10-Q

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to

Commission File No. 001-15577

Qwest Communications International Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	84-1339282 (I.R.S. Employer Identification No.)
1801 California Street, Denver, Colorado (Address of principal executive offices)	80202 (Zip Code)
(303) 992-1400 (Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last report)

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

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

        On July 31, 2005, 1,837,409,794 shares of common stock were outstanding.

QWEST COMMUNICATIONS INTERNATIONAL INC.

FORM 10-Q

TABLE OF CONTENTS

Item
	Glossary of Terms
PART I—FINANCIAL INFORMATION
1.	Financial Statements
	Condensed Consolidated Statements of Operations—Three and six months ended June 30, 2005 and 2004 (unaudited)
	Condensed Consolidated Balance Sheets—June 30, 2005 and December 31, 2004 (unaudited)
	Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2005 and 2004 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
3.	Quantitative and Qualitative Disclosures About Market Risk
4.	Controls and Procedures
PART II—OTHER INFORMATION
1.	Legal Proceedings
2.	Unregistered Sales of Equity Securities and Use of Proceeds
4.	Submission of Matters to a Vote of Security Holders
6.	Exhibits
	Signature Page

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GLOSSARY OF TERMS

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

•

Access Lines.  Telephone lines reaching from the customer's premises to a connection with the public switched telephone network. When we refer to our access lines we mean all our mass markets, wholesale and business access lines, including those used by us and our affiliates.



•

Asynchronous Transfer Mode (ATM).  A broadband, network transport service that provides a fast, efficient way to move large quantities of information.



•

Bell Operating Company (BOC).  As defined in the Telecommunications Act of 1996, the term includes our subsidiary, Qwest Corporation, as the successor to U S WEST Communications, Inc. Under the Telecommunications Act of 1996, "Bell Operating Company" also would include any successor or assign of Qwest Corporation that provides wireline telephone exchange service.



•

Competitive Local Exchange Carriers (CLECs). Telecommunications providers that compete with us in providing local voice services in our local service area.



•

Customer Premises Equipment (CPE).  Telecommunications equipment sold to a customer, usually in connection with our providing telecommunications services to that customer.



•

Dedicated Internet Access (DIA).  Internet access ranging from 128 kilobits per second to 2.4 gigabits per second.



•

Digital Subscriber Line (DSL).  A technology for providing high-speed data communications over telephone lines.



•

Frame Relay.  A high speed switching technology, primarily used to interconnect multiple local networks.



•

Incumbent Local Exchange Carrier (ILEC).  A traditional telecommunications provider, such as our subsidiary, Qwest Corporation, that, prior to the Telecommunications Act of 1996, had the exclusive right and responsibility for providing local telecommunications services in its local service area.



•

Integrated Services Digital Network (ISDN).  A telecommunications standard that uses digital transmission technology to support voice, video and data communications applications over regular telephone lines.



•

Interexchange Carriers (IXCs).  Telecommunications providers that provide long-distance services to end-users by handling calls that are made from a phone exchange in one LATA to an exchange in another LATA or between exchanges within a LATA.



•

InterLATA long-distance services.  Telecommunications services, including "800" services, that cross LATA boundaries.



•

Internet Dial Access.  Provides ISPs and business customers with a comprehensive, reliable and cost-effective dial-up network infrastructure.



•

Internet Protocol (IP).  A protocol for transferring information across the Internet in packets of data.



•

Internet Service Providers (ISPs).  Businesses that provide Internet access to retail customers.

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•

IntraLATA long-distance services.  These services include calls that terminate outside a caller's local calling area but within their LATA, including wide area telecommunications service or "800" services for customers with geographically highly concentrated demand.



•

Local Access Transport Area (LATA).  A geographical area in which telecommunications providers may offer services. There are 163 LATAs in the United States and 27 in our local service area.



•

Local Calling Area.  A geographical area, usually smaller than a LATA, within which a customer can make telephone calls without incurring long-distance charges. Multiple local calling areas generally make up a LATA.



•

Private Lines.  Direct circuits or channels specifically dedicated to the use of an end-user organization for the purpose of directly connecting two or more sites.



•

Public Switched Telephone Network (PSTN).  The worldwide voice telephone network that is accessible to every person with a telephone and a dial tone.



•

Unbundled Network Elements (UNEs) Platform (UNE-P). Discrete elements of our network that are sold or leased to competitive telecommunications providers and that may be combined to provide their retail telecommunications services.



•

Virtual Private Network (VPN).  A private network that operates securely within a public network (such as the Internet) by means of encrypting transmissions.



•

Voice over Internet Protocol (VoIP).  An application that provides real-time, two-way voice capability originating in the Internet protocol over a broadband connection.



•

Web Hosting.  The providing of space, power and bandwidth in data centers for hosting of customers' Internet equipment.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
Operating revenues		$	3,470		$	3,442		$	6,919		$	6,924
Operating expenses:
	Cost of sales (exclusive of depreciation and amortization)		1,434			1,486			2,873			2,940
	Selling, general and administrative		1,045			1,486			2,081			2,640
	Depreciation		649			660			1,302			1,315
	Amortization of capitalized software and other intangible assets		116			124			237			247
	Asset impairment charges		—			43			—			43
Operating income (loss)			226			(357	)		426			(261	)
Other expense (income):
	Interest expense—net		380			394			761			790
	Loss (gain) on early retirement of debt—net		43			(20	)		43			(5	)
	Loss (gain) on sale of assets—net		—			1			(257	)		—
	Other income—net		(30	)		(92	)		(15	)		(93	)
Total other expense—net			393			283			532			692
Loss before income taxes			(167	)		(640	)		(106	)		(953	)
Income tax benefit (expense)			3			(136	)		(1	)		(133	)
Net loss		$	(164	)	$	(776	)	$	(107	)	$	(1,086	)
Basic and diluted loss per share		$	(0.09	)	$	(0.43	)	$	(0.06	)	$	(0.61	)
Basic and diluted weighted average shares outstanding			1,823,338			1,801,302			1,820,048			1,787,285

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

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QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, SHARES IN THOUSANDS)
(UNAUDITED)

			June 30, 2005			December 31, 2004
ASSETS
Current assets:
	Cash and cash equivalents		$	2,245		$	1,151
	Short-term investments			634			764
	Accounts receivable (less allowance for doubtful accounts of $192 and $178, respectively)			1,566			1,594
	Prepaid and other assets			439			549
	Assets held for sale			14			160
Total current assets				4,898			4,218
Property, plant and equipment—net				16,101			16,853
Capitalized software and other intangible assets—net				1,073			1,179
Prepaid pension asset				1,182			1,192
Other assets				816			882
	Total assets		$	24,070		$	24,324
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
	Current borrowings		$	261		$	596
	Accounts payable			714			731
	Accrued expenses and other current liabilities			2,049			2,290
	Deferred revenue and advanced billings			626			669
Total current liabilities				3,650			4,286
Long-term borrowings (net of unamortized debt discount of $128 and $35, respectively)				17,287			16,690
Post-retirement and other post-employment benefit obligations				3,419			3,391
Deferred revenue				548			559
Other long-term liabilities				1,829			2,010
	Total liabilities			26,733			26,936
Commitments and contingencies (Note 11)
Stockholders' deficit:
		Preferred stock—$1.00 par value, 200 million shares authorized; none issued and outstanding		—			—
		Common stock—$0.01 par value, 5 billion shares authorized; 1,835,309 and 1,817,494 shares issued, respectively		18			18
		Additional paid-in capital		43,170			43,111
		Treasury stock—1,062 and 1,108 shares, respectively (including 62 and 168 shares, respectively, held in Rabbi Trust)		(16	)		(20	)
		Accumulated deficit		(45,828	)		(45,721	)
		Accumulated other comprehensive loss		(7	)		—
Total stockholders' deficit				(2,663	)		(2,612	)
	Total liabilities and stockholders' deficit		$	24,070		$	24,324

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

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QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)

				Six Months Ended June 30,
				2005			2004
OPERATING ACTIVITIES
	Net loss			$	(107	)	$	(1,086	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			1,539			1,562
		Provision for bad debts			110			106
		Asset impairment charges			—			43
		Deferred income taxes			2			3
		Gain on sale of assets			(257	)		—
		Loss (gain) on early retirement of debt			43			(5	)
		Other non-cash charges—net			7			81
	Changes in operating assets and liabilities:
		Accounts receivable			(82	)		110
		Prepaid and other current assets			98			15
		Accounts payable and accrued expenses			(258	)		1
		Deferred revenue and advance billings			(54	)		(193	)
		Other non-current assets and liabilities			(128	)		207
			Cash provided by operating activities		913			844
INVESTING ACTIVITIES
	Expenditures for property, plant and equipment (net of tax refund of $33 million in 2005)				(665	)		(941	)
	Proceeds from sales of property, plant and equipment				418			5
	Proceeds from sales of investment securities				1,086			986
	Purchases of investment securities				(912	)		(929	)
	Other				17			5
			Cash used for investing activities		(56	)		(874	)
FINANCING ACTIVITIES
	Proceeds from long-term borrowings				1,885			1,766
	Repayments of long-term borrowings, including current maturities				(1,550	)		(1,862	)
	Proceeds from issuance of common and treasury stock				7			4
	Debt issuance costs				(31	)		(41	)
	Other				(74	)		(19	)
			Cash provided by (used for) financing activities		237			(152	)
CASH AND CASH EQUIVALENTS
	Increase (decrease) in cash and cash equivalents				1,094			(182	)
	Beginning balance				1,151			1,366
	Ending balance			$	2,245		$	1,184

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

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QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)

Unless the context requires otherwise, references in this report to "Qwest," "we," "us," the "Company" and "our" refer to Qwest Communications International Inc. and its consolidated subsidiaries and references in this report to "QCII" refer to Qwest Communications International Inc. on an unconsolidated, stand-alone basis.

Note 1: Basis of Presentation

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

        In the opinion of management, these statements include all the adjustments necessary to fairly present our condensed consolidated results of operations, financial position and cash flows as of June 30, 2005 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K"). The condensed consolidated results of operations for the three and six month periods ended June 30, 2005 and the condensed consolidated statement of cash flows for the six month period ended June 30, 2005 are not necessarily indicative of the results or cash flows expected for the full year.

        As explained in our 2004 Form 10-K, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" No. 46 ("FIN 46R") in the first quarter of 2004. Upon adoption of FIN 46R, we identified two relationships that may be subject to consolidation by us. Both relationships are with entities that provide Internet port access and services to their customers. We do not currently have sufficient information about the entities to complete our analysis under FIN 46R, even though we have continuously requested it. Until further information is available to us, we are unable to come to any conclusion regarding consolidation under FIN 46R.

        Approximately 60% of our employees are represented by collective bargaining agreements with the Communications Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). In August 2003, we entered into two-year collective bargaining agreements with the CWA and IBEW and each of these agreements expires on August 13, 2005.

Use of estimates

        Our consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions made when accounting for items and matters such as long-term contracts, customer retention patterns, allowance for bad debts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets, employee benefits, taxes, reserves and other provisions and contingencies are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We also assess potential losses in relation to threatened or pending litigation and, if a loss is considered probable and the amount can be reasonably

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estimated, we recognize an expense for the estimated loss. Actual results could differ from these estimates. See Note 11—Commitments and Contingencies.

Depreciation

        Property, plant and equipment are shown net of depreciation on our balance sheet. As of June 30, 2005 and December 31, 2004, accumulated depreciation was $29.5 billion and $28.6 billion, respectively.

Stock-based compensation

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

        We account for our stock-based compensation arrangements under the intrinsic-value recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic-value method, no compensation expense is recognized for options granted to employees when the strike price of those options equals or exceeds the value of the underlying security on the measurement date. Any excess of the stock price on the measurement date over the exercise price is recorded as deferred compensation and amortized over the service period during which the stock option award vests using the accelerated method described in FIN No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."

        Had compensation cost for our stock-based compensation plans been determined under the fair-value method in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," our net loss and basic and diluted loss per share would have been changed to the pro forma amounts indicated below:

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
		(Dollars in millions, except per share amounts)
Net loss:
	As reported	$	(164	)	$	(776	)	$	(107	)	$	(1,086	)
	Remove: Stock-based employee compensation expense included in net loss, net of related tax effects		(1	)		—			(1	)		(2	)
	Include: Total stock-based employee compensation expense determined under the fair-value-based method for all awards, net of related tax effects		(17	)		(14	)		(34	)		(28	)
	Pro forma net loss	$	(182	)	$	(790	)	$	(142	)	$	(1,116	)
Net loss per share:
	As reported—basic and diluted	$	(0.09	)	$	(0.43	)	$	(0.06	)	$	(0.61	)
	Pro forma—basic and diluted	$	(0.10	)	$	(0.44	)	$	(0.08	)	$	(0.62	)

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

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Issued Accounting Pronouncements" below for further discussion of SFAS No. 123R "Share-Based Payments" ("SFAS No. 123R").

Earnings per share

        The weighted average number of shares used for computing basic and diluted loss per share for the three months ended June 30, 2005 and 2004 was 1,823 million and 1,801 million, respectively, and for the six months ended June 30, 2005 and 2004 was 1,820 million and 1,787 million, respectively. For these same periods, the effects of approximately 145 million and 136 million of outstanding stock options, respectively, were excluded from the calculation of diluted loss per share because the effect was anti-dilutive.

Reclassifications

        We have reclassified our investments in auction rate securities of $619 million as of December 31, 2004 from cash and cash equivalents into short-term investments in our condensed consolidated balance sheets. We invest in auction rate securities as part of our cash management strategy. These investments are highly liquid, variable-rate debt securities. While the underlying security typically has a stated maturity of 20 to 30 years, the interest rate is reset through dutch auctions that are typically held every 7, 28 or 35 days, creating a highly liquid, short-term instrument. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. We have reclassified the purchases and sales of these auction rate securities in our condensed consolidated statements of cash flows, decreasing cash used for investing activities by $123 million from $997 million to $874 million for the six months ended June 30, 2004. This reclassification has no impact on previously reported total current assets, total assets, working capital position, results of operations or debt covenants and does not affect previously reported cash flows from operating or financing activities.

        Other short-term investments of $145 million as of December 31, 2004 have also been reclassified to short-term investments from prepaid and other assets.

        Certain other prior period balances have been reclassified to conform to the current presentation.

Recently issued accounting pronouncements

        In July 2005, the FASB issued an exposure draft of its proposed interpretation intended to clarify the accounting for uncertain tax positions. The interpretation's proposed effective date for us would be December 31, 2005. Until the final interpretation is issued, we are unable to estimate the ultimate impact on our financial statements. However, if the interpretation is issued in its current form, it could result in a significant cumulative charge upon adoption.

        In May 2005, the FASB, as part of an effort to conform to international accounting standards, issued SFAS No. 154, "Accounting Changes and Error Corrections," which is effective for us beginning on January 1, 2006. SFAS No. 154 requires that all voluntary changes in accounting principles are retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The adoption of SFAS No. 154 is not anticipated to have a material effect on our financial position or results of operations.

        In April 2005, the Securities and Exchange Commission ("SEC") delayed the effective date of SFAS No. 123R, "Share-Based Payments." SFAS No. 123R will now be effective for Qwest as of the interim reporting period beginning January 1, 2006. SFAS No. 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements based on the fair

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value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. We do not anticipate that the adoption of SFAS No. 123R will have a material impact on our financial position or results of operations.

        In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 will be effective for Qwest on December 31, 2005 and requires us to recognize asset retirement obligations that are conditional on a future event, such as the obligation to safely dispose of asbestos when a building is remodeled. Uncertainty about the timing or settlement of the obligation is factored into the measurement of the liability. We are in the process of quantifying the impact FIN 47 will have on our financial position and results of operations.

        In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary Assets," which is effective for us starting July 1, 2005. In the past, we were required to measure the value of assets exchanged in non-monetary transactions by using the net book value of the asset relinquished. Under SFAS No. 153, we will measure assets exchanged at fair value, as long as the transaction has commercial substance and the fair value of the assets exchanged is determinable within reasonable limits. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS No. 153 is not anticipated to have a material effect on our financial position or results of operations.

Note 2: Assets Held for Sale

        On July 1, 2004, we entered into an agreement with Verizon Wireless ("Verizon") under which it agreed to acquire all of our PCS licenses and substantially all of our related wireless network assets in our local service area (including cell sites and wireless network infrastructure, site leases, and associated network equipment). This sale closed in the first quarter of 2005, and Verizon paid us $418 million to purchase these assets. As of December 31, 2004, $160 million of assets were classified as held for sale. During the first quarter of 2005, we recorded a gain of $257 million from this sale, and other dispositions of wireless assets.

        In March 2005, we committed to a plan to sell specific assets no longer needed in our business with a value of $14 million and ceased recording depreciation related to these assets.

Note 3: Asset Impairment Charges

        During May 2004, we recognized asset impairment charges in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" related to our pay phone business and network supplies held for sale in the aggregate amount of $19 million and $24 million, respectively.

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Note 4: Borrowings

        As of June 30, 2005 and December 31, 2004, our borrowings, net of discounts and premiums, consisted of the following:

		June 30, 2005		December 31, 2004
		(Dollars in millions)
Current borrowings:
	Current portion of long-term borrowings	$	245	$	584
	Current portion of capital lease obligations and other		16		12
	Total current borrowings	$	261	$	596
Long-term borrowings:
	Long-term notes	$	17,187	$	16,609
	Long-term capital lease obligations and other		100		81
	Total long-term borrowings	$	17,287	$	16,690

Borrowing Activity

        In June 2005, we issued a total of $1.95 billion (face value) of new debt, as described below.

        On June 17, 2005, our wholly owned subsidiary, Qwest Corporation ("QC") issued a total of $1.15 billion in notes which consisted of $750 million in floating rate notes due in 2013 with interest at LIBOR plus 3.25% (6.67% for the current payment period) and $400 million notes due in 2015 bearing fixed interest at 7.625% per annum. The notes are unsecured general obligations and rank equally with all of QC's other unsecured and unsubordinated indebtedness. The covenant and default terms are substantially the same as those associated with QC's other long-term debt. QC plans to file an exchange offer registration statement for a new issue of substantially identical notes within 315 calendar days of the date of issuance of the notes. If the exchange offer registration statement does not become effective within 315 calendar days of the issuance of the notes or the exchange offer is not consummated within 45 days of the registration statement's effectiveness date, the rate at which interest accrues will increase by 0.25% per annum. The aggregate net proceeds of approximately $1.13 billion from the notes have been or will be used to fund our investments in telecommunication assets, repay indebtedness and, to a limited extent, for other general corporate purposes.

