<PAGE>
--------------------------------------------------------------------------------
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
<TABLE>
<C>          <S>                                                                      <C>
    /X/               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
                                 SECURITIES EXCHANGE ACT OF 1934
 
                           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                               OR
 
    / /               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
                                 SECURITIES EXCHANGE ACT OF 1934
                                FOR THE TRANSITION PERIOD FROM TO
 
                                   COMMISSION FILE NO. 1-3040
</TABLE>
 
                         U S WEST COMMUNICATIONS, INC.
 
           A COLORADO CORPORATION                      84-0273800
  ----------------------------------------  ---------------------------------
        (State or other jurisdiction                (I.R.S. Employer
     of incorporation or organization)             Identification No.)
 
                1801 California Street, Denver, Colorado 80202
                        Telephone Number (303) 672-2700
 
                            ------------------------
 
          Securities registered pursuant to Section 12 (b) of the Act:
 
<TABLE>
<CAPTION>
                               NAME OF EACH EXCHANGE ON
    TITLE OF EACH CLASS            WHICH REGISTERED
---------------------------  -----------------------------
<S>                          <C>
   5.625% Notes Due 2008        New York Stock Exchange
</TABLE>
 
                            ------------------------
 
          Securities registered pursuant to Section 12 (g) of the Act:
                                      None
 
    THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF U S WEST, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION 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 _X_ No ____
 
    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 the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.  ***
 
*** Not applicable in that registrant is a wholly owned subsidiary.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
                                   FORM 10-K
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
  ITEM                                DESCRIPTION                                 PAGE
  ------------------------------------------------------------------------------  ----
  <C> <S>                                                                         <C>
                                         PART I
 
    1. Business..................................................................  2
    2. Properties................................................................  3
    3. Legal Proceedings.........................................................  3
    4. Submission of Matters to a Vote of Security Holders.......................  4
 
                                        PART II
 
    5. Market for Registrant's Common Equity and Related Stockholder Matters.....  4
    6. Selected Financial Data...................................................  4
    7. Management's Discussion and Analysis of Financial Condition and Results of
        Operations..............................................................   4
   7A. Quantitative and Qualitative Disclosures About Market Risk................  4
    8. Consolidated Financial Statements and Supplementary Data..................  4
    9. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure..............................................................   4
 
                                        PART III
 
   10. Directors and Executive Officers of the Registrant........................  4
   11. Executive Compensation....................................................  4
   12. Security Ownership of Certain Beneficial Owners and Management............  4
   13. Certain Relationships and Related Transactions............................  4
 
                                        PART IV
 
   14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........  5
</TABLE>
 
                                       i
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
                                   FORM 10-K
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
    Some of the information presented in this Annual Report on Form 10-K or
incorporated by reference constitutes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Although U S WEST Communications, Inc. (the "Company," which may also be
referred to as "we," "us" or "our") believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its businesses and
operations, there can be no assurance that actual results will not differ
materially from our expectations. Factors that could cause actual results to
differ from expectations include:
 
    - greater than anticipated competition from new entrants into the local
      exchange, intraLATA (local access transport area) toll, wireless and data
      markets, causing loss of customers and increased price competition;
 
    - changes in demand for our products and services, including optional custom
      calling features;
 
    - higher than anticipated employee levels, capital expenditures and
      operating expenses (such as costs associated with interconnection and Year
      2000 remediation);
 
    - the loss of significant customers;
 
    - pending and future state and federal regulatory changes affecting the
      telecommunications industry, including changes that could have an impact
      on the competitive environment in the local exchange market;
 
    - a change in economic conditions in the various markets served by our
      operations;
 
    - higher than anticipated start-up costs associated with new business
      opportunities;
 
    - delays in our ability to begin offering interLATA long-distance services;
 
    - consumer acceptance of broadband services, including telephony, data and
      wireless services; and
 
    - delays in the development of anticipated technologies, or the failure of
      such technologies to perform according to expectations.
 
    These cautionary statements should not be construed by you as an exhaustive
list or as any admission by us regarding the adequacy of disclosures made by us.
We cannot always predict or determine after the fact what factors would cause
actual results to differ materially from those indicated by our forward-looking
statements or other statements. In addition, you are urged to consider
statements that include the terms "believes," "belief," "expects," "plans,"
"objectives," "anticipates," "intends" or the like to be uncertain and
forward-looking. All cautionary statements should be read as being applicable to
all forward-looking statements wherever they appear.
 
    We do not undertake any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed herein might not occur.
 
                                       1
<PAGE>
                                     PART I
 
ITEM 1.  BUSINESS.
 
GENERAL
 
    We are incorporated under the laws of the State of Colorado and have our
principal offices at 1801 California Street, Denver, Colorado 80202, telephone
number (303) 672-2700. We are a wholly owned subsidiary of U S WEST, Inc., a
Delaware corporation ("U S WEST").
 
    On June 12, 1998, our former parent corporation, which has subsequently been
renamed MediaOne Group, Inc., separated its media business and communications
business into two publicly traded companies (the "Separation"). The media
business is conducted through MediaOne Group, Inc. and the communications
business, including the domestic directory business, is now conducted through U
S WEST and its subsidiaries.
 
COMPANY OPERATIONS
 
    We provide communications services to more than 25 million residential and
business customers in our 14 state region (the "Region"). The Region includes
the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New
Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming.
 
    The principal types of communications services we offer are: (i) local
exchange telephone services, (ii) exchange access services (which connect
customers to facilities of carriers, including long-distance providers and
wireless operators), (iii) long-distance network services within local access
and transport areas ("LATAs") in the Region, (iv) wireless and (v) high-speed
data and Internet services.
 
    LOCAL EXCHANGE.  Local exchange telephone services provide lines from
telephone exchange offices to customers' premises to originate and terminate
telecommunications services within our local exchange service territories as
defined by the state public utilities commissions. These services include basic
local exchange services provided through our regular switched network, dedicated
private line facilities for voice and special services, such as transport of
data, radio and video, switching services for customers' internal communications
through facilities owned by us, data transport services that include managing
and configuring special service networks and dedicated low- and high-capacity
public or private digital networks. Other local exchange revenue is derived from
directory assistance, public telephone service and various custom calling
features such as Caller ID, Call Waiting, Call Return and 3-Way Calling.
 
    EXCHANGE ACCESS.  We provide exchange access services by connecting the
equipment and facilities of our customers with the communications networks of
interexchange carriers and other local exchange carriers, including competitive
local exchange carriers. These connections are provided by linking these
carriers and customers through our public switched network or through our
dedicated private lines.
 
    INTRALATA LONG-DISTANCE.  We provide intraLATA long-distance services within
our Region. These services include intraLATA service beyond the local calling
area, Wide Area Telecommunications Service or "800" services for customers with
highly concentrated demand, and special services, such as transport of data,
radio and video. We intend to begin offering interLATA long-distance services in
our Region pursuant to the Telecommunications Act of 1996 (the
"Telecommunications Act" or the "Act") through the successful completion of
regulatory proceedings. We currently offer limited out-of-region long-distance
services.
 
    We also provide other products and services, such as customer premises
equipment and enhanced services, including voice mail to residents, business
customers and governmental agencies.
 
                                       2
<PAGE>
    WIRELESS SERVICES.  We hold 10 MHz licenses to provide personal
communications services ("PCS") in 53 markets in our Region. These licenses,
which cover approximately 20 million POPs (I.E., potential customers), were
purchased in a Federal Communications Commission ("FCC") auction held in January
1997. In December 1997, we purchased additional licenses for a majority of the
Seattle market, which cover an additional 4 million POPs. Using these licenses,
we are constructing networks utilizing digital code division multiple access
technology. We launched wireless PCS services in Denver, Fort Collins, Greeley
and Colorado Springs, Colorado; Portland and Salem, Oregon; and Vancouver,
Washington in 1997 and in Phoenix and Tucson, Arizona; Minneapolis, St. Cloud,
St. Paul and Rochester, Minnesota; and Seattle, Olympia and Bremerton,
Washington in 1998 covering approximately 13 million POPs. These wireless
services, which are being marketed under the "U S WEST Advanced PCS" brand,
enable customers to use the same number for their wireless phone as for their
home or business phone.
 
    HIGH-SPEED DATA AND INTERNET SERVICES.  We offer high-speed data and
Internet services to customers inside our Region. Through U S WEST !INTERPRISE,
our data division, we provide high-speed data communications and network
services, including frame relay service, Transparent LAN service, ATM Cell Relay
Service, network integration solutions and other data-related services to
business customers. In 1997 and 1998, we introduced U S WEST Megabit Services, a
high-speed Internet access service, and U S WEST.net, a standard Internet access
service, in select markets and expect to launch these services in additional
markets in 1999. For factors which could cause actual results to differ from
expectations, you should read "Special Note Regarding Forward-Looking
Statements" on page 1.
 
    At December 31, 1998, we had over 16.5 million telephone network access
lines in service, an increase of 3.5% over 1997. On January 15, 1999, we
announced that we plan to sell approximately 500,000 access lines over the next
12-18 months. For the year ended December 31, 1998, local exchange service,
exchange access service and high speed data and Internet access services
accounted for 49%, 24% and 11%, respectively, of our total revenue. IntraLATA
long-distance service and wireless services each accounted for less than 10% of
total 1998 revenues.
 
COMPETITION AND REGULATION
 
    For a discussion of competition and regulation affecting us, you should read
"Item 1. Business" of U S WEST's Form 10-K for the year ended December 31, 1998.
 
ITEM 2.  PROPERTIES.
 
