | ) |                       |  |       |       
|                           |                                       |              |       |                                      |   |                       |   |       |       
|Balance, December 31, 2001 |                                       |              | 8,482 |                                      |   | (286                  | ) |       | (3,617
|                           | Net income                            |              |       |                                     |   |                       |  |       |       
|                           | Dividends declared on common stock    |              |       |                                     |   |                       |  |       |       
|                           | Stock-based 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
|                           | Net income                            |              |       |                                     |   |                       |  |       |       
|                           | Dividends declared on common stock    |              |       |                                     |   |                       |  |       |       
|                           | Stock-based compensation              |              |       | 1                                    |   |                       |  |       |       
|                           | Income tax benefit distributed to QSC |              |       | (173                                 | ) |                       |  |       |       
|                           | Other net asset transfers             |              |       | 8                                    |   |                       |  |       |       
|                           |                                       |              |       |                                      |   |                       |   |       |       
|Balance, December 31, 2003 |                                       | $            | 8,236 |                                      | $ | (286                  | ) | $     | (4,873
|                           |                                       |              |       |                                      |   |                       |   |       |       

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

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QWEST CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        For the Years Ended December 31, 2003, 2002 and 2001

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. The Merger has been accounted
for as a reverse acquisition
under the purchase method of accounting with U S WEST being deemed the accounting acquirer and QCII (prior to the Merger, "pre-Merger QCII") the acquired entity.

Our
wireless services are provided by our wholly owned subsidiary Qwest Wireless LLC ("Qwest Wireless"). 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 second quarter of 2004.

Note 2: Summary of Significant Accounting Policies

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 with our consolidated subsidiaries have been eliminated.

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

Use of estimates.Our consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions
made 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, reserves and other provisions and contingencies are reasonable, based on information available at the
time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the
reported amounts of revenue and expenses during the periods presented. We also assess

61

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potential
losses in relation to pending litigation and, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. Actual results
could differ from these estimates. See Note 15Commitments and Contingencies.

Reclassifications.Certain prior year balances have been reclassified to conform to our current year presentation.

Revenue recognition.Revenue for services is 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 periods, which range from 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.

Revenues
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 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 $127 million,
$211 million and $310 million for the years ended December 31, 2003, 2002 and 2001, respectively and is included in selling, general and administrative in the accompanying
consolidated statements of operations.

Legal costs.In our normal course of business, we incur costs to hire and retain external legal counsel to advise us on
regulatory and litigation matters. We expense these costs as such services are received.

Income taxes.We are included in the consolidated federal income tax return of QCII. The QCII tax allocation policy treats
our consolidated results as if we were a separate taxpayer. The policy requires that each subsidiary pay their tax liabilities in cash 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. 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 of the rate change. Deferred tax assets are reviewed to determine if they are more likely than not to be realized and, if not, then valuation allowances are established to
reduce deferred income tax assets to the amounts expected to be recovered.

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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. Investment tax credits are included in other long-term liabilities on our consolidated balance sheets. 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.

Allowance for doubtful accounts.The allowance for doubtful accounts receivable reflects our best estimate of probable losses
inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.

Property, plant and equipment.Property, plant and equipment is carried at cost and, effective January 1, 2003, with
our adoption of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), is adjusted for legal retirement
obligations. Property, plant and equipment is depreciated using the straight-line group method. Under the straight-line group method, assets dedicated to providing regulated
telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are categorized in the year
acquired on the basis of equal life groups of similar assets for purposes of depreciation and tracking. Generally, under the straight-line group method, when an asset is sold or retired;
the cost 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; unusual; when a sale involves land; 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. Employee-related costs directly 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.

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.

63

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Prior
to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("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.

Software capitalization.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 American Institute of Certified Public Accountants 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 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. Capitalized software development costs are
included in intangible assets in our consolidated balance sheets.

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 an intangible asset, we classify the intangible asset as indefinite lived and as such these intangible assets are not 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.

Restructuring and Merger-related charges.Periodically QCII commits to exit certain business activities, eliminate
administrative and network locations, and/or reduce our number of employees. At the time a restructuring plan is approved by QCII, we record a charge to the consolidated statement of operations for
our 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 the market for abandoned rented locations and contractual

64

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termination
costs. We also record a charge when we permanently cease use of a leased location. Estimates of charges associated with the abandoned operating leases, some of which entail
long-term lease obligations, are based on existing market conditions and net amounts that we estimate we will pay in the future. In accordance with SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities," ("SFAS No. 146"), charges associated with abandoned operating leases recorded in 2003 were measured using the present value of the estimated net
amounts we will pay and charges recorded in 2002 and 2001 were measured on an undiscounted basis. 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, 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 borrowings, excluding affiliate borrowings, had a fair value of approximately $8.2 billion and $6.5 billion at December 31, 2003 and 2002,
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 based compensation.Some of our employees participate in QCII's stock option plans. These plans are accounted for using
the intrinsic-value method allowed under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25") under which no compensation expense is
recognized for our options granted to employees when the exercise 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 and Other Variable Stock Option or Award Plans", ("FIN
No. 28"). QCII allocates to us, through a contribution, our share of the deferred compensation expense described herein based on options granted.

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

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

65

---

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 2003, 2002 and 2001:

Years Ended December 31,2003

2002

2001Risk-free interest rate


2.7
%

4.1
%

4.1
%Expected dividend yield


0.0
%

0.0
%

0.2
%Expected option life (years)


4.4


4.4


4.4Expected stock price volatility


88.0
%

57.6
%

41.4
%Weighted-average grant date fair value

$
2.37

$
2.25

$
9.40


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 Effects of Adoption

FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
No. 45") was issued in November 2002. The interpretation provides guidance on the guarantor's accounting for and disclosure of guarantees, including indirect guarantees of indebtedness
of others. We adopted the disclosure requirements of FIN No. 45 as of December 31, 2002. The accounting guidelines are applicable to certain guarantees, excluding affiliate guarantees,
issued or modified after December 31, 2002, and required 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.

On
January 1, 2003, we adopted 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. 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 (an asset retirement obligation of $12 million net of an incremental adjustment to the historical cost of the underlying assets of
$5 million) in 2003.

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

66

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removal
costs exceeded the estimated salvage value and we did not have a legal removal obligation. This resulted in income from the cumulative effect of a change in accounting principle of
$365 million before taxes upon adoption of SFAS No. 143. 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) in 2003. Beginning January 1, 2003 the net costs of removal related to these assets are charged to our consolidated statement of operations in
the period in which the costs are incurred.

In
January 2003 and December 2003, the FASB issued and then revised 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
March 15, 2004 for variable interest entities or the first quarter 2004 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 losses, or, 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 believe it is unlikely that the adoption of FIN No. 46 will require consolidation of any significant unconsolidated entities.

Note 3: Accounts Receivable

The following table presents details of our accounts receivable balances:

December 31,2003

2002(Dollars in millions)Trade receivables

$
980

$
1,131Earned and unbilled receivables


207


250Purchased and other receivables


188


253Subtotal


1,375


1,634Less: Allowance for bad debts


(132
)

(140
)Accounts receivablenet


1,243


1,494Accounts receivableaffiliates


106


120Total accounts receivablenet

$
1,349

$
1,614


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 accounts receivable from other telecommunications service providers on a non-recourse basis and include these amounts in our
accounts receivable balance. We have not experienced any significant losses related to these purchased receivables.