        Also on June 17, 2005, QCII issued $600 million of 7.50% senior notes due 2014, Series B. These notes are guaranteed by Qwest Capital Funding, Inc. ("QCF") and Qwest Services Corporation ("QSC"). The guarantee by QCF is on a senior unsecured basis and the guarantee by QSC is on a senior subordinated secured basis. The QSC guarantee is secured by a lien on certain assets of QSC, including the stock of QC and all debt owed to QSC. This collateral also secures other obligations of QSC, but the lien securing the QSC guarantee is (1) junior to the lien securing senior debt secured by the collateral, including the three-year revolving credit facility established by QSC in 2004 (the "2004 QSC Credit Facility"), (2) pari-passu to the lien securing QCII's floating rate senior notes due 2009, 7.25% senior notes due 2011, and 7.5% senior notes due 2014 (the "2009, 2011 and 2014 QCII Notes"), and (3) senior to the lien securing QSC's 13% senior subordinated secured notes due 2007, 13.5% senior subordinated secured notes due 2010 and 14% senior subordinated secured notes due 2014 (the "2007, 2010 and 2014 QSC Notes"), and certain other obligations. Upon the release of the liens securing the 2007, 2010 and 2014 QSC Notes and certain other obligations, subject to certain conditions, the collateral will be released and the subordinated provisions will terminate such that the 2009, 2011 and 2014 QCII Notes will be guaranteed on a senior unsecured basis by QSC. The covenant and default terms of these notes include but are not limited to: (i) limitations on incurrence of indebtedness; (ii) limitations on restricted payments; (iii) limitations on dividends and loans and other

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payment restrictions; (iv) limitations on asset sales or transfers; (v) limitations on transactions with affiliates; (vi) limitations on liens; (vii) limitations on mergers and consolidation and (viii) limitations on business activities. If any series of the notes receive investment grade ratings, most of the covenants with respect to any series of the notes will be subject to suspension or termination. Under the indenture governing the notes, we must repurchase the notes upon certain changes of control. This indenture also contains provisions for cross acceleration relating to any of our other debt obligations and the debt obligations of our restricted subsidiaries in the aggregate in excess of $100 million. The net proceeds of approximately $540 million from the notes have been or will be used to fund our investments in telecommunication assets, repay indebtedness and, to a limited extent, for other general corporate purposes.

        On June 23, 2005, QCII issued an additional $200 million aggregate principal amount of its 7.50% senior notes due 2014, Series B, bringing the total principal amount outstanding of such series to $800 million. The net proceeds of approximately $180 million from the notes issued on June 23, 2005 have been or will be used to fund our investments in telecommunication assets, repay indebtedness and, to a limited extent, for other general corporate purposes.

Repayment Activity

        On June 7, 2005, we announced cash tender offers for the purchase of up to $250 million of aggregate principal amount of QC's 6.625% notes due September 15, 2005 (the "QC 6.625% Notes"), up to $150 million aggregate principal amount of QC's 6.125% notes due November 15, 2005 (the "QC 6.125% Notes"), and up to $504 million aggregate principal amount of QSC's 13.0% senior subordinated secured notes due 2007 (the "13% QSC Notes"). We received and accepted tenders of approximately $211 million face amount of QC 6.625% Notes for $216 million, including accrued interest of $4 million, approximately $129 million face amount of QC 6.125% Notes for $131 million, including accrued interest of $1 million, and approximately $452 million face amount of 13% QSC Notes for $501 million, including accrued interest of $1 million. On June 20 and June 23, 2005 QC pre-paid an aggregate of $750 million face amount of its $1.25 billion term loan maturing in June 2007 for $775 million, including accrued interest of $2 million. These transactions resulted in a loss of $55 million due to call premiums that ranged from 0.680% to 10.762%.

Exchange Activity

        During the three months ended June 30, 2005, we exchanged approximately $69 million of existing QCF notes plus $2 million of accrued interest, for approximately 16 million shares of our common stock with an aggregate value of $58 million. The effective share price for the exchange transactions ranged from $4.20 per share to $4.98 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our shares at the time the exchange transactions were consummated ranged from $3.53 per share to $3.88 per share. As a result, we recorded a gain of $12 million on debt extinguishments during the six month period ended June 30, 2005. These gains are included in other expense—net in our condensed consolidated statements of operations.

        On May 11, 2005, we announced registered exchange offers for the 2009, 2011 and 2014 QCII Notes, and QSC's 13.5% senior subordinated secured notes due 2010 and 14% senior subordinated secured notes due 2014 (the 2010 and 2014 QSC Notes) pursuant to the registration rights agreements that we entered into in connection with the issuance of these outstanding notes. The terms of the registered 2009, 2011 and 2014 QCII Notes and the registered 2010 and 2014 QSC Notes issued in the exchange offers are substantially identical to the terms of the outstanding 2009, 2011 and 2014 QCII Notes and 2010 and 2014 QSC Notes, respectively, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding notes do not apply to the registered notes. We completed the registered exchange offers for the 2009, 2011 and 2014 QCII Notes and for the 2010 and 2014 QSC Notes on June 16, 2005 and on June 17, 2005, respectively.

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        On May 27, 2005, QC announced registered exchange offers for its 7.875% notes due 2011(the "2011 QC Notes") and its 8.875% notes due 2012 (the "2012 QC Notes") pursuant to the registration rights agreements that QC entered into in connection with the issuance of these outstanding notes. The terms of the registered 2011 QC Notes and 2012 QC Notes issued in the exchange offers are substantially identical to the terms of the outstanding 2011 QC Notes and 2012 QC Notes, respectively, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding notes do not apply to the registered notes. QC completed the registered exchange offers for the 2011 QC Notes and 2012 QC Notes on July 5, 2005.

Interest Rate Swap Activity

        In 2004 we entered into interest rate swap agreements with notational amounts totaling $825 million. We previously disclosed that all these interest rate swap agreements were designated as fair-value hedges, which effectively converted the related fixed-rate debt to floating rate through the receipt of fixed-rate amounts in exchange for floating-rate interest payments. While the structure of the swaps did not change, we determined in the quarter ended March 31, 2005 that agreements with notional amounts totaling $575 million did not meet all the requirements to be treated as fair-value hedges. As a result of this change the changes in the fair value of the swap agreements were included in other expense (income) in our condensed consolidated results of operations in March 2005. Had we applied this same accounting treatment to the swap agreements in 2004, the impact would have been less than $1 million in our 2004 financial statements.

        In the quarter ended June 30, 2005, we terminated each of these interest rate swap agreements. We paid $3 million to terminate the agreements that were not treated as fair-value hedges, and we received $6 million from the termination of the interest rate swap agreement that was treated as a fair-value hedge. For the agreements that were not treated as fair-value hedges the changes in fair value prior to termination resulted in a net $13 million non-operating gain for the three months ended June 30, 2005 and a net $3 million non-operating loss for the six months ended June 30, 2005, respectively, which amounts are included in other expense—net in our condensed consolidated results of operations. For the interest rate swap agreement that was treated as a fair-value hedge, we are amortizing the $6 million of proceeds as a reduction in interest expense over the remaining six years until the hedged notes mature.

Note 5: Restructuring Charges

        The restructuring reserve balances discussed below are included in our condensed consolidated balance sheets in accrued expenses and other current liabilities for the current portion and other long-term liabilities for the long-term portion. As of June 30, 2005 and December 31, 2004, the amounts included as current liabilities were $95 million and $146 million, respectively, and the long-term portions were $355 million and $374 million, respectively.

        An analysis of activity associated with the existing restructuring reserves for the six months ended June 30, 2005 is as follows:

		2004 Restructuring Plan			2003 and Prior Restructuring Plans			Totals
		(Dollars in millions)
Balance at December 31, 2004		$	78		$	442		$	520
	Provisions		—			1			1
	Utilizations		(36	)		(29	)		(65	)
	Reversals		—			(6	)		(6	)
Balance at June 30, 2005		$	42		$	408		$	450

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        As of June 30, 2005, 3,820 of the 4,000 planned employee reductions associated with the 2004 restructuring plan had been completed and an additional $36 million of the restructuring reserve had been used for severance payments during the six months ended June 30, 2005. In accordance with our severance plan, the remaining severance payments are expected to occur over the next nine months.

        As part of the 2003 and prior restructuring plans, we permanently abandoned 104 leased facilities and planned employee reductions of 2,240. In relation to these plans we recorded a charge in our condensed consolidated statement of operations. The abandonment costs include rental payments due over the remaining terms of the leases (up to five years), net of estimated sublease rentals, and estimated costs to terminate the leases. Also in 2001 we suspended our plans to build web hosting centers where construction had not begun and halted work on those sites that were under construction. We identified 10 web-hosting centers that would be permanently abandoned. We expected to sublease the majority of the non-operational web hosting centers at rates less than our lease rates for the facilities. Certain of these leases are for terms of up to 20 years. For the six months ended June 30, 2005, we utilized $26 million of the established reserve primarily for payments of amounts due under the leases. We expect the balance of the reserve to be utilized over the remaining terms of the leases or sooner if market conditions enable transactions to exit the remaining lease obligations. All of the 2,240 planned employee reductions under the 2003 restructuring plan are complete.

Note 6: Employee Benefits

        We have a noncontributory defined benefit pension plan (the "Pension Plan") for substantially all management and occupational (union) employees. In addition to this qualified Pension Plan we also maintain a non-qualified pension plan (the "Non-Qualified Pension Plan") for certain highly compensated employees and executives. We also maintain post-retirement healthcare and life insurance plans that provide medical, dental, vision and life insurance benefits for certain retirees.

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

        The components of the net pension cost (credit), non-qualified pension benefit cost and post-retirement benefit cost are as follows:

		Pension Cost (Credit)						Non-Qualified Pension Cost				Post-retirement Benefit Cost
		Three Months Ended June 30,
		2005			2004			2005		2004		2005			2004
		(Dollars in millions)
Service cost		$	39		$	34		$	—	$	1	$	5		$	5
Interest cost			126			144			1		1		80			92
Expected return on plan assets			(175	)		(194	)		—		—		(32	)		(33	)
Amortization of transition asset			—			(16	)		1		1		—			—
Amortization of prior service cost			(2	)		(2	)		—		—		(14	)		(6	)
Recognized net actuarial loss			17			4			—		—		21			23
	Net cost (credit) included in current earnings (loss)	$	5		$	(30	)	$	2	$	3	$	60		$	81

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		Pension Cost (Credit)						Non-Qualified Pension Cost				Post-retirement Benefit Cost
		Six Months Ended June 30,
		2005			2004			2005		2004		2005			2004
		(Dollars in millions)
Service cost		$	78		$	82		$	1	$	2	$	10		$	10
Interest cost			251			284			2		2		161			184
Expected return on plan assets			(349	)		(387	)		—		—		(65	)		(66	)
Amortization of transition asset			—			(32	)		1		1		—			—
Amortization of prior service cost			(3	)		(3	)		—		—		(28	)		(12	)
Recognized net actuarial loss			34			4			—		—		40			46
	Net cost (credit) included in current earnings (loss)	$	11		$	(52	)	$	4	$	5	$	118		$	162

        The net pension cost is allocated between cost of sales and selling, general and administrative expense in our condensed consolidated statements of operations. The measurement date used to determine pension and other post-retirement benefit measures for the pension plan and the post-retirement benefit plan is December 31.

Note 7: Income Tax Provision

        We are currently generating net operating loss carryforwards for tax purposes and have not recognized any net tax benefits associated with the losses because generation of sufficient taxable income to realize the benefits is not considered more likely than not. We also recognize a tax provision for changes in our estimated liability for uncertain tax positions. In the three months ended June 30, 2004, we recorded income tax expense of $136 million primarily related to a change in the expected timing of deductions related to a tax strategy, referred to as Contested Liability Acceleration Strategy ("CLAS").

Note 8: Segment Information

        Our three segments are (1) wireline, (2) wireless and (3) other services. Our chief operating decision maker ("CODM") regularly reviews the results of operations of these three segments to evaluate the performance of each segment and allocate capital resources.

        Segment income consists of each segment's revenue and direct expenses. Segment revenue is based on the types of products and services offered as described below. Segment expenses include employee-related costs, facility costs, network expenses and non-employee related costs such as customer support, collections and marketing. We manage indirect administrative services costs such as finance, information technology, real estate and legal centrally; consequently, these costs are allocated to the other services segment. We manage depreciation, amortization, interest expense, interest income and other income (expense) on a total company basis. As a result, these charges are not allocated to any segment.

        Our wireline segment includes revenue from the provision of voice services and data and Internet services. Voice services consist of local voice services (such as basic local exchange services), long-distance voice services (such as IntraLATA long-distance services and InterLATA long-distance services) and other voice services (such as operator services, enhanced voice services, CPE and collocation services). Voice services revenue is also generated on a wholesale basis from, among other things, network transport and billing services, wholesale long-distance service revenue (included in long-distance services revenue), other voice services and wholesale access revenue (included in local voice services revenue). Data and Internet services include data services (such as traditional private lines, wholesale private lines, frame relay, asynchronous transfer mode and related CPE) and Internet

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services (such as DSL, dedicated Internet access ("DIA"), virtual private network ("VPN"), Internet dial access, web hosting, professional services and related CPE). Revenue from optical capacity transactions is also included in revenue from data services. Depending on the product or service purchased, a customer may pay an up-front fee, a monthly fee, a usage charge or a combination of these fees and charges.

        Our wireless services are provided through our wholly owned subsidiary, Qwest Wireless LLC ("Qwest Wireless"). In August 2003, Qwest Wireless entered into a services agreement with a third party provider that allows us to resell its services, including access to its nationwide personal communications service wireless network, to consumer and business customers primarily within our local service area. We began offering these services under our brand name in March 2004 and completed transitioning all of our wireless customers onto its network in March 2005.

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

        Other than as already described herein, the accounting principles used are the same as those used in our condensed consolidated financial statements. The revenue shown below for each segment is derived from transactions with external customers. Internally, we do not separately track the total assets of our wireline or other segments. As such, total asset information for the three segments shown below is not presented. Also, prior to the fourth quarter of 2004, we excluded restructuring expenses from segment income. However, restructuring expenses are now included in the segment information for all periods.

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        Segment information for the three and six months ended June 30, 2005 and 2004 is summarized in the following table:

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
		(Dollars in millions)
Operating revenues:
	Wireline services	$	3,331		$	3,306		$	6,645		$	6,648
	Wireless services		130			128			254			254
	Other services		9			8			20			22
Total operating revenues		$	3,470		$	3,442		$	6,919		$	6,924
Operating expenses:
	Wireline services	$	1,623		$	1,797		$	3,265		$	3,602
	Wireless services		148			104			309			181
	Other services		708			1,071			1,380			1,797
Total segment expenses		$	2,479		$	2,972		$	4,954		$	5,580
Segment income (loss):
	Wireline services	$	1,708		$	1,509		$	3,380		$	3,046
	Wireless services		(18	)		24			(55	)		73
	Other services		(699	)		(1,063	)		(1,360	)		(1,775	)
Total segment income		$	991		$	470		$	1,965		$	1,344
Capital expenditures:
	Wireline	$	253		$	384		$	508		$	760
	Wireless		1			1			2			1
	Other services		98			101			155			180
Total capital expenditures		$	352		$	486		$	665		$	941

        The following table reconciles segment income to net loss for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
		(Dollars in millions)
Segment income		$	991		$	470		$	1,965		$	1,344
	Depreciation		(649	)		(660	)		(1,302	)		(1,315	)
	Capitalized software and other intangibles amortization		(116	)		(124	)		(237	)		(247	)
	Impairment charges		—			(43	)		—			(43	)
	Total other expense—net		(393	)		(283	)		(532	)		(692	)
	Income tax benefit (expense)		3			(136	)		(1	)		(133	)
Net loss		$	(164	)	$	(776	)	$	(107	)	$	(1,086	)

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        Set forth below is revenue information for the three and six months ended June 30, 2005 and 2004 for revenue derived from external customers for our products and services:

		Three Months Ended June 30,				Six Months Ended June 30,
		2005		2004		2005		2004
		(Dollars in millions)
Operating revenues:
	Local voice	$	1,616	$	1,680	$	3,235	$	3,406
	Long-distance		547		493		1,105		993
	Access		172		164		322		334
Total voice services			2,335		2,337		4,662		4,733
	Data and Internet services		996		969		1,983		1,915
Total wireline segment revenues			3,331		3,306		6,645		6,648
Wireless segment revenues			130		128		254		254
Other services revenues			9		8		20		22
	Total operating revenues	$	3,470	$	3,442	$	6,919	$	6,924

        We provide a variety of telecommunications services on a national and international basis to global and national businesses (including other telecommunications providers and information service providers), small businesses, governmental agencies and residential customers. It is impractical for us to provide revenue information about geographic areas.

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

Note 9: Non-Cash Activities

        Supplemental disclosures of non-cash investing and financing activities are as follows:

	Six Months Ended June 30,
	2005		2004
	(Dollars in millions)
Retirement of debt in exchange for common stock	$	58	$	144
Assets acquired through capital leases		29		10

        During the six months ended June 30, 2005, we exchanged debt with a carrying value of $69 million that was issued by QCF for approximately 16 million shares of our common stock with a value of $58 million and recorded a $12 million gain on debt extinguishment.

        During the six months ended June 30, 2004, we exchanged debt with a carrying value of $169 million that was issued by QCF for approximately 37 million shares of our common stock with a value of $144 million and recorded a $25 million gain on debt extinguishment.

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Note 10: Other Comprehensive Loss

        Other comprehensive loss for the three and six months ended June 30, 2005 and 2004 was as follows:

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
		(Dollars in millions)
Net loss		$	(164	)	$	(776	)	$	(107	)	$	(1,086	)
	Adjustments to other comprehensive loss, net of $0 tax benefit		2			—			(7	)		17
Comprehensive loss		$	(162	)	$	(776	)	$	(114	)	$	(1,069	)

Note 11: Commitments and Contingencies

        Throughout this note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.

DOJ Investigation and Securities Actions

        The Department of Justice ("DOJ") investigation and the securities actions described below present material and significant risks to us. The size, scope and nature of the restatements of our consolidated financial statements for 2001 and 2000, which are described in our previously issued consolidated financial statements for the year ended December 31, 2002 (the "2002 Financial Statements"), affect the risks presented by this investigation and these actions, as these matters involve, among other things, our prior accounting practices and related disclosures. Plaintiffs in certain of the securities actions have alleged our restatement of items in support of their claims. We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from all of these matters. During 2003 and 2004, we recorded reserves in our financial statements totaling $750 million in connection with these matters. On October 21, 2004, we entered into a settlement with the SEC concluding a formal investigation concerning our accounting and disclosures, among other subjects, that began in April 2002. The $750 million reserve was reduced by $125 million in December 2004 as a result of a payment in that amount in connection with our SEC settlement. The remaining reserve amount represents a final payment to be made in connection with the SEC settlement in the amount of $125 million and the minimum estimated amount of loss we believe is probable with respect to the securities actions described below.