    Our properties do not lend themselves to description by character and
location of principal units. At December 31, 1998, the percentage distribution
of total net telephone plant by major category for us was as follows:
 
<TABLE>
<S>                                                                <C>
Telecommunications outside plant.................................         41%
 
Telecommunications network equipment (primarily central office
  equipment).....................................................         42%
 
Land and buildings (principally central offices).................          7%
 
General purpose computers and other..............................         10%
</TABLE>
 
    At December 31, 1998, substantially all of the installations of central
office equipment were located in buildings owned by us situated on land which we
own in fee, while many garages and administrative and business offices are
leased.
 
ITEM 3.  LEGAL PROCEEDINGS.
 
    We are subject to claims and proceedings arising in the ordinary course of
business. There are pending certain regulatory actions in local regulatory
jurisdictions that call for price decreases, refunds or both. For
 
                                       3
<PAGE>
a discussion of these actions, you should read Note 10 to the consolidated
financial statements on pages F-15 through F-16.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    Not applicable.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
    Not applicable.
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
    We have omitted this information pursuant to General Instruction I(2).
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.
 
    We have omitted this information pursuant to General Instruction I(2). See
"Management's Analysis of Results of Operations." Please refer to the
information set forth on pages 8 through 15.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
    See "Management's Analysis of Results of Operation -- Risk Management."
Please refer to the information set forth on pages 11 through 12.
 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    Please refer to the information set forth on pages F-1 through F-16.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.
 
    We have nothing to report to you under this item.
 
                                    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.
 
    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).
 
                                       4
<PAGE>
                                    PART IV
 
ITEM 14.  FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
 
(a) Documents filed as part of this report
 
<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                            --------------------
<S>        <C>                                                                              <C>
(1)        Reports of Independent Public Accountants......................................          F-1
(2)        Consolidated Financial Statements:
           Consolidated Statements of Income for the years ended
                 December 31, 1998, 1997 and 1996.........................................          F-2
           Consolidated Balance Sheets as of December 31, 1998 and 1997...................          F-3
           Consolidated Statements of Cash Flows for the years ended
                 December 31, 1998, 1997 and 1996.........................................          F-4
           Notes to Consolidated Financial Statements and
                 Supplementary Data.......................................................    F-5 through F-16
(3)        Consolidated Financial Statement Schedule:
           Schedule II -- Valuation and Qualifying Accounts...............................          F-17
 
Financial statement schedules other than those listed above have been omitted because the required information
is contained in the consolidated financial statements and notes thereto or because such schedules are not
required or applicable.
</TABLE>
 
(b) Reports on Form 8-K:
 
        U S WEST Communications filed the following reports on Form 8-K during
        the fourth quarter of 1998 and through the filing of this Form 10-K:
 
    (i) report dated November 17, 1998 providing notification of the Company's
        closing of $320 million note offering.
 
    (ii) report dated January 15, 1999 providing notification of a press release
         entitled "U S WEST to Sell 500,000 Access Lines."
 
(c) Exhibits:
 
        Exhibits identified in parentheses below, on file with the United States
        Securities and Exchange Commission ("SEC"), are incorporated herein by
        referenced as exhibits hereto. All other exhibits are provided as part
        of this electronic submission.
 
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER
----------
<C>         <S>
   (2a)     Articles of Merger including the Plan of Merger between The Mountain States Telephone and
            Telegraph Company (renamed U S WEST Communications, Inc.) and Northwestern Bell Telephone Company.
            (Incorporated herein by this reference to Exhibit 2a to Form SE filed on January 8, 1991, File No.
            1-3040).
   (2b)     Articles of Merger including the Plan of Merger between The Mountain States Telephone and
            Telegraph Company (renamed U S WEST Communications, Inc.) and Pacific Northwest Bell Telephone
            Company. (Incorporated herein by this reference to Exhibit 2b to Form SE filed on January 8, 1991,
            File No. 1-3040).
   (3a)     Restated Articles of Incorporation of the Registrant. (Incorporated herein by this reference to
            Exhibit 3a to Form 10-K/A filed on April 13, 1998, File No. 1-3040.)
   (3b)     Bylaws of the Registrant, as amended. (Incorporated herein by this reference to Exhibit 3b to Form
            10-K/A filed on April 13, 1998, File No. 1-3040.)
</TABLE>
 
                                       5
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER
----------
<C>         <S>
    4       No instrument which defines the rights of holders of long and intermediate term debt of the
            Registrant is filed herewith pursuant to Regulation S-K, Item 601(b) (4) (iii) (A). Pursuant to
            this regulation, the Registrant hereby agrees to furnish a copy of any such instrument to the SEC
            upon request.
  (10a)     Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone
            and Telegraph Company, U S WEST Inc., and certain of their affiliated companies, including The
            Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific
            Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10a to Form 10-K for
            the period ended December 31, 1983, File No. 1-3040).
  (10b)     Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and
            Telegraph Company, AT&T Communications of the Midwest, Inc. and The Mountain States Telephone and
            Telegraph Company. (Exhibit 10b to Form 10-K for the period ended December 31, 1983, File No.
            1-3040).
  (10c)     Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983,
            between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The
            Mountain States Telephone and Telegraph Company and Central Services Organization (Exhibit 10d to
            Form 10-K for the period ended December 31, 1983, File No. 1-3040).
  (10d)     Agreement Concerning Certain Centrally Developed Computer Systems effective December 31, 1983,
            between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The
            Mountain States Telephone and Telegraph Company and Central Services Organization (Exhibit 10e to
            Form 10-K for the period ended December 31, 1983, File No. 1-3040).
  (10e)     Agreement Concerning Patents, Technical Information and Copyrights effective December 31, 1983,
            between American Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f to Form 10-K for
            the period ended December 31, 1983, File No. 1-3040).
  (10f)     Agreement Concerning Liabilities, Tax Matters and Termination of Certain Agreements dated as of
            November 1, 1983, between American Telephone and Telegraph Company, U S WEST, Inc., The Mountain
            States Telephone and Telegraph Company and certain of their affiliates (Exhibit 10g to Form 10-K
            for the period ended December 31, 1983, File No. 1-3040).
  (10g)     Agreement Concerning Trademarks, Trade Names and Service Marks effective December 31, 1983,
            between American Telephone and Telegraph Company, American Information Technologies Corporation,
            Bell Atlantic Corporation, BellSouth Corporation, Cincinnati Bell, Inc., NYNEX Corporation,
            Pacific Telesis Group, The Southern New England Telephone Company, Southwestern Bell Corporation
            and U S WEST, Inc. (Exhibit 10i to Form 10-K for the period ended December 31, 1984, File No.
            1-3040).
  (10h)     Shareholders' Agreement dated as of January 1, 1988, between Ameritech Services, Inc., Bell
            Atlantic Management Services, Inc., BellSouth Services, Incorporated, NYNEX Service Company,
            Pacific Bell, Southwestern Bell Telephone Company, The Mountain States Telephone and Telegraph
            Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit
            10h to Form SE dated March 5, 1992, File No. 1-3040).
    12      Computation of Ratio of Earnings to Fixed Charges.
    24      Power of Attorney.
    27      Financial Data Schedule.
</TABLE>
 
                                       6
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on February 10, 1999.
 
<TABLE>
<S>                             <C>  <C>
                                U S WEST COMMUNICATIONS, INC.
 
                                By:              /s/ ALLAN R. SPIES
                                     -----------------------------------------
                                                   Allan R. Spies
                                              VICE PRESIDENT AND CHIEF
                                                 FINANCIAL OFFICER
</TABLE>
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the date indicated.
 
PRINCIPAL EXECUTIVE OFFICER:
 
/s/ Solomon D. Trujillo         President and Chief
                                  Executive Officer
 
PRINCIPAL FINANCIAL OFFICER:
 
/s/ Allan R. Spies              Vice President and Chief
                                  Financial Officer
 
CONTROLLER:
 
/s/ Oscar X. Munoz              Vice President --
                                  Controller
 
DIRECTORS:
 
/s/ Solomon D. Trujillo
 
/s/ Allan R. Spies
 
/s/ Janet K. Cooper
 
Dated: February 10, 1999
 
                                       7
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
                 MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
 
                             (DOLLARS IN MILLIONS)
 
    Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" on page 1 for additional
factors relating to such statements.
 
RESULTS OF OPERATIONS
 
1998 COMPARED WITH 1997
 
    Several non-recurring and non-operating items impacted net income in 1998
and 1997. Results of operations for the two years, normalized to exclude the
effects of such items, are as follows:
 
<TABLE>
<CAPTION>
                                                 1998       1997           INCREASE
                                               ---------  ---------  ---------------------
Net income...................................  $   1,335  $   1,252  $      83        6.6%
<S>                                            <C>        <C>        <C>        <C>
Non-recurring and non-operating items........         89        (80)       169      211.3
                                               ---------  ---------  ---------      -----
Normalized income............................  $   1,424  $   1,172  $     252       21.5%
                                               ---------  ---------  ---------      -----
                                               ---------  ---------  ---------      -----
</TABLE>
 
    Non-recurring and non-operating items in 1998 include:
 
    - an after-tax charge of $68 for Separation costs and
 
    - an after-tax charge of $21 related to the impairment of certain long-lived
      assets associated with our video operations.
 
    Non-recurring and non-operating items in 1997 include:
 
    - an after-tax gain of $80 relating to the sales of local telephone
      exchanges and our investment in Bell Communications Research, Inc.
      ("Bellcore").
 
    Normalized income increased $252 or 21.5% in 1998. The increase was
primarily due to revenue growth associated with increased demand for services
and lower regulatory rate adjustments which unfavorably impacted revenue. The
1997 regulatory rate adjustments include a $152 ($250 pretax) charge primarily
attributable to a state of Washington adjustment (the "Washington Rate Order").
Partially offsetting these revenue increases were higher operating costs driven
by growth initiatives and interconnection activities.
 
    The following sections provide a more detailed discussion of the changes in
revenues and expenses.
 