67

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Note 4: Property, Plant and Equipment

Property, Plant and Equipment

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

|                                    |                                     |            |  | December 31, |        
|----------------------------------- | ----------------------------------- | ---------- |  | ------------ | -------
|
|
|
|Land                                |                                     | N/A        |  | $            | 102    
|Buildings                           |                                     | 38 years   |  |              | 2,954  
|Communications equipment            |                                     | 7-10 years |  |              | 18,465 
|Other network equipment             |                                     | 8-57 years |  |              | 18,662 
|General purpose computers and other |                                     | 5-11 years |  |              | 2,338  
|Construction in progress            |                                     | N/A        |  |              | 142    
|                                    |                                     |            |  |              |        
|                                    | Total property, plant and equipment |            |  |              |        
|Less: accumulated depreciation      |                                     |            |  |              | (26,207
|                                    |                                     |            |  |              |        
|                                    | Property, plant and equipmentnet   |            |  |              | $      
|                                    |                                     |            |  |              |        

Asset Impairments

A summary of asset impairments recognized is as follows:

Years Ended December 31,2003

2002

2001(Dollars in millions)Property, plant and equipment and internal use software projects

$
230

$
825

$
Capitalized software due to restructuring and Merger activities (Note 5Intangible Assets)





4


49Total asset impairments

$
230

$
829

$
49


2003 Activities

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 personal communications service ("PCS") wireless network, to consumer and business customers, primarily within our local service area. We began offering these
Sprint services under our brand name in March 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). Through Qwest Wireless, we continue to operate a 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. Our wireless customers who are currently being
serviced through our proprietary wireless network will be transitioned onto Sprint's

68

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network
over time. 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 wireless network assets and determined that the carrying value
of those assets were not expected to be recovered through future projected cash flows. We then estimated the fair value using recent selling prices for comparable assets and determined that our cell
sites, switches, related tools and equipment inventory and certain capitalized software that support the wireless network were impaired by an aggregate amount of $230 million.

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 was 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, beginning October 1, 2003.

2002 Activities

Effective June 30, 2002, 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. 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, capitalized software and customer lists
and then 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 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 reduced our annual depreciation and amortization expense by
approximately $135 million, beginning July 1, 2002.

Asset Retirement Obligations

As discussed in Note 2Summary of Significant Accounting Policies, we adopted SFAS No. 143 on January 1, 2003.

69

---

Our
asset retirement obligations primarily relate to the costs of removing circuit equipment and wireless towers from leased properties when the leases expire. The following table
reconciles the change in asset retirement obligations during the year:

Change in Asset
Retirement
Obligations(Dollars in millions)Liability recognized upon adoption on January 1, 2003

$
12Liability incurred


Liability settled


Accretion expense


1Balance as of December 31, 2003

$
13


If
the provisions of SFAS No. 143 had been adopted for the prior years presented, net income would have decreased by approximately $45 million and $40 million for
the years ended December 31, 2002 and 2001, respectively. The asset retirement obligation would have been approximately $10 million and $8 million at December 31, 2001 and
December 31, 2000, respectively.

Note 5: Intangible Assets

The components of intangible assets are as follows:

|                                   |                                |  |               | December 31, |  
|---------------------------------- | ------------------------------ |  | ------------- | ------------ | -
|
|
|
|Intangibles with indefinite lives: |                                |  |               |              |  
|                                   | Spectrum licenses              |  |               |              | $
|Intangibles with finite lives:     |                                |  |               |              |  
|                                   | Capitalized software and other |  | 1.5 - 5 years |              |  
|                                   |                                |  |               |              |  
|                                   | Total intangible assets        |  |               |              | $
|                                   |                                |  |               |              |  

70

---

Amortization Expense

We recorded amortization expense of $353 million in 2003 for intangible assets with finite lives. Based on the current amount of intangible assets subject
to amortization, the estimated amortization for each of the succeeding 5 years is as follows:

Estimated
Amortization
Expense(Dollars in millions)2004

$
3772005


3052006


2082007


992008


36Total

$
1,025


Adoption of SFAS No. 142

Effective 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 and annually thereafter, or more often if
events or circumstances warrant.

We
ceased amortizing our intangible assets with indefinite lives, primarily wireless spectrum licenses on January 1, 2002. We also reviewed the useful lives of our amortizable
intangible assets, primarily capitalized software, and determined that they remained appropriate. We performed a transitional impairment test of intangible assets with indefinite lives on
January 1, 2002 and determined the carrying values remained appropriate. We performed the annual impairment test for 2003 and also determined the carrying values remained appropriate.

Intangible asset impairment

In June 2002, as discussed in Note 4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. In
September 2003, as discussed in Note 4Property, Plant and Equipment, we recorded an asset impairment charge to Property, Plant and Equipment for $230 million, which
includes capitalized computer software of $15 million. We recorded asset impairment charges of $4 million and $49 million in 2002 and 2001, respectively, related to internal
software projects that we terminated, including customer database system projects.

71

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Note 6: Borrowings

Current Borrowings

As of December 31, 2003 and 2002, our current borrowings consisted of:

December 31,2003

2002(Dollars in millions)Current borrowings, affiliates

$
2,118

$
1,888Current portion of long-term borrowings


867


1,179Current portion of capital lease obligations and other


14


76Total current borrowings

$
2,999

$
3,143


Current
borrowingsaffiliates represent short-term borrowings by our wholly owned subsidiary, Qwest Wireless, on unsecured lines of credit from affiliates (the
"Affiliates Lines of Credit") 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.

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.

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.

Long-term Borrowings

As of December 31, 2003 and 2002, our long-term borrowings consisted of the following:

December 31,2003

2002(Dollars in millions)Notes with various rates ranging from 5.50% to 9.125%, including LIBOR* plus 4.75%, with maturities from 2004 to 2043

$
7,887

$
7,316Unamortized discount and other


(157
)

(142
)Capital lease obligations and other


25


97Less: current portion


(881
)

(1,255
)Total long-term borrowings

$
6,874

$
6,016


---

72

---

The
indentures governing the notes in the above table 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, 2003.

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 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 long-term debt. The net proceeds were used to refinance approximately $1.1 billion of our debt due in 2003 and fund or
refinance our investment in telecommunications assets.

The
floating rate tranche bears interest at LIBOR plus 4.75% (with a minimum interest rate of 6.50%) and the fixed rate tranche bears interest at 6.95% per annum. The interest rate on
the floating rate tranche was 6.50% at December 31, 2003. 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%.

In
March 2002, we issued $1.5 billion in bonds with a 10-year maturity and an 8.875% interest rate. At December 31, 2003 the interest rate was 9.125%.
Once we have registered the notes with the Securities and Exchange Commission (the "SEC"), the interest rate will return to 8.875%, the original stated rate.

Our
long-term borrowings had the following interest rates and maturities at December 31, 2003:

|                |                      | Maturities                     |       |       |  
|--------------- | -------------------- | ------------------------------ | ----- | ----- | -
|
|
|
|Above 5% to 6%  |                      | $                              | 117   |       | $
|Above 6% to 7%  |                      |                                |      |       |  
|Above 7% to 8%  |                      |                                | 2,868 |       |  
|Above 8% to 9%  |                      |                                |      |       |  
|Above 9% to 10% |                      |                                |      |       |  
|                |                      |                                |       |       |  
|                | Total                |                                | $     | 2,985 |  
|                |                      |                                |       |       |  
|                |                      | Capital leases and other       |       |       |  
|                |                      | Unamortized discount and other |       |       |  
|                |                      | Less current borrowings        |       |       |  
|                |                      |                                |       |       |  
|                | Total long-term debt |                                |       |       |  
|                |                      |                                |       |       |  

Other debt related matters

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

73

---

At
December 31, 2003, QCII was in compliance with all provisions and covenants of their borrowings. QCII obtained extensions under the QSC Credit Facility for the delivery of certain annual and
quarterly financial information. The waiver extended the compliance date to provide certain annual and quarterly financial information to March 31, 2004. On February 5, 2004, the QSC
Credit Facility was paid off and terminated.

