10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

or

¨ 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	84-1339282
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1801 California Street, Denver, Colorado	80202
(Address of principal executive offices)	(Zip Code)

(303) 992-1400

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On July 28, 2006, 1,905,231,777 shares of common stock were outstanding.

QWEST COMMUNICATIONS INTERNATIONAL INC.

FORM 10-Q

TABLE OF CONTENTS

Item		Page
	Glossary of Terms	3
	PART I—FINANCIAL INFORMATION
1.	Financial Statements	5
	Condensed Consolidated Statements of Operations—Three and six months ended June 30, 2006 and 2005 (unaudited)	5
	Condensed Consolidated Balance Sheets—June 30, 2006 and December 31, 2005 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2006 and 2005 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
3.	Quantitative and Qualitative Disclosures About Market Risk	49
4.	Controls and Procedures	49
	PART II—OTHER INFORMATION
1.	Legal Proceedings	50
1A.	Risk Factors	50
2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
4.	Submission of Matters to a Vote of Security Holders	56
6.	Exhibits	58
	Signature Page	65

2

GLOSSARY OF TERMS

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

• 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 utilizing data switches that provides a fast, efficient way to move large quantities of information.

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

• Data Integration. Voice and data telecommunications customer premises equipment (CPE) and associated professional services, including network management, the installation and maintenance of data equipment and the building of proprietary fiber-optic broadband networks, for our governmental and business customers.

• Frame Relay. A high speed data 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 extend beyond a customer’s local exchange service area.

• 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). Those protocols that facilitate transferring information in packets of data and that enable each packet in a transmission to “tell” the data switches it encounters where it is headed and enables the computers on each end to confirm that message has been accurately transmitted and received.

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

• 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 associated with the provision of telecommunications services by local exchange and long distance carriers. There are 163 LATAs in the United States, of which 27 are in our 14 state 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.

3

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

• Unbundled Network Elements (UNEs). 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 as well as related services.

• Wide Area Network (WAN). A communications network that covers a wide geographic area, such as a state or country. A WAN typically extends a local area network outside the building, over telephone common carrier lines to link to other local area networks in remote locations, such as branch offices or at-home workers and telecommuters.

4

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in millions except per share amounts, shares in thousands)
Operating revenue	$	3,472		$	3,470		$	6,948		$	6,919
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		1,393			1,434			2,810			2,873
Selling, general and administrative		970			1,045			1,984			2,081
Depreciation		592			649			1,180			1,302
Capitalized software and other intangible assets amortization		101			116			204			237
Total operating expenses		3,056			3,244			6,178			6,493
Other expense (income)—net:
Interest expense—net		298			380			594			761
(Gain) loss on early retirement of debt—net		(5	)		43			(5	)		43
Gain on sale of assets		(3	)		—			(3	)		(257	)
Other income—net		(9	)		(30	)		(37	)		(15	)
Total other expense (income)—net		281			393			549			532
Income (loss) before income taxes		135			(167	)		221			(106	)
Income tax (expense) benefit		(18	)		3			(16	)		(1	)
Net income (loss)	$	117		$	(164	)	$	205		$	(107	)
Basic income (loss) per share	$	0.06		$	(0.09	)	$	0.11		$	(0.06	)
Basic weighted average shares outstanding		1,882,398			1,823,338			1,878,378			1,820,048
Diluted income (loss) per share	$	0.06		$	(0.09	)	$	0.11		$	(0.06	)
Diluted weighted average shares outstanding		1,951,728			1,823,338			1,935,806			1,820,048

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

5

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30, 2006			December 31, 2005
	(Dollars in millions, shares in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,189		$	846
Short-term investments		205			101
Accounts receivable (less allowance of $151 and $167, respectively)		1,477			1,525
Prepaid expenses and other current assets		682			692
Total current assets		3,553			3,164
Property, plant and equipment—net		15,016			15,568
Capitalized software and other intangible assets—net		929			1,007
Prepaid pension asset		1,129			1,165
Other assets		665			593
Total assets	$	21,292		$	21,497
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current borrowings	$	2,683		$	512
Accounts payable		748			773
Accrued expenses and other current liabilities		2,055			2,317
Deferred revenue and advance billings		609			633
Total current liabilities		6,095			4,235
Long-term borrowings (net of unamortized debt discount of $211 and $221, respectively)		12,693			14,968
Post-retirement and other post-employment benefit obligations		3,439			3,459
Deferred revenue		508			522
Other long-term liabilities		1,383			1,530
Total liabilities		24,118			24,714
Commitments and contingencies (Note 8)
Stockholders’ deficit:
Preferred stock—$1.00 par value, 200 million shares authorized; none issued or outstanding		—			—
Common stock—$0.01 par value, 5 billion shares authorized; 1,904,765 and 1,867,422 shares issued, respectively		19			19
Additional paid-in capital		43,475			43,290
Treasury stock—1,101 and 1,062 shares, respectively (including 62 shares held in rabbi trust at both dates)		(17	)		(17	)
Accumulated deficit		(46,295	)		(46,500	)
Accumulated other comprehensive loss		(8	)		(9	)
Total stockholders’ deficit		(2,826	)		(3,217	)
Total liabilities and stockholders’ deficit	$	21,292		$	21,497

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

6

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2006			2005
	(Dollars in millions)
OPERATING ACTIVITIES
Net income (loss)	$	205		$	(107	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,384			1,539
Provision for bad debts—net		71			110
Gain on sale of assets		(3	)		(257	)
(Gain) loss on early retirement of debt—net		(5	)		43
Other non-cash charges—net		32			9
Changes in operating assets and liabilities:
Accounts receivable		(23	)		(82	)
Prepaid expenses and other current assets		28			98
Accounts payable and accrued expenses and other current liabilities		(284	)		(258	)
Deferred revenue and advance billings		(38	)		(54	)
Other non-current assets and liabilities		(190	)		(128	)
Cash provided by operating activities		1,177			913
INVESTING ACTIVITIES
Expenditures for property, plant and equipment and intangible assets (net of tax refund of $33 million in 2005)		(832	)		(665	)
Proceeds from sale of property and equipment		47			418
Proceeds from sale of investment securities		42			1,086
Purchases of investment securities		(146	)		(912	)
Other		—			17
Cash used for investing activities		(889	)		(56	)
FINANCING ACTIVITIES
Proceeds from long-term borrowings		—			1,885
Repayments of long-term borrowings, including current maturities		(47	)		(1,550	)
Proceeds from issuances of common stock		102			7
Early retirement of debt costs		—			(74	)
Debt issuance costs		—			(31	)
Cash provided by financing activities		55			237
CASH AND CASH EQUIVALENTS
Increase in cash and cash equivalents		343			1,094
Beginning balance		846			1,151
Ending balance	$	1,189		$	2,245

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

7

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(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 accounting principles generally accepted 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, 2006 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”). The condensed consolidated results of operations for the three and six month periods ended June 30, 2006 and the condensed consolidated statement of cash flows for the six month period ended June 30, 2006 are not necessarily indicative of the results or cash flows expected for the full year.

Use of estimates

Our condensed 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, but not limited to, long-term contracts, customer retention patterns, allowance for bad debts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets, impairment assessments, employee benefits, taxes, reserves and other provisions and contingencies are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed 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 legal and tax matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. In instances where we have the potential to recover a portion of such a loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable. For income tax related matters, we record a liability computed at the statutory income tax rate if we determine that (i) we do not believe we are more likely than not to prevail on an uncertainty related to the timing of recognition for an item, or (ii) we do not believe it is probable that we will prevail and the uncertainty is not related to the timing of recognition. Actual results could differ from these estimates. See Note 8—Commitments and Contingencies.

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

Depreciation and amortization

Property, plant and equipment are shown net of depreciation on our condensed consolidated balance sheets. As of June 30, 2006 and December 31, 2005, accumulated depreciation was $31.2 billion and $30.4 billion, respectively.

8

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Capitalized software and other intangible assets are shown net of amortization on our condensed consolidated balance sheets. Accumulated amortization was $1.5 billion and $1.3 billion as of June 30, 2006 and December 31, 2005, respectively.

Earnings per share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For purposes of this calculation, common stock outstanding does not include shares of restricted stock on which the restrictions have not yet lapsed. Diluted earnings per share reflects the potential dilution that could occur if certain outstanding stock options are exercised, convertible debt is converted and restrictions lapse on restricted stock awards. The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations:

	Three Months Ended June 30,					Six Months Ended June 30,
	2006		2005			2006		2005
	(Dollars in millions except per share amounts, shares in thousands)
Net income (loss)	$	117	$	(164	)	$	205	$	(107	)
Basic weighted average shares outstanding		1,882,398		1,823,338			1,878,378		1,820,048
Dilutive effect of options with strike prices equal to or less than the average price of our common stock, calculated using the treasury stock method		29,171		—			28,166		—
Dilutive effect of the equity premium on convertible debt at the average price of our common stock		34,330		—			23,557		—
Dilutive effect of unvested restricted stock and other		5,829		—			5,705		—
Diluted weighted average shares outstanding		1,951,728		1,823,338			1,935,806		1,820,048
Basic income (loss) per share	$	0.06	$	(0.09	)	$	0.11	$	(0.06	)
Diluted income (loss) per share	$	0.06	$	(0.09	)	$	0.11	$	(0.06	)

The following is a summary of the securities that could potentially dilute basic earnings per share, but have been excluded from the computations of diluted income (loss) per share:

	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
	(Shares in thousands)
Outstanding options to purchase common stock excluded because the strike prices of the options exceeded the average price of common stock during the period	44,459	122,704	44,518	121,680
Outstanding options to purchase common stock and unvested restricted stock excluded because the market-based vesting conditions have not been met	6,258	—	6,258	—
Other outstanding options to purchase common stock excluded because the impact would have been antidilutive	5,819	—	5,763	—

9

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Recently adopted accounting pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”), as part of an effort to conform to international accounting standards, issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which was effective for us beginning on January 1, 2006. SFAS No. 154 requires that all voluntary changes in accounting principles be 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 has not had a material effect on our financial position or results of operations.

Effective January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which revises SFAS No. 123, “Accounting for Stock-Based Compensation.” See Note 2 for additional information on this recently adopted accounting pronouncement.

Recently issued accounting pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes,” which will be effective for us beginning on January 1, 2007. The validity of any tax position is a matter of tax law, and generally there is no controversy about recognizing the benefit of a tax position in a company’s financial statements when the degree of confidence is high that the tax position will be sustained upon examination by a taxing authority. However, in some cases, the law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. For us, FIN No. 48 establishes a different process to measure the impact of uncertainty associated with the income tax provision than we are currently using. Under FIN No. 48, the impact of an uncertain income tax position on the income tax provision must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. FIN No. 48 also requires additional disclosures about unrecognized tax benefits associated with uncertain income tax positions and a reconciliation of the change in the unrecognized benefit. We currently recognize an uncertain income tax position related to the timing of recognition if we are more likely than not to prevail. For uncertain income tax positions not related to timing of recognition, we recognize the position if it is probable that we will prevail. We are currently evaluating the impact of FIN No. 48 on our financial statements. The standard establishes a lower threshold for recognizing the benefit of some uncertain tax positions than we have historically used. Therefore, the adoption could have a significant impact on our financial statements by causing us to record in our consolidated financial statements additional income tax increases or decreases from uncertain tax positions.

Note 2: Stock-Based Compensation

Adoption of SFAS No. 123(R)

Effective January 1, 2006, we adopted SFAS No. 123(R). Prior to 2006, we accounted for stock awards granted to employees under the intrinsic-value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under the intrinsic-value method, no compensation expense was recognized for options granted to employees when the strike price of those options equaled or exceeded the value of the underlying security on the measurement date. Under APB No. 25, stock-based compensation expense was generally limited to the excess of the stock price on the

10

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

measurement date over the exercise price, if any, and was recorded as deferred compensation and amortized over the service period during which the stock option award vested. However, SFAS No. 123(R) requires that compensation expense be measured using estimates of the fair value of all stock-based awards.

We are applying the “modified prospective method” for recognizing the expense over the remaining vesting period for awards that were outstanding but unvested at January 1, 2006. Under the modified prospective method, we have not adjusted the financial statements for periods ending prior to December 31, 2005. Under the modified prospective method, the adoption of SFAS No. 123(R) applies to new awards and to awards modified, repurchased, or cancelled after December 31, 2005, as well as to the unvested portion of awards outstanding as of January 1, 2006.

SFAS No. 123(R) also requires us to estimate forfeitures in calculating the expense related to stock-based compensation (estimated at 40% for 2006 grants).

Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period. As of June 30, 2006, there was $62 million of total unrecognized compensation cost related to unvested stock-based awards, which we expect to recognize over remaining weighted average vesting terms of 2.8 years. For the three and six months ended June 30, 2006, our total stock-based compensation expense was $8 million and $14 million, respectively, which includes $4 million and $8 million, respectively, of compensation expense for stock options and for stock issued under our Employee Stock Purchase Plan (“ESPP”) that would not have been recorded as expense under APB No. 25. We have not recorded any income tax benefit related to stock-based compensation in any of the three or six-month periods ended June 30, 2006 and 2005.

The following table illustrates the effect on net income and earnings per share for the three and six months ended June 30, 2005 as if our stock-based compensation had been determined based on the fair value at the grant dates:

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

We adopted an Equity Incentive Plan on June 23, 1997. This plan was most recently amended and restated on May 24, 2006 and permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock units and other stock grants. The maximum number of shares of our common stock

11

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

that may be issued under the plan at any time pursuant to awards is equal to 10% of the aggregate number of our common shares issued and outstanding reduced by the aggregate number of options and other awards then outstanding under the plan or otherwise. Issued and outstanding shares are determined as of the close of trading on the New York Stock Exchange on the preceding trading day. Since our merger with U S WEST, Inc., all stock-based awards have been issued from this plan. As of June 30, 2006, options and unvested restricted stock representing 128 million shares of our common stock were outstanding under the plan, and 62 million shares were available for future issuance under the plan.

Stock Options

The Compensation and Human Resources Committee of our Board of Directors, or its delegate, approves the exercise price for each option. Stock options generally have an exercise price that is at least equal to the fair market value of the common stock on the date the stock option is granted, subject to certain restrictions. Stock option awards generally vest in equal increments over the vesting period of the granted option (generally three to five years). Unless otherwise provided by the Compensation and Human Resources Committee, our Equity Incentive Plan provides that, upon a “change in control,” all awards granted under the Equity Incentive Plan will vest immediately. Options that we granted to our employees from June 1999 to September 2002 typically provide for accelerated vesting if the optionee is terminated without cause following a change in control. Since September 2002, options that we grant to our executive officers (vice president level and above) typically provide for accelerated vesting and an extended exercise period upon a change of control and options that we grant to all other employees typically provide for accelerated vesting if the optionee is terminated without cause following a change in control. Options granted subsequent to 2002 have ten-year terms.