REVENUES
 
<TABLE>
<CAPTION>
                                                  1998       1997           INCREASE
                                                ---------  ---------  ---------------------
Local service revenues........................  $   5,525  $   5,016  $     509       10.1%
<S>                                             <C>        <C>        <C>        <C>
                                                ---------  ---------  ---------        ---
                                                ---------  ---------  ---------        ---
</TABLE>
 
    LOCAL SERVICE REVENUES.  Local service revenues include basic monthly
service fees, fees for calling services, such as call waiting and caller
identification, public phone revenues and installation and connection charges.
Most local service rates are regulated by state public service commissions.
 
    Local service revenues increased in 1998 due largely to access line growth
and increased sales of calling services. Second line additions by residential
and small business customers contributed to access line growth due to continuing
demand for Internet access and data transport capabilities. In 1998, we provided
a total of 568,000 additional access lines, an increase of 3.5% over 1997. Of
this increase, second line installations accounted for 241,000 lines, an
increase of 18.0% compared with 1997. In addition,
 
                                       8
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
regulatory rate increases in various jurisdictions accounted for $53 or 10.4% of
the increase in local service revenues in 1998. Unfavorable regulatory rate
adjustments and other provisions for estimated state regulatory liabilities
decreased $122 in 1998 compared to 1997, due in part, to the Washington Rate
Order.
 
    While the number of access lines, calling services and associated revenue
increased in 1998, the growth rate has declined from 1997. The decline in the
growth rate was partially attributable to our customer retention strategy of
offering customers bundles of services at lower prices in return for entering
into longer-term contracts. Some business customers have also opted to migrate
from multiple single lines to high capacity lines, which decreases local service
revenues but increases access service revenues. Lastly, the work stoppage in the
third quarter of 1998 negatively impacted revenue growth. We believe we will
continue to experience declining growth rates as the level of customer demand
slows and competition increases. Additionally, we are planning the sale of
approximately 500,000 access lines that accounted for approximately $270 of 1998
revenues. While the sale is expected to provide us with a one-time gain in 1999
or 2000, the loss of the lines will negatively impact future revenue growth.
 
<TABLE>
<CAPTION>
                                                   1998       1997           INCREASE
                                                 ---------  ---------  ---------------------
Interstate access service revenues.............  $   2,816  $   2,666  $     150        5.6%
<S>                                              <C>        <C>        <C>        <C>
Intrastate access service revenues.............        822        761         61        8.0
                                                                                         --
                                                                                         --
                                                 ---------  ---------  ---------
                                                 ---------  ---------  ---------
</TABLE>
 
    INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES.  Interstate and
intrastate access service revenues are derived primarily from charging
interexchange carriers, such as AT&T and MCI WorldCom, for use of our local
network to connect customers to their long-distance networks. We also collect
fees from telephone customers to connect to their long-distance carriers.
 
    In 1998, interstate access service revenues were affected by a change in the
classification of fees paid into the universal service funds. In 1997 and prior
years, fees paid into the universal service funds were netted against interstate
access service revenues. In 1998, with the advent of the FCC's new universal
service fund structure and funding mechanism, these fees were recorded as access
expense within other operating expenses. Excluding the effects of the
reclassification, interstate access service revenues increased $65 or 2.4% in
1998 due to greater demand for interstate access services. The volume of access
minutes billed increased 6.4% in 1998. The increase in demand was substantially
offset by price reductions as mandated by the FCC. Commencing in 1999, the FCC
will allow us to recover non-recurring costs incurred in connection with
establishing local number portability.
 
    The increase in intrastate access service revenues was primarily
attributable to a $68 charge recognized in 1997 resulting from the Washington
Rate Order. Greater demand also contributed to the increase. The volume of
access minutes of use increased 5.4% in 1998.
 
<TABLE>
<CAPTION>
                                                                 1998       1997            DECREASE
                                                               ---------  ---------  ----------------------
<S>                                                            <C>        <C>        <C>        <C>
Long-distance network services revenues......................  $     779  $     885  $     106       12.0%
                                                               ---------  ---------  ---------        ---
                                                               ---------  ---------  ---------        ---
</TABLE>
 
    LONG-DISTANCE NETWORK SERVICES REVENUES.  Long-distance network services
revenues are derived from customer calls to locations outside of their local
calling area but within the same LATA. The decrease in long-distance network
services revenues was attributable to greater competition and regulatory rate
reductions in 1998, offset by a $51 charge recognized in 1997 resulting from the
Washington Rate Order. As of December 31, 1998, in five of the 14 states in
which we operate, customers are able to choose an alternative provider for
intraLATA calls without dialing a special access code when placing the call.
Additionally, contributing to the revenue decline was the expansion of multiple
toll carrier plans ("MTCPs") in 1997, whereby other telephone companies provide
toll services previously provided by us.
 
                                       9
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
Although we no longer receive these revenues, the revenue loss has been offset
with increased intrastate access service revenues and lower access expenses.
 
    We believe we will continue to experience further declines in long-distance
network services revenues as regulatory actions provide for increased levels of
competition. We are responding to competition through competitive pricing of
intraLATA long-distance services and increased promotional efforts to retain
customers. See "Special Note Regarding Forward-Looking Statements" on page 1.
 
<TABLE>
<CAPTION>
                                                                 1998       1997            INCREASE
                                                               ---------  ---------  ----------------------
<S>                                                            <C>        <C>        <C>        <C>
Other services revenues......................................  $     940  $     755  $     185       24.5%
                                                               ---------  ---------  ---------        ---
                                                               ---------  ---------  ---------        ---
</TABLE>
 
    OTHER SERVICES REVENUES.  Other services revenues include voice messaging,
inside wire installation and maintenance, wireless communications, billings and
collections for interexchange carriers, interconnection rent and customer
equipment sales. Other services revenues increased primarily as a result of
greater sales of wireless communications services, which commenced in 1997, and
inside wire installation and maintenance. Interconnection rent revenues and
continued market penetration in voice messaging services also contributed to the
increase.
 
EXPENSES
 
<TABLE>
<CAPTION>
                                                             1998       1997            INCREASE
                                                           ---------  ---------  ----------------------
<S>                                                        <C>        <C>        <C>        <C>
Employee-related expenses................................  $   3,430  $   3,344  $      86        2.6%
                                                           ---------  ---------  ---------        ---
                                                           ---------  ---------  ---------        ---
</TABLE>
 
    EMPLOYEE-RELATED EXPENSES.  Employee-related expenses include salaries and
wages, benefits, payroll taxes and contract labor. Employee-related expenses in
1998 include $21 of net costs incurred in connection with the third-quarter work
stoppage, including incremental travel costs, contract labor costs and bonuses
paid to management for work performed during the strike. Partially offsetting
these additional costs were lower salaries and wages for occupational employees
not working during the strike. Excluding these costs, employee-related expenses
increased $65 or 1.9%.
 
    Employee-related expenses increased because of growth in several sectors of
the business, primarily wireless communications, resulting in increased employee
levels. Across-the-board wage increases also contributed to the increase in
employee-related expenses. We also incurred higher contract labor costs for
systems development, including interconnection and year 2000 costs and marketing
and sales efforts. Partially offsetting these increases was the transfer of
approximately 1,200 employees during the third-quarter of 1997 to an unregulated
affiliate. Additionally, there was an $83 pension credit in 1998 compared to a
$29 pension credit in 1997.
 
    Approximately 33,000 of our employees are represented by the Communications
Workers of America. In October 1998, members of the union ratified a three-year
contract providing for salary increases of 10.9% over three years, effective in
August of each year, and a cumulative pension increase of 21% over three years.
 
<TABLE>
<CAPTION>
                                                             1998       1997            INCREASE
                                                           ---------  ---------  ----------------------
<S>                                                        <C>        <C>        <C>        <C>
Other operating expenses.................................  $   2,696  $   2,300  $     396       17.2%
                                                           ---------  ---------  ---------        ---
                                                           ---------  ---------  ---------        ---
</TABLE>
 
    OTHER OPERATING EXPENSES.  Other operating expenses include access charges
paid to independent local exchange carriers for the routing of long-distance
traffic through their facilities, network software expenses and other selling,
general and administrative costs. As discussed in "interstate and intrastate
access service revenues", universal service funding expenses were netted against
revenues in 1997 and prior years and
 
                                       10
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
have been classified in other operating expenses in 1998. Excluding the effects
of the reclassification, other operating expenses increased $311 or 13.5% in
1998. The increase was primarily attributable to the following:
 
    - increased affiliate expense due to the above referenced transfer of
      employees to an unregulated affiliate,
 
    - higher interconnection and local number portability costs,
 
    - increased costs associated with growth initiatives, including wireless
      handset costs and related marketing and advertising,
 
    - costs of $94 that were directly attributable to the Separation, including
      executive severance, legal and financial advisory fees, securities
      registration fees, printing and mailing costs and internal systems and
      rearrangement costs, and
 
    - an asset impairment charge of $35 related to certain long-lived assets
      used in our video operations in Omaha, Nebraska. Recent technological
      advances have permitted us to pursue and use more economical DSL
      technology in cable overbuild situations. Because the projected future
      cash flows were less than the assets' carrying values, an impairment loss
      was recognized. See Note 2 to the consolidated financial statements.
 
<TABLE>
<CAPTION>
                                                             1998       1997            INCREASE
                                                           ---------  ---------  ----------------------
<S>                                                        <C>        <C>        <C>        <C>
Depreciation and amortization expense....................  $   2,138  $   2,103  $      35        1.7%
                                                           ---------  ---------  ---------        ---
                                                           ---------  ---------  ---------        ---
</TABLE>
 
    DEPRECIATION AND AMORTIZATION EXPENSE.  Depreciation and amortization
expense increased primarily due to higher overall property, plant and equipment
balances resulting from continued investment in our network.
 