Interest

The following table presents the amount of gross interest expense, capitalized interest and cash paid for interest during 2003, 2002 and 2001:

Years Ended December 31,2003

2002

2001(Dollars in millions)Gross interest expense

$
739

$
724

$
659Capitalized interest


(13
)

(25
)

(46
)Net interest expense

$
726

$
699

$
613Cash interest paid

$
731

$
633

$
606


Of
the cash interest paid shown above, cash interest paid to affiliates amounted to $151 million, $162 million and $142 million for 2003, 2002 and 2001,
respectively.

Note 7: Restructuring and Merger-related Charges

The restructuring reserve balances discussed below are included in our consolidated balance sheets in the category of accrued expenses and other current
liabilities for the current portion and other long-term liabilities for the long-term portion. As of December 31, 2003 and 2002, the amounts included as current
liabilities are $58 million and $53 million, and the long-term portions are $14 million and $30 million, respectively.

2003 Activities

During the year ended December 31, 2003, as part of an ongoing effort of evaluating costs of operations, QCII reviewed our employee levels in certain areas
of our business. In connection with this restructuring and, as a result, we established a reserve and recorded a charge to our 2003 consolidated statement of operations for $71 million to cover
the costs associated with these actions, more fully described below.

74

---

An
analysis of activity associated with the 2003 restructuring plan as well as prior year restructuring and Merger plans is as follows:

|                        |       |   |    | Year Ended December 31, 2003 |   |   
|----------------------- | ----- | - | -- | ---------------------------- | - | --
|
|
|
|2003 restructuring plan |       | $ |   |                              | $ | 71
|2002 restructuring plan |       |   | 60 |                              |   |  
|2001 restructuring plan |       |   | 21 |                              |   |  
|Merger-related          |       |   | 2  |                              |   |  
|                        |       |   |    |                              |   |   
|                        | Total |   | $  | 83                           |   | $ 
|                        |       |   |    |                              |   |   

The
2003 restructuring reserve included charges of $65 million related to severance benefits pursuant to established severance policies and $6 million for real estate exit
obligations, which primarily include estimated future net payments on abandoned operating leases. QCII identified approximately 1,600 of
our employees from various functional areas to be terminated as part of this restructuring. Through December 31, 2003, approximately 1,100 of the planned reductions had been completed. The
remaining 500 reductions are expected to occur over the next year, with severance payments generally extending from two to 12 months. The real estate exit costs include the net present value of
rental payments due over the remaining term of the leases, net of estimated sublease rentals and estimated costs to terminate the leases. Through December 31, 2003, we had utilized
$20 million of the 2003 restructuring reserves for severance payments.

SFAS
No. 146 established standards for reporting information about restructuring activities. Effective for exit or disposal activities initiated after December 31, 2002,
SFAS No. 146 requires disclosure of the total amount of costs expected to be incurred in connection with these activities for each reportable segment. We do not have separate segments although
we contribute to QCII's segments. Our contribution to QCII's restructuring expense by segment includes $66 million for wireline and $5 million for other.

During
the year ended December 31, 2003, we utilized $30 million of the established reserves for severance payments made to employees that were terminated under the 2002
restructuring plan and $6 million for real estate exit-related payments. QCII had identified 2,400 of our employees to be terminated as part of the 2002 plan, and as of
December 31, 2003 these employee reductions were complete, with some severance payments extending into 2004. As the 2002 plan terminations were completed and actual costs were less than
originally estimated, we reversed $3 million of the 2002 plan reserves during the year ended December 31, 2003. The remaining 2002 plan reserve includes $4 million for severance
payments, which we expect to utilize in 2004 and $17 million for real estate exit costs. The real estate exit reserves are expected to be utilized over the next several years. QCII had
anticipated that 4,800 of our employees would be terminated as part of the 2001 plan. We have terminated 3,700 employees under this plan. During the year ended December 31, 2003, we utilized
$10 million of the 2001 plan reserves, primarily for real estate exit costs. As the employee severance-related activities relative to the 2001 plan were complete, the remaining combined reserve
of $11 million was reversed during the year ended December 31, 2003. Both the 2001 and 2002 plan reversals were necessary as actual costs for the plans were less than originally
estimated.

75

---

During
the year ended December 31, 2003, we utilized the remaining Merger-related reserve established during 2000.

2002 Activities

During the year ended December 31, 2002, in response to shortfalls in employee reductions as part of the 2001 restructuring plan (as discussed below) and
due to continued declines in our revenue and
general economic conditions, QCII identified employee reductions in various functional areas and permanently exited a number of operating and administrative locations. In connection with that
restructuring, we established a restructuring reserve and recorded a charge of $109 million to our 2002 consolidated statement of operations to cover the costs associated with these
restructuring actions more fully described below.

|                                  |       |   |     | Year Ended December 31, 2002 |   |    
|--------------------------------- | ----- | - | --- | ---------------------------- | - | ---
|
|
|
|2002 restructuring plan and other |       | $ |    |                              | $ | 109
|2001 restructuring plan           |       |   | 208 |                              |   | 75 
|Merger-related                    |       |   | 38  |                              |   |   
|                                  |       |   |     |                              |   |    
|                                  | Total |   | $   | 246                          |   | $  
|                                  |       |   |     |                              |   |    

The
2002 plan provision included $79 million for severance costs and $30 million for real estate exit costs. During the year ended December 31, 2002,
$42 million of the reserve was utilized for severance costs and $7 million was utilized for real estate exit costs. Relative to the 2001 plan, during the year ended December 31,
2002, $110 million of the reserve was utilized for severance costs and $17 million was utilized for real estate exit costs. Also during the year ended December 31, 2002, we
accrued an additional $75 million for additional 2001 plan real estate exit costs and reversed $135 million of 2001 plan severance and real estate exit reserves, primarily as actual 2001
plan terminations of 3,700 were lower than the 4,800 which were anticipated in the plan.

During
the year ended December 31, 2002, we utilized $6 million of Merger-related reserves established during 2000 and also reversed $30 million of the
Merger-related reserves as those employee reductions and contractual settlements were complete.

2001 Activities

During the year ended December 31, 2001, we established a reserve and charged to our consolidated statement of operations $212 million for
restructuring activities in conjunction with the QCII 2001 restructuring plan. This reserve was comprised of $188 million for severance costs and $24 million for real estate exit costs.
During the year ended December 31, 2001, in relation to the Merger, we charged to our consolidated statement of operations $114 million for additional contractual settlement, legal
contingency and other related costs and $6 million for additional severance and employee-related charges, net of reserve reversals. The additional provisions and reversals of our Merger-related
costs were due to additional Merger-related activities and modifications to previously accrued Merger-related activities.

76

---

Cumulative Plan Utilization

The following table outlines our cumulative utilization of the 2003, 2002 and 2001 and restructuring and Merger-related plans, through December 31, 2003:

|                        |                              | December 31, 2003-
Cumulative Utilization
|----------------------- | ---------------------------- | -----------------------------------------
|
|
|2003 restructuring plan |                              | $                                        
|2002 restructuring plan |                              |                                          
|2001 restructuring plan |                              |                                          
|Merger-related          |                              |                                          
|                        |                              |                                          
|                        | Total cumulative utilization |                                          
|                        |                              |                                          

Note 8: Other Financial Information

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

December 31,2003

2002(Dollars in millions)Accrued property taxes and other operating taxes

$
321

$
357Employee compensation


196


165Current portion of state regulatory and legal liabilities


196


182Accrued interest


121


140Other


66


55Restructuring


58


53Total accrued expenses and other current liabilities

$
958

$
952


Note 9: 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 QCII annual report on
Form 10-K for the year ended December 31, 2003 ("QCII 2003 Form 10-K").