        We have recorded our estimate of the minimum liability because no estimate of probable loss for these matters is a better estimate than any other amount. If the recorded reserve that will remain after we have paid the amount owed under the SEC settlement is insufficient to cover these other matters, we will need to record additional charges to our statement of operations in future periods. Additionally, we are unable at this time to provide a reasonable estimate of the upper end of the range of loss associated with these remaining matters due to their preliminary and complex nature, and, as a result, the amount we have reserved for these matters is our estimate of the lowest end of the possible range of loss. The ultimate outcomes of these matters are still uncertain and there is a significant possibility that the amount of loss we may ultimately incur could be substantially more than the reserve we have provided.

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        At this time, we believe that it is probable that a portion of the recorded reserve for the securities actions will be recoverable from a portion of the insurance proceeds that were placed in a trust to cover our losses and the losses of individual insureds following our November 12, 2003 settlement of disputes with certain of our insurance carriers related to, among other things, the investigation and securities actions described below. The insurance proceeds are subject to claims by us and other insureds for, among other things, the costs of defending certain matters and, as a result, such proceeds are being depleted over time. In any event, the terms and conditions of applicable bylaws, certificates or articles of incorporation, or agreements or applicable laws may obligate us to indemnify our current and former directors, officers and employees with respect to certain liabilities, and we have been advancing legal fees and costs to many current and former directors, officers and employees in connection with the DOJ investigation, securities actions and certain other matters.

        We continue to defend against the securities actions vigorously and are currently unable to provide any estimate as to the timing of the resolution of these actions. Any settlement of or judgment in one or more of these actions substantially in excess of our recorded reserves could have a significant impact on us, and we can give no assurance that we will have the resources available to pay any such judgment. The magnitude of any settlement or judgment resulting from these actions could materially and adversely affect our ability to meet our debt obligations and our financial condition, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of any such settlement or judgment may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets.

DOJ Investigation

        On July 9, 2002, we were informed by the U.S. Attorney's Office for the District of Colorado of a criminal investigation of Qwest's business. We believe the U.S. Attorney's Office is investigating various matters that include the transactions related to the various adjustments and restatements described in our 2002 Financial Statements, transactions between us and certain of our vendors and certain investments in the securities of those vendors by individuals associated with us, and certain prior disclosures made by us. We are continuing in our efforts to cooperate fully with the U.S. Attorney's Office in its investigation. However, we cannot predict the outcome of this investigation or the timing of its resolution.

Securities Actions

        Qwest is a defendant in the securities actions described below. Plaintiffs in these actions have variously alleged, among other things, that Qwest violated federal and state securities laws, engaged in fraud, civil conspiracy and negligent misrepresentation, and breached fiduciary duties owed to investors and current and former employees. Other defendants in one or more of these actions include current and former directors of Qwest, former officers and employees of Qwest, Arthur Andersen LLP, certain investment banks and others.

•

Consolidated securities action. Twelve putative class actions purportedly brought on behalf of purchasers of publicly traded securities of Qwest between May 24, 1999 and February 14, 2002 have been consolidated into a consolidated securities action pending in federal district court in Colorado. The first of these actions was filed on July 27, 2001. Plaintiffs allege, among other things, that defendants issued false and misleading financial results and made false statements about Qwest's business and investments, including making materially false statements in certain Qwest registration statements. The most recent complaint in this matter seeks unspecified compensatory damages and other relief. However, counsel for plaintiffs has indicated that the putative class will seek damages in the tens of billions of dollars. Further, a non-class action

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brought by Stichting Pensioenfonds ABP ("SPA") (described below under "SPA action") has also been consolidated with the consolidated securities action.

•

ERISA actions. Seven putative class actions purportedly brought on behalf of all participants and beneficiaries of the Qwest Savings and Investment Plan and predecessor plans, or the Plan, from March 7, 1999 until January 12, 2004 have been consolidated into a consolidated action in federal district court in Colorado. These suits also purport to seek relief on behalf of the Plan. The first of these actions was filed in March 2002. Plaintiffs assert breach of fiduciary duty claims against us and others under the Employee Retirement Income Security Act of 1974, as amended, alleging, among other things, various improprieties in managing holdings of Qwest stock in the Plan. Plaintiffs seek damages, equitable and declaratory relief, along with attorneys' fees and costs and restitution. A non-class action alleging similar claims was filed in the federal district court in Montana in June 2003 and was later transferred to federal district court in Colorado.



•

Colorado action. A putative class action purportedly brought on behalf of purchasers of Qwest's stock between June 28, 2000 and June 27, 2002 and owners of U S WEST stock on June 28, 2000 is pending in Colorado in the District Court for the County of Boulder. This action was filed on June 27, 2002. Plaintiffs allege, among other things, that the defendants issued false and misleading statements and engaged in improper accounting practices in order to accomplish the U S WEST/Qwest merger, to make Qwest appear successful and to inflate the value of Qwest's stock. Plaintiffs seek unspecified monetary damages, disgorgement of illegal gains and other relief.



•

New Jersey action. An action by the State of New Jersey (Treasury Department, Division of Investment), or New Jersey, is pending in the New Jersey Superior Court, Mercer County. This action was filed on November 27, 2002. New Jersey alleges, among other things, that defendants caused Qwest's stock to trade at artificially inflated prices by employing improper accounting practices and by issuing false statements about Qwest's business, revenues and profits, and contends that it incurred hundreds of millions of dollars in losses. Among other requested relief, New Jersey seeks from the defendants, jointly and severally, compensatory, consequential, incidental and punitive damages.



•

CalSTRS action. An action by the California State Teachers' Retirement System, or CalSTRS, is pending in the Superior Court of the State of California in and for the County of San Francisco. This action was filed on December 10, 2002. CalSTRS alleges, among other things, that defendants engaged in a scheme to falsely inflate Qwest's revenue and decrease its expenses so that Qwest would appear more successful than it actually was during the period in which CalSTRS purchased Qwest securities, and asserts that defendants' actions caused it to lose in excess of $150 million invested in Qwest's equity and debt securities. Plaintiffs seek compensatory, special and punitive damages, restitution, pre-judgment interest and costs.



•

SURSI action. An action by the State Universities Retirement System of Illinois, or SURSI, is pending in the Circuit Court of Cook County, Illinois. This action was filed on January 10, 2003. SURSI alleges, among other things, that defendants engaged in a scheme to falsely inflate Qwest's revenues and decrease its expenses by improper conduct related to transactions with various customers and suppliers and claims that its losses from investments in Qwest securities are in excess of $12.5 million. SURSI seeks, among other things, compensatory and punitive damages, costs, equitable relief, including an injunction to freeze or prevent disposition of the defendants' assets, and disgorgement.



•

SPA action. An action by SPA is pending in federal district court in Colorado. This action was filed on February 9, 2004. SPA alleges, among other things, that defendants created a false perception of Qwest's revenues and growth prospects and that its losses from investments in

22

Qwest securities are in excess of $100 million. SPA seeks, among other things, compensatory and punitive damages, rescission or rescissionary damages, pre-judgment interest, attorneys' fees and costs.

•

SHC action. An action by Shriners Hospital for Children, or SHC, is pending in federal district court in Colorado. This action was filed on March 22, 2004. SHC alleges, among other things, that defendants issued false and misleading financial reports about Qwest. SHC alleges compensatory damages of approximately $17 million. SHC seeks compensatory and punitive damages, interest, costs and attorneys' fees.



•

TRSL action. An action by the Teachers' Retirement System of Louisiana, or TRSL, is pending in federal district court in Colorado. This action was filed on or about March 30, 2004. TRSL alleges, among other things, that defendants issued false and misleading financial reports about Qwest. TRSL alleges compensatory damages of approximately $23 million. TRSL seeks compensatory and punitive damages, interest, costs and attorneys' fees.



•

NYC Funds action. An action by a number of New York City pension and retirement funds, or NYC Funds, is pending in federal district court in Colorado. This action was filed on September 22, 2004. NYC Funds allege, among other things, that defendants created a false perception of Qwest's revenues and growth prospects and that their losses from investments in Qwest securities are in excess of $300 million. NYC Funds seek, among other things, compensatory and punitive damages, rescission or rescissionary damages, pre-judgment interest, attorneys' fees and costs.

KPNQwest Litigation

        A putative class action is pending in the federal district court for the Southern District of New York against Qwest, certain of our former executives who were also on the supervisory board of KPNQwest (in which we were a major shareholder), and others. This lawsuit was initially filed on October 4, 2002. The current complaint alleges, on behalf of certain purchasers of KPNQwest securities, that, among other things, defendants engaged in a fraudulent scheme and deceptive course of business in order to inflate KPNQwest's revenue and the value of KPNQwest securities. Plaintiffs seek compensatory damages and/or rescission as appropriate against defendants, as well as an award of plaintiffs' attorneys' fees and costs.

        On October 31, 2002, Richard and Marcia Grand, co-trustees of the R.M. Grand Revocable Living Trust, dated January 25, 1991, filed a lawsuit in Arizona Superior Court which, as amended, alleges, among other things, that the defendants violated state and federal securities laws and breached their fiduciary duty in connection with investments by plaintiffs in securities of KPNQwest. Qwest is a defendant in this lawsuit along with Qwest B.V. (a subsidiary of Qwest), Joseph Nacchio, Qwest's former Chairman and Chief Executive Officer, and John McMaster, the former President and Chief Executive Officer of KPNQwest. Plaintiffs claim to have lost approximately $10 million in their investments in KPNQwest.

        On June 25, 2004, J.C. van Apeldoorn and E.T. Meijer, in their capacities as trustees in the Dutch bankruptcy proceeding for KPNQwest, filed a complaint in the federal district court for the District of New Jersey alleging violations of the Racketeer Influenced and Corrupt Organizations Act, and breach of fiduciary duty and mismanagement under Dutch law. Qwest is a defendant in this lawsuit along with Joseph Nacchio, Robert S. Woodruff, Qwest's former Chief Financial Officer, and John McMaster. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of KPNQwest and the bankruptcy deficit of KPNQwest was in excess of $3 billion. Plaintiffs seek compensatory and punitive damages, as well as an award of plaintiffs' attorneys' fees and costs.

23

        On June 17, 2005, Appaloosa Investment Limited Partnership I, Palomino Fund Ltd., and Appaloosa Management L.P. filed a complaint in the federal district court for the Southern District of New York against Qwest, Joseph Nacchio, John McMaster and Koninklijke KPN N.V. ("KPN"). The complaint alleges that defendants violated federal securities laws in connection with the purchase by plaintiffs of certain KPNQwest debt securities. Plaintiffs seek compensatory damages, as well as an award of plaintiffs' attorneys' fees and costs.

        Various former lenders to KPNQwest or their assignees, including Citibank, N.A., Deutsche Bank AG London and others have notified us of their intent to file legal claims in connection with the origination of a credit facility and subsequent borrowings made by KPNQwest of approximately €300 million under that facility. They have indicated that Qwest would be a defendant in this threatened lawsuit along with Joseph Nacchio, John McMaster, Drake Tempest, Qwest's former General Counsel, KPN and other former employees of Qwest, KPN or KPNQwest.

        The four KPNQwest litigation matters described above are in preliminary phases and we will defend against the four filed cases vigorously and will likewise defend against the fifth matter if it is filed. We have not yet conducted discovery on plaintiffs' possible recoverable damages and other relevant issues. Thus, we are unable at this time to estimate reasonably a range of loss that we would incur if the plaintiffs in one or more of these matters were to prevail. Any settlement or judgment in certain of these matters could be significant, and we can give no assurance that we will have the resources available to pay any such judgment. In the event of an adverse outcome in certain of these matters, our financial condition and our ability to meet our debt obligations could be materially and adversely affected.

Regulatory Matters

        As described below, formal proceedings against us have been initiated with the public utilities commissions in several states alleging, among other things, that we, in contravention of federal and state law, failed to file interconnection agreements with the state commissions and that we therefore allegedly discriminated against various CLECs. The complainants seek fines, penalties and/or carrier credits.

•

Minnesota. On February 14, 2002, the Minnesota Department of Commerce filed a formal complaint against us with the Minnesota Public Utilities Commission. On November 1, 2002, the Minnesota Commission issued a written order finding against us. The Minnesota Commission's final, written decision was issued on May 21, 2003 and would require a penalty payment to the state of approximately $26 million and payments of carrier credits of approximately $18 million. Of the $18 million, about $3 million has been released by the carriers in bankruptcy proceedings. The Minnesota Commission, the carriers and Qwest each appealed portions of the decision to the federal district court in Minnesota, and the district court upheld the penalty and vacated the carrier credits. The Minnesota Commission, the carriers and Qwest each have appealed to the Eighth Circuit Court of Appeals.



•

Colorado. On April 15, 2004, Qwest and the Office of Consumer Counsel for Colorado entered into a settlement, subject to Colorado Commission approval, that would require Qwest to pay $7.5 million in contributions to state telecommunications programs and that offers CLECs credits that could total approximately $9 million. Of the $9 million, about $2 million has been released by the carriers in bankruptcy proceedings. The administrative law judge recommended rejection of the settlement and the initiation of a show cause docket against Qwest. The administrative law judge's recommendation came before the Commission on motions for reconsideration, and on April 25, 2005 the Commission issued an order stating that it will not open a show cause proceeding at this time but rather will open a new proceeding to consider the proposed settlement. Hearings on the proposed settlement are scheduled for September 2005.

24

•

New Mexico. In December 2004, Qwest, the New Mexico Staff, the New Mexico Attorney General and party-CLECs entered into and filed for approval a settlement that would resolve all claims for penalties and credits for a total payment of $3.5 million. On June 30, 2005, the Commission approved the settlement.



•

Oregon. On June 17, 2005, the Oregon Commission approved a stipulation between Qwest and the Oregon Staff for the payment of a penalty of approximately $1 million.

        Also, some telecommunications providers have filed private actions based on facts similar to those underlying these administrative proceedings. These private actions, together with any similar, future actions, could result in additional damages and awards that could be significant.

        On July 15, 2004, the New Mexico state regulatory commission opened a proceeding to investigate whether we are in compliance with or are likely to meet a commitment that we made in 2001 to invest in communications infrastructure in New Mexico through March of 2006 pursuant to an Alternative Form of Regulation plan ("AFOR"). The AFOR says, in part, that "Qwest commits to devote a substantial budget to infrastructure investment, with the goal of achieving the purposes of this Plan. Specifically, Qwest will make capital expenditures of not less than $788 million over the term of this Plan. This level of investment is necessary to meet the commitments made in this Plan to increase Qwest's investment and improve its service quality in New Mexico." Multiple parties filed comments in that proceeding and variously argued that we should be subject to a range of requirements including an escrow account for capital spending, new investment obligations, and customer credits or price reductions.

        On April 14, 2005, the Commission issued its Final Order in connection with this investigation. In this Final Order, the Commission ruled that the evidence in the record indicates Qwest will not be in compliance with the investment commitment at the conclusion of the AFOR in March, 2006, and if the current trend in Qwest's capital expenditures continues, there will be a shortfall of $200 million or more by the end of the AFOR. The Commission also concluded that Qwest has an unconditional commitment to invest $788 million over the life of the AFOR. Finally, the Commission ruled that if Qwest fails to satisfy this investment commitment, any shortfall must be credited or refunded to Qwest's New Mexico customers. The Commission also opened an enforcement and implementation docket to review Qwest's investments and consider the structure and size of any refunds or credits to be issued to customers. On May 12 and 13, 2005, we filed appeals in federal district court and in the New Mexico State Supreme Court, respectively, challenging the lawfulness of the Commission's Final Order. On May 31, 2005, the Commission issued an order, in response to a Qwest report filed on May 20, 2005, designating a hearing examiner to conduct proceedings addressing whether customer credits and refunds should be imposed on Qwest based on Qwest's investment levels as of June 30, 2005, and prior to the expiration of the AFOR in March 2006.

        Qwest has vigorously argued, and will continue to argue, among other things, that the underlying purpose of the investment commitment set forth in the AFOR has been met in that Qwest has met all service quality and service deployment obligations under the AFOR; that, in light of this, it should not be held to a specific amount of investment; and that the Commission has failed to include all eligible investments in the calculation of how much Qwest has actually invested. Nevertheless, Qwest believes it is unlikely the Commission will reverse its determination that Qwest has an unconditional obligation to invest $788 million over the term of the AFOR. In addition, Qwest has argued, and will continue to argue, that customer credits or refunds are an impermissible and illegal form of relief for the Commission to order in the event there is an investment shortfall.

        Qwest believes there is a substantial likelihood that the ultimate outcome of this matter will result in it having to make expenditures or payments beyond those it would otherwise make in the normal course of business. These expenditures or payments could take the form of one or more of the following: penalties, capital investment, basic service rate reductions and customer refunds or credits.

25

At this time, however, Qwest is not able to reasonably estimate the amount of these expenditures or payments and, accordingly, has not reserved any amount for such potential liability. Any final resolution of this matter could be material.

        To the extent appropriate, we have provided reserves for the above matters. We have other regulatory actions pending in local regulatory jurisdictions, which call for price decreases, refunds or both. These actions are generally routine and incidental to our business.

Other Matters

        In January 2001, an amended class action complaint was filed in Denver District Court on behalf of a class of U S WEST stockholders of record as of June 30, 2000, the day of the U S WEST/Qwest merger, alleging that Qwest had a duty to pay a quarterly dividend that had been declared by the U S WEST Board of Directors on June 2, 2000. The complaint named as defendants Qwest, the individuals who served on the U S WEST Board of Directors in June 2000, and Joseph Nacchio. Plaintiffs claimed that the defendants attempted to avoid paying the dividend by changing the record date from June 30, 2000 to July 10, 2000, a claim Qwest denied. Plaintiffs sought damages of approximately $273 million plus interest, a constructive trust upon Qwest's assets in the amount of the dividend, costs, and attorneys' fees on behalf of the class, which was certified by the court in January 2005. On June 24, 2005, the court preliminarily approved a $50 million settlement, almost half of which will be funded by the defendants' insurers. The settlement is still subject to final court approval, and will be reviewed at a hearing on August 30, 2005 to determine whether it is fair, just, reasonable and adequate as to the class. We have accrued an amount for the portion of the settlement that will be funded by us.

        Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against Qwest on behalf of landowners on various dates and in various courts in California, Colorado, Georgia, Illinois, Indiana, Kansas, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas. For the most part, the complaints challenge Qwest's right to install its fiber optic cable in railroad rights-of-way. Complaints in Colorado, Illinois and Texas, also challenge Qwest's right to install fiber optic cable in utility and pipeline rights-of-way. The complaints allege that the railroads, utilities and pipeline companies own a limited property right-of-way that did not include the right to permit Qwest to install Qwest's fiber optic cable in the right-of-way without the Plaintiffs' consent. Most actions (California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, North Carolina, Oregon, South Carolina, Tennessee and Texas) purport to be brought on behalf of state-wide classes in the named plaintiffs' respective states. Several actions purport to be brought on behalf of multi-state classes. The Illinois state court action purports to be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. A newly filed Illinois federal court action purports to be on behalf of landowners in Arkansas, California, Florida, Illinois, Indiana, Missouri, Nevada, New Mexico, Montana and Oregon. The Indiana action purports to be on behalf of a national class of landowners adjacent to railroad rights-of-way over which Qwest's network passes. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages.

        On January 20, 2004, we filed a complaint in the District Court for the City and County of Denver against KMC Telecom LLC and several of its related parent or subsidiary companies (collectively, "KMC"). Subsequently, we filed an amended complaint to name additional defendants, including General Electric Capital Corporation ("GECC"), one of KMC's lenders, and GECC filed a complaint in intervention. We are seeking a declaration that a series of agreements with KMC and its lenders are not effective because conditions precedent were not satisfied and to recoup other damages and attorneys' fees and costs. These agreements would obligate us to pay a net incremental amount of approximately $105 million if determined to be effective. GECC and KMC have asserted counterclaims for declaratory judgment and anticipatory breach of contract. GECC and KMC seek a declaration that the relevant agreements are in effect and claim monetary damages for anticipatory breach of the agreements and their attorneys' fees and costs. We have not reserved any amount for this matter.

26

        The Internal Revenue Service, or IRS, proposed a tax adjustment for tax years 1994 through 1996. The principal issue involves Qwest's allocation of costs between long-term contracts with customers for the installation of conduit or fiber optic cable and additional conduit or fiber optic cable retained by us. The IRS disputes the allocation of the costs between Qwest and third parties. Similar claims have been asserted against Qwest with respect to the 1997 to 1998 and the 1998 to 2001 audit periods. The 1994-1996 claim is currently being litigated in the Tax Court, and we do not believe the IRS will be successful, although the ultimate outcome is uncertain. If Qwest were to lose this issue for the tax years 1994 through 1998, we estimate that we would have to pay $57 million plus interest pursuant to tax sharing agreements with the Anschutz Company relating to those time periods.

        In 2004, we recorded income tax expense of $158 million related to a change in the expected timing of deductions related to our tax strategy, referred to as the Contested Liability Acceleration Strategy ("CLAS"), which we implemented in 2000. CLAS is a strategy that sets aside assets to provide for the satisfaction of asserted liabilities associated with litigation in a tax efficient manner. CLAS accelerated deductions for contested liabilities by placing assets for potential litigation liabilities out of the control of the company and into trusts managed by a third party trustee. In July 2004, we were formally notified by the IRS that it was contesting the CLAS tax strategy. Also in July 2004, in connection with the preparation of our financial statements for the fiscal quarter ended June 30, 2004, and as a result of a series of notices on CLAS strategies issued by the IRS and the receipt of legal advice with respect thereto, we adjusted our accounting for CLAS as required by SFAS No. 109, "Accounting for Income Taxes." The change in expected timing of deductions caused an increase in our liability for uncertain tax positions and a corresponding increase in our net operating loss carry-forwards ("NOLs"). Because we are not currently forecasting future taxable income sufficient to realize the benefits of this increase in our NOLs, we recorded an increase in our valuation allowance on deferred tax assets as required by SFAS No. 109. Additionally, in September 2004 the IRS proposed a penalty of $37 million on this strategy. We believe that the imposition of a penalty is not appropriate as we acted in good faith in implementing this tax strategy in reliance on two contemporaneous tax opinions and adequately disclosed this transaction to the IRS in our initial and subsequent tax returns. We intend to vigorously defend our position on this and other tax matters.

        We have other tax related matters pending against us. We believe we have adequately provided for these matters.

Note 12:    Financial Statements of Guarantors

        In February 2004, QCII issued a total of $1.775 billion of senior notes, which consisted of $750 million in floating rate senior notes due in 2009 with interest at LIBOR plus 3.50%, $525 million fixed rate senior notes due in 2011 with an interest rate of 7.25%, and $500 million fixed rate senior notes due in 2014 with an interest rate of 7.50%, and in June 2005 QCII issued another $800 million of fixed rate senior notes due in 2014, Series B, with an interest rate of 7.50% (collectively, the "QCII Guaranteed Notes"). In addition, over the period from December 2002 to April 2003, we executed exchanges of approximately $5.8 billion in total face amount of QCF notes for approximately $3.7 billion of QSC notes consisting of 13.0% senior subordinated secured notes due 2007, 13.5% senior subordinated secured notes due 2010 and 14.0% senior subordinated secured notes due 2014 (collectively, the "QSC Guaranteed Notes"). Also, in connection with cash tender offers in December 2003 and June 2005, QSC purchased an aggregate of $779 million face amount of the QSC Guaranteed Notes for $886 million in cash. As of June 30, 2005, the outstanding QSC Guaranteed Notes totaled $2.9 billion. The QCII Guaranteed Notes are guaranteed by QCF and QSC. The QSC Guaranteed Notes are guaranteed by QCF and QCII on a senior basis, and the guarantee by QCII is secured by liens on the stock of QSC and QCF.

        The guarantees are full and unconditional, and joint and several. A significant amount of QCII's and QSC's income and cash flow are generated by their subsidiaries. As a result, funds necessary to

27

meet each issuer's debt service obligations are provided in large part by distributions or advances from their subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as our and our subsidiaries' financial condition and operating requirements, could limit each issuer's ability to obtain cash for the purpose of meeting its debt service obligations including the payment of principal and interest on its notes.

        The following information sets forth our condensed consolidating balance sheets as of June 30, 2005 and December 31, 2004 and our condensed consolidating statements of operations for the three and six months ended June 30, 2005 and 2004 and our condensed consolidating statements of cash flows for the six months ended June 30, 2005 and 2004. The information for QCII, QSC and QCF is presented for each entity on a stand-alone basis, including that entity's investments in all of its subsidiaries, if any, under the equity method. The direct subsidiaries of QCII that are not guarantors of the QCII Guaranteed Notes or the QSC Guaranteed Notes are presented on a combined basis. The subsidiaries of QSC that are not guarantors of the QCII Guaranteed Notes or the QSC Guaranteed Notes are presented on a combined basis. Both QSC and QCF are 100% owned by QCII. Other than as already described herein, the accounting principles used are the same as those used in our consolidated financial statements.

        We utilize lines of credit between certain of our entities, other intercompany obligations, capital contributions and dividends to manage our cash. Amounts outstanding under these intercompany lines of credit and intercompany obligations may vary materially over time.

28

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2005
(UNAUDITED)

			QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
			(Dollars in millions)
Operating revenues			$	—		$	—		$	—		$	1		$	3,469		$	—		$	3,470
Operating revenues—affiliate				—			338			—			10			37			(385	)		—
Operating expenses:
	Cost of sales (exclusive of depreciation and amortization)			—			275			—			—			1,427			(268	)		1,434
	Cost of sales—affiliate			—			47			—			—			23			(70	)		—
	Selling, general and administrative			28			—			—			11			738			268			1,045
	Selling, general and administrative—affiliate			—			—			—			—			315			(315	)		—
	Depreciation			—			—			—			—			649			—			649
	Amortization of capitalized software and other intangible assets			—			—			—			—			116			—			116
		Total operating expenses		28			322			—			11			3,268			(385	)		3,244
Operating (loss) income				(28	)		16			—			—			238			—			226
Other expense (income):
	Interest expense—net			40			110			69			—			161			—			380
	Interest expense—affiliate			2			—			107			—			252			(361	)		—
	Interest income—affiliate			—			(110	)		(250	)		(1	)		—			361			—
	Loss (gain) on early retirement of debt—net			—			17			(12	)		—			38			—			43
	Other (income) expense—net			(2	)		(5	)		—			—			(23	)		—			(30	)
	Loss from equity investments in subsidiaries			129			341			—			—			—			(470	)		—
	Total other expense (income)—net			169			353			(86	)		(1	)		428			(470	)		393
(Loss) income before income taxes				(197	)		(337	)		86			1			(190	)		470			(167	)
Income tax benefit (expense)				33			154			(33	)		—			(151	)		—			3
Net (loss) income			$	(164	)	$	(183	)	$	53		$	1		$	(341	)	$	470		$	(164	)

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

29

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004
(UNAUDITED)

			QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors		QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
			(Dollars in millions)
Operating revenues			$	—		$	—		$	—		$	2	$	3,440		$	—		$	3,442
Operating revenues—affiliate				—			328			—			8		35			(371	)		—
Operating expenses:																					—
	Cost of sales (exclusive of depreciation and amortization)			—			313			—			—		1,481			(308	)		1,486
	Cost of sales—affiliate			—			43			—			—		19			(62	)		—
	Selling, general and administrative			324			—			—			10		854			298			1,486
	Selling, general and administrative—affiliate			—			—			—			—		299			(299	)		—
	Depreciation			—			1			—			—		659			—			660
	Amortization of capitalized software and other intangible assets			—			—			—			—		124			—			124
	Asset impairment charges			—			—			—			—		43			—			43
		Total operating expenses		324			357			—			10		3,479			(371	)		3,799
Operating (loss) income				(324	)		(29	)		—			—		(4	)		—			(357	)
Other expense (income):
	Interest expense—net			32			124			71			—		168			(1	)		394
	Interest expense—affiliate			—			—			276			—		403			(679	)		—
	Interest income—affiliate			(18	)		(265	)		(397	)		—		—			680			—
	Gain on early retirement of debt—net			—			—			(20	)		—		—			—			(20	)
	Loss on the sale of assets			—			—			—			—		1			—			1
	Other (income) expense—net			(1	)		(3	)		1			—		(89	)		—			(92	)
	Loss from equity investments in subsidiaries			465			592			—			—		—			(1,057	)		—
	Total other expense (income)—net			478			448			(69	)		—		483			(1,057	)		283
(Loss) income before income taxes				(802	)		(477	)		69			—		(487	)		1,057			(640	)
Income tax benefit (expense)				26			(31	)		(26	)		—		(105	)		—			(136	)
Net (loss) income			$	(776	)	$	(508	)	$	43		$	—	$	(592	)	$	1,057		$	(776	)

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

30

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)

			QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantor			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
			(Dollars in millions)
Operating revenues			$	—		$	—		$	—		$	3		$	6,916		$	—		$	6,919
Operating revenues—affiliate				—			677			—			18			76			(771	)		—
Operating expenses:
	Cost of sales (exclusive of depreciation and amortization)			—			552			—			—			2,858			(537	)		2,873
	Cost of sales—affiliate			—			94			—			—			48			(142	)		—
	Selling, general and administrative			62			—			—			19			1,463			537			2,081
	Selling, general and administrative—affiliate			—			—			—			—			629			(629	)		—
	Depreciation			—			1			—			—			1,301			—			1,302
	Amortization of capitalized software and other intangible assets			—			—			—			—			237			—			237
		Total operating expenses		62			647			—			19			6,536			(771	)		6,493
Operating (loss) income				(62	)		30			—			2			456			—			426
Other expense (income):
	Interest expense—net			75			225			138			—			323			—			761
	Interest expense—affiliate			4			—			366			—			673			(1,043	)		—
	Interest income—affiliate			(18	)		(353	)		(671	)		(1	)		—			1,043			—
	Loss (gain) on early retirement of debt—net			—			17			(12	)		—			38			—			43
	Gain on the sale of assets			—			—			—			—			(257	)		—			(257	)
	Other (income) expense—net			(3	)		(8	)		—			—			(4	)		—			(15	)
	Loss from equity investments in subsidiaries			56			629			—			—			—			(685	)		—
	Total other expense (income)—net			114			510			(179	)		(1	)		773			(685	)		532
(Loss) income before income taxes				(176	)		(480	)		179			3			(317	)		685			(106	)
Income tax benefit (expense)				69			311			(68	)		(1	)		(312	)		—			(1	)
Net (loss) income			$	(107	)	$	(169	)	$	111		$	2		$	(629	)	$	685		$	(107	)

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

31

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)

			QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors		QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
			(Dollars in millions)
Operating revenues			$	—		$	—		$	—		$	3	$	6,921		$	—		$	6,924
Operating revenues—affiliate				—			716			—			16		55			(787	)		—
Operating expenses:																					—
	Cost of sales (exclusive of depreciation and amortization)			—			590			—			—		2,930			(580	)		2,940
	Cost of sales—affiliate			—			71			—			—		42			(113	)		—
	Selling, general and administrative			342			—			—			18		1,710			570			2,640
	Selling, general and administrative—affiliate			—			—			—			—		664			(664	)		—
	Depreciation			—			1			—			—		1,314			—			1,315
	Amortization of capitalized software and other intangible assets			—			—			—			—		247			—			247
	Asset impairment charges			—			—			—			—		43			—			43
		Total operating expenses		342			662			—			18		6,950			(787	)		7,185
Operating (loss) income				(342	)		54			—			1		26			—			(261	)
Other expense (income):
	Interest expense—net			52			265			151			—		323			(1	)		790
	Interest expense—affiliate			6			—			559			—		764			(1,329	)		—
	Interest income—affiliate			(18	)		(556	)		(756	)		—		—			1,330			—
	Gain on early retirement of debt—net			—			—			(5	)		—		—			—			(5	)
	Other (income) expense—net			(11	)		(5	)		—			—		(77	)		—			(93	)
	Loss from equity investments in subsidiaries			734			1,275			—			—		—			(2,009	)		—
	Total other expense (income)—net			763			979			(51	)		—		1,010			(2,009	)		692
(Loss) income before income taxes				(1,105	)		(925	)		51			1		(984	)		2,009			(953	)
Income tax benefit (expense)				19			158			(19	)		—		(291	)		—			(133	)
Net (loss) income			$	(1,086	)	$	(767	)	$	32		$	1	$	(1,275	)	$	2,009		$	(1,086	)

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

32

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2005

		QCII(1)			QSC(2)			QCF(3)		QCII Subsidiary Non-Guarantors		QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
		(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents		$	150		$	1,300		$	—	$	—	$	795		$	—		$	2,245
	Short-term investments		44			378			—		—		212			—			634
	Accounts receivable—net		—			17			—		1		1,548			—			1,566
	Accounts receivable—affiliates		31			383			84		—		20			(518	)		—
	Notes receivable—affiliates		—			4,858			13,439		87		—			(18,384	)		—
	Prepaid and other assets		3			37			—		31		478			(118	)		431
	Assets held for sale		—			—			—		—		14			—			14
Total current assets			228			6,973			13,523		119		3,067			(19,020	)		4,890
Property, plant and equipment—net			—			5			—		—		16,096			—			16,101
Capitalized software and other intangible assets—net			40			—			—		—		1,033			—			1,073
Investments in subsidiaries			362			(10,004	)		—		—		—			9,642			—
Prepaid pension assets			—			94			—		—		1,088			—			1,182
Other assets			167			2,405			40		100		438			(2,319	)		831
Total assets		$	797		$	(527	)	$	13,563	$	219	$	21,722		$	(11,697	)	$	24,077
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
	Current borrowings	$	5		$	—		$	179	$	—	$	77		$	—		$	261
	Current borrowings—affiliates		86			—			4,761		—		13,537			(18,384	)		—
	Accounts payable		3			29			—		—		682			—			714
	Accounts payable—affiliates		—			21			—		26		248			(295	)		—
	Accrued expenses and other current liabilities		212			239			125		35		1,448			(92	)		1,967
	Accrued expenses and other current liabilities—affiliates		—			—			37		30		181			(248	)		—
	Deferred revenue and advanced billings		—			—			—		—		626			—			626
Total current liabilities			306			289			5,102		91		16,799			(19,019	)		3,568
	Long-term borrowings—net		2,622			3,030			3,568		—		8,067			—			17,287
	Post-retirement and other post-employment benefit obligations		—			434			—		—		2,985			—			3,419
	Deferred income taxes		34			—			—		—		2,286			(2,320	)		—
	Deferred revenue		—			—			—		—		548			—			548
	Other long-term liabilities		498			267			—		112		1,041			—			1,918
Total liabilities			3,460			4,020			8,670		203		31,726			(21,339	)		26,740
Stockholders' (deficit) equity			(2,663	)		(4,547	)		4,893		16		(10,004	)		9,642			(2,663	)
Total liabilities and stockholders' equity (deficit)		$	797		$	(527	)	$	13,563	$	219	$	21,722		$	(11,697	)	$	24,077

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

33

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2004

(UNAUDITED)