Summarized below is the activity of our stock option plans for the six months ended June 30, 2006:

	Number of Shares		Weighted Average Exercise Price
	(in thousands)
Outstanding December 31, 2005	134,940		$	12.23
Granted	9,782			6.13
Exercised	(20,949	)		4.33
Canceled or expired	(3,189	)		20.66
Outstanding June 30, 2006	120,584		$	12.89

The options to purchase 120.6 million shares of Qwest common stock that were outstanding at June 30, 2006 had remaining contractual terms with a weighted average of 5.8 years. The aggregate intrinsic value for those outstanding options that were in the money was $290 million at June 30, 2006. Of those outstanding options to purchase shares of Qwest common stock, 104.7 million were exercisable at June 30, 2006 and had a weighted-average exercise price of $14.08 and remaining contractual terms with a weighted average of 5.3 years. Options that were both exercisable and in the money on June 30, 2006 had an aggregate intrinsic value of $241 million on that date.

Except for option awards with market-based vesting conditions, we use the Black-Scholes model to estimate the fair value of new stock option grants and establish such fair value at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Additionally, all option valuation models require the input of

12

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

highly subjective assumptions including the expected life of the options and the expected stock price volatility. Because our employee stock options have characteristics significantly different from traded options, and changes in the input assumptions can materially affect the fair value estimate, estimates of the fair value of our stock option awards are subjective. Following are the weighted-average assumptions used and the resulting fair value estimates of options granted in the six months ended June 30, 2006 and 2005 excluding the market-based vesting condition awards described below:

	Six Months Ended June 30,
	2006		2005
Risk-free interest rate	4.2% – 5.0	%	3.3% – 4.2	%
Expected dividend yield	0.0	%	0.0	%
Expected option life (years)	5.5		4.5
Expected stock price volatility	80.3	%	87.8	%
Weighted-average grant date fair value	$4.31		$2.74

We believe the two most significant assumptions used in our estimates of fair value are the expected option life and the expected volatility, both of which we estimate based on historical information. During the six months ended June 30, 2006 and 2005, options to purchase 20.9 million and 0.8 million shares were exercised with aggregate intrinsic values totaling $53 million and $1 million, respectively.

Restricted Stock

During the six months ended June 30, 2006, 5.9 million shares of restricted stock were granted under the Equity Incentive Plan.

Except for restricted stock awards with market-based vesting conditions, we use the closing price of our common stock on the date of the award as the fair value for restricted stock awards. Excluding the market-based vesting condition awards described below, the weighted average estimate of fair value for restricted stock awards granted during the six months ended June 30, 2006 was $6.17 per share. A summary of the status of unvested shares of restricted stock as of and during the six months ended June 30, 2006 is as follows:

	Number of Shares		Weighted Average Grant- Date Fair Value
	(in thousands)
Unvested at December 31, 2005	1,704		$	4.19
Granted	5,891			5.72
Vested	—			—
Forfeited	(39	)		6.15
Unvested at June 30, 2006	7,556		$	5.37

Compensation expense of $3 million and $5 million was recognized for restricted stock grants in the three and six months ended June 30, 2006, respectively.

Employee Stock Purchase Plan

We are authorized to issue 27 million shares of our common stock to eligible employees under our ESPP. Under the terms of our ESPP, eligible employees may authorize payroll deductions of up to 15% of their base

13

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

compensation, as defined, to purchase our common stock at a price of 85% of the fair market value of our common stock on the last trading day of the month in which our common stock is purchased. In the three and six months ended June 30, 2006, approximately 358,000 shares and 823,000 shares, respectively, were purchased under this plan at a weighted-average purchase price of $6.15 and $5.76 per share, respectively. During the three and six months ended June 30, 2006, we recognized compensation expense of approximately $384,000 and $831,000, respectively, for the difference between the employees’ purchase price and the fair market value of the stock.

Market-Based Vesting Condition Awards

On February 16, 2006, we granted non-qualified option awards to purchase a total of 3,851,000 shares of our common stock at an exercise price of $6.15 and restricted stock awards totaling 2,407,000 shares of our common stock. As these awards include vesting provisions that are tied to the future market value of our common stock, we do not believe our standard valuation models accurately estimate the fair value of these awards. We valued these awards using Monte-Carlo simulations and estimate that the grant date fair value of each option was $3.99 per option and the grant date fair value of each share of restricted stock was $5.07 per share. These estimates were based on the following assumptions:

• Risk-free interest rate of 4.5%;

• Dividend yield of zero; and

• Volatility factor of the expected market price of our common stock of 60%.

We believe the most significant assumption used in our estimate of fair value is the expected volatility, which we estimated based on historical information.

We had not granted market-based vesting condition awards prior to February 16, 2006, and all such awards granted on that date were still outstanding as of June 30, 2006.

Note 3: Sale of Property and Equipment

In the first quarter of 2005, we closed the sale of our personal communications services, or 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). We received $418 million for these assets and recorded a gain of $257 million from this sale and dispositions of other wireless assets.

14

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Note 4: Borrowings

As of June 30, 2006 and December 31, 2005, our borrowings, net of discounts and premiums, consisted of the following:

	June 30, 2006		December 31, 2005
	(Dollars in millions)
Current borrowings:
Current portion of long-term borrowings	$	2,657	$	492
Current portion of capital lease obligations and other		26		20
Total current borrowings	$	2,683	$	512
Long-term borrowings:
Long-term notes	$	12,600	$	14,863
Long-term capital lease obligations and other		93		105
Total long-term borrowings	$	12,693	$	14,968

Borrowings classified as current are due and payable within twelve months from the applicable balance sheet date. The balance of our $1.265 billion 3.50% Convertible Senior Notes due 2025 is classified as a current obligation as of June 30, 2006 because specified, market-based conversion provisions were met as of that date. These notes were classified as a non-current obligation as of December 31, 2005 because the market-based conversion provisions were not met as of that date. These market-based conversion provisions specify that, when our common stock has a closing price above $7.08 per share for twenty or more trading days during certain periods of thirty consecutive trading days, these notes become available for conversion for a period, and as a result all outstanding notes are reclassified as a current obligation. If our common stock does not maintain a closing price above $7.08 per share during certain subsequent periods, the notes would no longer be available for immediate conversion and the outstanding notes would again be reclassified as a non-current obligation. These notes are registered securities and freely tradable, and as of June 30, 2006, they had a market price of $1,525 per $1,000 principal amount of notes, compared to an estimated conversion value of $1,309. The conversion value is calculated based on the specified conversion provisions using the closing prices of our common stock during the 20 trading days ended June 30, 2006.

During the three months ended June 30, 2006, we exchanged approximately $70 million in face amount of debt issued by Qwest Capital Funding, Inc., our wholly-owned subsidiary, plus $2 million of accrued interest, for approximately 8.6 million shares of our common stock with an aggregate value of approximately $66 million at the time of issuance. The effective share price for the exchange transactions ranged from $7.79 per share to $8.72 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our common stock at the times the exchange transactions were consummated ranged from $7.16 per share to $8.04 per share. As a result, we recorded a gain of $6 million on debt extinguishments during the three months ended June 30, 2006. This gain was partially offset by losses on the retirement of certain other debt.

In July 2006, we substituted QCII for Qwest Services Corporation (“QSC”) as borrower under our $850 million revolving credit facility (“the Credit Facility”), which is currently undrawn and which expires in October 2010. The Credit Facility is guaranteed by QSC and is secured by a senior lien on the stock of its wholly owned subsidiary, Qwest Corporation.

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Note 5: Restructuring Charges

During 2004 and previous years, as part of our ongoing effort to evaluate our operating costs, we established restructuring programs, which included workforce reductions, consolidation of excess facilities, and restructuring of certain business functions. The restructuring reserve balances 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. The charges and reversals are included in our condensed consolidated statements of operations in selling, general and administrative expense. As of June 30, 2006 and December 31, 2005, our restructuring reserve was $383 million and $428 million, respectively. The amount included as current liabilities was $48 million and $62 million, respectively, and the long-term portion was $335 million and $366 million, respectively. In the three and six months ended June 30, 2006, $0 million and $11 million, respectively, in restructuring provisions were added to these reserves, $31 million and $46 million, respectively, of these reserves were utilized and $9 million and $10 million in the same periods were reversed.

Substantially all of the planned employee reductions associated with the 2004 and prior restructuring plans were complete as of June 30, 2006. The majority of the remaining restructuring reserve is for real estate exit costs; we expect to utilize this remaining reserve over the remaining terms of the leases, which remaining terms range from 0.1 years to 19.7 years, with a weighted average of 13.0 years.

Note 6: Employee Benefits

The components of the pension, non-qualified pension and post-retirement benefits expense are as follows:

	Pension Expense						Non- Qualified Pension Expense				Post-Retirement Benefits Expense
	Three Months Ended June 30,
	2006			2005			2006		2005		2006			2005
	(Dollars in millions)
Service cost	$	38		$	39		$	1	$	—	$	4		$	5
Interest cost		121			126			1		1		73			80
Expected return on plan assets		(166	)		(175	)		—		—		(32	)		(32	)
Amortization of transition asset		—			—			1		1		—			—
Amortization of prior service cost		(2	)		(2	)		—		—		(21	)		(14	)
Recognized net actuarial loss		27			17			—		—		10			21
Net expense included in net income (loss)	$	18		$	5		$	3	$	2	$	34		$	60

	Pension Expense						Non- Qualified Pension Expense				Post-Retirement Benefits Expense
	Six Months Ended June 30,
	2006			2005			2006		2005		2006			2005
	(Dollars in millions)
Service cost	$	75		$	78		$	2	$	1	$	7		$	10
Interest cost		241			251			2		2		146			161
Expected return on plan assets		(331	)		(349	)		—		—		(64	)		(65	)
Amortization of transition asset		—			—			1		1		—			—
Amortization of prior service cost		(3	)		(3	)		—		—		(42	)		(28	)
Recognized net actuarial loss		54			34			—		—		20			40
Net expense included in net income (loss)	$	36		$	11		$	5	$	4	$	67		$	118

16

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

The pension, non-qualified pension and post-retirement benefit expense 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, non-qualified pension and other post-retirement healthcare and life insurance benefit measurements for the plans is December 31.

Note 7: Segment Information

Our three segments are (1) wireline services, (2) wireless services and (3) other services. Our chief operating decision maker (“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 as defined below.

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. Wireline and wireless segment expenses include employee-related costs, facility costs, network expenses and other non-employee related costs such as customer support, collections and telephone marketing. Expenses are generally assigned to the wireline and wireless segment based primarily on usage. Therefore, the results presented herein are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented. We manage indirect administrative services costs such as finance, information technology, real estate, legal, marketing and advertising and human resources centrally; consequently, these costs are included in 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 assigned to any segment.

Our wireline services segment uses our network to provide voice services and data and Internet services to mass markets, business and wholesale customers. Our wireline services include:

• Voice services. Voice services revenue includes local voice, long-distance voice and access services. Local voice services revenue includes basic local exchange, switching, enhanced voice, operator and collocation services and custom calling features. Local voice services revenue also includes the provisioning of network transport, billing services and access to our local network on a wholesale basis. Long-distance voice services revenue includes InterLATA and IntraLATA long-distance services. Access services revenue includes fees charged to other data and telecommunications providers to connect their customers and their networks to our network.

• Data and Internet services. Data and Internet services revenue includes data services (such as traditional private lines, wholesale private lines and WAN), Internet services (such as high-speed Internet, ISDN and web hosting) and Data Integration.

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. By utilizing a third-party’s nationwide PCS wireless network, we sell wireless services to mass markets and business customers primarily in the states within our local service area.

Our other services revenue is predominantly derived from the sublease of some of our real estate, 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, real estate, legal, marketing and advertising and human resources, which we centrally manage.

Depending on the products or services purchased, a customer may pay an up-front or monthly fee, a usage charge or a combination of these.

17

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

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. Substantially all of our assets are in our wireline and other segments.

Segment information for the three and six months ended June 30, 2006 and 2005 is summarized in the following table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Operating revenue:
Wireline services	$	3,320		$	3,329		$	6,647		$	6,641
Wireless services		142			132			281			258
Other services		10			9			20			20
Total operating revenue	$	3,472		$	3,470		$	6,948		$	6,919
Operating expenses:
Wireline services	$	1,563		$	1,627		$	3,174		$	3,269
Wireless services		136			147			277			303
Other services		664			705			1,343			1,382
Total segment expenses	$	2,363		$	2,479		$	4,794		$	4,954
Segment income (loss):
Wireline services	$	1,757		$	1,702		$	3,473		$	3,372
Wireless services		6			(15	)		4			(45	)
Other services		(654	)		(696	)		(1,323	)		(1,362	)
Total segment income	$	1,109		$	991		$	2,154		$	1,965
Capital expenditures:
Wireline services	$	364		$	252		$	686		$	507
Wireless services		—			1			—			2
Other services		78			99			146			156
Total capital expenditures	$	442		$	352		$	832		$	665

The following table reconciles segment income to net income (loss) for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Segment income	$	1,109		$	991		$	2,154		$	1,965
Depreciation		(592	)		(649	)		(1,180	)		(1,302	)
Capitalized software and other intangible assets amortization		(101	)		(116	)		(204	)		(237	)
Total other expense—net		(281	)		(393	)		(549	)		(532	)
Income tax (expense) benefit		(18	)		3			(16	)		(1	)
Net income (loss)	$	117		$	(164	)	$	205		$	(107	)

18

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Set forth below is information for the three and six months ended June 30, 2006 and 2005 about revenue derived from external customers for our products and services:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
	(Dollars in millions)
Wireline voice services	$	2,211	$	2,304	$	4,447	$	4,604
Wireline data and Internet services		1,109		1,025		2,200		2,037
Wireless services		142		132		281		258
Other services		10		9		20		20
Total operating revenue	$	3,472	$	3,470	$	6,948	$	6,919

We provide a variety of telecommunications services on a domestic and international basis to business, government, mass markets and wholesale customers; however, our internationally-based customers do not result in a material amount of revenue to us.

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

Note 8: 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. To the extent appropriate, we have provided reserves for each of the matters described below.

Settlement of Consolidated Securities Action

Twelve putative class actions purportedly brought on behalf of purchasers of our publicly traded securities 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 our business and investments, including making materially false statements in certain of our registration statements. The most recent complaint in this matter seeks unspecified compensatory damages and other relief. However, counsel for plaintiffs indicated that the putative class would seek damages in the tens of billions of dollars. The SPA action described below has been consolidated with the consolidated securities action for certain purposes.