77

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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 during 2003 or 2002 and as of December 31, 2003
and 2002, the fair value of the assets in the qualified pension trust exceeded the accumulated benefit obligation of the qualified pension plan. In addition, we did not make any contributions to the
post-retirement healthcare or life trusts in 2002; however, we did contribute $8 million to the post-retirement healthcare trust in 2003. We expect to contribute
approximately $13 million to the post-retirement healthcare trust during 2004.

Our
allocated pension credits for 2003, 2002 and 2001 were $108 million, $160 million and $279 million, respectively. Our allocated post-retirement
benefit costs for 2003, 2002 and 2001 were $297 million, $107 million and $12 million, respectively. These allocated amounts represent our share of the pension credits and
post-retirement benefit costs based on the actuarially determined amounts.

For
2003, the net pension expense allocated to cost of sales was $127 million, and for 2002 and 2001 the net pension credit allocated to cost of sales was $34 million and
$190 million, respectively. For 2003, the net pension expense allocated to Selling, General and Administrative ("SG&A") was $62 million, and for 2002 and 2001 the net pension credit
allocated to SG&A was $19 million and $77 million, respectively.

Medicare Prescription Drug, Improvement and Modernization Act of 2003

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Medicare Act") became law in the United States. The
Medicare Act introduces a prescription drug benefit under Medicare as well as a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially
equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," QCII elected to defer recognition of the effects of the Medicare Act in any measures of the benefit obligation or cost. Specific authoritative guidance on
the accounting for the Federal subsidy is pending and that guidance, when issued, could require QCII and us to change previously reported information. Currently, QCII does not believe it will need to
amend its plan to benefit from the Medicare Act. The measurement date used to determine pension and other postretirement benefit measures for the pension plan and the postretirement benefit plan is
December 31.

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, QCII on our behalf, matches a
percentage of our employee contributions in QCII common stock. We made cash contributions in connection with our employee's participation in QCII's 401(k) plan of $5 million for 2002 and
$59 million for 2001. In addition, QCII, on our behalf, made contributions of QCII common stock valued at $46 million in 2003 and $44 million in 2002. QCII did not make any
contributions of QCII common stock on our behalf in 2001.

78

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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 plans 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 other long-term liabilities. 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 deferred compensation liability in the QCII plan as of December 31, 2003 and 2002 was $5 million and $7 million, respectively. Our portion of QCII's deferred
compensation plans' assets were $1 million at December 31, 2003, and is included in other long-term assets on our consolidated balance sheets.

Note 10: Stock Incentive Plans

Stock Options

Our employees participate in the QCII employee stock option plans. The QCII plans are stock-based compensation plans that permit the issuance of stock-based
instruments including stock options, stock appreciation rights, restricted stock and phantom units, as well as substitute stock options and restricted stock awards.

QCII's
stock option 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 exercise price that equals or exceeds the value of the underlying security on the measurement date. In certain instances, the exercise 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 $1 million, $2 million and $6 million in the years ended
December 31, 2003, 2002 and 2001, respectively. For further discussion of QCII employee stock incentive plans see the QCII 2003 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 may participate in QCII's 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. In accordance with APB No. 25, we do not recognize compensation expense for the difference between the employees' purchase price and the fair market value of the stock.

79

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Note 11: 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. QSC transferred to us $6 million in stock compensation during 2001. 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. During 2003, QSC transferred to us $8 million of net assets
and $1 million for stock compensation. During 2003 and 2002, we transferred to QSC $173 million and $110 million in tax benefits, respectively.

Dividends

We have historically declared and paid regular dividends to our parent, QSC, based on our consolidated net income. In August 2003, we modified our dividend
practice to exclude the impact of our wireless subsidiary's net income (loss) on our consolidated earnings for purposes of determining the amount of regular dividends we declare and pay. As a result,
we now declare and pay regular dividends based only on the earnings of our wireline operations.

We
declared cash dividends to QSC of $2.306 billion, $805 million and $1.407 billion during 2003, 2002 and 2001, respectively. The 2003 dividends declared include
regular dividends of $1.227 billion and dividends of $1.079 billion relating to net income from prior periods that was not 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 $1.360 billion.

We
paid cash dividends of $2.880 billion and $1.915 billion in 2003 and 2002, respectively. At December 31, 2003, we had $200 million in dividends payable. In
February 2004, we paid dividends of $200 million. All dividends are paid to QSC, our parent.

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 legally restricted. During 2000, the trust was funded with a contribution of a note receivable of $286 million. We recorded $286 million as an
increase to common stock, and the related $286 million note receivable into common stock as well.

80

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Note 12: Income Taxes

The components of the provision for income tax are as follows:

|                                |                 | Years Ended December 31,
|------------------------------- | --------------- | ------------------------
|
|
|Current tax provision:          |                 |                         
|                                | Federal         |                         
|                                | State and local |                         
|                                |                 |                         
|                                |                 |                         
|                                |                 |                         
|Deferred tax expense (benefit): |                 |                         
|                                | Federal         |                         
|                                | State and local |                         
|                                |                 |                         
|                                |                 |                         
|                                |                 |                         
|Provision for income taxes      |                 | $                       
|                                |                 |                         

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

|                                         |                           | Years Ended December 31, |     
|---------------------------------------- | ------------------------- | ------------------------ | ----
|
|
|Federal statutory income tax rate        |                           | 35.0                     | %   
|State income taxesnet of federal effect |                           | 3.2                      |     
|Other                                    |                           | 0.1                      |     
|                                         |                           |                          |     
|                                         | Effective income tax rate |                          | 38.3
|                                         |                           |                          |     

The
components of the deferred tax assets and liabilities are as follows:

December 31,2003

2002(Dollars in millions)Property, plant and equipment

$
(2,944
)
$
(2,540
)Intangible assets


(372
)

(388
)Other deferred tax liabilities


(45
)

(133
)Total deferred tax liabilities


(3,361
)

(3,061
)Post-retirement benefitsnet of pension


751


737Allowance for doubtful accounts


76


86Unamortized investment tax credit


45


49Restructuring reserves


30


29Other deferred tax assets


98


112Total deferred tax assets


1,000


1,013Net deferred tax liabilities

$
(2,361
)
$
(2,048
)


81

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We
paid $135 million, $646 million and $523 million to QCII, through QSC, for income taxes in 2003, 2002 and 2001, respectively.

We
had unamortized investment tax credits of $114 million and $125 million as of December 31, 2003 and 2002, respectively, which are included in other
long-term liabilities on the consolidated balance sheets. These credits are amortized over the life of the related asset. Amortization of investment tax credits of $11 million,
$10 million and $19 million are included in the provision for income taxes for the years ended December 31, 2003, 2002 and 2001, respectively. At the end of 2003, we had
$13 million ($8 million, net of federal income tax) of state investment tax credit carryforwards that will expire between 2010 and 2016, if not utilized.

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 13: Contribution 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 2003 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.

82

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SFAS No. 146 established standards for reporting information about restructuring activities. Effective for exit or disposal activities initiated after
December 31, 2002, SFAS No. 146 requires disclosure of the total amount of costs expected to be incurred in connection with these activities for each reportable segment. The
SFAS 146 disclosure information is included in Note 7Restructuring and Merger-related charges.