<TABLE>
<CAPTION>
                                                             1998       1997            INCREASE
                                                           ---------  ---------  ----------------------
<S>                                                        <C>        <C>        <C>        <C>
Other expense -- net.....................................  $     468  $     318  $     150       47.2%
                                                           ---------  ---------  ---------        ---
                                                           ---------  ---------  ---------        ---
</TABLE>
 
    OTHER EXPENSE -- NET.  Interest expense was $386 in 1998 compared to $374 in
1997. The increase in interest expense was primarily a result of higher average
debt balances. Also included in other expense -- net, were other expenses of $82
in 1998 compared to other income of $56 in 1997. The 1998 other expenses
resulted primarily from interest expense on state regulatory liabilities whereas
the 1997 other income was derived primarily from sales of local telephone
exchanges and our investment in Bellcore, offset by interest expense on state
regulatory liabilities.
 
<TABLE>
<CAPTION>
                                                             1998       1997            INCREASE
                                                           ---------  ---------  ----------------------
<S>                                                        <C>        <C>        <C>        <C>
Provision for income taxes...............................  $     815  $     766  $      49        6.4%
                                                           ---------  ---------  ---------        ---
                                                           ---------  ---------  ---------        ---
</TABLE>
 
    PROVISION FOR INCOME TAXES.  The effective tax rate remained relatively
consistent at 37.9% for 1998 compared to 38.0% for 1997.
 
RISK MANAGEMENT
 
    Over time, we are exposed to market risks arising from changes in interest
rates. The objective of our interest rate risk management program is to manage
the level and volatility of our interest expense. We may employ derivative
financial instruments to manage our interest rate risk exposure. We have also
employed derivative instruments to hedge interest rate and foreign currency
exposures associated with
 
                                       11
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
particular debt issues in order to synthetically obtain below-market interest
rates. We do not use derivative financial instruments for trading purposes.
 
    As of December 31, 1998 and 1997, $123 and $62, respectively, of
floating-rate debt was exposed to changes in interest rates. This exposure was
primarily linked to the 30-day commercial paper rate. A hypothetical 10% change
in the 30-day commercial paper rate would not have had a material effect on our
annual earnings. As of December 31, 1998 and 1997, we also had $228 and $335,
respectively, of fixed-rate debt obligations maturing in the following fiscal
year. 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.
 
    As of December 31, 1998 and 1997, we had entered into interest rate swaps
with a notional amount of $155. These swaps synthetically transform certain
floating rate issues into fixed-rate obligations. The swaps and associated debt
issues are indexed to two-and 10-year constant maturity U.S. Treasury rates. Any
gains (losses) on the swaps would be offset by losses (gains) on the associated
debt instruments.
 
    As of December 31, 1998 and 1997, we had also entered into cross-currency
swaps with a notional amount of $204. The cross-currency swaps synthetically
transformed $182 and $171 of Swiss Franc borrowings at December 31, 1998 and
1997, respectively, into U.S. dollar obligations. Any gains (losses) on the
cross-currency swaps would be offset by losses (gains) on the Swiss Franc debt
obligations.
 
CONTINGENCIES
 
    We have pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. See Note 10 to the consolidated
financial statements.
 
OTHER ITEMS
 
    From time to time, we engage in discussions regarding restructurings,
dispositions, acquisitions and other similar transactions. Any such transaction
could include, among other things, the transfer, sale or acquisition of
significant assets, businesses or interests, including joint ventures, or the
incurrence, assumption or refinancing of indebtedness, and could be material to
our financial condition and results of operations. There is no assurance that
any such discussions will result in the consummation of any such transaction.
 
COMPETITION AND REGULATORY ENVIRONMENT
 
    For a complete discussion of our competitive and regulatory environment, see
the U S WEST, Inc. Form 10-K -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Competition and Regulation.
 
YEAR 2000 COSTS
 
    BACKGROUND.  During 1997 and 1998, we conducted a comprehensive review of
our computer-based systems and related software and began to take measures to
ensure that such systems will properly recognize the year 2000 and continue to
process beyond December 31, 1999. The systems we evaluated include (i) the
Public Switched Telephone Network (the "Network"), (ii) Information Technologies
("IT") and (iii) individual Business Units (the "Business Units").
 
                                       12
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
    The Network, which processes voice and data information relating to our core
communications business, relies on remote switches, central office equipment,
interoffice equipment, and loop transport equipment that is predominantly
provided to us by telecommunications network vendors. IT is comprised of our
internal business systems that employ hardware and software on an
enterprise-wide basis, including operational, financial and administrative
functions. The Business Units, which include internal organizations such as
finance, procurement, operator services, wireless, data networks, real estate,
etc., employ systems that support desktop and departmental applications, as well
as embedded computer chip technologies, which relate specifically to each of our
Business Unit's functions and generally are not part of the Network or IT.
 
    We have approached year 2000 remediation activities through five general
phases: (i) inventory/ assessment, (ii) planning, (iii) conversion, (iv)
testing/certification and (v) implementation. Additionally, we have monitored
and improved our year 2000 related activities and progress, communicated with
our customers and vendors, participated in cooperative testing with others and
taken steps to assure that we have contingency plans in place prior to the end
of 1999. We plan to continue these activities during 1999.
 
    NETWORK UPDATE.  With regard to the Network, we are working with our
telecommunications network vendors to obtain and convert to compliant releases
of hardware and software. We also are testing, at our own initiative, in
cooperation with certain of our customers and vendors, and in cooperation with
other major wireline telecommunications companies, network equipment over
multiple configurations involving a broad spectrum of services. Toward this end,
we participate in the Telco Year 2000 Forum (the "Forum"), an organization that
addresses the year 2000 readiness of network elements and network
interoperability. The Forum has contracted with Bellcore, a former affiliate
engaged in telecommunications industry research, development and maintenance
activities, to engage in inter-region interoperability testing. We also
participate in the FCC's Network Reliability and Interoperability Council IV
working group, which is tasked to evaluate the year 2000 readiness of the public
telecommunications network, and in the Alliance for Telecommunications Industry
Solutions ("ATIS"), which is testing inter-network interoperability, and which,
in conjunction with the Cellular Telecommunications Industry Association
("CTIA"), is testing network interoperability with wireless networks. Our
inventory/assessment, planning and conversion phases for the Network are
complete. The network testing/certification phase was approximately 99% complete
as of December 31, 1998 and we anticipate that this phase will be complete
during the first quarter of 1999. Cooperative testing with certain customers,
vendors and other telecommunications companies is expected to continue during
1999. As of December 31, 1998 approximately 79% of our Network remediation
implementation was complete, with completion of the remainder anticipated by
July 1999. We have initiated Network contingency planning activities and
approximately 10% of the anticipated Network contingency planning activity was
complete as of December 31, 1998. We anticipate that the remainder of our
Network contingency planning activity will be complete by mid-1999.
 
    IT UPDATE.  Within IT, we have identified approximately 570 applications
that support our critical business processes, such as billing and collections,
network monitoring, repair and ordering. The inventory/assessment and planning
phases for such IT applications are complete. As of December 31, 1998,
approximately 96% of IT conversion activities, 84% of IT testing activities and
81% of IT implementation had been completed. We anticipate that each of these
phases for IT will be complete by July 1999. IT contingency planning activity is
approximately 40% complete and we anticipate that the remainder will be complete
by mid-1999.
 
    BUSINESS UNITS UPDATE.  Within our Business Units, it is estimated that as
of December 31, 1998, approximately 95% of the inventory/assessment activity,
70% of the planning activity, 20% of the conversion activity and 5% of the
testing and remediation implementation activity were complete. We anticipate
that each of these phases will be complete in the Business Units for major
conversions and
 
                                       13
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
upgrades by the end of the third quarter of 1999. Some of our Business Units,
such as the retail markets organization, are at the beginning of the conversion,
testing and implementation phases, while other Business Units, such as our
finance organization, have substantially completed all of the phases. We have
recently initiated Business Unit contingency planning activities and we
anticipate those will be complete by mid-1999.
 
    COSTS RELATING TO YEAR 2000.  We have spent approximately $115 from the
beginning of 1997 through the end of 1998 on year 2000 projects and activities.
We estimate that additional costs for year 2000 related projects and activities
will be approximately $60 through the end of 1999. We estimate total spending on
year 2000 projects and activities from the beginning of 1997 through the end of
1999 will be approximately $175. Virtually all year 2000 related expenditures
are being funded through operations. Though year 2000 costs will directly impact
the reported level of future net income, we intend to control our total cost
structure, including deferral of non-critical projects to future years, in an
effort to mitigate the impact of year 2000 costs on our historical rate of
earnings growth. The estimates stated above are subject to change. The timing of
our expenses may vary and is not necessarily indicative of readiness efforts or
progress to date.
 
    CONTINGENCY PLAN.  We cannot provide assurance that the results of our year
2000 compliance efforts or the costs of such efforts will not differ materially
from estimates. Accordingly, we are developing year 2000 specific business
continuity and contingency plans to address high risk areas as they are
identified. Our year 2000 contingency planning activities will include training
of crisis managers on year 2000 issues and potential business impacts to their
particular process areas, reviewing and modifying existing business continuity
plans to address year 2000 issues and establishing rapid response teams and
communications procedures for each of the major critical operations and
facilities to handle potential post-implementation year 2000 failures. These
year 2000 specific contingency planning activities are to be in place by the
third quarter of 1999. In addition, we have in place our standard overall
business continuity, contingency and disaster recovery plans (such as diesel
generator back-up power supply sources for our Network, Network rerouting
capabilities, computer data and records safe-keeping and back-up and recovery
procedures) which will be verified, and as appropriate, augmented for specific
year 2000 contingencies.
 