On November 23, 2005, we, certain other defendants, and the putative class representatives entered into and filed with the federal district court in Colorado a Stipulation of Partial Settlement that, if implemented, will settle the consolidated securities action against us and certain other defendants. On January 5, 2006, the federal district court in Colorado issued an order preliminarily approving the proposed settlement and certifying a settlement class on behalf of purchasers of our publicly traded securities between May 24, 1999 and July 28, 2002. The hearing to consider final approval of the proposed settlement was held on May 19, 2006, and the matter remains pending before the court.

19

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Under the proposed settlement agreement, we would pay a total of $400 million in cash—$100 million of which was deposited in an escrow account 30 days after preliminary approval of the proposed settlement by the federal district court in Colorado, $100 million of which would be so deposited 30 days after final approval of the settlement by the court, and $200 million of which would be so deposited on January 15, 2007, plus interest at 3.75% per annum on the $200 million between the date of final approval by the court and the date of payment.

If approved, the proposed settlement agreement in the consolidated securities action will settle and release the individual claims of the class representatives and the claims of the class they represent against us and all defendants except Joseph Nacchio, our former chief executive officer, and Robert Woodruff, our former chief financial officer. (The non-class action brought by SPA that is consolidated for certain purposes with the consolidated securities action is not part of the settlement.) As part of the proposed settlement, we have received $10 million from Arthur Andersen LLP. If the settlement is approved, Arthur Andersen will also be released by the class representatives and the class they represent. If the settlement is not approved, we will repay the $10 million to Arthur Andersen. No parties admit any wrongdoing as part of the proposed settlement.

The proposed settlement agreement is subject to a number of conditions and future contingencies. Among others, it (i) requires final court approval; (ii) provides us with the right to terminate the settlement if we do not receive adequate protections for claims relating to substantive liabilities of non-settling defendants; and (iii) is subject to review on appeal even if the district court were finally to approve it.

A number of parties, including large pension funds, have requested exclusion from the proposed settlement of the consolidated securities action. As noted below under “Remaining Securities Actions—Opt-Outs with Previously-Filed Lawsuits,” seven parties that had filed individual suits against us prior to the proposed settlement of the consolidated securities action have requested exclusion from the proposed settlement, and as noted below under “Remaining Securities Actions—Opt-Outs with Recently-Filed Lawsuits,” other parties that have requested exclusion from the proposed settlement filed individual suits against us after we entered into the proposed settlement. We will vigorously defend against such claims regardless of whether the proposed settlement of the consolidated securities action is consummated.

Settlement of Consolidated ERISA Action

Seven putative class actions purportedly brought against us 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. Other defendants in this action include current and former directors of Qwest, former officers and employees of Qwest and Deutsche Bank Trust Company Americas, or Deutsche Bank (formerly doing business as Bankers Trust Company). 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 our stock in the Plan. Plaintiffs seek damages, equitable and declaratory relief, along with attorneys’ fees and costs and restitution. Counsel for plaintiffs indicated that the putative class would seek billions of dollars of damages.

On April 26, 2006, we, the other defendants, and the putative class representatives entered into a Stipulation of Settlement that, if implemented, will settle the consolidated ERISA action. Under the proposed settlement agreement, we would pay a total of $33 million in cash to the Plan no later than 90 days after preliminary approval of the proposed settlement by the federal district court in Colorado. Deutsche Bank would pay a total of $4.5 million in cash to the Plan to settle the claims against it. No parties admit any wrongdoing as part of the proposed settlement. If the proposed settlement is approved by the court, we will receive certain insurance

20

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

proceeds as a contribution by individual defendants to this settlement, which will offset $10 million of our $33 million payment. In addition to the $33 million cash settlement, we have also agreed to pay, subject to certain contingencies, the amount (if any) by which the Plan’s recovery from the settlement of the consolidated securities action is less than $20 million. If approved by the district court, the proposed settlement will settle and release the claims of the class against us and all other defendants in the consolidated ERISA action. On July 25, 2006, the federal district court in Colorado issued an order (1) preliminarily approving the proposed settlement, (2) setting a hearing for October 27, 2006 to consider final approval of the proposed settlement, and (3) certifying a settlement class on behalf of participants in and beneficiaries of the Plan who owned, bought, sold or held shares or units of the Qwest Shares Fund, U S WEST Shares Fund or Qwest common stock in their Plan accounts from March 7, 1999 until January 12, 2004. The proposed settlement is subject to review on appeal if the district court were finally to approve it.

DOJ Investigation and Remaining Securities Actions

The Department of Justice, or 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, or our 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.

We have a reserve recorded in our financial statements for the minimum estimated amount of loss we believe is probable with respect to the remaining securities actions described below as well as any additional actions that may be brought by parties that, as described below under “Additional Opt-Out Parties,” have more recently opted out of the proposed settlement of the consolidated securities action. We have recorded our estimate of the minimum liability for these matters because no estimate of probable loss for these matters is a better estimate than any other amount. If the recorded reserve is insufficient to cover these matters, we will need to record additional charges to our consolidated statement of operations in future periods. 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 the amount of loss we may ultimately incur could be substantially more than the reserve we have provided.

We continue to defend against the remaining securities actions described below 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 (or any additional actions that may be brought by parties that, as described below under “Additional Opt-Out Parties,” have more recently opted out of the proposed settlement of the consolidated securities action) 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 financial condition and ability to meet our debt obligations, 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.

21

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law 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.

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 our business. We believe the U.S. Attorney’s Office has investigated various matters that include 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.

Remaining Securities Actions

We are a defendant in the securities actions described below. Plaintiffs in these actions have requested exclusion from the proposed settlement of the consolidated securities action. Plaintiffs have variously alleged, among other things, that we and the other defendants violated federal and state securities laws, engaged in fraud, civil conspiracy and negligent misrepresentation, and breached fiduciary duties owed to investors by issuing false and misleading financial reports and statements, falsely inflating revenue and decreasing expenses, creating false perceptions of revenue and growth prospects and/or employing improper accounting practices. 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. Plaintiffs variously seek, among other things, compensatory and punitive damages, restitution, equitable and declaratory relief, pre-judgment interest, costs and attorneys’ fees.

Opt-Outs with Previously-Filed Lawsuits. Together, the parties to these lawsuits contend that they have incurred losses resulting from their investments in our securities in excess of $900 million; they have also asserted claims for punitive damages and interest, in addition to claims to recover their alleged losses.

Plaintiff(s)	Date Filed	Court
State of New Jersey (Treasury Department, Division of Investment)	November 27, 2002	New Jersey Superior Court, Mercer County
California State Teachers’ Retirement System	December 10, 2002	Superior Court, State of California, County of San Francisco
State Universities Retirement System of Illinois	January 10, 2003	Circuit Court of Cook County, Illinois
Stichting Pensioenfonds ABP (SPA)	February 9, 2004	Federal District Court in Colorado
A number of New York City pension and retirement funds	September 22, 2004	Federal District Court in Colorado
Shriners Hospital for Children	March 22, 2004	Federal District Court in Colorado
Teachers’ Retirement System of Louisiana	March 30, 2004	Federal District Court in Colorado

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QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Opt-Outs with Recently-Filed Lawsuits. Together, the parties to these lawsuits contend that they have incurred losses resulting from their investments in our securities in excess of $462 million; they have also asserted claims for punitive damages and interest, in addition to claims to recover their alleged losses.

Plaintiff(s)	Date Filed	Court
New York State Common Retirement Fund	April 18, 2006	United States District Court for the Southern District of New York
San Francisco Employees Retirement System	April 18, 2006	United States District Court for the Northern District of California
Fire and Police Pension Association of Colorado	April 18, 2006	Federal District Court in Colorado
Commonwealth of Pennsylvania Public School Employees’ Retirement System	May 1, 2006	United States District Court for the Eastern District of Pennsylvania
Merrill Lynch Investment Master Basic Value Trust Fund, et al.	June 21, 2006	United States District Court for the Southern District of New York

Additional Opt-Out Parties. Since we announced the proposed settlement of the consolidated securities action, a number of additional persons, including large pension funds, have requested to be excluded from the class. Some of these additional opt-out parties have recently filed actions against us, which are included in the summary that appears above under “Opt-Outs with Recently-Filed Lawsuits.” We expect that other parties who have opted out will file actions against us as well if we are unable to resolve those matters amicably. The claims of those persons who requested to be excluded from the class will not be released as a result of the proposed settlement of the consolidated securities action, even in the event that the settlement is approved. In the aggregate, the persons who have requested exclusion from the class, excluding those listed above under “Opt-Outs with Previously-Filed Lawsuits” and “Opt-Outs with Recently-Filed Lawsuits,” contend that they have incurred losses resulting from their investments in our securities of approximately $1.34 billion, which does not include any claims for punitive damages or interest. Due in part to the recent timing of the decisions by these persons to request exclusion from the proposed settlement of the consolidated securities action and to the fact that many of the persons who requested exclusion have not filed lawsuits, it is difficult to evaluate the claims that they have asserted or may assert. We will vigorously defend against any such claims regardless of whether the proposed settlement of the consolidated securities action is consummated.

Other. A putative class action purportedly brought on behalf of purchasers of our stock between June 28, 2000 and June 27, 2002 and owners of U S WEST, Inc. 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 we and other defendants issued false and misleading statements and engaged in improper accounting practices in order to accomplish the U S WEST/Qwest merger, to make us appear successful and to inflate the value of our stock. Plaintiffs seek unspecified monetary damages, disgorgement of illegal gains and other relief.

KPNQwest Litigation/Investigation

A putative class action is pending in the federal district court for the Southern District of New York against us, certain of our former executives who were also on the supervisory board of KPNQwest, N.V. (of 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

23

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

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 February 3, 2006, we, certain other defendants and the putative class representative in this action executed an agreement to settle the case against us and certain other defendants. Under the settlement agreement, we will pay $5.5 million in cash to the settlement fund no later than 30 days following preliminary court approval, and no later than 30 days following final approval by the court, we will issue shares of our stock to the settlement fund then valued at $5.5 million as additional consideration for the settlement. The settlement agreement would settle the individual claims of the putative class representative and the claims of the class he purports to represent against us and all defendants except Koninklijke KPN N.V. a/k/a Royal KPN N.V., Willem Ackermans, Eelco Blok, Joop Drechsel, Martin Pieters, and Rhett Williams. The settlement agreement, which has been filed with the district court, is subject to a number of conditions and future contingencies. Among others, it (i) requires both preliminary and final court approval; (ii) provides us with the right to terminate the settlement if class members representing more than a specified amount of alleged securities losses elect to opt out of the settlement; (iii) provides us with the right to terminate the settlement if we do not receive adequate protections for claims relating to substantive liabilities of non-settling defendants; and (iv) is subject to review on appeal even if the district court were finally to approve it. Any lawsuits that may be brought by parties opting out of the settlement will be vigorously defended regardless of whether the settlement described herein is consummated. No parties admit any wrongdoing as part of the proposed settlement.

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. We are a defendant in this lawsuit along with Qwest B.V. (one of our subsidiaries), Joseph Nacchio 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. The superior court granted defendants’ motion for partial summary judgment with respect to a substantial portion of plaintiffs’ claims. Plaintiffs have appealed that order to the Arizona Court of Appeals.

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. We are a defendant in this lawsuit along with Joseph Nacchio, Robert S. Woodruff and John McMaster. Plaintiffs allege, among other things, that defendants’ actions were a cause of the bankruptcy of KPNQwest and they seek damages for the bankruptcy deficit of KPNQwest of approximately $2.4 billion. Plaintiffs also seek treble damages as well as an award of plaintiffs’ attorneys’ fees and costs.

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 us, Joseph Nacchio, John McMaster and Koninklijke KPN N.V., or 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.

24

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

They have indicated that we would be a defendant in this threatened lawsuit along with Joseph Nacchio, John McMaster, Drake Tempest, our former General Counsel, KPN and other former employees of Qwest, KPN or KPNQwest.

On August 23, 2005, the Dutch Shareholders Association (Vereniging van Effectenbezitters, or VEB) filed a petition for inquiry with the Enterprise Chamber of the Amsterdam Court of Appeals, located in the Netherlands, with regard to KPNQwest. VEB seeks an inquiry into the policies and course of business at KPNQwest that are alleged to have caused the bankruptcy of KPNQwest in May 2002, and an investigation into alleged mismanagement of KPNQwest by its executive management, supervisory board members, joint venture entities (us and KPN), and KPNQwest’s outside auditors and accountants.

Other than the putative class action in which we have entered into a proposed settlement (and for which we have recorded a reserve of $11 million in connection with the proposed settlement), we will continue to defend against the pending KPNQwest litigation matters vigorously and will likewise defend against any claims asserted by KPNQwest’s former lenders if litigation is filed.

Regulatory Matter

On July 15, 2004, the New Mexico state regulatory commission opened a proceeding to investigate whether we were in compliance with or were likely to meet a commitment that we made in 2001 to invest $788 million in communications infrastructure in New Mexico through March 2006 pursuant to an Alternative Form of Regulation plan, or AFOR. 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. The Commission concluded in this Final Order that we had an unconditional commitment to invest $788 million over the life of the AFOR. The Commission also ruled that if we failed to satisfy this investment commitment, any shortfall must be credited or refunded to our New Mexico customers. The Commission also opened an enforcement and implementation docket to review our 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 February 24, 2006, the federal district court granted the defendants’ motion to dismiss and on June 29, 2006, the New Mexico Supreme Court issued its opinion affirming the Commission’s Final Order. The opinion concluded that the Commission had the authority to add to the AFOR the incentive requiring Qwest to issue credits or refunds in the amount of the shortfall between the investment commitment and the amount invested during the term of the AFOR.

On July 26, 2006, we entered into a settlement with the New Mexico General Services Department and the New Mexico Attorney General that would resolve the disputes described above. This settlement must be approved by the Commission, and we anticipate that the Commission will hold a public hearing prior to deciding whether to grant such approval. Under the settlement, we would contribute $15 million, for which we have established a liability, to the Students and Teachers Reaching Optimal New Goals Project, a program established and operated under the auspices of the New Mexico Department of Education. In addition, we would invest in our New Mexico network a total of $250 million over 42 months in specific categories of telecommunications infrastructure projects. Our obligation to make these expenditures and investments will arise only upon approval

25

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

of the settlement by the Commission. In the unlikely event that we do not achieve the required investment level over the 42 month period, we would be required to refund any deficiency to our New Mexico customers.