The
revenues and expenses shown below are derived from transactions with external customers:

|                       |                               | Years Ended December 31,                                     |  
|---------------------- | ----------------------------- | ------------------------------------------------------------ | -
|
|
|Operating revenues:    |                               |                                                              |  
|                       | 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 operating expenses        |  
|                       |                               |                                                              |  
|Segment income (loss): |                               |                                                              |  
|                       | Wireline services             |                                                              | $
|                       | Wireless services             |                                                              |  
|                       | Other services                |                                                              |  
|                       |                               |                                                              |  
|                       |                               | Total contribution to QCII segment income (loss)             |  
|                       |                               |                                                              |  
|Capital expenditures:  |                               |                                                              |  
|                       | Wireline services             |                                                              | $
|                       | Wireless services             |                                                              |  
|                       | Other services                |                                                              |  
|                       |                               |                                                              |  
|                       |                               | Total capital expenditures                                   |  
|                       | Non-cash investing activities |                                                              |  
|                       |                               |                                                              |  
|                       |                               | Total contribution to QCII segment cash capital expenditures |  
|                       |                               |                                                              |  

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 product results. 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.

83

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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 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. In August 2003, Qwest Wireless 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
began offering these Sprint services under our brand name in March 2004. Through Qwest Wireless, we continue to operate a 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. Our wireless
customers who are currently being serviced through our proprietary wireless network will be transitioned onto Sprint's network over time.

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.

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.

84

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The
following table reconciles our contribution to QCII segment operating income to our net income for each of the years ended December 31, 2003, 2002 and 2001:

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

We
do not have any single major customer that provides more than ten percent of the total of our revenues derived from external customers.

Note 14: 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
salary rates, including factors for taxes, employee benefits and 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.

85

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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.

Product and Technical Services

Product and technical services relate 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 31,2003

2002

2001(Dollars in millions)Revenuesaffiliates

$
639

$
411

$
368Cost of salesaffiliates

$
442

$
380

$
337SG&Aaffiliates

$
1,390

$
1,290

$
1,018Interest expensenetaffiliates

$
154

$
158

$
147


As of December 31,2003

2002(Dollars in millions)Accounts receivableaffiliates

$
106

$
120Prepaid income taxesQSC

$


$
255Current borrowingsaffiliates

$
2,118

$
1,888Accounts payableaffiliates

$
413

$
331Income taxes payableQSC

$
154

$



86

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Note 15: Commitments and Contingencies

Commitments



The following table summarizes our future commitments, excluding repayments of debt, as of December 31, 2003:

|                                |                   | Payments Due by Period
|------------------------------- | ----------------- | ----------------------
|
|
|Capital leases and other        |                   | $                     
|Operating leases                |                   |                       
|Purchase commitment obligations |                   |                       
|                                |                   |                       
|                                | Total commitments |                       
|                                |                   |                       



We lease certain office facilities and equipment under various capital lease arrangements. Assets acquired through capital leases during 2003, 2002 and 2001 were
$9 million, $16 million and $58 million, respectively. Assets recorded under capitalized lease agreements included in property, plant and equipment consisted of
$57 million, $243 million and $454 million of cost, less accumulated amortization of $27 million, $153 million and $260 million at December 31, 2003,
2002 and 2001, respectively.

The
future minimum payments under capital leases as of December 31, 2003 are reconciled to our balance sheet as follows:

Capital Lease
Obligations(Dollars in millions)Total minimum payments

$
36Less: amount representing interest


(11
)Present value of minimum payments


25Less: current portion


(14
)Long-term portion

$
11




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 under these operating leases was $247 million, $287 million and
$318 million during 2003, 2002 and 2001, respectively, net of sublease rentals of $6 million, $6 million and $5 million respectively. Minimum operating lease payments have
not been reduced by minimum sublease rentals of $49 million due in the future under non-cancelable subleases. In 2003, 2002 and 2001, contingent rentals representing the difference
between the fixed and variable rental payments were not material.

87

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We have purchase commitments with Competitive Local Exchange Carriers ("CLECs"), IXCs and third-party vendors that require us to make payments to purchase network
services, capacity and telecommunications equipment. These commitments require us to maintain minimum monthly and/or annual billings, in certain cases based on usage.



At December 31, 2003, the amount of letters of credit outstanding was $3 million and we did not have any outstanding guarantees.

Contingencies



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
("Securities Act"). The complaint seeks unspecified monetary damages, disgorgement
of illegal gains and other relief. On July 31, 2002, the defendants removed this state court action to federal district court in Colorado and subsequently moved to consolidate this action with
the consolidated securities action identified below. The plaintiffs have moved to remand the lawsuit back to state court. Defendants have opposed that motion, which is pending before the court.

Regulatory Matters

On February 14, 2002, the Minnesota Department of Commerce filed a formal complaint against us with the Minnesota Public Utilities Commission ("Minnesota
Commission") alleging that we, in contravention of federal and state law, failed to file interconnection agreements with the Minnesota Commission relating to certain of our wholesale customers, and
thereby allegedly discriminated against other CLECs. On November 1, 2002, the Minnesota Commission issued a written order adopting in full a proposal by an administrative law judge that we
committed 26 individual violations of federal law by failing to file, as required under section 252 of the Telecommunications Act, 26 distinct provisions found in 12 separate agreements with
individual CLECs for regulated services in Minnesota. The order also found that we agreed to provide and did provide to McLeodUSA Inc. ("McLeodUSA") 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.

88

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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 and credits 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 ("Arizona 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 sales of wholesale intrastate services provided by us. We filed 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, and on February 27, 2004, the Staff of the
Colorado Public Utility Commissions ("PUC") submitted its Initial Comments. The Colorado Staff's Initial Comments recommended that the PUC open a show cause proceeding based upon the Staff's view that
Qwest and CLECs had willfully and intentionally violated federal and state law and Commission rules. The Staff also detailed a range of remedies available to the Commission, including but not limited
to an assessment of penalties and an obligation to extend credits to CLECs. The proceedings and investigations in New Mexico, Colorado and Washington could result in the imposition of fines and other
penalties against us that could be material. Iowa and South Dakota have concluded their inquiries resulting in no imposition of penalties or obligations to issue credits to CLECs in those states.
Also, some telecommunications providers have filed private actions based on facts similar to those underlying these administrative proceedings. These private actions, together with any similar, future
actions, could result in additional damages and awards that could be significant.

89

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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 we perfected appeals in both states.
The proceedings in the other states and in states where Illuminet has not yet filed complaints could result in agency decisions requiring additional refunds.

As
a part of the approval by the Federal Communications Commission ("FCC") of the Merger, the FCC required QCII to engage an independent auditor to perform an attestation review of our
compliance with our divestiture of in-region InterLATA services and our ongoing compliance with Section 271 of the Telecommunications Act. In 2001, the FCC began an investigation of
QCII's compliance with the divestiture of in-region InterLATA services and our ongoing compliance with Section 271 for the audit years 2000 and 2001. In connection with this
investigation, QCII disclosed certain matters to the FCC that occurred in 2000, 2001, 2002 and 2003. These matters were resolved with the issuance of a consent decree on May 7, 2003, by which
the investigation was concluded. As part of the consent decree, QCII made a voluntary payment to the U.S. Treasury in the amount of $6.5 million, and agreed to a compliance plan for certain
future activities. Separate from this investigation, QCII disclosed matters to the FCC in connection with its 2002 compliance audit, including a change in traffic flow related to wholesale transport
for operator services traffic and certain toll-free traffic, certain bill mis-labeling for commercial credit card bills, and certain billing errors for public telephone
services originating in South Dakota and for toll free services. The FCC has not yet instituted an investigation into the latter categories of matters. If it does so, an investigation could result in
the imposition of fines and other penalties against QCII. The FCC has also instituted an investigation into whether QCII may have impermissibly engaged in the marketing of InterLATA services in
Arizona prior to receiving FCC approval of QCII's application to provide such services in that state.