    DEPENDENCIES.  Within Network, we are highly dependent upon our
telecommunications network vendors to provide year 2000 compliant hardware and
software in a timely manner, and on third parties that are assisting us in the
focused testing and implementation phases regarding the Network. Because of
these dependencies, we have developed and implemented a vendor compliance
process whereby we have obtained written assurances of timely year 2000
compliance from most of our critical vendors (not only for Network, but also for
IT and the Business Units). In addition, we monitor and actively participate in
coordinated Network testing activities, as discussed above, with respect to the
Forum, ATIS and Bellcore. Within IT, we depend on the development of software by
experts, both internal and external, and the availability of critical resources
with the requisite skill sets. Because of this dependency, we have developed
detailed timetables, resource plans and standardized year 2000 testing
requirements for identified critical applications (irrespective of whether these
applications are used primarily by IT, the Network or the Business Units).
Within the Business Units, we are dependent on vendor supplied goods and
services and operability of the Network and critical IT and Business Unit
specific applications. Because of these dependencies, we are implementing the
same type of vendor compliance processes and application planning and testing
processes at the Business Units, as discussed above with respect to the Network
and IT. Overall, we have sought compliance assurances from approximately 6,750
vendors concerning approximately 28,900 products and have received assurances
for approximately 77% of those products as of December 31, 1998. During 1999, we
will continue to pursue assurances of timely year 2000 compliance for the
remaining critical vendors.
 
                                       14
<PAGE>
           MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
 
    As with any large-scale computer-related project such as year 2000
remediation, the testing phase may require resources in excess of other project
phases and the other project phases may be affected by and dependent upon the
results of the testing phase.
 
    SUMMARY.  In management's view, the most reasonably likely worse case
scenario for year 2000 failure prospects we face is that a limited number of
important IT and/or Business Unit specific applications may unexpectedly fail.
In addition, there may be problems with the Network relating to the year 2000.
Our failure or the failure by certain of our vendors to remediate year 2000
compliance issues in advance of the year 2000 and to execute appropriate
contingency plans in the event that a critical failure is experienced, could
result in disruption of our operations, possibly impacting the Network and
impairing our ability to bill or collect revenues. However, while no assurance
can be given, management believes that our efforts at remediation and testing,
year 2000 specific contingency planning and overall business continuity,
contingency and disaster recovery planning will likely be successful, and that
the aforementioned "worse case scenario" is unlikely to develop or significantly
disrupt our financial operations.
 
    The above discussion regarding year 2000 contains many statements that are
"forward-looking" within the meaning of the Reform Act. Although we believe that
our estimates are based on reasonable assumptions, we cannot assure that actual
results will not differ materially from these expectations or estimates. See
"Special Note Regarding Forward-Looking Statements" on page 1.
 
NEW ACCOUNTING STANDARDS
 
    On January 1, 1999, we adopted the accounting provisions required by the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," issued in March 1998. SOP 98-1, among other things,
requires that certain costs of internal use software, whether purchased or
developed internally, be capitalized and amortized over the estimated useful
life of the software.
 
    Based on information currently available, adoption of the SOP may result in
an initial increase in net income in 1999 of approximately $100-$150. In periods
after adoption, if software expenditures remain level, the impact on earnings
will decline until the amortization expense related to the capitalized software
equals the software costs expensed prior to the accounting change. The estimated
net income impact for 1999 and thereafter will be subject to change as further
information becomes available. See "Special Note Regarding Forward-Looking
Statements" on page 1.
 
    On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and for hedging activities.
FAS No. 133 requires, among other things, that all derivative instruments be
recognized at fair value as assets or liabilities on the balance sheet and that
changes in fair value generally be recognized currently in earnings unless
specific criteria are met. The standard is effective for fiscal years beginning
after June 15, 1999, though earlier adoption is permitted. Financial statement
impacts of adopting the new standard depend upon the amount and nature of the
future use of derivative instruments and their relative changes in valuation
over time. Had we adopted FAS No. 133 in 1998, its impact on the financial
statements would not have been material.
 
                                       15
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholder of U S WEST Communications, Inc.:
 
    We have audited the accompanying consolidated balance sheets of U S WEST
Communications, Inc. (a Colorado corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Communications,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
 
    Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
 
ARTHUR ANDERSEN LLP
 
Denver, Colorado
January 22, 1999
 
                                      F-1
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1998       1997       1996
                                                                                       ---------  ---------  ---------
                                                                                            (DOLLARS IN MILLIONS)
<S>                                                                                    <C>        <C>        <C>
Operating revenues:
  Local service......................................................................  $   5,525  $   5,016  $   4,770
  Interstate access service..........................................................      2,816      2,666      2,507
  Intrastate access service..........................................................        822        761        770
  Long-distance network services.....................................................        779        885      1,100
  Other services.....................................................................        940        755        684
                                                                                       ---------  ---------  ---------
    Total operating revenues.........................................................     10,882     10,083      9,831
Operating expenses:
  Employee-related expenses..........................................................      3,430      3,344      3,377
  Other operating expenses...........................................................      2,696      2,300      1,953
  Depreciation and amortization......................................................      2,138      2,103      2,101
                                                                                       ---------  ---------  ---------
    Total operating expenses.........................................................      8,264      7,747      7,431
                                                                                       ---------  ---------  ---------
Operating income.....................................................................      2,618      2,336      2,400
Other income (expense):
  Interest expense...................................................................       (386)      (374)      (414)
  Gains on sales of local telephone exchanges........................................     --             77         59
  Gain on sale of investment in Bellcore.............................................     --             53     --
  Other expense -- net...............................................................        (82)       (74)       (44)
                                                                                       ---------  ---------  ---------
    Total other expense--net.........................................................       (468)      (318)      (399)
                                                                                       ---------  ---------  ---------
Income before income taxes and cumulative effect of change in accounting principle...      2,150      2,018      2,001
Provision for income taxes...........................................................        815        766        768
                                                                                       ---------  ---------  ---------
Income before cumulative effect of change in accounting principle....................      1,335      1,252      1,233
Cumulative effect of change in accounting principle -- net of tax....................     --         --             34
                                                                                       ---------  ---------  ---------
Net income...........................................................................  $   1,335  $   1,252  $   1,267
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-2
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1998       1997
                                                                                              ---------  ---------
                                                                                                  (DOLLARS IN
                                                                                                   MILLIONS)
<S>                                                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................................................  $      68  $      26
  Accounts receivable, less allowance for uncollectibles of $48 and $50.....................      1,619      1,608
  Inventories and supplies..................................................................        154        124
  Deferred tax asset........................................................................        113        226
  Prepaid and other.........................................................................         61         68
                                                                                              ---------  ---------
Total current assets........................................................................      2,015      2,052
Property, plant and equipment -- net........................................................     14,681     14,141
Other assets -- net.........................................................................        882        815
                                                                                              ---------  ---------
Total assets................................................................................  $  17,578  $  17,008
                                                                                              ---------  ---------
                                                                                              ---------  ---------
 
LIABILITIES AND STOCKHOLDER'S EQUITY
 
Current liabilities:
  Short-term debt...........................................................................  $     789  $     497
  Accounts payable..........................................................................      1,411      1,439
  Accrued expenses..........................................................................      1,383      1,495
  Advanced billings and customer deposits...................................................        326        292
                                                                                              ---------  ---------
Total current liabilities...................................................................      3,909      3,723
Long-term debt..............................................................................      5,154      5,019
Postretirement and other postemployment benefit obligations.................................      2,458      2,365
Deferred income taxes.......................................................................        898        891
Unamortized investment tax credits..........................................................        159        168
Deferred credits and other..................................................................        537        442
Commitments and contingencies
Stockholder's equity:
  Common stock -- one share without par value, owned by parent..............................      8,080      8,017
  Cumulative deficit........................................................................     (3,617)    (3,617)
                                                                                              ---------  ---------
Total stockholder's equity..................................................................      4,463      4,400
                                                                                              ---------  ---------
Total liabilities and stockholder's equity..................................................  $  17,578  $  17,008
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                      1998       1997       1996
                                                                                    ---------  ---------  ---------
                                                                                         (DOLLARS IN MILLIONS)
<S>                                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES
Net income........................................................................  $   1,335  $   1,252  $   1,267
Adjustments to net income:
  Depreciation and amortization...................................................      2,138      2,103      2,101
  Gains on sales of local telephone exchanges.....................................     --            (77)       (59)
  Gain on sale of investment in Bellcore..........................................     --            (53)    --
  Asset impairment................................................................         35     --         --
  Cumulative effect of change in accounting principle.............................     --         --            (34)
  Deferred income taxes and amortization of investment tax credits................        110        (23)        99
Changes in operating assets and liabilities:
  Accounts receivable.............................................................        (11)       (46)       (12)
  Inventories, supplies and other current assets..................................         28        (53)         6
  Accounts payable, accrued expenses and advanced billings........................       (210)       508        (80)
  Other...........................................................................        100        167         50
                                                                                    ---------  ---------  ---------
Cash provided by operating activities.............................................      3,525      3,778      3,338
                                                                                    ---------  ---------  ---------
 
INVESTING ACTIVITIES
Expenditures for property, plant and equipment....................................     (2,566)    (2,101)    (2,392)
Proceeds from sales of local telephone exchanges..................................     --             67        174
Proceeds from sale of investment in Bellcore......................................     --             65     --
Proceeds from (payments on) disposals of property, plant and equipment............        (30)        22         15
Other.............................................................................        (26)       (73)    --
                                                                                    ---------  ---------  ---------
Cash used for investing activities................................................     (2,622)    (2,020)    (2,203)
                                                                                    ---------  ---------  ---------
 
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt.................................        399       (639)       158
Proceeds from issuance of long-term debt..........................................        320         29         23
Repayments of long-term debt......................................................       (443)      (142)      (466)
Dividends paid on common stock....................................................     (1,200)    (1,367)    (1,259)
Equity infusions from U S WEST, Inc...............................................         63        295        310
                                                                                    ---------  ---------  ---------
Cash used for financing activities................................................       (861)    (1,824)    (1,234)
                                                                                    ---------  ---------  ---------
 
CASH AND CASH EQUIVALENTS
Increase (decrease)...............................................................         42        (66)       (99)
Beginning balance.................................................................         26         92        191
                                                                                    ---------  ---------  ---------
Ending balance....................................................................  $      68  $      26  $      92
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS OF PRESENTATION.  The consolidated financial statements include the
accounts of U S WEST Communications, Inc., and its wholly owned subsidiaries. We
are a wholly owned subsidiary of U S WEST, Inc. ("U S WEST").
 