Other Matters

Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against us on behalf of landowners on various dates and in various courts in California, Colorado, Georgia, Illinois, Indiana, Kansas, Mississippi, Missouri, Oregon, South Carolina, Tennessee and Texas. For the most part, the complaints challenge our right to install our fiber optic cable in railroad rights-of-way. Complaints in Colorado, Illinois and Texas, also challenge our right to install fiber optic cable in utility and pipeline rights-of-way. The complaints allege that the railroads, utilities and pipeline companies own the right-of-way as an easement that did not include the right to permit us to install our fiber optic cable in the right-of-way without the plaintiffs’ consent. Most actions (California, Colorado, Georgia, Kansas, Mississippi, Missouri, 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. The 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 our network passes. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages.

The Internal Revenue Service (“IRS”) proposed a tax adjustment for tax years 1994 through 1996. The principal issue involves the 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 us and third parties. Similar claims have been asserted against us with respect to the 1997 to 1998 and the 1998 to 2001 audit periods. On March 13, 2006, the Tax Court issued a decision, which was favorable to Qwest. The IRS may appeal the decision to the 10th Circuit Court of Appeals. The trial for the 1997-1998 tax years has been scheduled for April 2007. If we ultimately were to lose this issue for the tax years 1994 through 1998, we estimate that we would have to pay approximately $57 million in tax plus approximately $47 million in interest pursuant to tax sharing agreements with the Anschutz Company relating to those time periods.

We have tax related matters pending against us, certain of which are before the Appeals Office of the IRS. In addition, tax sharing agreements have been executed between us and previous affiliates, and we believe the liabilities, if any, arising from adjustments to previously filed returns 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 recognized in our financial statements certain amounts owed to us under one of these agreements; however, generally, we have not provided for liabilities of former affiliated members or for claims they have asserted or may assert against us. We believe we have adequately provided for these tax-related matters. If the recorded reserves for these tax-related matters are insufficient, we may need to record additional amounts in future periods.

On May 12, 2006, we agreed to acquire OnFiber Communications, Inc., a privately-held Austin, Texas based provider of custom-built and managed network solutions, for a purchase price of $107 million, subject to certain purchase price adjustments. We expect this acquisition will require us to make a cash payment in the third quarter of 2006.

26

QWEST COMMUNICATIONS INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

Note 9: Income Taxes

We have increased our uncertain tax position liability by $16 million in the six months ended June 30, 2006 for certain federal and state income tax issues.

Note 10: Financial Statements of Guarantors

We and two of our subsidiaries, Qwest Capital Funding, Inc. (“QCF”) and QSC, guarantee certain of each other’s registered debt securities. QCII issued a total of $2.575 billion aggregate principal amount of senior notes in February 2004 and June 2005 that are guaranteed by QCF and QSC (the “QCII Guaranteed Notes”). Between December 2002 and April 2003, QSC issued a total of $3.7 billion aggregate principal amount of senior subordinated secured notes (approximately $21 million of which remain outstanding) that are guaranteed by QCF and QCII on a senior unsecured basis (the “QSC Guaranteed Notes”). Each series of QCF’s outstanding notes totaling approximately $3.4 billion in aggregate principal amount (the “QCF Guaranteed Notes”) is guaranteed on a senior unsecured basis by QCII. 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 meet each issuer’s debt service obligations are provided in large part by distributions or advances from their subsidiaries.

The following information sets forth our condensed consolidating balance sheets as of June 30, 2006 and December 31, 2005, our condensed consolidating statements of operations for the three and six months ended June 30, 2006 and 2005 and our condensed consolidating statements of cash flows for the six months ended June 30, 2006 and 2005. 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 condensed consolidating statements of operations and balance sheets include the effects of consolidating adjustments to our subsidiaries’ tax provisions and the related income tax assets and liabilities in the QSC and QCII results. 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 condensed consolidated financial statements.

27

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

	QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue	$	—		$	—		$	—		$	2		$	3,470		$	—		$	3,472
Operating revenue—affiliates		—			339			—			15			30			(384	)		—
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			289			—			—			1,383			(279	)		1,393
Cost of sales—affiliates		—			45			—			—			26			(71	)		—
Selling, general and administrative		16			—			—			13			661			280			970
Selling, general and administrative—affiliates		—			—			—			—			314			(314	)		—
Depreciation		—			—			—			—			592			—			592
Capitalized software and other intangible assets amortization		—			—			—			—			101			—			101
Total operating expenses		16			334			—			13			3,077			(384	)		3,056
Other expense (income)—net:
Interest expense—net		68			2			63			—			165			—			298
Interest expense—affiliates		3			—			115			—			295			(413	)		—
Interest (income)—affiliates		—			(115	)		(297	)		(1	)		—			413			—
(Gain) loss on early retirement of debt—net		—			—			(5	)		—			—			—			(5	)
Gain on sale of assets		—			—			—			—			(3	)		—			(3	)
Other (income) expense—net		(1	)		3			—			(1	)		(10	)		—			(9	)
(Income) loss from equity investments in subsidiaries		(154	)		172			—			—			—			(18	)		—
Total other expense (income)—net		(84	)		62			(124	)		(2	)		447			(18	)		281
Income (loss) before income taxes		68			(57	)		124			6			(24	)		18			135
Income tax benefit (expense)		49			131			(47	)		(3	)		(148	)		—			(18	)
Net income (loss)	$	117		$	74		$	77		$	3		$	(172	)	$	18		$	117

(1) QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

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 revenue	$	—		$	—		$	—		$	1		$	3,469		$	—		$	3,470
Operating revenue—affiliates		—			338			—			10			37			(385	)		—
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			275			—			—			1,427			(268	)		1,434
Cost of sales—affiliates		—			47			—			—			23			(70	)		—
Selling, general and administrative		28			—			—			11			738			268			1,045
Selling, general and administrative—affiliates		—			—			—			—			315			(315	)		—
Depreciation		—			—			—			—			649			—			649
Capitalized software and other intangible assets amortization		—			—			—			—			116			—			116
Total operating expenses		28			322			—			11			3,268			(385	)		3,244
Other expense (income)—net:
Interest expense—net		40			110			69			—			161			—			380
Interest expense—affiliates		2			—			107			—			252			(361	)		—
Interest (income)—affiliates		—			(110	)		(250	)		(1	)		—			361			—
Loss (gain) on early retirement of debt—net		—			18			(12	)		—			37			—			43
Other (income) expense—net		(2	)		(6	)		—			—			(22	)		—			(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 and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

29

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

	QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue	$	—		$	—		$	—		$	5		$	6,943		$	—		$	6,948
Operating revenue—affiliates		—			676			—			24			60			(760	)		—
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			588			—			—			2,790			(568	)		2,810
Cost of sales—affiliates		—			84			—			—			47			(131	)		—
Selling, general and administrative		28			—			—			25			1,363			568			1,984
Selling, general and administrative—affiliates		—			—			—			—			629			(629	)		—
Depreciation		—			1			—			—			1,179			—			1,180
Capitalized software and other intangible assets amortization		—			—			—			—			204			—			204
Total operating expenses		28			673			—			25			6,212			(760	)		6,178
Other expense (income)—net:
Interest expense—net		136			4			127			—			327			—			594
Interest expense—affiliates		6			—			218			—			576			(800	)		—
Interest (income)—affiliates		—			(218	)		(580	)		(2	)		—			800			—
(Gain) loss on early retirement of debt—net		—			—			(5	)		—			—			—			(5	)
Gain on sales of assets		—			—			—			—			(3	)		—			(3	)
Other (income) expense—net		(2	)		(14	)		—			(2	)		(19	)		—			(37	)
(Income) loss from equity investments in subsidiaries		(280	)		405			—			—			—			(125	)		—
Total other expense (income)—net		(140	)		177			(240	)		(4	)		881			(125	)		549
Income (loss) before income taxes		112			(174	)		240			8			(90	)		125			221
Income tax benefit (expense)		93			300			(91	)		(3	)		(315	)		—			(16	)
Net income (loss)	$	205		$	126		$	149		$	5		$	(405	)	$	125		$	205

(1) QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes and the QCF 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 and is the issuer of the QCF 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-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Operating revenue	$	—		$	—		$	—		$	3		$	6,916		$	—		$	6,919
Operating revenue—affiliates		—			677			—			18			76			(771	)		—
Operating expenses:
Cost of sales (exclusive of depreciation and amortization)		—			552			—			—			2,858			(537	)		2,873
Cost of sales—affiliates		—			94			—			—			48			(142	)		—
Selling, general and administrative		62			—			—			19			1,463			537			2,081
Selling, general and administrative—affiliates		—			—			—			—			629			(629	)		—
Depreciation		—			1			—			—			1,301			—			1,302
Capitalized software and other intangible assets amortization		—			—			—			—			237			—			237
Total operating expenses		62			647			—			19			6,536			(771	)		6,493
Other expense (income)—net:
Interest expense—net		75			225			138			—			323			—			761
Interest expense—affiliates		4			—			366			—			673			(1,043	)		—
Interest (income)—affiliates		(18	)		(353	)		(671	)		(1	)		—			1,043			—
Loss (gain) on early retirement of debt—net		—			18			(12	)		—			37			—			43
Gain on the sale of assets		—			—			—			—			(257	)		—			(257	)
Other (income) expense—net		(3	)		(9	)		—			—			(3	)		—			(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 and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

31

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

JUNE 30, 2006

(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	$	—		$	1,015		$	—	$	—	$	174		$	—		$	1,189
Short-term investments		—			186			—		—		19			—			205
Accounts receivable—net		—			9			—		1		1,467			—			1,477
Accounts receivable—affiliates		64			485			99		—		13			(661	)		—
Current tax receivable		1			—			1		—		—			(2	)		—
Notes receivable—affiliates		—			5,916			15,898		88		—			(21,902	)		—
Deferred income taxes		—			23			6		—		91			(6	)		114
Prepaid expenses and other current assets		10			67			—		85		419			(13	)		568
Total current assets		75			7,701			16,004		174		2,183			(22,584	)		3,553
Property, plant and equipment—net		—			8			—		—		15,008			—			15,016
Capitalized software and other intangible assets—net		41			—			—		—		888			—			929
Investments in subsidiaries		1,595			(13,518	)		—		—		—			11,923			—
Deferred income taxes		—			1,596			40		11		1			(1,648	)		—
Prepaid pension asset		—			89			—		—		1,040			—			1,129
Other assets		196			46			13		—		410			—			665
Total assets	$	1,907		$	(4,078	)	$	16,057	$	185	$	19,530		$	(12,309	)	$	21,292
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current borrowings	$	1,271		$	—		$	485	$	—	$	927		$	—		$	2,683
Current borrowings—affiliates		193			—			5,916		—		15,793			(21,902	)		—
Accounts payable		1			24			—		—		723			—			748
Accounts payable—affiliates		—			46			—		30		216			(292	)		—
Accrued expenses and other current liabilities		386			133			96		50		1,239			—			1,904
Accrued expenses and other current liabilities—affiliates		—			—			39		—		330			(369	)		—
Current taxes payable		—			41			—		3		109			(2	)		151
Deferred income taxes		6			—			—		—		—			(6	)		—
Deferred revenue and advance billings		—			—			—		13		609			(13	)		609
Total current liabilities		1,857			244			6,536		96		19,946			(22,584	)		6,095
Long-term borrowings—net		2,590			22			2,916		—		7,165			—			12,693
Post-retirement and other post-employment benefit obligations		—			507			—		—		2,932			—			3,439
Deferred income taxes		50			—			2		—		1,684			(1,648	)		88
Deferred revenue		—			—			—		—		508			—			508
Other long-term liabilities		236			179			—		67		813			—			1,295
Total liabilities		4,733			952			9,454		163		33,048			(24,232	)		24,118
Stockholders’ (deficit) equity		(2,826	)		(5,030	)		6,603		22		(13,518	)		11,923			(2,826	)
Total liabilities and stockholders’ equity (deficit)	$	1,907		$	(4,078	)	$	16,057	$	185	$	19,530		$	(12,309	)	$	21,292

(1) QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

32

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2005

(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	$	67		$	563		$	—	$	—	$	216		$	—		$	846
Short-term investments		9			77			—		—		15			—			101
Accounts receivable—net		—			10			—		3		1,512			—			1,525
Accounts receivable—affiliates		43			428			94		—		21			(586	)		—
Current tax receivable		34			28			—		—		—			(62	)		—
Notes receivable—affiliates		—			4,728			14,568		76		—			(19,372	)		—
Deferred income taxes		—			19			—		—		99			—			118
Prepaid expenses and other current assets		20			38			—		112		412			(8	)		574
Total current assets		173			5,891			14,662		191		2,275			(20,028	)		3,164
Property, plant and equipment—net		—			6			—		—		15,562			—			15,568
Capitalized software and other intangible assets—net		41			—			—		—		966			—			1,007
Investments in subsidiaries		1,143			(12,112	)		—		—		—			10,969			—
Deferred income taxes		—			1,791			22		11		—			(1,824	)		—
Prepaid pension asset		—			95			—		—		1,070			—			1,165
Other assets		111			58			14		—		410			—			593
Total assets	$	1,468		$	(4,271	)	$	14,698	$	202	$	20,283		$	(10,883	)	$	21,497
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current borrowings	$	6		$	—		$	485	$	—	$	21		$	—		$	512
Current borrowings—affiliates		165			—			4,728		—		14,479			(19,372	)		—
Accounts payable		4			38			—		—		731			—			773
Accounts payable—affiliates		—			34			—		9		248			(291	)		—
Accrued expenses and other current liabilities		288			192			98		81		1,539			—			2,198
Accrued expenses and other current liabilities—affiliates		—			—			34		30		239			(303	)		—
Current taxes payable		—			—			34		2		145			(62	)		119
Deferred revenue and advance billings		—			—			—		—		633			—			633
Total current liabilities		463			264			5,379		122		18,035			(20,028	)		4,235
Long-term borrowings—net		3,884			22			2,986		—		8,076			—			14,968
Post-retirement and other post-employment benefit obligations		—			506			—		—		2,953			—			3,459
Deferred income taxes		33			—			—		—		1,881			(1,824	)		90
Deferred revenue		—			—			—		—		522			—			522
Other long-term liabilities		305			145			—		62		928			—			1,440
Total liabilities		4,685			937			8,365		184		32,395			(21,852	)		24,714
Stockholders’ (deficit) equity		(3,217	)		(5,208	)		6,333		18		(12,112	)		10,969			(3,217	)
Total liabilities and stockholders’ equity (deficit)	$	1,468		$	(4,271	)	$	14,698	$	202	$	20,283		$	(10,883	)	$	21,497

(1) QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

33

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(UNAUDITED)