		QCII(1)			QSC(2)			QCF(3)		QCII Subsidiary Non-Guarantors		QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
		(Dollars in millions)
ASSETS
Current assets:
	Cash and cash equivalents	$	59		$	252		$	—	$	—	$	840		$	—		$	1,151
	Short-term investments		—			764			—		—		—			—			764
	Accounts receivable—net		—			13			2		2		1,577			—			1,594
	Accounts receivable—affiliates		72			466			141		—		84			(763	)		—
	Current tax receivable		—			227			—		—		—			(227	)		—
	Notes receivable—affiliates		87			13,986			21,972		59		—			(36,104	)		—
	Deferred income taxes		—			—			—		—		111			(111	)		—
	Prepaid and other assets		—			38			—		67		452			(8	)		549
	Assets held for sale		—			—			—		—		160			—			160
Total current assets			218			15,746			22,115		128		3,224			(37,213	)		4,218
Property, plant and equipment—net			—			5			—		—		16,848			—			16,853
Capitalized software and other intangible assets—net			39			—			—		—		1,140			—			1,179
Investments in subsidiaries			(1,266	)		(18,006	)		—		—		—			19,272			—
Prepaid pension assets			—			96			—		—		1,096			—			1,192
Other assets			1,140			2,339			47		66		468			(3,178	)		882
Total assets		$	131		$	180		$	22,162	$	194	$	22,776		$	(21,119	)	$	24,324
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
	Current borrowings	$	5		$	—		$	179	$	—	$	412		$	—		$	596
	Current borrowings—affiliates		126			—			13,976		—		22,002			(36,104	)		—
	Accounts payable		3			31			—		—		698			(1	)		731
	Accounts payable—affiliates		—			2			—		—		234			(236	)		—
	Accrued expenses and other current liabilities		174			334			123		35		1,962			(338	)		2,290
	Accrued expenses and other current liabilities—affiliates		17			65			139		53		260			(534	)		—
	Deferred revenue and advanced billings		—			—			—		—		669			—			669
Total current liabilities			325			432			14,417		88		26,237			(37,213	)		4,286
	Long-term borrowings—net		1,886			3,528			3,637		—		7,639			—			16,690
	Post-retirement and other post-employment benefit obligations		—			433			—		—		2,958			—			3,391
	Deferred income taxes		34			—			—		—		2,194			(2,228	)		—
	Deferred revenue		—			—			—		—		559			—			559
	Other long-term liabilities		497			245			950		91		1,177			(950	)		2,010
Total liabilities			2,742			4,638			19,004		179		40,764			(40,391	)		26,936
Stockholders' (deficit) equity			(2,612	)		(4,439	)		3,158		15		(18,006	)		19,272			(2,612	)
Total liabilities and stockholders' (deficit) equity		$	130		$	199		$	22,162	$	194	$	22,758		$	(21,119	)	$	24,324

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

34

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)

		QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
		(Dollars in millions)
OPERATING ACTIVITIES:
	Net (loss) income	$	(107	)	$	(169	)	$	111		$	2		$	(629	)	$	685		$	(107	)
	Adjustments to net (loss) income		(9	)		805			(7	)		1			1,339			(685	)		1,444
	Net change in operating assets and liabilities		92			(45	)		(39	)		25			(456	)		(1	)		(424	)
Cash provided by (used for) operating activities			(24	)		591			65			28			254			(1	)		913
INVESTING ACTIVITIES:
	Expenditures for property, plant and equipment		(1	)		(19	)		—			—			(645	)		—			(665	)
	Proceeds from sale of property, plant and equipment		—			—			—			—			418			—			418
	Proceeds from sales of investment securities		—			1,086			—			—			—			—			1,086
	Purchases of investment securities		—			(912	)		—			—			—			—			(912	)
	Net proceeds (purchases) of investments managed by QSC		(18	)		(100	)		—			—			118			—			—
	Cash infusion to subsidiaries		(530	)		(10,000	)		—			—			—			10,530			—
	Net decrease (increase) in short-term affiliate loans		—			9,128			8,533			(28	)		—			(17,633	)		—
	Dividends received from affiliate		—			1,419			—			—			—			(1,419	)		—
	Other		—			—			—			—			17			—			17
	Cash (used for) provided by investing activities		(549	)		602			8,533			(28	)		(92	)		(8,522	)		(56	)
FINANCING ACTIVITIES
	Proceeds from long-term borrowings		735			—			—			—			1,150			—			1,885
	Repayments of long-term borrowings, including current maturities		—			(452	)		—			—			(1,098	)		—			(1,550	)
	Net repayments of short-term affiliate borrowings		(40	)		—			(9,128	)		—			(8,466	)		17,634			—
	Proceeds from issuances of common and treasury stock		7			—			—			—			—			—			7
	Equity infusion from parent		—			—			530			—			10,000			(10,530	)		—
	Dividends paid to parent		—			—			—			—			(1,419	)		1,419			—
	Debt issuance costs		(13	)		—			—			—			(18	)		—			(31	)
	Other		—			(49	)		—			—			(25	)		—			(74	)
	Cash provided by (used for) financing activities		689			(501	)		(8,598	)		—			124			8,523			237
CASH AND CASH EQUIVALENTS
	Increase (decrease) in cash		116			692			—			—			286			—			1,094
	Beginning balance		34			608			—			—			509			—			1,151
	Ending balance	$	150		$	1,300		$	—		$	—		$	795		$	—		$	2,245

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

35

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)

		QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
		(Dollars in millions)
OPERATING ACTIVITIES:
	Net (loss) income	$	(1,086	)	$	(767	)	$	32		$	1		$	(1,275	)	$	2,009		$	(1,086	)
	Adjustments to net (loss) income		729			1,683			16			1			1,337			(1,976	)		1,790
	Net change in operating assets and liabilities		419			(24	)		(28	)		11			(237	)		(1	)		140
Cash provided by (used for) operating activities			62			892			20			13			(175	)		32			844
INVESTING ACTIVITIES:
	Expenditures for property, plant and equipment		(1	)		—			—			—			(940	)		—			(941	)
	Proceeds from sale of property, plant and equipment		—			—			—			—			5			—			5
	Proceeds from sale of investment securities		—			981			—			—			5			—			986
	Purchase of investment securities		—			(929	)		—			—			—			—			(929	)
	Net proceeds (purchases) of investments managed by QSC		(52	)		(3	)		—			18			37			—			—
	Cash infusion to subsidiaries		—			(2,206	)		—			—			—			2,206			—
	Net decrease (increase) in short-term affiliate loans		—			(53	)		(877	)		(68	)		(1	)		999			—
	Long-term loans made to affiliates		(950	)		—			—			—			—			950			—
	Principal collected on long-term affiliate loans		—			400			793			—			—			(1,193	)		—
	Dividends received from affiliate		—			1,560			—			—			—			(1,560	)		—
	Other		—			—			—			—			5			—			5
Cash used for investing activities			(1,003	)		(250	)		(84	)		(50	)		(889	)		1,402			(874	)
FINANCING ACTIVITIES
	Proceeds from long-term borrowings		1,763			—			—			—			3			—			1,766
	Repayments of long-term borrowings including current maturities		—			(750	)		(921	)		—			(191	)		—			(1,862	)
	Proceeds from long-term borrowings—affiliates		—			—			950			—			—			(950	)		—
	Repayments of long-term borrowings—affiliates		—			—			—			—			(1,193	)		1,193			—
	Net (repayments of) proceeds from short-term affiliate borrowings		(719	)		—			54			—			1,663			(998	)		—
	Proceeds from issuances of common and treasury stock		37			—			—			—			—			(33	)		4
	Equity infusion from parent		—			—			—			—			2,206			(2,206	)		—
	Dividends paid to parent		—			—			—			—			(1,560	)		1,560			—
	Debt issuance costs		(32	)		(9	)		—			—			—			—			(41	)
	Other		—			—			(19	)		—			—			—			(19	)
	Cash provided by (used for) financing activities		1,049			(759	)		64			—			928			(1,434	)		(152	)
CASH AND CASH EQUIVALENTS
	Increase (decrease) in cash		108			(117	)		—			(37	)		(136	)		—			(182	)
	Beginning balance		—			461			—			37			868			—			1,366
	Ending balance	$	108		$	344		$	—		$	—		$	732		$	—		$	1,184

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes and is the issuer of the QSC Guaranteed Notes.

(3)

QCF is a guarantor of both the QCII Guaranteed Notes and the QSC Guaranteed Notes.

36

Note 13: Subsequent Events

        On July 15, 2005, we paid $179 million for the 6.25% per annum QCF notes that matured on that date. These notes were included in current portion of long-term borrowings in our condensed consolidated balance sheets as of June 30, 2005 and as of December 31, 2004.

37

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

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

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

Business Overview and Presentation

        We provide local telecommunications and related services, long-distance services and wireless, data and video services within our local service area, which consists of the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We also provide InterLATA long-distance services and reliable, scalable and secure broadband data, voice and video communications outside our local service area as well as globally.

        Our analysis presented below is organized to provide the information we believe will be instructive for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our condensed consolidated financial statements in Item 1 of Part I of this report, including the footnotes thereto. Our operating revenues are generated from our wireline, wireless and other services segments. An overview of the segment results is provided in Note 8—Segment Information to our condensed consolidated financial statements in Item 1 of Part I of this report. Segment discussions reflect the way we reported our segment results to our Chief Operating Decision Maker ("CODM") in the second quarter of 2005 and include revenue results for each of our customer channels within the wireline segment: business, mass markets and wholesale. In order to better serve the similar needs of our small business and consumer customers, we have combined these customers into a new channel, which we refer to as "mass markets," and have reclassified our small business customers for all periods presented. Certain prior year revenue and expense amounts have been reclassified to conform to the current year presentations.

Business Trends

        Our results continue to be impacted by a number of factors influencing the telecommunications industry as follows:

•

Industry competition is based primarily on pricing, packaging of services and features, quality of service and increasingly on meeting customer care needs. We expect this trend to continue. Our on-going response to industry competition has included initiatives to retain and win-back customers by rolling out new or expanded services such as wireless, in-region long-distance, DSL, video and VoIP, bundling of expanded feature-rich products and improving the quality of our customer service.



•

The consolidation trend in the telecommunications industry, as exemplified by the current proposed mergers, could have significant impact on customer choice and may impact our efforts to win customers and strengthen our position as a national provider of communications services. Our revenues and expenses may also be impacted as partners to the mergers integrate and consolidate their operations.



•

We expect technology substitution such as wireless substitution for wireline telephones, cable telephony substitution for wireline telephony and cable modem substitution for dial-up modem lines and DSL to continue to cause additional access line losses.

38

•

Employees represented by labor unions represent a significant portion of our work force and of the industry. We are currently in negotiations with the Communications Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW") regarding agreements that expire on August 13, 2005. The impact of these negotiations could have a material impact on our future financial results and financial position from changes to our wage and benefit structure including, but not limited to, wage rates, health care costs, pensions and post-retirement benefit obligations.



•

Our results continue to be impacted by regulatory responses to the competitive landscape for both our local and long-distance services. For instance, recent FCC decisions, including its Triennial Review Remand Order, may facilitate some carriers converting existing special access transport services to lower priced UNE transport. Such conversions could have a significant impact on our future financial results.



•

We expect business users of telecommunication services to increasingly want to receive all of their services from one provider.

Results of Operations

Overview

        Our operating revenues are generated from the following three segments:

•

Wireline services. The wireline segment utilizes our traditional telephone and fiber optic broadband networks to provide voice services and data and Internet services to mass markets, which includes consumer and small business customers, business and wholesale customers. Our wireline services include:

Voice services.    Voice services revenue includes local voice services, long-distance voice services and access services. Local voice services revenue includes revenue from basic local exchange services, switching services, custom calling features, enhanced voice services, operator services, collocation services and related equipment. Long-distance voice services revenue includes revenue from InterLATA and IntraLATA long-distance services. Access services revenue includes fees charged to other long-distance providers to connect to our network.

Data and Internet services.    Data and Internet services revenue includes data services (such as traditional private lines, wholesale private lines, frame relay, ATM and related equipment) and Internet services (such as DSL, DIA, VPN, Internet dial access, web hosting, professional services and related equipment).

•

Wireless services. We offer wireless services and equipment to residential and business customers, providing them the ability to use the same telephone number for their wireless phone as for their home or business phone. In August 2003, we entered into a services agreement with a third party provider that allows us to resell wireless services, including access to their nationwide PCS wireless network, to mass markets and business customers, primarily within our local service area states. We began offering these services under our brand name in March 2004 and now provide the services through the third party provider's network.



•

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

39

        The following table summarizes our results of operations for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended June 30,											Six Months Ended June 30,
								Increase/ (Decrease)			% Change								Increase/ (Decrease)			% Change
		2005			2004								2005			2004
		(Dollars in millions)
Operating revenues		$	3,470		$	3,442		$	28		1	%	$	6,919		$	6,924		$	(5	)	nm
	Operating expenses		3,244			3,799			(555	)	(15	)%		6,493			7,185			(692	)	(10	)%
Operating income (loss)			226			(357	)		583		nm			426			(261	)		687		nm
	Other expense—net		393			283			110		39	%		532			692			(160	)	(23	)%
	Loss before income taxes		(167	)		(640	)		473		74	%		(106	)		(953	)		847		89	%
	Income tax benefit (expense)		3			(136	)		139		nm			(1	)		(133	)		132		99	%
Net loss		$	(164	)	$	(776	)	$	612		79	%	$	(107	)	$	(1,086	)	$	979		90	%
	Basic and diluted loss per share	$	(0.09	)	$	(0.43	)	$	0.34		79	%	$	(0.06	)	$	(0.61	)	$	0.55		90	%

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

40

Operating Revenues

        The following table compares operating revenue by segment including the detail of customer channels within our wireline segment for the three and six months ended June 30, 2005 and 2004:

				Three Months Ended June 30,									Six Months Ended June 30,
								Increase/ (Decrease)			% Change						Increase/ (Decrease)			% Change
				2005		2004							2005		2004
				(Dollars in millions)
Wireline revenues
	Voice Services:
		Local Voice:
			Business	$	270	$	278	$	(8	)	(3	)%	$	536	$	569	$	(33	)	(6	)%
			Mass Markets		1,124		1,163		(39	)	(3	)%		2,252		2,375		(123	)	(5	)%
			Wholesale		222		239		(17	)	(7	)%		447		462		(15	)	(3	)%
		Total local voice			1,616		1,680		(64	)	(4	)%		3,235		3,406		(171	)	(5	)%
		Long Distance:
			Business		114		114		—		nm			228		230		(2	)	(1	)%
			Mass Markets		164		140		24		17	%		330		280		50		18	%
			Wholesale		269		239		30		13	%		547		483		64		13	%
		Total long-distance			547		493		54		11	%		1,105		993		112		11	%
		Access:
			Business		1		1		—		nm			2		3		(1	)	(33	)%
			Mass Markets		2		1		1		100	%		4		3		1		33	%
			Wholesale		169		162		7		4	%		316		328		(12	)	(4	)%
		Total access			172		164		8		5	%		322		334		(12	)	(4	)%
			Total voice services		2,335		2,337		(2	)	nm			4,662		4,733		(71	)	(2	)%
	Data and Internet:
		Business			510		498		12		2	%		1,004		995		9		1	%
		Mass Markets			175		141		34		24	%		346		277		69		25	%
		Wholesale			311		330		(19	)	(6	)%		633		643		(10	)	(2	)%
	Total data and Internet				996		969		27		3	%		1,983		1,915		68		4	%
Total wireline revenues					3,331		3,306		25		1	%		6,645		6,648		(3	)	nm
Wireless revenues					130		128		2		2	%		254		254		—		nm
Other services revenues					9		8		1		13	%		20		22		(2	)	(9	)%
Total operating revenues				$	3,470	$	3,442	$	28		1	%	$	6,919	$	6,924	$	(5	)	nm

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

Wireline Revenue

Voice Services

        Local Voice Services.    The decrease in local voice services revenue for the three and six months ended June 30, 2005 in our business and mass markets channels was primarily due to access line losses from competitive pressures and technology substitution partially offset by Universal Service Fund, or USF, rate increases. The decrease in our wholesale channel is primarily due to the sale of our payphone business in August 2004.

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        The following table shows our access lines by channel as of June 30, 2005 and 2004:

	Access Lines*
	As of June 30,
			Increase/ (Decrease)		% Change
	2005	2004
		(in thousands)
Business	2,489	2,655	(166	)	(6	)%
Mass Markets	10,790	11,283	(493	)	(4	)%
Wholesale	1,807	1,901	(94	)	(5	)%
Total	15,086	15,839	(753	)	(5	)%

*

We may modify the channel classification of our access lines from time to time in our efforts to better approximate the related revenue channels and better reflect how we manage our business.

        Long Distance Services.    The increase in long-distance services revenue for the three and six months ended June 30, 2005 was primarily due to increased in-region long-distance subscribers using increased minutes of use, an increase in our monthly recurring charge to our mass markets customers and wholesale volume increases. These increases were partially offset by lower rates per minute across all customer channels. Decreases in rates for our business customers, driven by competition, offset business subscriber and volume increases.

        Access Services.    The increase in total access services revenue for the three months ended June 30, 2005 was primarily due to a $23 million favorable settlement of a customer billing dispute during the quarter. Additionally, total access services revenue for the three and six months ended June 30, 2005 continue to be negatively effected by mass markets and business access line losses, as well as our increasing penetration into in-region long-distance (as we became a competitor to our access services customers).

Data and Internet Services

        The increase in data and Internet services revenue for the three and six months ended June 30, 2005 was driven by customer growth across the suite of products offered in our business and mass markets channels including Internet and video products and related equipment, expanded service availability and increased penetration of DSL in our mass markets channel and an increase in Frame Relay and DIA revenue in our wholesale channel. These increases were partially offset by declines in our wholesale channel due to the termination of our wholesale modem services product in April 2005 and a favorable one-time revenue adjustment recorded during the second quarter of 2004 from a customer bankruptcy in our wholesale channel.

Wireless Revenue

        Wireless services revenue remained flat for the three and six months ended June 30, 2005 due to decreased subscribers, offset by increased plan and airtime rates to new subscribers resulting in higher average revenue per subscriber.

Operating Expenses

Operating Expense Trends

        Our expenses continue to be impacted by shifting demand due to increased competition and the expansion of our product offerings. These and other factors have led to some of the following trends affecting our operating expenses:

•

Variable expenses.  Expenses associated with our growing product offerings outside of our local market, long-distance products, and products related to wireless tend to be more variable in

42

nature. While our traditional local market product offerings tend to rely upon our embedded cost structure, the mix of products we expect to sell, combined with regulatory and market pricing forces, will continue to pressure operating margins. In addition, facility costs (described below) are not always reduced at the same rate as our revenue declines due to long-term contract commitments.

•

Facility costs.  Facility costs are third-party telecommunications expenses we incur to connect our customers to networks or to end-user product platforms not owned by us. We have benefited in this area from the renegotiation, termination or settlement during 2004 and 2003 of various service arrangements, from network optimization initiatives and from regulatory approval allowing us to provide long-distance services in our local service area using our own telecommunications equipment, thereby decreasing our reliance on third party providers. These decreases in rates were more than offset by increases in costs due to increased long-distance traffic, consistent with increases in our in-region, international and wholesale long-distance, as well as data and Internet volumes and new wireless facility costs due to our agreement with a third party wireless provider.