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. 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

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environmental
protection laws or related matters will not be material to our business or financial condition.



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.



The investigations and securities actions described below present material and significant risks to QCII. The size, scope and nature of the recent restatements of
our and QCII's consolidated financial statements for the fiscal 2001 and 2000 affect the risks presented by these matters, and QCII can give no assurance as to the impacts on our and QCII's financial
results or financial condition that may ultimately result from these matters. As QCII has previously disclosed, it has engaged in preliminary discussions for purposes of resolving certain of these
matters. QCII's most recent preliminary discussions and further analysis have led it to conclude that a reserve should be provided. Accordingly, QCII has recorded a reserve in its consolidated
financial statements for the estimated minimum liability associated with these matters. However, the ultimate outcomes of these matters are still uncertain and there is a significant possibility that
the amount of loss it ultimately incurs could be substantially more than the reserve it has provided.

At
this time, QCII believes that it is probable that all but $100 million of the recorded reserve will be recoverable out of a portion of insurance proceeds, consisting of cash
and letters of credit, which were placed in a trust to cover its losses and the losses of individual insureds following its November 12, 2003 settlement of disputes with certain of its
insurance carriers related to, among other things, the investigations and securities and derivative actions described below. However, the use and allocation of these proceeds has yet to be resolved
between QCII and individual insureds.

The
securities actions are in a preliminary phase and QCII continues to defend against these matters vigorously. None of the plaintiffs or the defendants in the securities actions has
advanced evidence concerning possible recoverable damages and QCII has not yet conducted discovery on these and other relevant issues. QCII is currently unable to provide any estimate as to the timing
of the resolution of any of these matters. Any settlement of or judgment in one or more of these matters in excess of QCII's recorded reserves could be significant, and QCII can give no assurance that
it will have the resources available to pay any such judgment. In the event of an adverse outcome in one or more of these matters, QCII's ability to meet its debt service obligations and its financial
condition could be materially and adversely affected. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.

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. 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. 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.

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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.

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
has engaged in discussions with the SEC staff in an effort to resolve the issues raised in the SEC's investigation of it, and QCII continues to evaluate any possible range of loss.
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 disgorgement and a civil
penalty, the amounts of which could be substantially in excess of QCII's recorded reserve, and the entry of a court order that would require, among other things, that QCII and its officers and
directors comply with provisions of the federal securities laws as to which there have been allegations of prior violations.

In
addition, as previously reported, the SEC has conducted an investigation concerning QCII's earnings release for the fourth quarter and full year 2000 issued on January 24,
2001. The release provided pro forma normalized earnings information that excluded certain nonrecurring expense and income items resulting primarily from the Merger. On November 21, 2001, the
SEC staff informed QCII of its intent to recommend that the SEC authorize an action against QCII that would allege it should have included in the earnings release a statement of its earnings in
accordance with GAAP. 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 was the
February 2003 indictment against four former QCII employees in connection with a transaction with the Arizona School Facilities Board in June 2001 and a civil complaint also filed in
February 2003 by the SEC against the same former employees and others relating to the Arizona School Facilities Board transaction and a transaction with Genuity Inc. ("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.

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".

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On
August 21, 2002, plaintiffs in the consolidated securities action filed their Fourth Consolidated Amended Class Action Complaint ("Fourth Consolidated Complaint"), which
defendants moved to dismiss. On January 13, 2004, the United States District Court for the District of Colorado granted the defendants' motions to dismiss in part and denied them in part. In
that order, the court allowed plaintiffs to file a proposed amended complaint seeking to remedy the pleading defects addressed in the court's dismissal order and ordered that discovery, which
previously had been stayed during the pendency of the motions to dismiss, proceed regarding the surviving claims. On February 6, 2004, plaintiffs filed a Fifth Consolidated Amended Class
Complaint ("Fifth Consolidated Complaint"). The Fifth Consolidated Complaint attempts to expand the class period previously alleged in the Fourth Consolidated Complaint, seeks to restore the claims
dismissed by the court, including claims against certain individual defendants who were dismissed as defendants by the court's dismissal order, and to add additional individual defendants who have not
been named as defendants in plaintiffs' previous complaints. The Fifth Consolidated Complaint also advances allegations related to a number of matters and transactions that were not pleaded in the
earlier complaints. The Fifth Consolidated Complaint is purportedly brought on behalf of purchasers of publicly traded securities of QCII between May 24, 1999 and July 28, 2002, and
names as defendants QCII, QCII's former Chairman and Chief Executive Officer, Joseph P. Nacchio, 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 Fifth Consolidated Complaint alleges, among other things, that during the putative class period QCII and certain of the individual
defendants made materially false statements regarding the results of QCII's operations in violation of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), that certain of
the individual defendants are liable as control persons under section 20(a) of the Exchange Act and that certain of the individual defendants sold some of their shares of QCII's common stock in
violation of section 20(a) of the Exchange Act. The Fifth Consolidated Complaint further alleges that QCII and certain other defendants violated section 11 of the Securities Act by
preparing and disseminating false registration statements and prospectuses for the registration of QCII
common stock to be issued to U S WEST shareholders in connection with the Merger of the two companies, and for the exchange of $3 billion of QCII's notes pursuant to a registration statement
dated January 17, 2001, $3.25 billion of QCII's notes pursuant to a registration statement dated July 12, 2001, and $3.75 billion of QCII's notes pursuant to a registration
statement dated October 30, 2001. Additionally, the Fifth Consolidated Complaint alleges that certain of the individual defendants are liable as control persons under section 15 of the
Securities Act by reason of their stock ownership, management positions and/or membership or representation on the QCII's Board of Directors. The Fifth Consolidated Complaint seeks unspecified
compensatory damages and other relief. However, counsel for plaintiffs has indicated that the purported class will seek damages in the tens of billions of dollars. See
Note 16Subsequent Events for additional unaudited information related to this matter.

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 (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 ("Second 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 Second Consolidated Complaint
filed on May 21, 2003, names as defendants, among others, QCII, several former and current directors, officers and employees of QCII, Qwest Asset Management, the QCII Plan Design Committee, the
Plan's Investment Committee, and

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the
Plan Administrative Committee of the pre-Merger QCII 401(k) Savings Plan. 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 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
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 defendants engaged in a scheme to falsely inflate QCII's revenue and decrease its expenses so that QCII would appear more
successful than it actually was during the period in which CalSTRS purchased and sold QCII securities. The complaint purported to state causes of action against QCII for (i) violation of
California Corporations Code section 25400 et seq. (securities laws); (ii) violation of California Corporations Code section 17200 et seq. (unfair competition);
(iii) fraud, deceit and concealment; and (iv) breach of fiduciary duty. Among other requested relief, CalSTRS sought compensatory, special and punitive damages, restitution,
pre-judgment interest and costs. QCII and the individual defendants filed a demurrer, seeking dismissal of all claims. In response, CalSTRS voluntarily dismissed the unfair competition
claim but maintained the balance of the complaint. The court denied the demurrer as to the California securities law and fraud claims, but dismissed the breach of fiduciary duty claim against QCII
with leave to amend. The court also dismissed the claims against Robert S. Woodruff and Robin R. Szeliga on jurisdictional grounds. On or about July 25, 2003, plaintiff filed a First
Amended Complaint. The material allegations and the relief sought remain largely the same, but plaintiff no longer alleges claims against Mr. Woodruff and Ms. Szeliga following the
court's dismissal of the claims against them. CalSTRS reasserted its claim against QCII for breach of fiduciary duty as a claim of aiding and abetting breach of fiduciary duty. QCII filed a second
demurrer to that claim, and on November 17, 2003, the court dismissed that claim without leave to amend. Discovery is proceeding in the CalSTRS litigation.