    SEGMENT INFORMATION.  We operate in a single segment; communications and
related services. Telecommunications services are provided to more than 25
million residential and business customers in Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming. Services offered include local telephone services,
exchange access services that connect customers to the facilities of other
carriers, long-distance services within local access and transport areas,
wireless personal communications services and high-speed data and Internet
services.
 
    SIGNIFICANT CONCENTRATIONS.  The largest volume of our services are provided
to AT&T Corp. ("AT&T"). During 1998, 1997 and 1996, revenues from services
provided to AT&T were $900, $1,049 and $1,046, respectively. At December 31,
1998, we are not aware of any other significant concentration of business
transacted with a particular customer that could, if suddenly eliminated,
severely impact operations.
 
    At December 31, 1998, 72% of our employees were represented by unions.
 
    USE OF ESTIMATES.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
    CASH AND CASH EQUIVALENTS.  Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
 
    INVENTORIES AND SUPPLIES.  New and reusable materials are carried at average
cost, except for significant individual items that are valued based on specific
costs. Nonreusable material is carried at its estimated salvage value.
 
    PROPERTY, PLANT AND EQUIPMENT.  Property, plant and equipment is carried at
cost. Property, plant and equipment is depreciated using straight-line group
methods. When the depreciable property, plant and equipment is retired or sold,
gross book cost less salvage value is generally charged to accumulated
depreciation; no gain or loss is recognized. The average depreciable lives used
for the major categories of property, plant, and equipment follow:
 
<TABLE>
<CAPTION>
                                                                                      LIFE
CATEGORY                                                                             (YEARS)
---------------------------------------------------------------------------------  -----------
<S>                                                                                <C>
Buildings........................................................................    27 - 40
Telecommunications network equipment.............................................    8 - 14
Telecommunications outside plant.................................................    8 - 57
General purpose computers and other..............................................    3 - 17
</TABLE>
 
                                      F-5
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Interest related to qualifying construction projects is capitalized and
reflected as a reduction of interest expense. Amounts capitalized were $25, $20
and $31 in 1998, 1997 and 1996, respectively.
 
    COMPUTER SOFTWARE.  The cost of computer software, whether purchased or
developed internally, is generally expensed as incurred; however initial
operating systems software is capitalized and amortized over the life of the
related hardware and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software are
charged to expense.
 
    Capitalized computer software costs of $180 and $132 at December 31, 1998
and 1997, respectively, are recorded in property, plant and equipment.
Amortization of capitalized computer software costs totaled $82, $78 and $81 in
1998, 1997 and 1996, respectively.
 
    FINANCIAL INSTRUMENTS.  The objective of our interest rate risk management
program is to obtain the minimum total cost of debt over time consistent with an
acceptable level of interest rate volatility. This objective is achieved through
the type of debt issued, interest rate swaps that adjust the ratio of fixed- to
variable-rate debt, cross-currency swaps that convert foreign-denominated debt
to dollar-denominated debt and forward contracts to hedge future debt issues.
 
    Under an interest rate swap, we agree with another party to exchange
interest payments, based on a notional amount, at specified intervals over a
defined term. Interest rate swaps are accounted for under the synthetic
instruments accounting model if the index, maturity and amount of the instrument
match the terms of the underlying debt. Net interest accrued is recognized over
the life of the instruments as an adjustment to interest expense and is a
component of cash provided by operating activities. Any gain or loss on the
termination of an instrument that qualifies for synthetic instrument accounting
would be deferred and amortized over the remaining life of the original
instrument.
 
    Under a cross-currency swap, we agree with another party to exchange U. S.
dollars for foreign currency based on a notional amount, at specified intervals
over a defined term. Cross-currency swaps are
accounted for under the synthetic instruments accounting model if the index,
maturity and amount of the instruments match the terms of the underlying debt.
The cross-currency swaps and the foreign currency debt are combined and
accounted for as if dollar denominated-debt was issued directly.
 
    Under a forward contract, we agree with another party to sell a specified
amount of U. S. Treasuries to hedge the treasury-rate component of future debt
issues. The gain or loss on the forward contract is recorded as part of the
carrying value of the related debt and is amortized as a yield adjustment.
 
    REVENUE RECOGNITION.  Local telephone and wireless services are generally
billed in advance with revenues recognized when services are provided. Revenues
derived from exchange access, long-distance network services and wireless
airtime usage are recognized as services are provided.
 
    ADVERTISING COSTS.  Costs related to advertising are expensed as incurred.
Advertising expense was $208, $188 and $96 in 1998, 1997 and 1996, respectively.
 
    INCOME TAXES.  The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. For financial statement purposes, investment tax credits are being
amortized over the economic lives of the related property, plant and equipment.
 
                                      F-6
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    We are included in the consolidated federal income tax returns of U S WEST.
We recognize federal income tax expense based upon a pro-rata allocation
agreement with U S WEST. Under the agreement, we are allocated income tax
consequences or benefits based upon our pro-rata contribution to the
consolidated group's taxable income, deductions and credits. The amount of
federal income tax expense recognized by us is not significantly different than
an amount computed on a stand-alone basis.
 
    We are included in combined state tax returns filed by U S WEST. We
recognize state income tax expense based upon a stand-alone allocation policy
with U S WEST.
 
    NEW ACCOUNTING STANDARDS.  On January 1, 1999, we adopted the accounting
provisions required by the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software.
 
    Based on information currently available, adoption of the SOP may result in
an initial increase in net income in 1999 of approximately $100 to $150. In
periods after adoption, if software expenditures remain level, the impact on
earnings will decline until the amortization expense related to the capitalized
software equals the software costs expensed prior to the accounting change. The
estimated net income impact for 1999 and thereafter may be subject to change as
further information becomes available. Please see Part I -- "Special Note
Regarding Forward-Looking Statements."
 
    In 1998, we adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income." FAS No. 130 requires that the components
and total amount of comprehensive income be displayed in the financial
statements beginning in 1998. Comprehensive income includes net income and all
changes in equity during a period that arise from nonowner sources, such as
foreign currency items and unrealized gains and losses on certain investments in
equity securities. We do not have any components of comprehensive income other
than net income.
 
    On June 15, 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. FAS No. 133 requires, among other
things, that all derivative instruments be recognized at fair value as assets or
liabilities on the balance sheet and changes in fair value are generally
recognized currently in earnings unless specific criteria are met. The standard
is effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. Financial statement impacts of adopting the new standard
depend upon the amount and nature of the future use of derivative instruments
and their relative changes in valuation over time. Had we adopted FAS No. 133 in
1998, its impact on our financial statements would not have been material.
 
    RECLASSIFICATION.  Certain reclassifications within the consolidated
financial statements have been made to conform to the current year presentation.
 
                                      F-7
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 2: PROPERTY, PLANT AND EQUIPMENT
 
    The components of property, plant and equipment are as follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1998       1997
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Land and buildings......................................................  $   2,405  $   2,379
Telecommunications network equipment....................................     14,742     13,505
Telecommunications outside plant........................................     14,342     13,802
General purpose computers and other.....................................      2,870      2,886
Construction in progress................................................        681        610
                                                                          ---------  ---------
                                                                             35,040     33,182
                                                                          ---------  ---------
Less accumulated depreciation:
  Buildings.............................................................        709        664
  Telecommunications network equipment..................................      8,944      8,216
  Telecommunications outside plant......................................      9,151      8,657
  General purpose computers and other...................................      1,555      1,504
                                                                          ---------  ---------
                                                                             20,359     19,041
                                                                          ---------  ---------
Property, plant and equipment -- net....................................  $  14,681  $  14,141
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    Effective January 1, 1996, we adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
that requires long-lived assets and associated intangibles be written down to
fair value whenever an impairment review indicates that the carrying value
cannot be recovered on an undiscounted cash flow basis. Adoption of FAS No. 121
resulted in income of $34 (net of income tax expense of $22) in 1996 from the
cumulative effect of reversing depreciation expense related to local telephone
exchanges held for sale as recorded in prior years. Depreciation expense was
reversed from the date we formally committed to a plan to dispose of local
telephone exchange assets to January 1, 1996. The income was recorded as a
cumulative effect of change in accounting principle in accordance with FAS No.
121. As a result of adopting FAS No. 121, depreciation expense for 1996 was
reduced by $24.
 
    ASSET IMPAIRMENT.  During 1998, we recorded a non-cash charge of $21 (net of
a $14 income tax benefit) related to the impairment of certain long-lived assets
associated with our video operations in Omaha, Nebraska. The impaired assets
primarily consist of underground cable and hardware. Recent technological
advances have permitted us to pursue and use more economical DSL technology in
cable overbuild situations. Because the projected future cash flows were less
than the assets' carrying value, an impairment loss was recognized in accordance
with FAS No. 121. The amount of impairment was determined based on the net
present value of the expected future cash flows of the video operations,
discounted at our cost of capital. The pretax charge is recorded in "other
operating expenses" within the consolidated statements of income.
 