        The following table provides further detail regarding our operating expenses for the three and six months ended June 30, 2005 and 2004:

			Three Months Ended June 30,										Six Months Ended June 30,
								Increase/ (Decrease)			% Change						Increase/ (Decrease)			% Change
			2005			2004							2005		2004
			(Dollars in millions)
Operating expenses:
	Cost of sales:
		Facility costs	$	682		$	681	$	1		nm		$	1,359	$	1,343	$	16		1	%
		Network expenses		59			66		(7	)	(11	)%		125		123		2		2	%
		Employee-related costs		388			437		(49	)	(11	)%		798		887		(89	)	(10	)%
		Other non-employee related costs		305			302		3		1	%		591		587		4		1	%
	Total cost of sales			1,434			1,486		(52	)	(3	)%		2,873		2,940		(67	)	(2	)%
	Selling, general and administrative:
		Property and other taxes		111			115		(4	)	(3	)%		210		196		14		7	%
		Bad debt		53			13		40		nm			110		106		4		4	%
		Restructuring and severance related costs		(1	)		127		(128	)	nm			14		142		(128	)	(90	)%
		Employee-related costs		410			434		(24	)	(6	)%		817		903		(86	)	(10	)%
		Other non-employee related costs		472			797		(325	)	(41	)%		930		1,293		(363	)	(28	)%
	Total selling, general and administrative			1,045			1,486		(441	)	(30	)%		2,081		2,640		(559	)	(21	)%
	Depreciation			649			660		(11	)	(2	)%		1,302		1,315		(13	)	(10	)%
	Amortization of capitalized software and other intangible assets			116			124		(8	)	(6	)%		237		247		(10	)	(4	)%
	Asset impairment charges			—			43		(43	)	nm			—		43		(43	)	nm
Total operating expenses			$	3,244		$	3,799	$	(555	)	(15	)%	$	6,493	$	7,185	$	(692	)	(10	)%

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

Cost of Sales

        Cost of sales includes employee-related costs, such as salaries and wages directly attributable to products or services, and benefits, network, facility costs and other non-employee related costs such as

43

real estate, USF charges, materials and supplies, contracted engineering services, computer system support and the cost of CPE sold. Cost of sales as a percentage of revenue for the three and six months ended June 30, 2005 has remained relatively flat at 41.3% and 41.5%, respectively. Cost of sales as a percentage of revenue decreased by 1% for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 primarily due to employee reductions from our restructuring plans, continued focus on containing our employee-related costs and productivity improvements.

        Facility costs have remained relatively flat for the three and six months ended June 30, 2005. Increases in facility costs for the six months ended June 30, 2005 driven by increased long-distance volumes, primarily domestic, and additional wireless costs have been offset by cost savings of approximately $115 million from the renegotiation, termination or settlement of service arrangements and from network optimization initiatives.

        Employee-related costs, such as salaries and wages, benefits and overtime for the three and six months ended June 30, 2005 decreased primarily due to employee reductions as explained above.

Selling, General and Administrative Expenses

        Selling, general and administrative, or SG&A, expenses include employee-related costs such as salaries and wages not directly attributable to products or services, restructuring charges, benefits and sales commissions and other non-employee related costs such as property taxes, bad debt charges, rent for administrative space, advertising, professional service fees, real estate and computer systems support.

        Our property and other taxes increased for the six months ended June 30, 2005 primarily as the result of a one-time expense reduction from a successful property tax settlement of $28 million for the quarter ended March 31, 2004.

        Bad debt expense increased for the three months ended June 30, 2005 primarily due to favorable settlements during the second quarter of 2004 totaling $52 million from companies emerging from bankruptcy offset by a $13 million unfavorable bad debt settlement. Our bad debt expense for the six months ended June 30, 2005 increased as a result of these favorable settlements partially offset by a continued trend of improved collection practices as well as an unfavorable bad debt settlement of approximately $20 million recorded in the first quarter of 2004.

        Restructuring and severance related costs decreased for the three and six months ended June 30, 2005 due to a second quarter of 2004 charge of $127 million resulting from a planned workforce reduction.

        Employee-related costs, such as salaries and wages, benefits and overtime for the three and six months ended June 30, 2005 decreased due to employee reductions from our restructuring efforts and productivity improvements.

        Other non-employee related costs decreased for the three and six months ended June 30, 2005 primarily due to $318 million litigation reserves recorded in the second quarter of 2004 and reduced professional fees related to our cost containment efforts.

Combined Pension and Post-retirement Benefits

        Our results include a net pension expense, which is the combined cost of our pension and post-retirement benefit plans. We recorded a net pension expense of $67 million and $54 million for the three months ended June 30, 2005 and 2004, respectively, and $133 million and $115 million for the six months ended June 30, 2005 and 2004, respectively. The net pension expense is a function of the amount of pension and post-retirement benefits earned, interest on projected benefit obligations, amortization of costs and credits from prior benefit changes and the expected return on the assets held

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in the various plans. The increase in net pension expense for the three and six month periods ended June 30, 2005 as compared to the three and six month period ended June 30, 2004 is primarily due to decreased expected return on investments in the benefit trusts, completion of amortization of the transition asset in 2004, and amortization of actuarial losses caused by the volatile equity markets and lower discount rates partially offset by reductions in expense due to headcount reduction, plan design changes, and the inclusion of the Medicare Part D subsidy in the first quarter of 2005 versus the delayed recognition during 2004. The net pension expense is allocated to cost of sales and SG&A.

Operating Expenses by Segment

        Segment expenses include employee-related costs, facility costs, network expenses and other non-employee related costs such as customer support, collections and marketing. We centrally manage indirect administrative services costs such as finance, information technology, real estate and legal; consequently, these costs are allocated to the other services segment. We evaluate depreciation, amortization, interest expense, interest income, and other (income) expense on a total company basis. As a result, these charges are not allocated to any segment. Similarly, we do not include impairment charges in the segment results. Our CODM regularly reviews the results of operations at a segment level to evaluate the performance of each segment and allocate capital resources based on segment income.

Wireline Segment Expenses

        The following table sets forth wireline expenses for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended June 30,									Six Months Ended June 30,
						Increase/ (Decrease)			% Change						Increase/ (Decrease)			% Change
		2005		2004							2005		2004
		(Dollars in millions)
Wireline expenses:
	Facility costs	$	602	$	662		(60	)	(9	)%	$	1,201	$	1,316	$	(115	)	(9	)%
	Network expenses		58		61		(3	)	(5	)%		120		114		6		5	%
	Bad debt		40		8		32		nm			83		83		—		nm
	Restructuring and severance related costs		4		81		(77	)	(95	)%		10		86		(76	)	(88	)%
	Employee-related costs		590		651		(61	)	(9	)%		1,199		1,326		(127	)	(10	)%
	Other non-employee related costs		329		334		(5	)	(1	)%		652		677		(25	)	(4	)%
Total wireline expenses		$	1,623	$	1,797	$	(174	)	(10	)%	$	3,265	$	3,602	$	(337	)	(9	)%

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

        Wireline operating expenses represent 66% and 65% of total segment expenses for the six months ended June 30, 2005 and 2004, respectively and decreased primarily due to reduced restructuring expenses, employee reductions from our restructuring plans, decreased facility costs achieved through network optimization initiatives and the renegotiation, termination or settlement of services arrangements. Partially offsetting these decreases was increased bad debt expense due to the items discussed above.

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Wireless Segment Expenses

        The following table sets forth wireless expenses for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended June 30,									Six Months Ended June 30,
						Increase/ (Decrease)			% Change						Increase/ (Decrease)			% Change
		2005		2004							2005		2004
		(Dollars in millions)
Wireless expenses:
	Facility costs	$	79	$	13	$	66		nm		$	155	$	22	$	133		nm
	Wireless equipment		28		29		(1	)	(3	)%		54		50		4		8	%
	Bad debt		14		6		8		133	%		28		15		13		87	%
	Employee-related costs		8		7		1		14	%		20		13		7		54	%
	Other non-employee related costs		19		49		(30	)	(61	)%		52		81		(29	)	(36	)%
Total wireless expenses		$	148	$	104	$	44		42	%	$	309	$	181	$	128		71	%

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

        Wireless operating expenses increased for the three and six months ended June 30, 2005 primarily due to facility costs associated with our customers who previously received their services on our network and whose services we now provide through a third party and classify as facility costs rather than other non-employee related costs. We expect our facility costs to increase proportionally as our subscriber base and usage increases. Partially offsetting this increase in facility costs was a decrease in other non-employee related expenses associated with providing wireless services through our network.

Other Services Expenses

        Other services expenses include unallocated corporate expenses for direct services such as finance, information technology, legal, real estate, marketing services and human resources, which we centrally manage. The following table sets forth additional expense information as to the composition of other services expenses for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended June 30,										Six Months Ended June 30,
							Increase/ (Decrease)			% Change						Increase/ (Decrease)			% Change
		2005			2004							2005		2004
		(Dollars in millions)
Other services expenses:
	Property and other taxes	$	111		$	114	$	(3	)	(3	)%	$	209	$	195	$	14		7	%
	Real estate costs		99			106		(7	)	(7	)%		204		218		(14	)	(6	)%
	Restructuring and severance related costs		(5	)		46		(51	)	nm			2		56		(54	)	(96	)%
	Employee-related costs		200			213		(13	)	(6	)%		398		450		(52	)	(12	)%
	Other non-employee related *		303			592		(289	)	(49	)%		567		878		(311	)	(35	)%
Total other services expenses		$	708		$	1,071	$	(363	)	(34	)%	$	1,380	$	1,797	$	(417	)	(23	)%

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

*

Certain immaterial expenses for facility costs, bad debt and network expenses in the other segment are recorded in other non-employee related costs.

        The decrease in other services expenses for the three and six months ended June 30, 2005 was primarily driven by a $300 million litigation reserve record in the second quarter of 2004. Other

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contributing factors include decreases in real estate costs, restructuring and related costs as well as reductions in our employee related costs due to our restructuring efforts and productivity improvements, which more than offset the increase in property and other taxes. Property and other taxes increased primarily as the result of a favorable property tax settlement during the first quarter of 2004.

Other Consolidated Results

Other Expense—Net

        Other expense—net generally includes interest expense net of capitalized interest, investment write-downs, gains and losses on the sales of investments and fixed assets, gains and losses on early retirement of debt and changes in derivative instrument market values.

		Three Months Ended June 30,											Six Months Ended June 30,
								Increase/ (Decrease)			% Change								Increase/ (Decrease)			% Change
		2005			2004								2005			2004
		(Dollars in millions)
Interest expense—net		$	380		$	394		$	(14	)	(4	)%	$	761		$	790		$	(29	)	(4	)%
Loss (gain) on early retirement of debt—net			43			(20	)		63		nm			43			(5	)		48		nm
Loss (gain) on sale of assets			—			1			(1	)	nm			(257	)		—			(257	)	nm
Other income—net			(30	)		(92	)		62		67	%		(15	)		(93	)		78		84	%
	Total other expense—net	$	393		$	283		$	110		39	%	$	532		$	692		$	(160	)	(23	)%

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

        Interest expense—net.    Interest expense—net decreased during the six months ended June 30, 2005 primarily due to the recognition of $22 million of unamortized debt-issuance costs associated with the early termination of a previous credit facility included in the interest expense for the three months ended March 31, 2004. Interest expense decreased for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 primarily due to a reduction of penalty interest on a portion of our debt and reduced interest on a purchase obligation.

        Loss (gain) on early retirement of debt.    In the quarter ended June 30, 2005, we recorded a loss of $55 million for cash tender offers and a prepayment of approximately $1.5 billion in debt and a gain of $12 million from a debt for equity exchange as further discussed in Note 4—Borrowings to our condensed consolidated financial statements in Item 1 of Part I of this report.

        Loss (gain) on sale of assets.    On July 1, 2004, we entered into an agreement with Verizon Wireless under which Verizon Wireless agreed to acquire all of our PCS licenses and substantially all of our related wireless network assets. We closed this transaction in the first quarter of 2005 and recognized a gain of $257 million associated with this and related asset sales.

        Other income—net.    Other income—net decreased for the three and six months ended June 30, 2005 primarily due to a $60 million gain from the settlement of a customer emerging from bankruptcy and a $20 million gain related to the termination of indefeasible rights of use agreements in the quarter ended June 30, 2004. In the second quarter of 2005 we had a $13 million gain and a net $3 million loss for the six months ended June 30, 2005 as a result of changes in the fair value of certain interest rate swap agreements.

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Income Taxes

        For the three and six months ended June 30, 2004 our income tax benefit was offset by a full deferred tax asset valuation allowance. As discussed further in Note 7—Income Tax Provision we incurred a charge to tax expense of $136 million for the three months ended June 30, 2004, primarily related to our CLAS tax strategy.

Liquidity and Capital Resources

Near-Term View

        Our working capital, or the amount by which our current assets exceed our current liabilities, was $1.25 billion as of June 30, 2005, as compared to our working capital deficit, or the amount by which our current liabilities exceed our current assets, of $68 million as of December 31, 2004. Our working capital has improved as the result of several factors. During the second quarter of 2005, our borrowing and repayment activity significantly improved our liquidity by reducing the current portion of our long-term borrowings and temporarily increasing our cash balance as further discussed in Note 4—Borrowings to our condensed consolidated financial statements in Item 1 of Part 1 of this report. In addition, we have remaining 2005 maturities of approximately $240 million, of which $179 million was paid on July 15 as described in Note 13—Subsequent Events to our condensed consolidated financial statements in Item 1 of Part I of this report. In the first quarter of 2005, we sold our PCS licenses and substantially all of our related wireless network assets for $418 million and recognized a gain of $257 million related to this sale.

        We believe that our cash on hand together with our short-term investments and our cash flows from operations should be sufficient to meet our cash needs through the next twelve months. However, if we become subject to significant judgments, settlements or tax payments, such as the potential CLAS obligation, as further discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report, we could be required to make significant payments that we do not have the resources to make. The magnitude of any settlements or judgments resulting from these actions could materially and adversely affect our ability to meet our debt obligations and our financial condition, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of any settlements or judgments may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets.

        To the extent that our EBITDA (as defined in our debt covenants) is reduced by cash judgments or settlements, our debt to consolidated EBITDA ratios under certain debt agreements will be adversely affected. This could reduce our liquidity and flexibility due to potential restrictions on drawing on our line of credit and potential restrictions on incurring additional debt under certain provisions of our debt agreements. In addition, a three-year revolving credit facility established by Qwest Services Corporation ("QSC") in 2004 (the "2004 QSC Credit Facility") contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the investigation and securities actions discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

        The wireline segment provides over 95% of our total operating revenue with the balance attributed to wireless and other services segments and the wireline segment also provides all of the consolidated cash flows from operations. Cash flows used in operations of our wireless segment are not expected to be significant in the near term. Cash flows used in operations of our other services segment are significant; however, we expect that the cash flows provided by the wireline segment will be sufficient to fund these operations in the near term.

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        We expect that our 2005 capital expenditures will approximate 2004 levels, with the majority being used in our wireline segment.

        We continue to pursue our strategy to improve our near-term liquidity and our capital structure in order to reduce financial risk. During the quarter ended June 30, 2005, we have taken the following measures to improve our near-term financial position:

•

On June 17, 2005, we issued a total of $1.75 billion aggregate principal amount of new debt consisting of $1.15 billion in notes issued by Qwest Corporation ("QC"), including $750 million in floating rate notes due in 2013 with interest at LIBOR plus 3.25% (6.67% for the current payment period), and $400 million notes due in 2015 with an interest rate of 7.625% and $600 million of 7.50% senior notes due 2014, Series B, issued by QCII.



•

On June 23, 2005, QCII issued an additional $200 million aggregate principal amount of its 7.50% senior notes due 2014, Series B, bringing the total principal amount outstanding of such series to $800 million.



•

On June 7, 2005, we announced cash tender offers for the purchase of up to $250 million aggregate principal amount of QC's 6.625% notes due September 15, 2005 (the "QC 6.625% Notes"), up to $150 million aggregate principal amount of QC's 6.125% notes due in November 15, 2005 (the "QC 6.125% Notes"), and up to $504 million aggregate principal amount of QSC's 13.0% senior subordinated secured notes due 2007 (the "QSC 13% Notes"). We received and accepted tenders of approximately $211 million face amount of QC 6.625% Notes for $216 million, including accrued interest of $4 million, approximately $129 million face amount of QC 6.125% Notes for $131 million, including accrued interest of $1 million, and approximately $452 million face amount of QSC 13% Notes for $501 million, including accrued interest of $1 million. On June 20 and June 23, 2005 QC pre-paid an aggregate of $750 million face amount of its $1.25 billion term loan maturing in June 2007 for $775 million, including accrued interest of $2 million. These transactions resulted in a loss of $55 million.



•

During the three months ended June 30, 2005, we exchanged approximately $69 million of existing QCF notes plus $2 million of accrued interest for approximately 16 million shares of our common stock with an aggregate value of $58 million. The effective share price for the exchange transactions ranged from $4.20 per share to $4.98 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our shares at the time the exchange transactions were consummated ranged from $3.53 per share to $3.88 per share. As a result, we recorded a gain of $12 million on debt extinguishments during the six month period ended June 30, 2005. These gains are included in other expense (income) in our condensed consolidated statements of operations.



•

On May 11, 2005, we announced registered exchange offers for QCII's floating rate senior notes due 2009, 7.25% senior notes due 2011, and 7.5% senior notes due 2014 (the "2009, 2011 and 2014 QCII Notes"), and QSC's 13.5% senior notes due in 2010 and 14% senior subordinated secured notes due 2014 (the "2010 and 2012 QSC Notes") pursuant to the registration rights agreements that we entered into in connection with the issuance of these outstanding notes. We completed the registered exchange offer for the 2009, 2011 and 2014 QCII Notes and for the 2010 and 2014 QSC Notes on June 16, 2005 and June 17, 2005, respectively.



•

On May 27, 2005, QC announced registered exchange offers for its 7.875% QC notes due 2011 (the "2011 QC Notes") and its 8.875% notes due 2012 (the "2012 QC Notes") pursuant to the registration rights agreements that it entered into in connection with the issuance of these outstanding notes. QC completed the registered exchange offers for the 2011 QC notes and 2012 QC Notes on July 5, 2005.

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Long-Term View

        While we currently have a working capital surplus, we have historically operated with a working capital deficit as a result of our highly leveraged position. We believe that cash provided by operations, combined with our current cash position and continued access to capital markets to refinance our current portion of debt, should allow us to meet our cash requirements for the foreseeable future.

        In addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) if cash provided by operations does not improve, if revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or if we become subject to significant judgments, settlements or tax payments as further discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report. In the event of an adverse outcome in one or more of these matters, we could be required to make significant payments that we do not have the resources to make. The magnitude of any settlements or judgments resulting from these actions could materially and adversely affect our ability to meet our debt obligations and our financial condition, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of any settlements or judgments may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets.