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, revenue and profits.
As a result, New Jersey

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contends
that it incurred hundreds of millions of dollars in losses. New Jersey's complaint purports to state causes of action against QCII for: (i) fraud; (ii) negligent
misrepresentation; and (iii) civil conspiracy. Among other requested relief, New Jersey seeks from the defendants, jointly and severally, compensatory, consequential, incidental and punitive
damages. On November 17, 2003, QCII filed a motion to dismiss. That motion is pending before the court.

On
January 10, 2003, the State Universities Retirement System of Illinois ("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 which alleges, among other things, that defendants engaged in fraudulent conduct that caused it to lose in excess of
$12.5 million invested in QCII's common stock and debt and equity securities and that defendants engaged in a scheme to falsely inflate QCII's revenues and decrease its expenses by improper
conduct related to transactions with the Arizona School Facilities Board, Genuity, Calpoint LLC, KMC Telecom Holdings, Inc., KPNQwest N.V. and Koninklijke KPN, N.V. The second amended complaint
purports to state the following causes of action against QCII: (i) violation of the Illinois Securities Act; (ii) common law fraud; (iii) common law negligent misrepresentation;
and (iv) violation of section 11 of the Securities Act. SURSI seeks, among other relief, punitive and exemplary damages, costs, equitable relief, including an injunction to freeze or
prevent disposition of the defendants' assets and disgorgement. All the individual defendants moved to dismiss the action against them for lack of personal jurisdiction. To date, neither QCII nor the
individual defendants have filed a response to the second amended complaint, and the Illinois' court's schedule does not contemplate that answers or motions to dismiss be filed until after the
challenges to jurisdiction have been resolved.

On
October 22, 2001, a purported derivative lawsuit was filed in the United States District Court for the District of Colorado (the "Federal Derivative Litigation"). On
February 6, 2004, a third amended complaint was filed in the Federal Derivative Litigation, naming as defendants certain of QCII's present and former directors and certain former officers and
naming QCII as a nominal defendant. The Federal Derivative Litigation is based upon the allegations made in the consolidated securities action and alleges, among other things, that the defendants
breached their fiduciary duties to QCII by engaging in self-dealing, insider trading, usurpation of corporate opportunities, failing to oversee implementation of securities laws that
prohibit insider trading, failing to maintain appropriate financial controls within QCII, and causing or permitting QCII to commit alleged securities violations, thus (1) causing QCII to be
sued for such violations and (2) subjecting QCII to adverse publicity, increasing its cost of raising capital and impairing earnings. The Federal Derivative Litigation has been consolidated
with the consolidated securities action. Plaintiff seeks, among other remedies, disgorgement of alleged insider trading profits.

On
August 9, 2002, a purported derivative lawsuit was filed in the Court of Chancery of the State of Delaware. A separate alleged derivative lawsuit was filed in the Court of
Chancery of the State of Delaware on or about August 28, 2002. On October 30, 2002, these two alleged derivative lawsuits were consolidated, (collectively the "Delaware Derivative
Litigation"). The Second Amended Complaint in the Delaware Derivative Litigation was filed on or about January 23, 2003, naming as defendants certain of QCII's current and former officers and
directors and naming QCII as a nominal defendant. In the Second Amended Complaint the plaintiffs allege, among other things, that the individual defendants; (i) breached their fiduciary duties
by allegedly engaging in illegal insider trading in QCII's stock; (ii) failed to ensure compliance with federal and state disclosure, anti-fraud and insider trading

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laws
within QCII, resulting in exposure to it; (iii) appropriated corporate opportunities, wasted corporate assets and self-dealt in connection with investments in initial public
offering securities through QCII's investment bankers; and (iv) improperly awarded severance payments to QCII's former Chief Executive Officer, Mr. Nacchio and QCII's former Chief
Financial Officer, Mr. Woodruff. The plaintiffs seek recovery of incentive compensation allegedly wrongfully paid to certain defendants, all severance payments made to Messrs. Nacchio
and Woodruff, disgorgement, contribution and indemnification, repayment of compensation, injunctive relief, and all costs including legal and accounting fees. On March 17, 2003, defendants
moved to dismiss the Second Amended Complaint, or, in the alternative, to stay the action. As described below, a proposed settlement of the Delaware Derivative Litigation has been reached.

On
each of March 6, 2002 and November 22, 2002, a purported derivative action was filed in Denver District Court (collectively, the "Colorado Derivative Litigation"). On
February 5, 2004, plaintiffs in one of these cases filed an amended complaint naming as defendants certain of QCII's current and former officers and directors and Anschutz Company, and naming
QCII as a nominal defendant. The two
purported derivative actions were consolidated on February 17, 2004. The amended complaint alleges, among other things, that various of the individual defendants breached their legal duties to
QCII by engaging in various kinds of self-dealings, failing to oversee compliance with laws that prohibit insider trading and self-dealing and causing or permitting QCII to
commit alleged securities laws violations, thereby causing QCII to be sued for such violations and subjecting QCII to adverse publicity, increasing its cost of raising capital and impairing earnings.

Beginning
in May 2003, the parties to the Colorado Derivative Litigation and the Delaware Derivative Litigation participated in a series of mediation sessions with former United
States District Judge Layn R. Phillips. On November 14, 2003, as a result of this process, the parties agreed in principle upon a settlement of the claims asserted in the Colorado Derivative
Litigation and the Delaware Derivative Litigation, subject to approval and execution of formal settlement documents, approval by the Denver District Court and dismissal with prejudice of the Colorado
Derivative Litigation, the Delaware Derivative Litigation and the Federal Derivative Litigation. From November 14, 2003 until February 17, 2004, the parties engaged in complex
negotiations to resolve the remaining issues concerning the potential settlement. On February 17, 2004, the parties reached a formal Stipulation of Settlement, which was filed with the Denver
District Court. The stipulation of settlement provides, among other things, that if approved by the Denver District Court and upon dismissal with prejudice of the Delaware Derivative Litigation and
the Federal Derivative Litigation, $25 million from the insurance settlement with certain of QCII's insurance carriers will be designated for the exclusive use of QCII to pay losses and QCII
will implement a number of corporate governance changes. The Stipulation of Settlement also provides that the Denver District Court may enter awards of attorneys' fees and costs to derivative
plaintiffs' counsel from the $25 million in amounts not to exceed $7.5 million and $125,000, respectively. On February 17, 2004, the Denver District Court entered a Preliminary
Approval Order and scheduled a hearing to take place on June 15, 2004, to consider final approval of the proposed settlement and derivative plaintiffs' counsels' request for an award of fees
and costs. Pursuant to the Preliminary Approval Order, QCII mailed, on February 27, 2004, notice of the proposed settlement and hearing to stockholders of its Common stock as of
February 17, 2004.

On
or about February 23, 2004, plaintiff in the Federal Derivative Litigation filed a motion in the United States District Court for the District of Colorado to enjoin further
proceedings relating to the proposed settlement of the Colorado Derivative Litigation, or alternatively, to enjoin the enforcement

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of
a provision in the Preliminary Approval Order of the Denver District Court which plaintiff claims would prevent the Federal Derivative Litigation from being prosecuted pending a final determination
of whether the settlement of the Colorado Derivative Litigation shall be approved. See Note 16Subsequent Events for additional unaudited information related to this matter.