	QCII(1)			QSC(2)			QCF(3)			QCII Subsidiary Non-Guarantors			QSC Subsidiary Non-Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES	$	(189	)	$	836		$	142		$	12		$	360		$	16		$	1,177
INVESTING ACTIVITIES
Expenditures for property, plant and equipment and intangible assets		—			(3	)		—			—			(829	)		—			(832	)
Proceeds from sale of property and equipment		—			—			—			—			47			—			47
Proceeds from sale of investment securities		—			42			—			—			—			—			42
Purchases of investment securities		—			(146	)		—			—			—			—			(146	)
Net proceeds from (purchases of) investments managed by QSC		9			(5	)		—			—			(4	)		—			—
Net decrease (increase) in short-term affiliate loans		—			(1,188	)		(1,330	)		(12	)		—			2,530			—
Dividends received from subsidiaries		—			916			—			—			—			(916	)		—
Cash provided by (used for) investing activities		9			(384	)		(1,330	)		(12	)		(786	)		1,614			(889	)
FINANCING ACTIVITIES
Repayments of long-term borrowings, including current maturities		(33	)		—			—			—			(14	)		—			(47	)
Net proceeds from (payments of) affiliate borrowings		28			—			1,188			—			1,314			(2,530	)		—
Proceeds from issuances of common stock		102			—			—			—			—			—			102
Dividends paid to parent		—			—			—			—			(916	)		916			—
Other		16			—			—			—			—			(16	)		—
Cash provided by financing activities		113			—			1,188			—			384			(1,630	)		55
CASH AND CASH EQUIVALENTS
(Decrease) increase in cash and cash equivalents		(67	)		452			—			—			(42	)		—			343
Beginning balance		67			563			—			—			216			—			846
Ending balance	$	—		$	1,015		$	—		$	—		$	174		$	—		$	1,189

(1) QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QSC Guaranteed Notes and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

34

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW

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)
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES	$	(24	)	$	591		$	65		$	28		$	254		$	(1	)	$	913
INVESTING ACTIVITIES
Expenditures for property, plant and equipment and intangible assets		(1	)		(19	)		—			—			(645	)		—			(665	)
Proceeds from sale of property and equipment		—			—			—			—			418			—			418
Proceeds from sale of investment securities		—			1,086			—			—			—			—			1,086
Purchases of investment securities		—			(912	)		—			—			—			—			(912	)
Net proceeds from (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 subsidiaries		—			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 proceeds from (payments of) affiliate borrowings		(40	)		—			(9,128	)		—			(8,466	)		17,634			—
Proceeds from issuances of common stock		7			—			—			—			—			—			7
Equity infusion from parent		—			—			530			—			10,000			(10,530	)		—
Dividends paid to parent		—			—			—			—			(1,419	)		1,419			—
Early retirement of debt costs		—			(49	)		—			—			(25	)		—			(74	)
Debt issuance costs		(13	)		—			—			—			(18	)		—			(31	)
Cash provided by (used for) financing activities		689			(501	)		(8,598	)		—			124			8,523			237
CASH AND CASH EQUIVALENTS
Increase in cash and cash equivalents		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 and the QCF 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 and is the issuer of the QCF Guaranteed Notes.

35

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, and references in this report to “QCII” refer to Qwest Communications International Inc. on an unconsolidated, stand-alone basis.

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, and see “Risk Factors” in Item 1A of Part II of this report 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 reliable, scalable and secure broadband data and voice (including long-distance) communications services 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 notes thereto. Our operating revenue is generated from our wireline services, wireless services and other services segments. An overview of the segment results is provided in Note 7—Segment Information to our condensed consolidated financial statements in Item 1 of Part I of this report. The following segment discussions reflect the way we currently report our operating results to our Chief Operating Decision Maker, or CODM, which includes revenue results for each of the customer channels within the wireline services segment: business, mass markets and wholesale. Certain prior year revenue, expense and access line amounts have been reclassified to conform to the current year presentations.

Business Trends

Our financial results continue to be impacted by several significant trends, which are described below:

• Access line losses. Our revenue has been, and we expect it to continue to be, adversely affected by access line losses. Increased competition, including product substitution, continues to be the primary reason for our access line losses. For example, consumers are increasingly substituting other telephony services for traditional telecommunications services, which has increased the number and type of competitors within our industry and decreased our market share. Product bundling, as described more fully below, has been one of our responses to our declining revenue due to access line losses.

• Data and Internet growth. Data and Internet revenue and subscribers continue to grow as customers continue to migrate Internet service to higher speed connections. We have expanded our availability of these services and continue to increase the available connection speeds in order to meet customer demand. We expect this trend will continue into the future. We also expect to face continuing competition for these subscribers.

• Product bundling. We believe consumers increasingly value the convenience of receiving multiple services from a single provider. As such, we increased our marketing and advertising spending levels in 2005 and 2006 focusing on product bundling and packaging. Product bundles and packages represent combinations of products and services—such as local voice, long-distance, high-speed Internet, video and wireless—and features and services—such as three-way calling and call forwarding—related to an access line. As a result of these offerings, our sales of bundled products have increased.

36

• Variable expenses. Expenses associated with higher growth products, such as long-distance, high-speed Internet and wireless services, tend to be more variable in nature. While our traditional telecommunications services tend to rely upon our fixed cost structure, the mix of products we expect to sell, combined with regulatory and market pricing forces, will continue to pressure operating expense. In addition, facility costs (described below) do not always change proportionally with revenue fluctuations.

• 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 continue to reduce costs in this area from initiatives to optimize our usage of other local carriers’ services to connect our customers to our network, and we continue to benefit from reduced costs due to the renegotiation, termination or settlement of various service arrangements in prior periods. However, these cost reductions have been partially offset in varying degrees by increased costs from increased long-distance, data and Internet and wireless volumes.

• Operational efficiencies. We have continued to evaluate our operating structure and focus, and we continue to right-size our workforce in response to changes in the telecommunications industry. Through targeted restructuring plans in prior years, focused improvements in operational efficiency, process improvements through automation and normal employee attrition, we have reduced our workforce and employee-related costs while achieving operational goals.

While these trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in “Risk Factors” in Item 1A of Part II of this report may also materially impact our business operations and financial results.

Results of Operations

Overview

We generate revenue from our wireline services, wireless services and other services as described below.

• Wireline services. The wireline services segment uses our network to provide voice services and data and Internet services to mass markets, business and wholesale customers. Our wireline services include:

• Voice services. Voice services revenue includes local voice, long-distance voice and access services. Local voice services revenue includes basic local exchange, switching, enhanced voice, operator and collocation services and custom calling features. Local voice services revenue also includes the provisioning of network transport, billing services and access to our local network on a wholesale basis. Long-distance voice services revenue includes InterLATA and IntraLATA long-distance services. Access services revenue includes fees charged to other data and telecommunications providers to connect their customers and their networks to our network.

• Data and Internet services. Data and Internet services revenue includes data services (such as traditional private lines, wholesale private lines and WAN), Internet services (such as high-speed Internet, ISDN and web hosting) and Data Integration.

• 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. By utilizing a third party’s nationwide PCS wireless network, we sell wireless services to residential and business customers primarily in the states within our local service area.

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

Depending on the products or services purchased, a customer may pay an up-front or monthly fee, a usage charge or a combination of these.

37

The following table summarizes our results of operations for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,						Increase/ (Decrease)			%Change		Six Months Ended June 30,						Increase/ (Decrease)			%Change
	2006			2005								2006			2005
	(Dollars in millions, except per share amounts)
Operating revenue	$	3,472		$	3,470		$	2		0	%	$	6,948		$	6,919		$	29		0	%
Operating expenses		3,056			3,244			(188	)	(6	)%		6,178			6,493			(315	)	(5	)%
Other expense—net		281			393			(112	)	(28	)%		549			532			17		3	%
Income (loss) before income taxes		135			(167	)		302		nm			221			(106	)		327		nm
Income tax (expense) benefit		(18	)		3			(21	)	nm			(16	)		(1	)		(15	)	nm
Net income (loss)	$	117		$	(164	)	$	281		nm		$	205		$	(107	)	$	312		nm
Basic income (loss) per share	$	0.06		$	(0.09	)	$	0.15		nm		$	0.11		$	(0.06	)	$	0.17		nm
Diluted income (loss) per share	$	0.06		$	(0.09	)	$	0.15		nm		$	0.11		$	(0.06	)	$	0.17		nm

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

Operating Revenue

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, 2006 and 2005:

	Three Months Ended June 30,				Increase/ (Decrease)			% Change		Six Months Ended June 30,				Increase/ (Decrease)			% Change
	2006		2005							2006		2005
	(Dollars in millions)
Wireline services revenue:
Voice services:
Local voice services:
Business	$	309	$	323	$	(14	)	(4	)%	$	625	$	646	$	(21	)	(3	)%
Mass markets		1,018		1,058		(40	)	(4	)%		2,046		2,119		(73	)	(3	)%
Wholesale		174		194		(20	)	(10	)%		350		391		(41	)	(10	)%
Total local voice services		1,501		1,575		(74	)	(5	)%		3,021		3,156		(135	)	(4	)%
Long-distance services:
Business		138		146		(8	)	(5	)%		282		292		(10	)	(3	)%
Mass markets		161		133		28		21	%		316		268		48		18	%
Wholesale		278		268		10		4	%		549		545		4		1	%
Total long-distance services		577		547		30		5	%		1,147		1,105		42		4	%
Access services		133		182		(49	)	(27	)%		279		343		(64	)	(19	)%
Total voice services		2,211		2,304		(93	)	(4	)%		4,447		4,604		(157	)	(3	)%
Data and Internet services:
Business		582		562		20		4	%		1,167		1,103		64		6	%
Mass Markets		206		147		59		40	%		397		290		107		37	%
Wholesale		321		316		5		2	%		636		644		(8	)	(1	)%
Total data and Internet services		1,109		1,025		84		8	%		2,200		2,037		163		8	%
Total wireline services revenue		3,320		3,329		(9	)	0	%		6,647		6,641		6		0	%
Wireless services revenue		142		132		10		8	%		281		258		23		9	%
Other services revenue		10		9		1		11	%		20		20		—		0	%
Total operating revenue	$	3,472	$	3,470	$	2		0	%	$	6,948	$	6,919	$	29		0	%

38

Wireline Services Revenue

Voice Services

Local voice services. The decrease in mass markets and business local voice services revenue for the three and six months ended June 30, 2006 was primarily due to access line losses from competitive pressures, including wireless and cable substitution. In addition, although we are seeing a decline in local services revenue related to our bundle discounts as more customers take advantage of bundled offerings, we are seeing an increase in revenue on other products as discussed below. We continue to see declines in wholesale access lines, as demand for UNEs decreases.

The following table shows our access lines by channel as of June 30, 2006 and 2005:

	Access Lines
	As of June 30,		Increase/ (Decrease)		Percentage Change
	2006	2005
	(in thousands)
Mass markets	9,759	10,235	(476	)	(5	)%
Business	2,900	3,044	(144	)	(5	)%
Wholesale	1,624	1,808	(184	)	(10	)%
Total	14,283	15,087	(804	)	(5	)%

Long-distance services. The increase in long-distance services revenue was primarily due to long-distance subscriber and rate increases in our mass markets channel, partially due to our bundled offerings, as well as a higher percentage of customers migrating toward our fixed fee based offerings and increased price.

Access services. The decrease in access services revenue was primarily due to a $23 million favorable settlement of a customer billing dispute in the three months ended June 30, 2005. Additionally, for the three and six months ended June 30, 2006, regulated access rates decreased due to legislative action in certain states and wholesale volumes decreased. We also recognized a one-time benefit in the three months ended June 30, 2005 due to favorable regulatory rulings.

Data and Internet Services

The increase in data and Internet services revenue for the three and six months ended June 30, 2006 was primarily due to a 51% increase in high-speed Internet subscribers as of June 30, 2006 compared to June 30, 2005 in our mass markets channel. This growth in high-speed Internet subscribers resulted generally from customers migrating from dial-up connections and expanded service availability. We also experienced strong growth in Data Integration revenue in our business channel for the three and six month periods ended June 30, 2006.

Wireless Services Revenue

Wireless services revenue increased due to a 4.4% increase in subscribers as of June 30, 2006 compared to June 30, 2005 and an increased average rate per customer primarily due to more customers signing up for higher priced calling plans.

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Operating Expenses

The following table provides further detail regarding our operating expenses for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,						Increase/ (Decrease)			% Change		Six Months Ended June 30,				Increase/ (Decrease)			% Change
	2006			2005								2006		2005
	(Dollars in millions)
Operating expenses:
Cost of sales:
Facility costs	$	610		$	677		$	(67	)	(10	)%	$	1,228	$	1,351	$	(123	)	(9	)%
Network expenses		62			59			3		5	%		114		126		(12	)	(10	)%
Employee-related costs		388			387			1		0	%		784		796		(12	)	(2	)%
Other non-employee related costs		333			311			22		7	%		684		600		84		14	%
Total cost of sales		1,393			1,434			(41	)	(3	)%		2,810		2,873		(63	)	(2	)%
Selling, general and administrative:
Property and other taxes		72			111			(39	)	(35	)%		160		210		(50	)	(24	)%
Bad debt		27			53			(26	)	(49	)%		71		110		(39	)	(35	)%
Restructuring, realignment and severance related costs		(2	)		(1	)		(1	)	100	%		20		14		6		43	%
Employee-related costs		405			410			(5	)	(1	)%		806		817		(11	)	(1	)%
Other non-employee related costs		468			472			(4	)	(1	)%		927		930		(3	)	0	%
Total selling, general and administrative		970			1,045			(75	)	(7	)%		1,984		2,081		(97	)	(5	)%
Depreciation		592			649			(57	)	(9	)%		1,180		1,302		(122	)	(9	)%
Capitalized software and other intangible assets amortization		101			116			(15	)	(13	)%		204		237		(33	)	(14	)%
Total operating expenses	$	3,056		$	3,244		$	(188	)	(6	)%	$	6,178	$	6,493	$	(315	)	(5	)%