        The 2004 QSC Credit Facility makes available to us $750 million of additional credit subject to certain restrictions as described below, and is currently undrawn. This facility has a cross payment default provision, and this facility and certain other debt issues also have cross acceleration provisions. When present, such provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments could occur if:

•

we fail to pay any indebtedness when due in an aggregate principal amount greater than $100 million;



•

any indebtedness is accelerated in an aggregate principal amount greater than $100 million ($25 million in the case of one of the debt instruments); or



•

judicial proceedings are commenced to foreclose on any of our assets that secure indebtedness in an aggregate principal amount greater than $100 million.

        Upon such a cross default, the creditors of a material amount of our debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due such creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated. In addition, the 2004 QSC Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the investigation and securities actions discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

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Letters of Credit

        We maintain letter of credit arrangements with various financial institutions for up to $40 million. At June 30, 2005, we had outstanding letters of credit of approximately $30 million.

Historical View

		For the Six Months Ended June 30,
		2005			2004
		(Dollars in millions)
Cash Flows:
	Provided by operating activities	$	913		$	844
	Used for investing activities		(56	)		(874	)
	Provided by (used for) financing activities		237			(152	)
Net increase (decrease) in cash and cash equivalents		$	1,094		$	(182	)

Operating Activities

        During the six months ended June 30, 2005 our primary source of funds was cash from operating activities which increased 8% as compared to the six months ended June 30, 2004 primarily due to cash savings in cost of sales and SG&A expenses, partially offset by higher collections on receivables in the six months ended June 30, 2004 compared to the six months ended June 30, 2005.

Investing Activities

        We used significantly less cash for our investing activity during the six months ended June 30, 2005 as compared to the six months ended June 30, 2004. As compared to 2004, during 2005, our capital expenditures decreased $276 million or 29%, due to decreased DSL deployment and lower local network infrastructure spending due, in part, to our reuse programs as well as from a one time adjustment related to a $33 million sales and use tax refund received in the second quarter of 2005, We expect that our 2005 capital expenditures will approximate 2004 levels. In addition, we received $418 million from the sale of our wireless assets and $174 million in net investment proceeds for the six months ended June 30, 2005 as compared to $57 million in net investment proceeds for the six months ended June 30, 2004.

Financing Activities

        Cash provided by financing activities increased primarily as a result of the timing of the payment of existing debt maturities and the receipt of cash from debt offers in the quarter ended June 30, 2005. In addition, we have remaining 2005 maturities of approximately $240 million, of which $179 million was paid on July 15 as described in Note 13—Subsequent Events to our condensed consolidated financial statements in Item 1 of Part I of this report. At June 30, 2005 we were in compliance with all provisions or covenants of our borrowings. See Note 8—Borrowings to our consolidated financial statements in Part 2, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2004, or the 2004 Form 10-K, for a discussion of our exchange transactions and for additional information regarding the covenants of our existing debt instruments.

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Credit ratings

        The table below summarizes our long-term debt ratings at June 30, 2005 and December 31, 2004:

	June 30, 2005			December 31, 2004
	Moody's	S&P	Fitch	Moody's	S&P	Fitch
Corporate rating/Sr. Implied rating	B2	BB-	NA	B2	BB-	NA
Qwest Corporation	Ba3	BB-	BB	Ba3	BB-	BB
Qwest Services Corporation	Caa1	B	B+	Caa1	B	B+
Qwest Communications Corporation	NR	NR	B	NR	B	B
Qwest Capital Funding, Inc.	Caa2	B	B	Caa2	B	B
Qwest Communications International Inc.*	B3/Caa1/Caa2	B	B+/B	B3/Caa1/Caa2	B	B+/B

NA = Not applicable

NR = Not rated

* = QCII notes have various ratings

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

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

Risk Management

        We are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative financial instruments to manage our interest rate risk exposure. We may also employ financial derivatives to hedge foreign currency exposures associated with particular debt.

        Approximately $2 billion of floating-rate debt was exposed to changes in interest rates as of June 30, 2005 and December 31, 2004. This exposure is linked to LIBOR. A hypothetical increase of 100 basis points in LIBOR would increase annual pre-tax interest expense by $20 million in 2005. As of June 30, 2005 and December 31, 2004, we had approximately $240 million and $579 million, respectively, of long-term fixed rate debt obligations maturing in the following 12 months. We are exposed to changes in interest rates at any time that we choose to refinance this debt. A hypothetical increase of 100 or 200 basis points in the interest rates on this debt would not have a material effect on our earnings.

        As of June 30, 2005, we had $2.18 billion invested in money market instruments and $500 million invested in auction rate securities. As interest rates change, so will the interest income derived from these instruments. Assuming that these investment balances were to remain constant, a hypothetical increase of 100 basis points in money market rates would increase annual interest income by $27 million. As of June 30, 2005 we also had short-term investments of $132 million; however, the income from these investments is not subject to interest rate volatility due to their fixed rate structure.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Form 10-Q contains or incorporates by reference forward-looking statements about our financial condition, results of operations and business. These statements include, among others:

•

statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenues, decreased expenses and avoided expenses and expenditures; and



•

statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.

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

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

RISK FACTORS

Risks Affecting Our Business

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

        We compete in a rapidly evolving and highly competitive market, and we expect competition to intensify. We have faced greater competition in our core local business from cable companies, wireless providers (including ourselves), facilities-based providers using their own networks as well as those leasing parts of our network (unbundled network elements), and resellers. Regulatory developments have generally increased competitive pressures on our business, such as the November 2003 decision of the Federal Communications Commission, or FCC, allowing for number portability from wireline to wireless phones.

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

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

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

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

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

        Our revenue decline over the past few years is largely attributable to our continued loss of access lines, which is a result of increased competition and technology substitution (such as wireless and cable substitution for wireline telephony). We are seeking to improve our competitive position through product bundling and other sales and marketing initiatives. However, we may not be successful in these efforts. If we are not successful and our revenue declines materially without corresponding cost reductions, this will cause a material deterioration to our results of operations and financial condition and adversely affect our ability to service debt and pay other obligations.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of the major lawsuits pending against us or the investigation currently being conducted by the U.S. Attorney's Office could have a material adverse impact on our financial condition and operating results, on the trading price of our debt and equity securities and on our ability to access the capital markets.

        The Department of Justice investigation and the securities actions described in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report present material and significant risks to us. In many of the securities actions, the plaintiffs seek tens of millions of dollars in damages or more, and in one putative class action lawsuit, lead counsel for the plaintiffs has indicated that plaintiffs will seek damages in the tens of billions of dollars. The outcomes in any cases which have been or may be brought by the U.S. Attorney's Office or the SEC against former officers or employees may have a negative impact on the outcome of certain of these legal actions.

        Further, the size, scope and nature of the restatements of our consolidated financial statements for 2001 and 2000, which are described in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002 (our "2002 Form 10-K/A"), affect the risks presented by these investigations and actions, as these matters involve, among other things, our prior accounting practices and related disclosures. Plaintiffs in certain of the securities actions have alleged our restatement of items in support of their claims. We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from all of these matters. During 2003 and 2004, we recorded reserves in our financial statements totaling $750 million in connection with the investigations and

54

securities actions. The $750 million reserve was reduced by $125 million in December 2004 as a result of a payment in that amount in connection with a settlement in October 2004 of the SEC's investigation of us. The remaining reserve amount represents a final payment to be made in connection with the SEC settlement in the amount of $125 million and the minimum estimated amount of loss we believe is probable with respect to the securities actions. However, the ultimate outcomes of these matters are still uncertain and there is a significant possibility that the amount of loss we ultimately incur could be substantially more than the reserve we have provided. If the recorded reserve that will remain after we have paid the amount owed under the SEC settlement is insufficient to cover these matters, we will need to record additional charges to our statement of operations in future periods.

        An adverse outcome with respect to the U.S. Attorney's Office investigation could have a material and significant adverse impact upon us. Additionally, we continue to defend against the securities actions vigorously and are currently unable to provide any estimate as to the timing of the resolution of these actions. Any settlement of or judgment in one or more of these actions substantially in excess of our recorded reserves could have a significant impact on us, and we can give no assurance that we will have the resources available to pay any such judgment. The magnitude of any settlement or judgment resulting from these actions could materially and adversely affect our ability to meet our debt obligations and our financial condition, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of any settlement or judgment may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets.

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

Continued scrutiny of our financial disclosures could reduce investor confidence and cause the trading price for our securities to decline.

        As a result of our past accounting issues and the increased scrutiny of financial disclosures, investor confidence in us has suffered and could suffer further. As discussed earlier, the U.S. Attorney's Office is currently conducting an investigation of, without limitation, transactions related to the various adjustments and restatements described in our 2002 Form 10-K/A, transactions between us and certain of our vendors and certain investments in the securities of those vendors by individuals associated with us, and certain prior disclosures made by us. Although, as described above, we have entered into a settlement with the SEC concerning its investigation of us, in March 2005, the SEC filed suit against our former Chief Executive Officer, Joseph Nacchio, two of our former Chief Financial Officers, Robert Woodruff and Robin Szeliga, and other former officers and employees. In February 2005, a criminal indictment was returned against Marc Weisberg, a former Qwest executive, in federal district court in Colorado. The indictment alleges that Mr. Weisberg violated federal laws by seeking and obtaining investment opportunities for himself and others in vendors that did or sought to do business with Qwest. In June 2005, Ms. Szeliga reached an agreement in principle with the SEC staff to settle the actions against her alleging civil fraud and other claims and in July 2005, she pleaded guilty to a criminal charge of insider trading. Other former officers or employees have entered into settlements with the SEC involving civil fraud or other claims in which they neither admitted nor denied the allegations against them. Civil and criminal trials in the matters discussed in this paragraph could take place in the future. Evidence that is introduced at such trials and in other matters may result in further scrutiny by governmental authorities and others.

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

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

        Our operations are subject to extensive federal regulation, including the Communications Act of 1934, as amended, and FCC regulations thereunder. We are also subject to the applicable laws and regulations of various states, including regulation by PUCs and other state agencies. Federal laws and FCC regulations generally apply to regulated interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities generally have jurisdiction over regulated telecommunications services that are intrastate in nature. The local competition aspects of the Telecommunications Act of 1996 are subject to FCC rulemaking, but the state regulatory authorities play a significant role in implementing those FCC rules. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer regulated services and must obtain prior regulatory approval of rates, terms and conditions for our intrastate services, where required. Our businesses are subject to numerous, and often quite detailed, requirements under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are always in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on their own perceptions of our conduct, or based on customer complaints.

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

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

Risks Affecting Our Liquidity

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

        We are highly leveraged. As of June 30, 2005, our consolidated debt was approximately $17.5 billion. A considerable amount of our debt obligations comes due over the next few years. While we currently believe we will have the financial resources to meet our obligations when they come due, we cannot anticipate what our future condition will be. We may have unexpected costs and liabilities and we may have limited access to financing.

        In addition to our periodic need to obtain financing in order to meet our debt obligations as they come due, we may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) if cash provided by operations does not improve, if revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or if we become subject to significant judgments and/or settlements as further discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report and in "Liquidity and Capital Resources" above. We can give no assurance that such additional financing will be available on terms that are acceptable.

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

56

acceleration of a single debt instrument. Any such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. In addition, the 2004 QSC Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the investigation and securities actions discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

        Our high debt levels could adversely impact our credit ratings. Additionally, the degree to which we are leveraged may have other important limiting consequences, including the following:

•

placing us at a competitive disadvantage as compared with our less leveraged competitors, including some who have significantly reduced their debt through a bankruptcy proceeding;



•

making us more vulnerable to the current or future downturns in general economic conditions or in any of our businesses;



•

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and



•

impairing our ability to obtain additional financing in the future for working capital, capital expenditures or general corporate purposes.

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

        We anticipate that our capital requirements relating to maintaining and routinely upgrading our network will continue to be significant in the coming years. We may be unable to further significantly reduce our capital requirements or operating expenses, even if revenue is decreasing. We also may be unable to significantly reduce the operating expenses associated with our future contractual cash obligations, including future purchase commitments, which may in turn affect our operating results. Such non-discretionary capital outlays and operating expenses may lessen our ability to compete with other providers who face less significant spending requirements. While we believe that our current level of capital expenditures will meet both our maintenance and our core growth requirements going forward, this may not be the case if circumstances underlying our expectations change.

If we are unable to renegotiate a significant portion of certain future purchase commitments, we may suffer related losses.

        As of December 31, 2004, our aggregate future purchase commitments totaled approximately $2.8 billion. We entered into these commitments, which obligate us to purchase network services and capacity, hardware or advertising from other vendors, with the expectation that we would use these commitments in association with projected revenues. In certain cases, as a result of changes in strategy or other factors, we no longer generate the revenue we originally projected to be associated with these commitments. Because we are in a rapidly changing industry, we always face the risk of other contracts becoming similarly underutilized. If we are unable to restructure or renegotiate our underutilized contracts (both existing and future) in a profitable manner, we could suffer from substantial ongoing expenses without associated revenue to offset the expenses related to these arrangements. In addition, we may incur losses in connection with these restructurings and renegotiations.

Declines in the value of pension plan assets could require us to provide significant amounts of funding for our pension plan.

        While we do not expect to be required to make material cash contributions to our defined benefit pension plan in the near term based upon current actuarial analyses and forecasts, a significant decline in the value of pension plan assets in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension

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funding. As a result, we may be required to fund our benefit plans with cash from operations, perhaps by a material amount. As of December 31, 2004, our plan assets exceed our accumulated benefit obligation by $475 million. Recognition of an additional minimum liability caused by changes in plan assets or measurement of the accumulated benefit obligation could have a material impact on our consolidated balance sheet. As an example, if our accumulated benefit obligation exceeded plan assets in the future, the impact would be to eliminate our prepaid pension asset, which was $1.192 billion as of December 31, 2004, and record a pension liability for the amount that our accumulated benefit obligation exceeds plan assets with a corresponding charge to other comprehensive loss in stockholder's deficit. Alternatively, we could make a voluntary contribution to the plan so that the plan assets exceed the accumulated benefit obligation.

If we pursue and are involved in any business combinations, our financial condition could be adversely affected.

        On a regular and ongoing basis, we review and evaluate other businesses and opportunities for business combinations that would be strategically beneficial. As a result, we may be involved in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our financial condition (including short-term or long-term liquidity) or short-term or long-term results of operations.

        Should we make an error in judgment when identifying an acquisition candidate, or should we fail to successfully integrate acquired operations, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences. Acquisitions involve a number of other risks, including:

•

incurrence of substantial transaction costs;



•

diversion of management's attention from operating our existing business;



•

charges to earnings in the event of any write-down or write-off of goodwill recorded in connection with acquisitions;



•

depletion of our cash resources or incurrence of additional indebtedness to fund acquisitions;



•

an adverse impact on our tax position; and



•

assumption of liabilities of an acquired business (including unforeseen liabilities).

        We can give no assurance that we will be able to successfully complete and integrate strategic acquisitions.

Other Risks Relating to Qwest

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

        The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in our 2004 Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered "critical" because they require judgments, assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies or different assumptions are used in the future, such events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

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Taxing authorities may determine we owe additional taxes relating to various matters, which could adversely affect our financial results.

        As a significant taxpayer, we are subject to frequent and regular audits from the Internal Revenue Service, or IRS, as well as from state and local tax authorities. These audits could subject us to risks due to adverse positions that may be taken by these tax authorities. Please see Note 11—Commitments and Contingencies—Other Matters to our condensed consolidated financial statements in Item 1 of Part I of this report for examples of legal proceedings involving some of these adverse positions. For example, in the fourth quarter of 2004, Qwest received notices of proposed adjustments on several significant issues for the 1998-2001 audit cycle. Additionally, the IRS indicated in January 2005, that it is reviewing Qwest's tax treatment of the sale of its DEX directory publishing business in the 2002-2003 audit cycle.

        Because prior to 1999 Qwest was a member of affiliated groups filing consolidated U.S. federal income tax returns, we could be severally liable for tax examinations and adjustments not directly applicable to current members of the Qwest affiliated group. Tax sharing agreements have been executed between us and previous affiliates, and we believe the liabilities, if any, arising from adjustments to tax liability would be borne by the affiliated group member determined to have a deficiency under the terms and conditions of such agreements and applicable tax law. We have not provided in our financial statements for any liability of former affiliated members or for claims they have asserted or may assert against us.

        While we believe our tax reserves adequately provide for the associated tax contingencies under current accounting literature, Qwest's tax audits and examinations may result in tax liabilities that differ materially from those we have recorded in our consolidated financial statements. Also, the ultimate outcomes of all of these matters are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results, including potentially offsetting a significant portion of our existing net operating losses.

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

        We are a party to collective bargaining contracts with our labor unions, which represent a significant number of our employees. Although we believe that our relations with our employees are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire from time to time. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business. In August 2003, we reached agreements with the Communications Workers of America, or CWA, and the International Brotherhood of Electrical Workers, or IBEW, on two-year labor contracts. Each of these agreements was ratified by union members and expires on August 13, 2005. The impact of the 2005 and future negotiations, including changes in wages and benefit levels, including, but not limited to, the cost of providing active and post-retirement healthcare, could have a material impact on our financial results.

The trading price of our securities could be volatile.

        In recent years, the capital markets have experienced extreme price and volume fluctuations. The overall market and the trading price of our securities may fluctuate greatly. The trading price of our securities may be significantly affected by various factors, including:

•

quarterly fluctuations in our operating results;

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•

changes in investors' and analysts' perception of the business risks and conditions of our business;



•

broader market fluctuations; and



•

general economic or political conditions.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information under the caption "Risk Management" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report is incorporated herein by reference.

ITEM 4.    CONTROLS AND PROCEDURES

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

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") as of June 30, 2005. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

        There were no changes in our internal control over financial reporting that occurred in the second quarter of 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        The information contained in Note 11—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report is hereby incorporated by reference.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        During the second quarter of 2005, we issued approximately 16 million shares of our common stock that were not registered under the Securities Act of 1933, as amended, in reliance on an exemption pursuant to Section 3(a)(9) of that Act. These shares of common stock were issued in a number of separately and privately negotiated direct exchange transactions occurring on various dates throughout the quarter for approximately $69 million in face amount of debt issued by Qwest Capital Funding, Inc., a wholly owned subsidiary of Qwest, and guaranteed by Qwest, and $2 of accrued interest. The effective share price for the exchange transactions ranged from $4.20 per share to $4.98 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our common stock at the time the exchange transactions were consummated range from $3.53 per share to $3.88 per share. No underwriters or underwriting discounts or commissions were involved.