Other Matters

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

Several
purported class actions relating to the installation of fiber optic cable in certain rights-of-way were filed in various courts against QCII on behalf of
landowners in Alabama, California, Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas. Class certification was
denied in the Louisiana proceeding and, subsequently, summary judgment was granted in QCII's favor. A new Louisiana class action complaint has recently been filed. Class certification was also denied
in the California proceeding, although plaintiffs have filed a motion for reconsideration. Class certification was granted in the Illinois proceeding. Class certification has not been resolved yet in
the other proceedings. The complaints challenge QCII's right to install its fiber optic cable in railroad rights-of-way and, in Colorado, Illinois and Texas, also challenge
QCII's right to install fiber optic cable in utility and pipeline rights-of-way. In Alabama, the complaint challenges QCII's right to install fiber optic cable in any
right-of-way, including public highways. The complaints allege that the railroads, utilities and pipeline companies own a limited property right-of-way
that did not include the right to permit QCII to install its fiber optic cable on the plaintiffs' property. The Indiana action purports to be on behalf of a national class of landowners adjacent to
railroad rights-of-way over which QCII's network passes. The Alabama, California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South
Carolina, Tennessee and Texas actions purport to be on behalf of a class of such landowners in those states, respectively. The Illinois action purports to be on behalf of landowners adjacent to
railroad rights-of-way over which QCII's network passes in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. Plaintiffs in the Illinois action have
filed a motion to expand the class to a nationwide class. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. Together with some of the other
telecommunication carrier defendants, in September 2002, QCII filed a proposed settlement of all these matters (except those in Louisiana) in the United States District Court for the Northern
District of Illinois. On July 25, 2003, the court granted preliminary approval of the settlement and entered an order enjoining competing class action claims, except those in Louisiana. 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.

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Note 16: Subsequent Events

Legal Matters

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

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

Legal Matters (Unaudited)

On March 8, 2004, QCII and other defendants filed motions to dismiss the Fifth Consolidated Complaint described in Note 15Commitments
and ContingenciesSecurities Actions and Derivative Actions.

On
March 8, 2004, the individual defendants in the Federal Derivative Litigation filed a motion to stay all proceedings in that action pending a determination by the Denver
District Court whether to approve the proposed settlement of the derivative claims asserted in the Colorado Derivative Litigation, which would resolve the derivative claims asserted in the Federal
Derivative Litigation. See Note 15Commitments and ContingenciesSecurities Actions and Derivative Actions for additional information regarding the Federal Derivative
Litigation.

On
June 26, 2003, we received from the FCC a letter of inquiry seeking information related to certain agreements with CLECs covering the provision of a variety of ancillary
services including signaling functions and database access, directory and operator assistance. We submitted our initial response to this inquiry on July 31, 2003. We took the position that we
were not in violation of our filing obligations under Section 252 of the Telecommunications Act. On March 12, 2004 the FCC released its Notice of Apparent Liability for Forfeiture in the
amount of $9 million for allegedly not meeting our filing obligations under the Telecommunications Act and the Commission's rules. We have

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thirty
days to pay the proposed forfeiture or file a written statement seeking reduction or cancellation of the proposed forfeiture.

Note 17: Quarterly Financial Data (Unaudited)

|                        |  | Quarterly Financial Data
|----------------------- |  | ------------------------
|
|
|2003                    |  |                         
|Operating revenue       |  | $                       
|Operating income        |  |                         
|Net income              |  |                         
|2002                    |  |                         
|Operating revenue       |  | $                       
|Operating income (loss) |  |                         
|Net income (loss)       |  |                         

---

First Quarter 2003Includes $219 million of net income due to the cumulative effect of change in accounting principle.

Third Quarter 2003Includes $140 million after-tax charge for asset impairment under FAS No. 144.

Second Quarter 2002Includes an after-tax charge of $503 million for the impairment of assets (primarily property, plant and equipment) under FAS No. 144.

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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 ("Andersen") as our independent auditor.

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

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

100

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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. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.

Under
the supervision and with the participation of QCII's management, including QCII's Chief Executive Officer and Chief Financial Officer, QCII evaluated the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") as of
December 31, 2003. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and
procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC. There have been no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date we performed our evaluation.

101

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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 ACCOUNTANT FEES AND SERVICES

Pre-Approval Policies and Procedures

The Audit Committee of the Board of Directors of QCII is responsible for the appointment, compensation and oversight of the work of our independent public
accountant. Pursuant to the Audit Committee's charter, which was amended and restated on May 8, 2003 and further amended on February 19, 2004, the Audit Committee
pre-approves all audit and permissible non-audit services provided by our independent auditor. The approval may be given as part of the Audit Committee's approval of the scope
of the engagement of our independent auditor or on an individual basis. The pre-approval of non-audit services may be delegated to one or more of the Audit Committee's members,
but the decision must be reported to the full Audit Committee. Our independent auditor may not be retained to perform the non-audit services specified in Section 10A(g) of
the Exchange Act.

Fees Paid to the Independent Auditor

QCII engaged KPMG to be our independent auditor on May 29, 2002. The aggregate fees billed or allocated to us for professional accounting services,
including the audit of our annual consolidated financial statements by KPMG for the fiscal years ended December 31, 2003 and 2002 included in this Form 10-K, are set
forth in the table below.

2003

2002(Dollars in thousands)Audit fees

$
5,422

$
16,795Audit-related fees


3,715


2,753Tax fees


375


Subtotal


9,512


19,548All other fees


548


Total fees

$
10,060

$
19,548


For
purposes of the preceding table, the professional fees are classified as follows:



102

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SEC
rules effective as of May 6, 2003 require QCII's Audit Committee to pre-approve all audit and permissible non-audit services provided by our
independent auditor (with certain limited exceptions). Since the effective date of these rules, all of the services performed by KPMG described above were approved in advance by QCII's Audit
Committee.

103

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PART IV

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

Page(1)

Independent Auditors' Report

56(2)

Financial Statements covered by the Report of Independent Public Accountants:Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001

57Consolidated Balance Sheets as of December 31, 2003 and 2002

58Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

59Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2002 and 2001

60Notes to the Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001

61






|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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-3040).                                                                                                                        
|(4.1)       |  | 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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2002, File
No. 1-3040).                
|(4.3)       |  | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2002, File
No. 1-3040).               
|(4.4)       |  | 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).                            
|            |  |                                                                                                                                                                                                                                                                                      

104

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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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---

105

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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 March 16, 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 March 16, 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)

106

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Independent Auditors' Report

The
Board of Directors and Stockholder
Qwest Corporation:

Under
date of March 2, 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, 2003 and 2002, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year
period ended December 31, 2003, as contained in the December 31, 2003, annual report on 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.

/s/KPMG LLP

Denver,
Colorado
March 2, 2004

S-1

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

|                                 |  | Balance at
beginning
of period |     | Charged to
expense |   | Deductions |  | Balance at
end of
period
|-------------------------------- |  | ------------------------------ | --- | ------------------ | - | ---------- |  | ------------------------
|Allowance for doubtful accounts: |  |                                |     |                    |   |            |  |                         
|2003                             |  | $                              | 140 |                    | $ | 175        |  | $                       
|2002                             |  |                                | 155 |                    |   | 331        |  |                         
|2001                             |  |                                | 81  |                    |   | 278        |  |                         

S-2

---