    LEASING ARRANGEMENTS.  Certain office facilities, real estate and equipment
used in operations are under operating leases. Rent expense under operating
leases for 1998, 1997 and 1996 was $169, $185 and $161, respectively. At
December 31, 1998, the future minimum rental payments under noncancelable
 
                                      F-8
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 2: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
operating leases for the years 1999 through 2003 and thereafter are $103, $96,
$87, $59, $58 and $394, respectively.
 
NOTE 3: ACCRUED EXPENSES
 
    Accrued expenses consist of the following:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                               1998       1997
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Employee compensation......................................................  $     326  $     321
Dividends payable to U S WEST..............................................        328        192
Current portion of state regulatory liability..............................         42        225
Accrued property taxes.....................................................        187        205
Other......................................................................        500        552
                                                                             ---------  ---------
Total accrued expenses.....................................................  $   1,383  $   1,495
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
NOTE 4: DEBT
 
SHORT-TERM DEBT
 
    The components of short-term debt are as follows:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                                --------------------
                                                                                  1998       1997
                                                                                ---------  ---------
<S>                                                                             <C>        <C>
Commercial paper..............................................................  $     123  $      62
Due to U S WEST...............................................................        337     --
Current portion of long-term debt.............................................        329        435
                                                                                ---------  ---------
Total.........................................................................  $     789  $     497
                                                                                ---------  ---------
                                                                                ---------  ---------
</TABLE>
 
    The weighted-average interest rate on commercial paper was 5.49% and 6.11%
at December 31, 1998 and 1997, respectively. The interest rate on the debt due
to U S WEST was 7.5% at December 31, 1998.
 
    We maintain commercial paper programs to finance short-term cash flow
requirements, as well as to maintain a presence in the short-term debt market.
We enter into lines of credit as backup facilities in issuing commercial paper.
We have lines of credit totaling $360 that expire in 1999. Commitment fees on
the unused portion of the lines range from 0.04% to .064%. As of December 31,
1998, there was no outstanding balance. To the extent we continue our commercial
paper programs, we plan to renew our lines of credit.
 
                                      F-9
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 4: DEBT (CONTINUED)
 
LONG-TERM DEBT
 
    Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
                                                                                MATURITIES
                                                          -------------------------------------------------------    TOTAL
INTEREST RATES                                              2000       2001       2002       2003     THEREAFTER     1998
--------------------------------------------------------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                                                       <C>        <C>        <C>        <C>        <C>          <C>
Up to 5%................................................  $      90  $  --      $     100  $      50   $  --       $     240
Above 5% to 6%..........................................     --             50     --         --             531         581
Above 6% to 7%..........................................        257        133        250         43       1,490       2,173
Above 7% to 8%..........................................     --         --         --             62       1,584       1,646
Above 8% to 9%..........................................     --         --         --         --             250         250
Above 9% to 10%.........................................        175     --         --         --          --             175
Variable-rate debt indexed to two- and ten-year constant
  maturity U.S. Treasury rates..........................     --         --         --         --          --          --
                                                          ---------  ---------  ---------  ---------  -----------  ---------
                                                          $     522  $     183  $     350  $     155   $   3,855       5,065
                                                          ---------  ---------  ---------  ---------  -----------
                                                          ---------  ---------  ---------  ---------  -----------
Capital lease obligations and other.....................                                                                 211
Unamortized discount -- net.............................                                                                (122)
                                                                                                                   ---------
Total...................................................                                                           $   5,154
                                                                                                                   ---------
                                                                                                                   ---------
 
<CAPTION>
 
                                                            TOTAL
INTEREST RATES                                              1997
--------------------------------------------------------  ---------
<S>                                                       <C>
Up to 5%................................................  $     240
Above 5% to 6%..........................................        261
Above 6% to 7%..........................................      2,244
Above 7% to 8%..........................................      1,646
Above 8% to 9%..........................................        250
Above 9% to 10%.........................................        175
Variable-rate debt indexed to two- and ten-year constant
  maturity U.S. Treasury rates..........................        155
                                                          ---------
                                                              4,971
 
Capital lease obligations and other.....................        172
Unamortized discount -- net.............................       (124)
                                                          ---------
Total...................................................  $   5,019
                                                          ---------
                                                          ---------
</TABLE>
 
    Interest paid, net of amounts capitalized, was $374, $374 and $422 for 1998,
1997 and 1996, respectively.
 
FINANCIAL CONTRACTS
 
    The following table summarizes the terms of outstanding interest rate and
cross-currency swaps at December 31, 1998 and 1997. Variable rates are indexed
to two- and ten-year constant maturity U.S. Treasuries. Cross-currency swaps are
tied to the Swiss franc.
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31, 1997
                                                     DECEMBER 31, 1998                  -------------------------------------
                                      ------------------------------------------------                             WEIGHTED-
                                                                WEIGHTED- AVERAGE RATE                              AVERAGE
                                                                                                                     RATE
                                       NOTIONAL                 ----------------------   NOTIONAL                 -----------
                                        AMOUNT     MATURITIES     RECEIVE       PAY       AMOUNT     MATURITIES     RECEIVE
                                      -----------  -----------  -----------  ---------  -----------  -----------  -----------
<S>                                   <C>          <C>          <C>          <C>        <C>          <C>          <C>
Variable to fixed...................   $     155         1999         5.16        6.24   $     155         1999         5.46
Cross-currency......................         204   1999- 2001       --            6.55         204   1999- 2001       --
                                           -----   -----------         ---         ---       -----   -----------         ---
                                           -----   -----------         ---         ---       -----   -----------         ---
 
<CAPTION>
 
                                         PAY
                                      ---------
<S>                                   <C>
Variable to fixed...................       6.24
Cross-currency......................       6.55
                                            ---
                                            ---
</TABLE>
 
    At December 31, 1998, deferred credits of $8 and deferred charges of $49 on
closed forward contracts are included as part of the carrying value of the
underlying debt. The deferred credits and charges are recognized as yield
adjustments over the life of the debt that matures at various dates through
2043.
 
                                      F-10
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 4: DEBT (CONTINUED)
    In the event we are owed money under the swap agreements, we could be
exposed to risk in the event of nonperformance by counterparties. We manage this
exposure by monitoring the credit standing of the counterparties and
establishing dollar and term limitations that correspond to the respective
credit rating of each counterparty. As of December 31, 1998, we do not believe
that we have any exposure to any individual counterparty and do not anticipate
nonperformance by any counterparty.
 
NOTE 5: FAIR VALUES OF FINANCIAL INSTRUMENTS
 
    Fair values of cash equivalents and current amounts receivable and payable
approximate carrying values due to their short-term nature.
 
    The fair values of interest rate and cross-currency swaps are based on
estimated amounts we would receive or pay to terminate such agreements allowing
for current interest/foreign exchange rates and creditworthiness of the
counterparties.
 
    The fair values of long-term debt are based on quoted market prices where
available or, if not available, are based on discounting future cash flows using
current interest rates.
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                           ----------------------------------------------
                                                                                    1998                    1997
                                                                           ----------------------  ----------------------
                                                                            CARRYING      FAIR      CARRYING      FAIR
                                                                              VALUE       VALUE       VALUE       VALUE
                                                                           -----------  ---------  -----------  ---------
<S>                                                                        <C>          <C>        <C>          <C>
Debt (includes short-term portion).......................................   $   5,943   $   6,209   $   5,516   $   5,660
Swap agreements -- liabilities...........................................      --              24      --              28
                                                                           -----------  ---------  -----------  ---------
Total Debt...............................................................   $   5,943   $   6,233   $   5,516   $   5,688
                                                                           -----------  ---------  -----------  ---------
                                                                           -----------  ---------  -----------  ---------
</TABLE>
 
                                      F-11
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 6: STOCKHOLDER'S EQUITY
 
    Activity in stockholder's equity is as follows:
 
<TABLE>
<CAPTION>
                                                                                    COMMON     CUMULATIVE
                                                                                     STOCK       DEFICIT      TOTAL
                                                                                  -----------  -----------  ---------
<S>                                                                               <C>          <C>          <C>
BALANCE, JANUARY 1, 1996........................................................   $   7,348    $  (3,602)  $   3,746
  Net income....................................................................      --            1,267       1,267
  Dividends declared............................................................      --           (1,267)     (1,267)
  Equity infusions..............................................................         329       --             329
  Other.........................................................................      --              (15)        (15)
                                                                                  -----------  -----------  ---------
BALANCE, DECEMBER 31, 1996......................................................       7,677       (3,617)      4,060
                                                                                  -----------  -----------  ---------
  Net income....................................................................      --            1,252       1,252
  Dividends declared............................................................      --           (1,252)     (1,252)
  Equity infusions..............................................................         295       --             295
  Other.........................................................................          45       --              45
                                                                                  -----------  -----------  ---------
BALANCE, DECEMBER 31, 1997......................................................       8,017       (3,617)      4,400
                                                                                  -----------  -----------  ---------
  Net income....................................................................      --            1,335       1,335
  Dividends declared............................................................      --           (1,335)     (1,335)
  Equity infusions..............................................................          63       --              63
                                                                                  -----------  -----------  ---------
BALANCE, DECEMBER 31, 1998......................................................   $   8,080    $  (3,617)  $   4,463
                                                                                  -----------  -----------  ---------
                                                                                  -----------  -----------  ---------
</TABLE>
 
NOTE 7: EMPLOYEE BENEFITS
 
    PENSION PLAN
 
    We participate in a defined benefit pension plan sponsored by U S WEST which
covers substantially all management and occupational employees. Management
benefits are based upon their salary while occupational employee benefits are
based upon years of service and job classification. The projected unit credit
method is used for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. Net pension credits
for 1998, 1997 and 1996 were $83, $29 and $5, respectively. No pension funding
was required in 1998, 1997 or 1996.
 
    POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
    We participate in plans sponsored by U S WEST which provide certain health
care and life insurance benefits to retired employees. We use the projected unit
credit method for the determination of postretirement medical and life costs for
financial reporting purposes. Net postretirement benefit costs for 1998, 1997
and 1996 were $149, $160 and $147, respectively. The amount funded by us is
based on regulatory accounting requirements.
 