        The following table contains information about repurchases of our common stock during second quarter of 2005.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 2005	—			—	N/A	N/A
May 2005	—			—	N/A	N/A
June 2005	27,387	(1)	$	3.65	N/A	N/A
Total	27,387		$	3.65	N/A	N/A

(1)

Represents shares of common stock delivered to us as payment of withholding taxes due on the vesting of restricted stock under our Equity Incentive Plan.

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

        We held our 2005 Annual Meeting of Stockholders on May 24, 2005. At the meeting, stockholders present in person or by proxy voted on the following matters:

        1.     The election of three directors to the Board of Directors to hold office until the annual meeting of stockholders in 2006 and until their successors are elected and qualified;

	Votes For	Votes Withheld
Linda G. Alvarado	1,549,206,365	48,109,779
Cannon Y. Harvey	1,220,379,625	376,936,519
Richard C. Notebaert	1,559,317,257	37,998,887

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        2.     Ratification of the appointment of KPMG LLP as our independent auditor for 2005;

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
1,569,387,091	14,655,225	13,273,828	N/A

        3.     A stockholder proposal requesting that we adopt a policy that all members of certain committees of the Board of Directors be independent under a definition of "independence" adopted by the Council of Institutional Investors;

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
444,477,937	809,842,151	16,544,055	326,452,001

        4.     A stockholder proposal requesting that we seek stockholder approval of certain benefits for senior executives under our non-qualified pension plan or any supplemental executive retirement plan; and

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
225,604,485	1,031,299,888	13,959,770	326,452,001

        5.     A stockholder proposal requesting that we adopt a policy whereby, in the event of a substantial restatement of financial results, our Board of Directors would review certain performance-based compensation made to executive officers and pursue legal remedies to recover such compensation to the extent that the restated results did not exceed original performance targets.

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
402,320,924	853,820,633	14,722,586	326,452,001

ITEM 6.    EXHIBITS

        Exhibits filed for Qwest through the filing of this Form 10-Q:

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

Exhibit Number		Description
(2.1	)	Agreement and Plan of Merger, dated as of July 18, 1999 between U S WEST, Inc. and Qwest (incorporated by reference to Qwest's Form S-4/A filed on August 13, 1999, File No. 333-81149).
(3.1	)	Restated Certificate of Incorporation of Qwest (incorporated by reference to Qwest's Registration Statement on Form S-4/A, filed September 17, 1999, File No. 333-81149).
(3.2	)	Certificate of Amendment of Restated Certificate of Incorporation of Qwest (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No. 001-15577).
(3.3	)	Amended and Restated Bylaws of Qwest, adopted as of July 1, 2002 and amended as of May 25, 2004 (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No. 001-15577).

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(4.1	)	Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by reference to Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).
(4.2	)	First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).
(4.3	)	Indenture, dated as of October 15, 1997, with Bankers Trust Company (including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47% Series B Senior Discount Notes due 2007 as an exhibit thereto) (incorporated by reference to exhibit 4.1 of Qwest's Form S-4 as declared effective on January 5, 1998, File No. 333-42847).
(4.4	)	Indenture, dated as of August 28, 1997, with Bankers Trust Company (including form of Qwest's 107/8% Series B Senior Discount Notes due 2007 as an exhibit thereto) (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).
(4.5	)	Indenture, dated as of January 29, 1998, with Bankers Trust Company (including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).
(4.6	)	Indenture, dated as of November 4, 1998, with Bankers Trust Company (including form of Qwest's 7.50% Senior Discount Notes due 2008 and 7.50% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).
(4.7	)	Indenture, dated as of November 27, 1998, with Bankers Trust Company (including form of Qwest's 7.25% Senior Discount Notes due 2008 and 7.25% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).
(4.8	)	Indenture, dated as of June 23, 1997, between LCI International, Inc. and First Trust National Association, as trustee, providing for the issuance of Senior Debt Securities, including Resolutions of the Pricing Committee of the Board of Directors establishing the terms of the 7.25% Senior Notes due June 15, 2007 (incorporated by reference to LCI's Current Report on Form 8-K, dated June 23, 1997, File No. 001-12683).
(4.9	)	Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., and The First National Bank of Chicago (now known as Bank One Trust Company, N. A.), as trustee (incorporated by reference to U S WEST's Current Report on Form 8-K, dated November 18, 1998, File No. 001-14087).
(4.10	)	Indenture, dated as of October 15, 1999, by and between Qwest Corporation and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-03040).
(4.11	)	First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest, and Bank One Trust Company, as trustee (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 001-15577).

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(4.12	)	First Supplemental Indenture, dated as of February 16, 2001, to the Indenture, dated as of January 29, 1998, with Bankers Trust Company (including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 001-15577).
(4.13	)	First Supplemental Indenture, dated as of February 16, 2001, to the Indenture, dated as of October 15, 1997, with Bankers Trust Company (including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47% Series B Senior Discount Notes due 2007 as an exhibit thereto) (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 001-15577).
(4.14	)	First Supplemental Indenture, dated as of February 16, 2001, to the Indenture, dated as of August 28, 1997, with Bankers Trust Company (including form of Qwest's 107/8% Series B Senior Discount Notes due 2007 as an exhibit thereto) (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 001-15577).
(4.15	)	Officer's Certificate of Qwest Corporation, dated March 12, 2002 (including forms of 87/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporation's Form S-4, File No. 333-115119).
(4.16	)	Indenture, dated as of December 26, 2002, between Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest's Current Report on Form 8-K filed on January 10, 2003, File No. 001-15577).
(4.17	)	First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).
(4.18	)	First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).
(4.19	)	Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).
(4.20	)	Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).

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(4.21	)	Indenture, dated as of February 5, 2004, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and J.P. Morgan Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11, 2004, File No. 001-15577).
(4.22	)	First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Registration Statement on Form S-4, File No. 333-115119).
(4.23	)	Second Supplemental Indenture, dated November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Current Report on Form 8-K filed on November 23, 2004, File No. 001-03040).
(4.24	)	First Supplemental Indenture, dated June 17, 2005, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S Bank National Association (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(4.25	)	Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S Bank National Association (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(4.26	)	Second Supplement Indenture, dated June 23, 2005, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S Bank National Association (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.1	)	Equity Incentive Plan, as amended, including forms of option and restricted agreements (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-15577).*
(10.2	)	Employee Stock Purchase Plan (incorporated by reference to Qwest's 2003 Proxy Statement for the Annual Meeting of Stockholders).*
(10.3	)**	Nonqualified Employee Stock Purchase Plan.*
(10.4	)	Deferred Compensation Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 000-22609).*
(10.5	)	Equity Compensation Plan for Non-Employee Directors (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).*
(10.6	)	Deferred Compensation Plan for Nonemployee Directors (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-15577).*
(10.7	)	Qwest Savings & Investment Plan, as amended and restated (incorporated by reference to Qwest's Form S-8 filed on January 15, 2004, File No. 333-11923).*
(10.8	)	2005 Qwest Management Bonus Plan Summary (incorporated by reference to Qwest's Current Report on Form 8-K, filed February 18, 2005, File No. 001-15577).*
(10.9	)	Registration Rights Agreement, dated as of April 18, 1999, with Anschutz Company and Anschutz Family Investment Company LLC (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999, File No. 000-22609).

65

(10.10	)	Common Stock Purchase Agreement, dated as of April 19, 1999, with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999, File No. 000-22609).
(10.11	)	Securities Purchase Agreement, dated January 16, 2001, with BellSouth Corporation (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-15577).
(10.12	)	Employee Matters Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 001-14087).
(10.13	)	Tax Sharing Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 001-14087).
(10.14	)	Purchase Agreement, dated August 16, 2000, among Qwest, Qwest Capital Funding, Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc., as representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 001-15577).
(10.15	)	Purchase Agreement, dated February 7, 2001, among Qwest, Qwest Capital Funding, Inc., Banc of America Securities LLC and Chase Securities Inc. as representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-15577).
(10.16	)	Purchase Agreement, dated July 25, 2001, among Qwest, Qwest Capital Funding, Inc., Lehman Brothers Inc. and Merrill Lynch & Co., Inc., as representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 001-15577).
(10.17	)	Registration Rights Agreement, dated February 5, 2004, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and the initial purchasers listed therein (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-15577).
(10.18	)	Registration Rights Agreement, dated August 19, 2004, among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(10.19	)	Registration Rights Agreement, dated November 23, 2004, by and among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Corporation's Current Report on Form 8-K dated November 18, 2004, File No. 001-03040).
(10.20	)	Registration Rights Agreement, dated June 17, 2005, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and the initial purchasers listed therein (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.21	)	Registration Rights Agreement, dated June 17, 2005, by and among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).

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(10.22	)	Registration Rights Agreement, dated June 23, 2005, among Qwest, Qwest Services Corporation, Qwest Capital Funding, Inc. and the initial purchasers listed therein (incorporated by reference to Qwest's Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.23	)	Amended and Restated Employment Agreement, dated August 19, 2004, by and between Richard C. Notebaert and Qwest Services Corporation (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.24	)	Aircraft Time Sharing Agreement, dated November 2, 2004, by and between Qwest Business Resources, Inc. and Richard C. Notebaert (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(10.25	)	Amended and Restated Employment Agreement, dated August 19, 2004, by and between Oren G. Shaffer and Qwest Services Corporation (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.26	)	Aircraft Time Sharing Agreement, dated March 19, 2004, by and between Qwest Business Resources, Inc. and Oren G. Shaffer (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(10.27	)**	Retention Agreement, dated May 8, 2002, by and between Qwest and Richard N. Baer.*
(10.28	)**	Severance Agreement, dated July 21, 2003, by and between Qwest and Richard N. Baer.*
(10.29	)**	Severance Agreement, dated July 21, 2003, by and between Qwest and Clifford S. Holtz.*
(10.30	)**	Letter Agreement, dated August 20, 2003, by and between Qwest and Paula Kruger.*
(10.31	)**	Severance Agreement, dated September 8, 2003, by and between Qwest and Paula Kruger.*
(10.32	)	Letter Agreement, dated August 19, 2004, by and between Qwest and Paula Kruger (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.33	)	Amended and Restated Employment Agreement, dated August 19, 2004 by and between Barry K. Allen and Qwest Services Corporation (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.34	)	Aircraft Time Sharing Agreement, dated March 19, 2004, by and between Qwest Business Resources, Inc. and Barry Allen (incorporated by reference to Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(10.35	)	Letter Agreement, dated March 27, 2003, by and between Qwest and John W. Richardson (incorporated by reference to Qwest's Registration Statement on Form S-4, File No. 333-115115).*
(10.36	)	Severance Agreement, dated as of July 28, 2003, by and between Qwest and John W. Richardson (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-15577).*
(10.37	)	Private Label PCS Services Agreement between Sprint Spectrum L.P. and Qwest Wireless LLC dated August 3, 2003 (incorporated by reference to Qwest's Current Report on Form 8-K filed on March 14, 2005, File No. 1-15577).†

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12	Calculation of Ratio of Earnings to Fixed Charges.
31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Quarterly Operating Revenue.
99.2	Quarterly Condensed Consolidated Statement of Operations.

(

)     Previously filed.

*

Executive Compensation Plans and Arrangements.

**

Incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577.

†

Confidential treatment has been granted by the SEC for certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the SEC.

        In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	QWEST COMMUNICATIONS INTERNATIONAL INC.
	By:	/s/  JOHN W. RICHARDSON John W. Richardson Senior Vice President and Controller (Chief Accounting Officer and Duly Authorized Officer)
August 2, 2005

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EX-12

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Exhibit 12

QWEST COMMUNICATIONS INTERNATIONAL INC.

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Dollars in Millions)

			Six Months Ended June 30, 2005			2004			2003			2002			2001			2000
Loss from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle			$	(107	)	$	(1,706	)	$	(1,832	)	$	(20,115	)	$	(7,362	)	$	(2,034	)
		Add: estimated fixed charges		836			1,678			1,936			1,998			1,856			1,324
		Add: estimated amortization of capitalized interest		7			18			24			25			19			12
		Less: interest capitalized		(5	)		(12	)		(19	)		(41	)		(187	)		(105	)
	Total earnings available for fixed charges			731			(22	)		109			(18,133	)		(5,674	)		(803	)
	Estimate of interest factor on rentals			70			135			160			168			232			176
	Interest expense, including amortization of premiums, discounts and debt issurance costs			761			1,531			1,757			1,789			1,437			1,043
	Interest capitalized			5			12			19			41			187			105
Total fixed charges			$	836		$	1,678		$	1,936		$	1,998		$	1,856		$	1,324
Ratio of earnings to fixed charges				0.9			(0.0	)		0.1			(9.1	)		(3.1	)		(0.6	)
Additional pre-tax income needed for earnings to cover total fixed charges			$	105		$	1,700		$	1,827		$	20,131		$	7,530		$	2,127

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Exhibit 12

QWEST COMMUNICATIONS INTERNATIONAL INC. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)

EX-31.1

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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard C. Notebaert, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Qwest Communications International Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 2, 2005

/s/  RICHARD C. NOTEBAERTChairman and Chief Executive Officer

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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

EX-31.2

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Oren G. Shaffer, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Qwest Communications International Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 2, 2005

/s/  OREN G. SHAFFERVice Chairman and Chief Financial Officer

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

EX-32

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Exhibit 32

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION

        Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Qwest Communications International Inc. ("Qwest"), that, to his knowledge, the Quarterly Report of Qwest on Form 10-Q for the quarter ended June 30, 2005, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of Qwest. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-Q. A signed original of this statement has been provided to Qwest and will be retained by Qwest and furnished to the Securities and Exchange Commission or its staff upon request.

Dated: August 2, 2005	By:	/s/  RICHARD C. NOTEBAERT Richard C. Notebaert Chairman and Chief Executive Officer
Dated: August 2, 2005	By:	/s/  OREN G. SHAFFER Oren G. Shaffer Vice Chairman and Chief Financial Officer

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Exhibit 32

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION

EX-99.1

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EXHIBIT 99.1

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY OPERATING REVENUE
(Dollars in millions)
(Unaudited)

			2005				2004								2003
			Q2		Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1
Business:
	Wireline revenue:
		Local voice	$	270	$	266	$	278	$	286	$	278	$	291	$	289	$	300	$	307	$	311
		Long distance		114		114		106		119		114		116		108		115		110		113
		Access		1		1		1		1		1		2		1		1		2		2
	Total voice services			385		381		385		406		393		409		398		416		419		426
		Data and Internet		510		494		504		488		498		497		484		497		476		463
Total business wireline				895		875		889		894		891		906		882		913		895		889
Mass Markets:
	Wireline revenue:
		Local voice		1,124		1,128		1,138		1,145		1,163		1,212		1,234		1,289		1,312		1,355
		Long distance		164		166		161		151		140		140		138		137		136		133
		Access		2		2		4		1		1		2		3		3		4		4
	Total voice services			1,290		1,296		1,303		1,297		1,304		1,354		1,375		1,429		1,452		1,492
		Data and Internet		175		171		158		137		141		136		137		132		130		133
Total wireline				1,465		1,467		1,461		1,434		1,445		1,490		1,512		1,561		1,582		1,625
Wholesale:
	Wireline revenue:
		Local voice		222		225		218		233		239		223		226		235		238		223
		Long distance		269		278		278		279		239		244		237		215		221		201
		Access		169		147		146		149		162		166		171		170		163		178
	Total voice services			660		650		642		661		640		633		634		620		622		602
		Data and Internet		311		322		312		319		330		313		319		313		336		345
Total wholesale wireline				971		972		954		980		970		946		953		933		958		947
Wireless revenue				130		124		124		132		128		126		138		152		153		151
Other services revenue				9		11		9		9		8		13		13		11		8		12
Total operating revenue			$	3,470	$	3,449	$	3,437	$	3,449	$	3,442	$	3,481	$	3,498	$	3,570	$	3,596	$	3,624

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EXHIBIT 99.1

QWEST COMMUNICATIONS INTERNATIONAL INC. QUARTERLY OPERATING REVENUE (Dollars in millions) (Unaudited)

EX-99.2

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EXHIBIT 99.2

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(Unaudited)

			2005						2004												2003
			Q2			Q1			Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
Operating revenue			$	3,470		$	3,449		$	3,437		$	3,449		$	3,442		$	3,481		$	3,498		$	3,570		$	3,596		$	3,624
Operating expenses:
	Cost of sales:
		Facility costs		682			677			650			748			681			662			704			1,137			688			702
		Network expenses		59			66			66			73			66			57			82			81			70			68
		Employee-related costs		388			410			390			429			437			450			464			468			439			433
		Other non-employee related costs		305			286			296			298			302			285			293			276			278			272
Total cost of sales				1,434			1,439			1,402			1,548			1,486			1,454			1,543			1,962			1,475			1,475
Selling, general and administrative:
		Property and other taxes		111			99			78			112			115			81			97			114			115			126
		Bad debt		53			57			49			39			13			93			61			70			72			100
		Restructuring and severance related costs		(1	)		15			53			2			127			15			46			37			16			13
		Employee-related costs		410			407			413			413			434			469			415			429			472			485
		Other non-employee related costs		472			458			477			695			797			496			629			455			480			458
	Total Selling, general and administrative			1,045			1,036			1,070			1,261			1,486			1,154			1,248			1,105			1,155			1,182
	Depreciation and amortization			765			774			783			779			784			777			798			796			789			784
	Impairments and other			—			—			36			34			43			—			—			230			—			—
Total operating expenses				3,244			3,249			3,291			3,622			3,799			3,385			3,589			4,093			3,419			3,441
Operating income (loss)				226			200			146			(173	)		(357	)		96			(91	)		(523	)		177			183
Other expense (income)
	Interest expense—net			380			381			366			374			394			397			436			437			444			440
	Other expense (income)—net			13			(242	)		(54	)		40			(111	)		12			(37	)		(18	)		(63	)		(61	)
Total other expense (income)				393			139			312			414			283			409			399			419			381			379
Income tax benefit (expense)				3			(4	)		27			18			(136	)		3			108			256			79			76
Income (loss) from continuing operations				(164	)		57			(139	)		(569	)		(776	)		(310	)		(382	)		(686	)		(125	)		(120	)
Discontinued operations—net				—						—			—			—			—			(25	)		2,517			61			66
Cumulative effect of accounting changes—net				—			—			—			—			—			—			—			—			—			206
Net income (loss)			$	(164	)	$	57		$	(139	)	$	(569	)	$	(776	)	$	(310	)	$	(407	)	$	1,831		$	(64	)	$	152

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EXHIBIT 99.2

QWEST COMMUNICATIONS INTERNATIONAL INC. QUARTERLY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions) (Unaudited)