Cost of Sales

Cost of sales includes employee-related costs (such as salaries, wages and benefits directly attributable to products or services), network expenses, facility costs and other non-employee related costs (such as real estate, Universal Service Fund charges, call termination fees, materials and supplies, contracted engineering services and the cost of Data Integration and wireless handsets sold). Cost of sales decreased by $41 million, or to 40.1% from 41.3% as a percentage of revenue, for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 and by $63 million, or to 40.4% from 41.5% as a percentage of revenue, for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. Our facilities costs decreased as we continue to implement initiatives to optimize our usage of other local carriers’ services to connect our customers to our network, and we continue to benefit from reduced costs due to the renegotiation, termination or settlement of service arrangements in prior periods. Increases in Data Integration revenue resulted in higher Data Integration expenses, which are included in non-employee related expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, include employee-related costs (such as salaries, wages and benefits not directly attributable to products or services and sales commissions), severance related costs, bad debt charges, property and other taxes and other non-employee related costs such as real estate, marketing and advertising, professional service fees and computer systems support. SG&A decreased $75 million, or to 27.9% from 30.1% as a percentage of revenue, for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005. SG&A decreased $97 million, or to 28.6% from 30.1% as a percentage of revenue, for the six months ended June 30, 2006 as compared to the six months ended

40

June 30, 2005 as we continue to focus on reducing costs and increasing efficiencies. Also contributing to the decrease were property tax reductions, sales and use tax refunds and a one-time $21 million reduction to our estimated sales tax obligations. We do not expect these property and other tax reductions to continue. Bad debt expense decreased due to a continuing trend of improved collection practices. We do not believe bad debt expense will continue to decrease at similar levels in future periods. Other non-employee related costs were essentially flat with decreased information technology expenses offsetting increases in marketing and advertising costs. Included in other non-employee related costs is the $15 million loss accrual associated with the New Mexico regulatory matter described in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

Combined Pension and Post-Retirement Benefits

Our results include the combined cost of our pension, non-qualified pension and post-retirement healthcare and life insurance plans. We recorded expense of $55 million and $67 million for the three months ended June 30, 2006 and 2005, respectively, and $108 million and $133 million for the six months ended June 30, 2006 and 2005, respectively. The expense is a function of the amount of benefits earned, interest on projected benefit obligations, amortization of costs and credits from prior benefit changes and the expected return on the assets held in the various plans. The expense decreased for the three and six month period ended June 30, 2006 as compared to the same periods in 2005 as a result of a decrease in interest costs due to lower discount rates, an increase in the expected benefit from the federal subsidy on prescription drug benefits, and plan design changes associated with a new union contract. Partially offsetting these decreases were increases in expense due to lower expected return on investments in the benefit trusts caused by asset smoothing and amortization of actuarial losses caused by volatile equity markets and lower discount rates. The combined expense of the benefit plans 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 telephone marketing. We manage indirect administrative services costs such as finance, information technology, real estate, legal, marketing and advertising and human resources centrally; consequently, these costs are included in 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 assigned 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 resources. The results presented herein are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

Wireline Services Segment Expenses

The following table sets forth wireline services expenses for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,				Increase/ (Decrease)			% Change		Six Months Ended June 30,				Increase/ (Decrease)			% Change
	2006		2005							2006		2005
	(Dollars in millions)
Wireline services expenses:
Facility costs	$	536	$	598	$	(62	)	(10	)%	$	1,083	$	1,196	$	(113	)	(9	)%
Network expenses		61		58		3		5	%		113		120		(7	)	(6	)%
Bad debt		15		40		(25	)	(63	)%		43		83		(40	)	(48	)%
Restructuring and severance related costs		1		4		(3	)	(75	)%		3		10		(7	)	(70	)%
Employee-related costs		578		584		(6	)	(1	)%		1,174		1,188		(14	)	(1	)%
Other non-employee related costs		372		343		29		8	%		758		672		86		13	%
Total wireline services expenses	$	1,563	$	1,627	$	(64	)	(4	)%	$	3,174	$	3,269	$	(95	)	(3	)%

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Facility costs decreased due to our implementation of initiatives to optimize our usage of other local carriers’ services to connect our customers to our network. Facilities costs also decreased as we continue to benefit from reduced costs due to the renegotiation, termination or settlement of service arrangements in prior periods. Bad debt expense decreased due to improved collection practices. These decreases were partially offset by increased other non-employee related costs associated with an increase in Data Integration revenue.

Wireless Services Segment Expenses

The following table sets forth wireless services expenses for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,				Increase/ (Decrease)			% Change		Six Months Ended June 30,				Increase/ (Decrease)			% Change
	2006		2005							2006		2005
	(Dollars in millions)
Wireless services expenses:
Facility costs	$	74	$	79	$	(5	)	(6	)%	$	145	$	155	$	(10	)	(6	)%
Wireless equipment		26		28		(2	)	(7	)%		56		54		2		4	%
Bad debt		12		14		(2	)	(14	)%		24		28		(4	)	(14	)%
Employee-related costs		11		12		(1	)	(8	)%		23		26		(3	)	(12	)%
Other non-employee related costs		13		14		(1	)	(7	)%		29		40		(11	)	(28	)%
Total wireless services expenses	$	136	$	147	$	(11	)	(7	)%	$	277	$	303	$	(26	)	(9	)%

Wireless services expenses decreased primarily due to decreased facilities costs, driven by lower cost per minute on airtime, and decreased bad debt expense due to improved collection practices. In addition, for the six months ended June 30, 2006, there were decreased costs associated with our transition to a third-party vendor, which was completed in the first quarter of 2005.

Other Services Segment Expenses

Other services expenses include corporate expenses for services such as finance, information technology, real estate, legal, marketing and advertising and human resources, which we centrally manage and are not assigned to the wireline or wireless services segments. The following table sets forth other services expenses for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,						Increase/ (Decrease)			% Change		Six Months Ended June 30,				Increase/ (Decrease)			% Change
	2006			2005								2006		2005
	(Dollars in millions)
Other services expenses:
Property and other taxes	$	72		$	111			(39	)	(35	)%	$	160	$	209	$	(49	)	(23	)%
Real estate costs		105			99			6		6	%		215		204		11		5	%
Restructuring, realignment and severance related costs		(3	)		(5	)		2		40	%		17		2		15		nm
Employee-related costs		204			201			3		1	%		393		399		(6	)	(2	)%
Other non-employee related costs		286			299			(13	)	(4	)%		558		568		(10	)	(2	)%
Total other services expenses	$	664		$	705		$	(41	)	(6	)%	$	1,343	$	1,382	$	(39	)	(3	)%

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

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The decrease in other services expenses was primarily attributable to property tax reductions, sales and use tax refunds and a one-time $21 million reduction to our estimated sales tax obligations, partially offset by an increase in real estate costs. We do not expect these property and other tax reductions to continue. Other non-employee related costs decreased due to lower information technology expenses offsetting increases in marketing and advertising costs. Included in other non-employee related costs is the $15 million loss accrual associated with the New Mexico regulatory matter described in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

Non-Segment Operating Expenses

Depreciation and Amortization

Depreciation expense for the three and six months ended June 30, 2006 was $592 million and $1,180 million, respectively, or 9% lower than the same periods in the prior year. The primary driver of this decrease was decreased capital expenditures over a period of time and the changing mix of our investment in property, plant and equipment over that period of time. If our capital investment program stays approximately the same and there are no significant decreases in our estimates of the useful lives of assets, we expect that our year over year depreciation expense will continue to decrease.

Amortization expense for the three and six months ended June 30, 2006 was $101 million and $204 million or 13% and 14% lower than the same periods in the prior year, respectively. This reduction reflects the lower capital spending on software related assets since 2001.

Other Consolidated Results

Other Expense (Income)—Net

Other expense (income)—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,						Increase/ (Decrease)			% Change		Six Months Ended June 30,						Increase/ (Decrease)			% Change
	2006			2005								2006			2005
	(Dollars in millions)
Interest expense—net	$	298		$	380		$	(82	)	(22	)%	$	594		$	761		$	(167	)	(22	)%
(Gain) loss on early retirement of debt—net		(5	)		43			(48	)	nm			(5	)		43			(48	)	nm
Gain on sale of assets		(3	)		—			(3	)	nm			(3	)		(257	)		254		99	%
Other income—net		(9	)		(30	)		21		70	%		(37	)		(15	)		(22	)	(147	)%
Total other expense—net	$	281		$	393		$	(112	)	(28	)%	$	549		$	532		$	17		3	%

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

Interest expense—net. Interest expense decreased primarily due to decreased total borrowings and lower interest rates on certain long-term borrowings as a result of retiring notes totaling $3.4 billion with coupon rates ranging from 13% to 14% during 2005.

(Gain) loss on early retirement of debt—net. In the second quarter of 2005, we had a loss on early retirement of debt of $55 million from cash tender offers and the prepayment of $1.5 billion of debt, offset by a gain of $12 million from debt-for-equity exchanges. In the second quarter of 2006, our debt-for-equity exchanges resulted in a gain of $6 million. This gain was partially offset by losses on the retirement of certain other debt.

Gain on sale of assets. In the first quarter of 2005, we closed the sale of all of our PCS licenses and substantially all of our related wireless network assets and recognized a gain of $257 million associated with this and related asset sales.

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Other income—net. Other income—net decreased $21 million for the three months ended June 30, 2006 compared with the three months ended June 30, 2005. The decrease is primarily due to the one-time gain for interest rate swap agreements in the second quarter of 2005 and tax interest expense in the second quarter of 2006. Other income—net increased by $22 million for the six months ended June 30, 2006 compared with the six months ended June 30, 2005 due to higher tax penalty and interest expense in 2005 when compared to 2006, and certain non-recurring items including the recognition of a $7 million gain on the abandonment of an indefeasible right of use (IRU) by a customer in the first quarter of 2006.

Income Taxes

We have a history of generating net operating loss carryforwards for tax purposes and therefore have recognized a valuation allowance for our net deferred tax assets. We have, however, reported income before income taxes for the three and six months ended June 30, 2006. If we continue to generate income before income taxes in future periods, our conclusion about the realizability of our deferred tax assets and therefore the appropriateness of a valuation allowance could change in a future period.

We have increased our uncertain tax position liability by $16 million in the six months ended June 30, 2006 for certain federal and state income tax issues.

Liquidity and Capital Resources

Near-Term View

Our working capital deficit, or the amount by which our current liabilities exceed our current assets, was $2,542 million as of June 30, 2006 and $1,071 million as of December 31, 2005. Our working capital deficit increased primarily due to the reclassification of $903 million of debt obligations maturing in the next twelve months, the reclassification of our $1.265 billion 3.50% convertible senior notes to current and our capital expenditures of $832 million. The impact of these items was partially offset by cash generated by operating activities.

The 3.50% convertible senior notes were reclassified as a current obligation because specified, market-based conversion provisions were met as of that date. As such, the holders of these notes have the right to convert the notes and receive from us cash for the principal value of notes and shares of our common stock in accordance with the terms of the notes. These notes were classified as a non-current obligation as of December 31, 2005 because the market-based conversion provisions were not met as of that date. These market-based conversion provisions specify that, when our common stock has a closing price above $7.08 per share for twenty or more trading days during certain periods of thirty consecutive trading days, these notes become available for conversion, and as a result all outstanding notes are reclassified as a current obligation. These notes are registered securities and freely tradable, and as of June 30, 2006, they had a market price of $1,525 per $1,000 principal amount of notes, compared to an estimated conversion value of $1,309. Therefore, we do not anticipate holders will elect to convert because we believe it would likely result in adverse economic consequences to such holders.

We believe that our cash on hand together with our short-term investments, our currently undrawn credit facility described below 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 and/or tax payments, as further discussed in Note 8—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 may not have the resources to make. The magnitude of any settlements or judgments resulting from these actions could materially and adversely affect our financial condition and ability to meet our debt obligations, 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.

44

To the extent that our EBITDA (as defined in our debt covenants) is reduced by cash judgments, settlements and/or tax payments, 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.

We have $850 million available to us under a revolving credit facility (referred to as the Credit Facility), which is currently undrawn and which expires in October 2010. In July 2006, we substituted QCII for our wholly-owned subsidiary, Qwest Services Corporation, or QSC, as borrower under the Credit Facility. The 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 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report. The Credit Facility is guaranteed by QSC and is secured by a senior lien on the stock of its wholly owned subsidiary, Qwest Corporation.

The wireline services segment provides over 95% of our total operating revenue with the balance attributed to our wireless services and other services segments and the wireline services segment also provides all of the consolidated cash flows from operations. Cash flows used in operations of our wireless services 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 services segment will be sufficient to fund these operations in the near term.

On May 12, 2006, we agreed to acquire OnFiber Communications, Inc., a privately-held Austin, Texas based provider of custom-built and managed network solutions, for a purchase price of $107 million, subject to certain purchase price adjustments. We expect this acquisition will require us to make a cash payment in the third quarter of 2006.

We expect that our 2006 capital expenditures will be approximately equal to our 2005 levels, with the majority being used in our wireline services segment.

We may in the future consider possible means of returning cash to our shareholders if we deem our cash position to be sufficient for such a transaction.

During the three months ended June 30, 2006, we exchanged approximately $70 million in face amount of debt issued by Qwest Capital Funding, Inc., our wholly-owned subsidiary, plus $2 million of accrued interest, for approximately 8.6 million shares of our common stock with an aggregate value of approximately $66 million at the time of issuance. The effective share price for the exchange transactions ranged from $7.79 per share to $8.72 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our common stock at the times the exchange transactions were consummated ranged from $7.16 per share to $8.04 per share. As a result, we recorded a gain of $6 million on debt extinguishments during the three months ended June 30, 2006.

Long-Term View

We have historically operated with a working capital deficit as a result of our highly leveraged position, and it is likely that we will operate with a working capital deficit in the future. We believe that cash provided by operations and our currently undrawn Credit Facility, 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.

We may periodically 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 revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or if we become subject to significant judgments, settlements and/or

45

tax payments as further discussed in Note 8—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 financial condition and ability to meet our debt obligations, 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 Credit Facility makes available to us $850 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 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 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

Letters of Credit

We maintain letter of credit arrangements with various financial institutions for up to $147 million. At June 30, 2006, we had outstanding letters of credit of approximately $133 million.

Historical View

	Six Months Ended June 30,						Increase/ (Decrease)			% Change
	2006			2005
	(Dollars in millions)
Cash flows:
Provided by operating activities	$	1,177		$	913		$	264		29	%
Used for investing activities		(889	)		(56	)		(833	)	nm
Provided by financing activities		55			237			(182	)	(77	)%
Increase in cash and cash equivalents	$	343		$	1,094		$	(751	)	(69	)%

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

46

Operating Activities

Our cash provided by operating activities increased $264 million primarily due to a decrease in interest expense due to the retirement of high coupon debt in the fourth quarter of 2005 and decreases in cost of sales and SG&A, partially offset by a $100 million deposit towards the proposed settlement of the consolidated securities action discussed in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.

Investing Activities

Cash used for investing activities decreased $833 million for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 primarily due to the receipt of proceeds from the sale of our wireless assets in our local service area in the three months ended March 31, 2005 of $418 million, lower net sales proceeds less purchases of investment securities and increased capital expenditures in the six months ended June 30, 2006 compared to the six months ended June 30, 2005.