                                      F-12
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 8: INCOME TAXES
 
    The components of the provision for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                                                                      YEAR ENDED
                                                                                                     DECEMBER 31,
                                                                                            -------------------------------
                                                                                              1998       1997       1996
                                                                                            ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
Federal:
  Current.................................................................................  $     614  $     680  $     576
  Deferred................................................................................        101        (16)       104
  Investment tax credits -- net...........................................................        (14)       (15)       (29)
                                                                                            ---------  ---------  ---------
                                                                                                  701        649        651
State and local:
  Current.................................................................................         91        109         93
  Deferred................................................................................         23          8         24
                                                                                            ---------  ---------  ---------
                                                                                                  114        117        117
                                                                                            ---------  ---------  ---------
Provision for income taxes................................................................  $     815  $     766  $     768
                                                                                            ---------  ---------  ---------
                                                                                            ---------  ---------  ---------
</TABLE>
 
    We paid $642, $797 and $667 for income taxes in 1998, 1997 and 1996,
respectively.
 
    The effective tax rate differs from the statutory tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                              -------------------------------
                                                                                                1998       1997       1996
                                                                                              ---------  ---------  ---------
                                                                                                       (IN PERCENT)
<S>                                                                                           <C>        <C>        <C>
Federal statutory tax rate..................................................................       35.0       35.0       35.0
Investment tax credit amortization..........................................................       (0.4)      (0.5)      (0.8)
State income taxes--net of federal effect...................................................        3.4        3.7        3.8
Other.......................................................................................       (0.1)      (0.2)       0.4
                                                                                                    ---        ---        ---
Effective tax rate..........................................................................       37.9       38.0       38.4
                                                                                                    ---        ---        ---
                                                                                                    ---        ---        ---
</TABLE>
 
                                      F-13
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 8: INCOME TAXES (CONTINUED)
 
    The components of the net deferred tax liability are as follows:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                               1998       1997
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Property, plant and equipment..............................................  $   1,630  $   1,573
State deferred taxes -- net of federal effect..............................        205        201
Other......................................................................         44         46
                                                                             ---------  ---------
  Deferred tax liabilities.................................................      1,879      1,820
                                                                             ---------  ---------
Postretirement benefits, net of pension....................................        659        631
Restructuring and other....................................................     --             20
Unamortized investment tax credit..........................................         56         59
State deferred taxes -- net of federal effect..............................        120        128
Other......................................................................        259        317
                                                                             ---------  ---------
  Deferred tax assets......................................................      1,094      1,155
                                                                             ---------  ---------
Net deferred tax liability.................................................  $     785  $     665
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
    At December 31, 1998 and 1997, we had outstanding taxes payable to U S WEST
of $90 and $27, respectively.
 
NOTE 9: RELATED PARTY TRANSACTIONS
 
    We purchase various services from affiliated companies. We also provide
various services to affiliated companies. The amount paid and received for these
services is determined in accordance with the Federal Communications Commission
and state cost allocation rules, which prescribe various cost allocation
methodologies that are dependent upon the service provided. Management believes
that such cost allocation methods are reasonable. The total cost of services
purchased from affiliated companies was $654, $566 and $451 in 1998, 1997 and
1996, respectively. The total amount of revenues derived from affiliated
companies was $111, $85 and $82 in 1998, 1997 and 1996, respectively.
 
    It is not practicable to provide a detailed estimate of the expenses that
would be recognized on a stand-alone basis. However, we believe that corporate
services, including those related to procurement, tax, legal and human
resources, are obtained more economically through affiliates than they would be
on a stand-alone basis, since we absorb only a portion of the total costs.
 
    In 1997, we sold our interests in Bell Communications Research, Inc.
("Bellcore"). We received cash proceeds of $65 and recorded an after-tax gain of
$32. Bellcore and other third parties continue to provide research and
development and other services to us on a contract basis.
 
                                      F-14
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 10: COMMITMENTS AND CONTINGENCIES
 
    COMMITMENTS
 
    We have entered into an agreement with Olympic Properties of the United
States to sponsor the 2002 Salt Lake City Winter Olympics and the U.S. Olympic
Teams through 2004. As of December 31, 1998, we have a remaining commitment of
$55 to be paid in a combination of cash and services through 2004.
 
    We have pending regulatory actions in local regulatory jurisdictions which
call for price decreases, refunds or both.
 
    CONTINGENCIES
 
    OREGON.  On May 1, 1996, the Oregon Public Utilities Commission ("OPUC")
approved a stipulation terminating prematurely our alternative form of
regulation ("AFOR") plan and it then undertook a review of our earnings. In May
1997, the OPUC ordered us to reduce our annual revenues by $97, effective May 1,
1997 and to issue a one-time refund, including interest, of approximately $102
to reflect the revenue reduction for the period May 1, 1996 through April 30,
1997. This one-time refund for interim rates became subject to refund when our
AFOR plan was terminated on May 1, 1996.
 
    We filed an appeal of the order and asked for an immediate stay of the
refund with the Oregon Circuit Court which granted our request for a stay,
pending a full review of the OPUC's order. On February 19, 1998, the Oregon
Circuit Court entered a judgment in our favor on most of the appealed issues.
The OPUC appealed to the Oregon Court of Appeals on March 19, 1998, and the
appeal remains pending. We continue to charge interim rates, subject to refund,
during the pendency of that appeal. The potential exposure, including interest,
at December 31, 1998, is not expected to exceed $315.
 
    UTAH.  The Utah Supreme Court has remanded a Utah Public Service Commission
("UPSC") order to the UPSC for hearing, thereby establishing two exceptions to
the rule against retroactive ratemaking: i) unforeseen and extraordinary events
and ii) misconduct. The UPSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of 1986.
The potential exposure, including interest at December 31, 1998, is not expected
to exceed $175.
 
    NEW MEXICO.  The New Mexico State Corporation Commission ("NMSCC") issued an
order on May 29, 1998, requiring us to reduce our annual revenues by
approximately $22. A rehearing before the NMSCC was denied. The NMSCC's order
was then removed to the New Mexico Supreme Court for review that effectively
stays the order. Oral arguments to the New Mexico Supreme Court are
preliminarily scheduled for February 1999. The potential exposure, including
interest, at December 31, 1998, is not expected to exceed $11.
 
    STATE REGULATORY ACCRUALS.  We have accrued $203 at December 31, 1998, which
represents our estimated liabilities for all state regulatory proceedings,
predominately the items discussed above. It is possible that the ultimate
liabilities could exceed the amounts accrued by up to approximately $300. We
will continue to monitor and evaluate the risks associated with our local
regulatory jurisdictions and will adjust estimates as new information becomes
available.
 
    In addition to its estimated liabilities for state regulatory proceedings,
we have an accrued liability of approximately $38 at December 31, 1998 related
to refunds in the state of Washington.
 
                                      F-15
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (DOLLARS IN MILLIONS)
 
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
    OTHER CONTINGENCIES.  In December 1998, we were informed of the possibility
of a claim by a purported class challenging the transfer of approximately $54
from the U S WEST pension trust to the U S WEST health care trust to pay retiree
medical expenses pursuant to Section 420 of the Internal Revenue Code of 1986,
as amended. We believe that this transfer complied with the applicable law and
the associated plan documents. We plan to vigorously defend any such claim if
and when it is asserted.
 
NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                      QUARTERLY FINANCIAL DATA
                                                         --------------------------------------------------
                                                            FIRST       SECOND        THIRD       FOURTH
                                                           QUARTER      QUARTER      QUARTER      QUARTER
                                                         -----------  -----------  -----------  -----------
<S>                                                      <C>          <C>          <C>          <C>
1998
Operating revenues.....................................   $   2,669    $   2,695    $   2,739    $   2,779
Income before income taxes.............................         607          454          579          510
Net income.............................................         374          276          360          325
 
1997
Operating revenues.....................................   $   2,547    $   2,488    $   2,609    $   2,439
Income before income taxes.............................         564          571          578          305
Net income.............................................         349          353          358          192
</TABLE>
 
    1998 second-quarter net income includes separation expenses of $68 and a $21
charge relating to the impairment of certain long-lived assets associated with
our video operations.
 
    1997 first-, second- and third-quarter net income includes $11, $18 and $19,
respectively, from gains on the sales of local telephone exchanges. 1997
fourth-quarter net income includes a $152 regulatory charge related primarily to
a state of Washington rate order and $32 from a gain on the sale of our interest
in Bellcore.
 
                                      F-16
<PAGE>
                         U S WEST COMMUNICATIONS, INC.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                       BALANCE AT                    CHARGED TO
                                                      BEGINNING OF    CHARGED TO        OTHER                      BALANCE AT
                                                         PERIOD         EXPENSE       ACCOUNTS      DEDUCTIONS    END OF PERIOD
                                                      -------------  -------------  -------------  -------------  -------------
<S>                                                   <C>            <C>            <C>            <C>            <C>
Allowance for credit losses:
  1998..............................................    $      50      $     113(2)   $  --          $     115(2)   $      48
  1997..............................................           37            101(1)      --                 88(2)          50
  1996..............................................           30             89(1)      --                 82(2)          37
Reserves related to 1993 business restructuring,
  including workforce and facility consolidation:
  1998..............................................    $      56      $  --          $     (24)     $      32      $  --
  1997..............................................          123         --             --                 67             56
  1996..............................................          349         --             --                226            123
</TABLE>
 
------------------------
 
(1)  Does not include amounts charged directly to expense. These amounts were
    $5, $8 and $7 for 1998, 1997 and 1996, respectively.
 
(2)  Represents credit losses written off during the period, less collection of
   amounts previously written off.
 
                                      F-17