Financing Activities

Cash provided by financing activities decreased $182 million primarily due to the timing of payments for existing debt maturities in 2005 and the receipt of cash from debt offerings in the quarter ended June 30, 2005, partially offset by proceeds in 2006 from the issuances of common stock from various stock benefit plans including the exercise of stock options.

Credit Ratings

The table below summarizes our long-term debt ratings at June 30, 2006 and December 31, 2005:

	Moody’s	S&P	Fitch
Corporate rating/Sr. Implied rating	B1	BB-	NR
Qwest Corporation	Ba3	BB	BB+
Qwest Communications Corporation	NR	NR	B+
Qwest Capital Funding, Inc.	B3	B	B+
Qwest Communications International Inc.*	B2/B3	B	BB/B+

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 $2.0 billion of floating-rate debt was exposed to changes in interest rates as of June 30, 2006 and December 31, 2005. This exposure is linked to LIBOR. A hypothetical increase of 100 basis points in LIBOR would have caused an immaterial increase in interest expense for the six months ended June 30, 2006. As

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of June 30, 2006 and December 31, 2005, we had approximately $0.9 billion and $0.5 billion, respectively, of long-term fixed rate debt obligations maturing in the subsequent 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 basis points in the interest rates on any refinancing of the current portion of long-term debt would not have a material effect on our earnings.

Our 3.50% convertible senior notes are currently convertible because specified, market-based conversion provisions have been met. As such, the holders of these notes have the right to convert the notes and receive from us cash for the principal value of notes and shares of our common stock in accordance with the terms of the notes. Although holders of these notes have the right to convert in the near term, we do not anticipate holders will elect to convert because we believe it would likely result in adverse economic consequences to such holders. In the unlikely event that holders of a substantial amount of these notes did elect to convert, we might choose to borrow additional amounts and we would be exposed to changes in interest rates. A hypothetical increase of 100 basis points in the interest rates on any refinancing of the convertible notes would not have a material effect on our earnings.

As of June 30, 2006, we had $1.1 billion invested in money market instruments and $0.2 billion 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 decrease of 100 basis points in money market rates would cause an immaterial decrease in other income.

Off-Balance Sheet Arrangements

There were no substantial changes to our off-balance sheet arrangements or contractual commitments in the six months ended June 30, 2006, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2005.

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 revenue, 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 have filed or will file with the Securities and Exchange Commission (“SEC”). You can find many of these statements by looking for words such as “may,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this document or documents incorporated by reference in this document.

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 in “Risk Factors” in Item 1A of Part II of this report. 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. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. 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

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or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intention as of the date of this document 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.

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, 2006. 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 2006 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 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

Risks Affecting Our Business

Increasing competition, including product substitution, continues to cause access line losses, 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 continue to intensify. We are facing 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, and resellers. As a reseller of wireless services, we face risks that facility based wireless providers do not have. In addition, regulatory developments over the past few years have generally increased competitive pressures on our business. Due to these and other factors, we continue to lose access lines and are experiencing pressure on profit margins.

We seek to distinguish ourselves from our competitors by providing new or expanded services such as in-region long-distance, high-speed Internet, wireless, video and VoIP, bundling of expanded feature-rich products and improving the quality of our customer service. However, we may not be successful in these efforts. 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 satellite video services. Even if we are successful, these initiatives may not be sufficient to offset our continuing loss of access lines. If these initiatives are unsuccessful or insufficient and our revenue declines significantly without corresponding cost reductions, this will cause a significant deterioration to our results of operations and financial condition and adversely affect our ability to service debt and pay other obligations.

Consolidation among participants in the telecommunications industry may allow our competitors to compete more effectively against us, which could adversely affect our operating results and financial performance.

The telecommunications industry is experiencing an ongoing trend towards consolidation, and several of our competitors have consolidated, or have announced plans to consolidate, with other telecommunications providers. This trend will result in competitors that are larger and better financed and will afford our competitors increased resources and greater geographical reach, thereby enabling such competitors to compete more effectively against us. We have begun to experience and expect further increased pressures as a result of this trend and in turn have been and may continue to be forced to respond with lower profit margin product offerings and pricing plans 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 and deploy new products and services, such as broadband data, wireless, video and VoIP services. The development and deployment of new products and services could require substantial expenditure of financial and other resources in excess of contemplated levels. If we are not able to develop new products and services to keep pace with technological advances, or if such products and services 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.

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Third parties may claim we infringe upon their intellectual property rights, and defending against these claims could adversely affect our profit margins and our ability to conduct business.

From time to time, we receive notices from third parties claiming we have or are infringing upon their intellectual property rights. We may receive similar notices in the future. Responding to these claims may require us to expend significant time and money defending our use of affected technology, may require us to enter into royalty or licensing agreements on less favorable terms than we could otherwise obtain or may require us to pay damages. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and adversely affect the way we conduct business.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of the investigation currently being conducted by the DOJ or the material litigation pending against us, including the securities actions, 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 DOJ investigation and the remaining securities actions described in Note 8—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 the aggregate, the plaintiffs in the remaining securities actions and persons who have sought exclusion from the class in the consolidated securities action seek billions of dollars in damages, and the outcome of one or more of these matters or the DOJ investigation could have a negative impact on the outcomes of the other 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, affect the risks presented by these actions and the DOJ investigation, 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 continue to defend against the remaining securities actions vigorously and are currently unable to provide any estimate as to the timing of their resolution.

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. We have a recorded reserve in our financial statements for the minimum estimated amount of loss we believe is probable with respect to the remaining securities actions described in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report, as well as to any additional actions that may be brought by parties that, as described under “Additional Opt-Out Parties” in Note 8, have more recently requested to be excluded from the proposed settlement of the consolidated securities action. However, the ultimate outcomes of these matters are still uncertain and the amount of loss we ultimately incur could be substantially more than the reserves we have provided. If the recorded reserves are insufficient, we will need to record additional charges to our consolidated statement of operations in future periods. In addition, 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 matters could materially and adversely affect our financial condition and ability to meet our debt obligations, 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, there exist other material proceedings pending against us as described in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report that, 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.

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Current or future civil or criminal actions against our former officers and employees could reduce investor confidence and cause the trading price for our securities to decline.

As a result of our past accounting issues, investor confidence in us has suffered and could suffer further. Although we have consummated 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 December 2005, a criminal indictment was filed against Mr. Nacchio charging him with 42 counts of insider trading.

Trials could take place in the pending SEC lawsuit against Mr. Nacchio and others or in connection with the criminal charges against Mr. Nacchio. Evidence 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.

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 significant federal regulation, including the Communications Act of 1934, as amended, and Federal Communications Commission, or FCC, regulations thereunder. We are also subject to the applicable laws and regulations of various states, including regulation by public utility commissions, or 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. Recently a number of state legislatures and state PUCs adopted reduced or modified forms of regulation for retail services. This is generally beneficial to us because it reduces regulatory costs and regulatory filing and reporting requirements. These changes also generally allow more flexibility for new product introduction and enhance our ability to respond to competition. At the same time, some of the changes, occurring at both the state and federal level, may have the potential effect of reducing some regulatory protections, including having FCC-approved tariffs that include rates, terms and conditions. These changes may necessitate the need for customer-specific contracts to address matters previously covered in our tariffs. Despite these regulatory changes, a substantial portion of our local voice services revenue remains subject to FCC and state PUC pricing regulation, which could expose us to unanticipated price declines. 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.

All of our operations are also subject to a variety of environmental, safety, health and other governmental 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.

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Risks Affecting Our Liquidity

Our high debt levels 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, 2006, our total debt was approximately $15.4 billion. Approximately $2.9 billion of our debt obligations comes due over the next three years. In addition, holders of our $1.265 billion 3.50% Convertible Senior Notes due 2025 may elect to convert the principal of their notes into cash during periods when specified, market-based conversion requirements are met. However, we do not anticipate holders will make such an election because we believe it would likely result in adverse economic consequences to such holders. 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.

We may periodically 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 revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or if we become subject to significant judgments, settlements and/or tax payments as further discussed in Note 8—Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Item 2 of Part I of this report. We can give no assurance that such additional financing will be available on terms that are acceptable. Also, we may be impacted by factors relating to or affecting our liquidity and capital resources due to perception in the market, impacts on our credit ratings or provisions in our financing agreements that may restrict our flexibility under certain conditions.

We may in the future consider possible means of returning cash to our shareholders if we deem our cash position to be sufficient for such a transaction.

Our $850 million revolving Credit Facility, which is currently undrawn, has a cross payment default provision, and the 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 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 Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the DOJ investigation and securities actions discussed in Note 8—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;

• making us more vulnerable to 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.

The industry in which we operate is capital intensive, and as such we anticipate that our capital requirements will continue to be significant in the coming years. Although we have reduced our capital expenditures and operating expenses over the past few years, we may be unable to further significantly reduce these costs, even if

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revenue is decreasing. 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.

Declines in the value of qualified pension plan assets, or unfavorable changes in laws or regulations that govern pension plan funding, could require us to provide significant amounts of funding for our qualified pension plan.

While we do not expect to be required to make material cash contributions to our qualified defined benefit pension plan in the near term based upon current actuarial analyses and forecasts, a significant decline in the value of qualified 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 funding. As a result, we may be required to fund our qualified defined benefit pension plan with cash from operations, perhaps by a material amount. Also, recognition of an additional minimum liability caused by changes in pension 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 exceeds pension plan assets in the future, the impact would be to eliminate our prepaid pension asset, which was $1.165 billion as of December 31, 2005, and record a pension liability for the amount that our accumulated benefit obligation exceeds pension plan assets with a corresponding charge to other comprehensive loss, thereby increasing stockholders’ deficit. Alternatively, we could make a voluntary contribution to the plan so that the qualified pension plan assets exceed the accumulated benefit obligation. As of December 31, 2005, our qualified pension plan assets exceed our accumulated benefit obligation by $596 million.

Our debt agreements allow us to incur significantly more debt, which could exacerbate the other risks described herein.

The terms of our debt instruments permit us to incur additional indebtedness. Such additional debt may be necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons alone. Incremental borrowings or borrowings at maturity on terms that impose additional financial risks to our various efforts to improve our financial condition and results of operations could exacerbate the other risks described herein.

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.

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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 annual report on Form 10-K for the year ended December 31, 2005, 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, such events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

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 8—Commitments and Contingencies 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. In addition, for example, in the fourth quarter of 2004, Qwest received notices of proposed adjustments on several significant issues for the 1998-2001 audit cycle. Certain of these proposed adjustments are before the Appeals Office of the IRS. And in June 2006 Qwest received notices of proposed adjustments on several significant issues for the 2002-2003 audit cycle, including a proposed adjustment disallowing a loss recognized by Qwest relating to the sale of its DEX directory publishing business. There is no assurance that we and the IRS will reach settlements on any of these issues or that, if we do reach settlements, the terms will be favorable to us.

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 previously filed returns 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 recognized in our financial statements certain amounts owed to us under one of these agreements; however, generally, we have not provided for liabilities 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, 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 or our net operating loss carryforwards.

If we fail to extend or renegotiate our collective bargaining agreements 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 agreements with our labor unions, which represent a significant number of our employees. In August 2005, we reached agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers on three-year labor agreements. Each of these agreements was ratified by union members and expires on August 16, 2008. Although we believe that our

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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. The impact of future negotiations, including changes in wages and benefit levels, could have a material impact on our financial results. Also, 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.

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;

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

• broader market fluctuations;

• general economic or political conditions;

• acquisitions and financings including the issuance of substantial number of shares of our common stock as consideration in acquisitions;

• sale of a substantial number of shares held by the existing shareholders in the public market, including shares issued upon exercise of outstanding options or upon the conversion of our convertible notes; and

• general conditions in the telecommunications industry.

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

During the second quarter of 2006, we issued approximately 8.6 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 $70 million in face amount of debt issued by our wholly owned subsidiary, Qwest Capital Funding, Inc., and guaranteed by us, and $2 million of accrued interest. The effective share price for the exchange transactions ranged from $7.79 per share to $8.72 per share (principal and accrued interest divided by the number of shares issued). The trading prices for our common stock at the times the exchange transactions were consummated ranged from $7.16 per share to $8.04 per share. No underwriters or underwriting discounts or commissions were involved.

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

We held our 2006 Annual Meeting of Stockholders on May 24, 2006. At the meeting, stockholders present in person or by proxy voted on the following matters:

1. The election of nine directors to the Board of Directors, or Board, to hold office until the annual meeting of stockholders in 2007 and until their successors are elected and qualified;

	Votes For	Votes Withheld
Linda G. Alvarado	1,667,766,838	65,001,151
Charles L. Biggs	1,697,197,304	35,570,685
R. David Hoover	1,575,020,771	157,747,218
Patrick J. Martin	1,700,322,101	32,445,888
Caroline Matthews	1,696,882,600	35,885,389
Wayne W. Murdy	1,688,989,077	43,778,913
Richard C. Notebaert	1,694,001,896	38,766,093
Frank P. Popoff	1,694,160,508	38,607,481
James A. Unruh	1,677,565,916	55,202,073

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2. Ratification of the appointment of KPMG LLP as our independent auditor for 2006;

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
1,681,679,271	39,648,583	11,439,959	N/A

3. Approval of the amended and restated Equity Incentive Plan;

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
1,253,808,134	308,947,155	13,283,995	156,728,705

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

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
317,402,180	1,234,538,086	24,099,017	156,728,706

5. 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;

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
486,584,708	1,077,552,747	11,897,616	156,732,918

6. A stockholder proposal that would amend our bylaws to provide that our directors be elected by a majority vote (or in some cases a plurality vote); and

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
850,526,706	711,475,140	14,037,612	156,728,531

7. A stockholder proposal requesting that our Board establish a policy of separating the roles of the Chairman and Chief Executive Officer whenever possible.

Votes For	Votes Against	Votes Abstained	Broker Non-Votes
245,741,206	1,316,359,801	13,938,429	156,728,553

On July 25, 2006, our Board unanimously elected Anthony Welters, President and Chief Executive Officer of AmeriChoice Corporation, a UnitedHealth Group Company, as a director.

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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 Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Form S-4/A filed on August 13, 1999, File No. 333-81149).
(3.1	)	Restated Certificate of Incorporation of Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’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 Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’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 Communications International Inc., adopted as of July 1, 2002 and amended as of May 25, 2004 (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No. 001-15577).
(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 January 29, 1998, with Bankers Trust Company (including form of Qwest Communications International Inc.’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 Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).
(4.4	)	Indenture, dated as of November 4, 1998, with Bankers Trust Company (including form of Qwest Communications International Inc.’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 Communications International Inc.’s Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).
(4.5	)	Indenture, dated as of November 27, 1998, with Bankers Trust Company (including form of Qwest Communications International Inc.’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 Communications International Inc.’s Registration Statement on Form S-4, filed February 2, 1999, File No. 333-71603).
(4.6	)	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).

58

Exhibit Number		Description
(4.7)		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).
(4.8)		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).
(4.9)		First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest Communications International Inc., and Bank One Trust Company, as trustee (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 001-15577).
(4.10	)	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 Communications International Inc.’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 Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 001-15577).
(4.11	)	Officer’s Certificate of Qwest Corporation, dated March 12, 2002 (including forms of 8 7/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporation’s Form S-4, File No. 333-115119).
(4.12	)	Indenture, dated as of December 26, 2002, between Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on January 10, 2003, File No. 001-15577).
(4.13	)	First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., 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 Communications International Inc.’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).
(4.14	)	First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., 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 Communications International Inc.’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).
(4.15	)	Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., 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 Communications International Inc.’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).
(4.16	)	Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., 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).

59

Exhibit Number		Description
(4.17	)	Indenture, dated as of February 5, 2004, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and J.P. Morgan Trust Company (incorporated by reference to Qwest Communications International Inc.’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 August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(4.19	)	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).
(4.20	)	First Supplemental Indenture, dated June 17, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(4.21	)	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 Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(4.22	)	Second Supplemental Indenture, dated June 23, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(4.23	)	Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 14, 2005, File No. 001-15577).
(4.24	)	First Supplemental Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 14, 2005, File No. 001-15577).
(4.25	)	First Supplemental Indenture, dated as of November 16, 2005, by and among Qwest Services Corporation, Qwest Communications International Inc., Qwest Capital Funding, Inc. and J.P. Morgan Trust Company, N.A. as successor to Bank One Trust Company, N.A. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on November 21, 2005, File No. 001-15577).
(10.1)		Equity Incentive Plan, as amended, including forms of option and restricted stock agreements (incorporated by reference to Qwest Communications International Inc.’s Proxy Statement for the 2006 Annual Meeting of Stockholders, File No. 001-15577).*
(10.2)		Forms of option and restricted stock agreements used under Equity Incentive Plan, as amended (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on October 24, 2005, Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 001-15577).*
(10.3)		Employee Stock Purchase Plan (incorporated by reference to Qwest Communications International Inc.’s Proxy Statement for the 2003 Annual Meeting of Stockholders, File No. 001-15577).*
(10.4)		Nonqualified Employee Stock Purchase Plan (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577).*

60

Exhibit Number		Description
(10.5)		Deferred Compensation Plan (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998, File No. 000-22609).*
(10.6)		Equity Compensation Plan for Non-Employee Directors (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 000-22609).*
(10.7)		Deferred Compensation Plan for Nonemployee Directors, as amended and restated (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on December 16, 2005, File No. 001-15577).*
(10.8)		Qwest Savings & Investment Plan, as amended and restated (incorporated by reference to Qwest Communications International Inc.’s Form S-8 filed on January 15, 2004, File No. 333-11923).*
(10.9)		2006 Qwest Management Bonus Plan Summary (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed December 16, 2005, File No. 001-15577).*
(10.10	)	Summary Sheet Describing the Compensation Package for Qwest Communications International Inc.’s Non-employee Directors (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on October 24, 2005, File No. 001-15577).*
(10.11	)	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).
(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	)	Registration Rights Agreement, dated August 19, 2004, among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
(10.15	)	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).
(10.16	)	Registration Rights Agreement, dated June 17, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.17	)	Registration Rights Agreement, dated June 17, 2005, by and among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.18	)	Registration Rights Agreement, dated June 23, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and the initial purchasers listed therein (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on June 23, 2005, File No. 001-15577).
(10.19	)	Amended and Restated Employment Agreement, dated August 19, 2004, by and between Richard C. Notebaert and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*

61

Exhibit Number		Description
(10.20	)	Amendment to Amended and Restated Employment Agreement, dated October 21, 2005, by and between Richard C. Notebaert and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on October 24, 2005, File No. 001-15577).*
(10.21	)	Form of Amendment to Amended and Restated Employment Agreement by and between Qwest Services Corporation and Richard C. Notebaert (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on December 16, 2005, File No. 001-15577).*
(10.22	)	Amendment to Amended and Restated Employment Agreement, dated as of February 16, 2006, by and between Richard C. Notebaert and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on February 17, 2006, File No. 001-15577).*
(10.23	)	Agreement, dated as of February 16, 2006, by and between Richard C. Notebaert and Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on February 17, 2006, File No. 001-15577).*
(10.24	)	Aircraft Time Sharing Agreement, dated February 14, 2006, by and between Qwest Business Resources, Inc. and Richard C. Notebaert (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005, 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 Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.26	)	Amendment to Amended and Restated Employment Agreement, dated October 21, 2005, by and between Oren G. Shaffer and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K filed on October 24, 2005, File No. 001-15577).*
(10.27	)	Form of Amendment to Amended and Restated Employment Agreement by and between Qwest Services Corporation and Oren G. Shaffer (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on December 16, 2005, File No. 001-15577).*
(10.28	)	Amendment to Amended and Restated Employment Agreement, dated as of February 16, 2006, by and between Oren G. Shaffer and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on February 17, 2006, File No. 001-15577).*
(10.29	)	Agreement, dated as of February 16, 2006, by and between Oren G. Shaffer and Qwest Communications International Inc. (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on February 17, 2006, File No. 001-15577).*
(10.30	)	Aircraft Time Sharing Agreement, dated February 14, 2006, by and between Qwest Business Resources, Inc. and Oren G. Shaffer (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-15577).
(10.31	)	Retention Agreement, dated May 8, 2002, by and between Qwest Services Corporation and Richard N. Baer (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577).*
(10.32	)	Severance Agreement, dated July 21, 2003, by and between Qwest Services Corporation and Richard N. Baer (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577).*

62

Exhibit Number		Description
(10.33	)	Severance Agreement, dated April 4, 2005, by and between Qwest Services Corporation and Thomas E. Richards (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, File No. 001-15577).*
(10.34	)	Letter Agreement, dated August 20, 2003, by and between Qwest Services Corporation and Paula Kruger (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577).*
(10.35	)	Severance Agreement, dated September 8, 2003, by and between Qwest Services Corporation and Paula Kruger (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-15577).*
(10.36	)	Letter Agreement, dated August 19, 2004, by and between Qwest Services Corporation 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).*
(10.37	)	Amended and Restated Employment Agreement, dated August 19, 2004 by and between Barry K. Allen and Qwest Services Corporation (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).*
(10.38	)	Aircraft Time Sharing Agreement, dated February 14, 2006, by and between Qwest Business Resources, Inc. and Barry Allen (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-15577).
(10.39	)	Letter Agreement, dated March 27, 2003, by and between Qwest Services Corporation and John W. Richardson (incorporated by reference to Qwest Communications International Inc.’s Registration Statement on Form S-4, File No. 333-115115).*
(10.40	)	Severance Agreement, dated as of July 28, 2003, by and between Qwest Services Corporation and John W. Richardson (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-15577).*
(10.41	)	Amendment to Severance Agreement, dated as of March 14, 2006, by and between Qwest Services Corporation and John W. Richardson (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 001-15577).*
(10.42	)	Form of Amendment to Severance Agreement between Qwest Services Corporation and each of Richard N. Baer, Paula Kruger and Thomas E. Richards (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K, filed on December 16, 2005, File No. 001-15577).*
(10.43	)	Private Label PCS Services Agreement between Sprint Spectrum L.P. and Qwest Wireless LLC dated August 3, 2003 (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-15577).†
(10.44	)	Stipulation of Partial Settlement, dated as of November 21, 2005, by and among Qwest Communications International Inc., the other settling defendants, and the Lead Plaintiffs in In re Qwest Communications International Inc. Securities Litigation on behalf of themselves and each of the class members (incorporated by reference to Qwest Communications International Inc.’s Current Report on Form 8-K/A filed on December 6, 2005, File No. 001-15577).
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.

63

Exhibit Number		Description
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.
(99.3	)	Credit Agreement, dated as of October 21, 2005, among Qwest Services Corporation, Qwest Communications International Inc., the Lenders party thereto from time to time, and Wachovia Bank, National Association, as Administrative Agent and Issuing Lender (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, File No. 001-15577).

(    ) Previously filed.

* Executive Compensation Plans and Arrangements.

† 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.

64

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 1, 2006

65

EX-12

Exhibit 12

QWEST COMMUNICATIONS INTERNATIONAL INC.

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES

(DOLLARS IN MILLIONS)

(UNAUDITED)

	Six Months Ended June 30, 2006			Years Ended December 31,
				2005			2004			2003			2002			2001
Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle	$	221		$	(760	)	$	(1,706	)	$	(1,832	)	$	(20,115	)	$	(7,362	)
Add: estimated fixed charges		656			1,648			1,678			1,936			1,998			1,856
Add: estimated amortization of capitalized interest		7			14			13			14			15			15
Less: interest capitalized		(7	)		(13	)		(12	)		(19	)		(41	)		(187	)
Total earnings available for fixed charges		877			889			(27	)		99			(18,143	)		(5,678	)
Estimate of interest factor on rentals		55			152			135			160			168			232
Interest expense, including amortization of premiums, discounts and debt issuance costs		594			1,483			1,531			1,757			1,789			1,437
Interest capitalized		7			13			12			19			41			187
Total fixed charges	$	656		$	1,648		$	1,678		$	1,936		$	1,998		$	1,856
Ratio of earnings to fixed charges		1.3			nm			nm			nm			nm			nm
Additional pre-tax income needed for earnings to cover total fixed charges	$	—		$	759		$	1,705		$	1,837		$	20,141		$	7,534

nm—negative ratios or ratios less than 1.0 are considered not meaningful

EX-31.1

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 1, 2006

/S/    RICHARD C. NOTEBAERT        

Richard C. Notebaert

Chairman and Chief Executive Officer

EX-31.2

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 1, 2006

/S/    OREN G. SHAFFER        

Oren G. Shaffer

Vice Chairman and Chief Financial Officer

EX-32

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, 2006, 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 1, 2006	By:	/S/    RICHARD C. NOTEBAERT
		Richard C. Notebaert Chairman and Chief Executive Officer
Dated: August 1, 2006	By:	/S/    OREN G. SHAFFER
		Oren G. Shaffer Vice Chairman and Chief Financial Officer

EX-99.1

EXHIBIT 99.1

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY OPERATING REVENUE

(Dollars in millions)

(Unaudited)

	2006				2005								2004
	Q2		Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1
Business:
Wireline services revenue:
Local voice	$	309	$	316	$	315	$	325	$	323	$	323	$	325	$	332	$	328	$	340
Long-distance		138		144		139		140		146		146		136		159		152		157
Access services		—		—		1		1		1		1		1		1		1		1
Total voice services		447		460		455		466		470		470		462		492		481		498
Data and Internet		582		585		587		625		562		541		561		546		551		550
Total business wireline services		1,029		1,045		1,042		1,091		1,032		1,011		1,023		1,038		1,032		1,048
Mass markets:
Wireline services revenue:
Local voice		1,018		1,028		1,030		1,036		1,058		1,061		1,072		1,078		1,099		1,151
Long-distance		161		155		152		141		133		135		133		115		103		101
Access services		1		1		2		2		2		2		4		2		2		2
Total voice services		1,180		1,184		1,184		1,179		1,193		1,198		1,209		1,195		1,204		1,254
Data and Internet		206		191		172		159		147		143		130		110		112		108
Total mass markets wireline services		1,386		1,375		1,356		1,338		1,340		1,341		1,339		1,305		1,316		1,362
Wholesale:
Wireline services revenue:
Local voice		174		176		181		183		194		197		189		199		206		195
Long-distance		278		271		276		278		268		277		277		276		237		242
Access services		132		145		159		156		179		158		157		166		176		176
Total voice services		584		592		616		617		641		632		623		641		619		613
Data and Internet		321		315		319		315		316		328		318		324		336		318
Total wholesale wireline services		905		907		935		932		957		960		941		965		955		931
Total wireline services revenue		3,320		3,327		3,333		3,361		3,329		3,312		3,303		3,308		3,303		3,341
Wireless services revenue		142		139		138		131		132		126		124		133		130		127
Other services revenue		10		10		9		12		9		11		10		8		9		13
Total operating revenue	$	3,472	$	3,476	$	3,480	$	3,504	$	3,470	$	3,449	$	3,437	$	3,449	$	3,442	$	3,481

EX-99.2

EXHIBIT 99.2

QWEST COMMUNICATIONS INTERNATIONAL INC.

QUARTERLY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions)

(Unaudited)

	2006						2005												2004
	Q2			Q1			Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
Operating revenue	$	3,472		$	3,476		$	3,480		$	3,504		$	3,470		$	3,449		$	3,437		$	3,449		$	3,442		$	3,481
Operating expenses:
Cost of sales
Facility costs		610			618			649			692			677			674			648			745			676			659
Network expenses		62			52			69			72			59			67			66			73			66			57
Employee-related costs		388			396			387			404			387			409			389			429			437			450
Other non-employee related costs		333			351			346			344			311			289			299			301			307			288
Total cost of sales		1,393			1,417			1,451			1,512			1,434			1,439			1,402			1,548			1,486			1,454
Selling, general and administrative:
Property and other taxes		72			88			43			100			111			99			78			112			115			81
Bad debt		27			44			36			27			53			57			49			39			13			93
Restructuring, realignment and severance related costs		(2	)		22			74			26			(1	)		15			59			5			132			15
Employee-related costs		405			401			405			401			410			407			413			413			434			469
Other non-employee related costs		468			459			492			462			472			458			471			692			792			496
Total selling, general and administrative		970			1,014			1,050			1,016			1,045			1,036			1,070			1,261			1,486			1,154
Depreciation and amortization		693			691			758			768			765			774			783			779			784			777
Asset impairment charges		—			—			—			—			—			—			36			34			43			—
Total operating expenses		3,056			3,122			3,259			3,296			3,244			3,249			3,291			3,622			3,799			3,385
Other expense—net
Interest expense—net		298			296			338			384			380			381			366			374			394			397
Other expense (income)—net		(17	)		(28	)		392			(31	)		13			(242	)		(54	)		40			(111	)		12
Total other expense—net		281			268			730			353			393			139			312			414			283			409
Income before income taxes and cumulative effect of accounting change—net		135			86			(509	)		(145	)		(167	)		61			(166	)		(587	)		(640	)		(313	)
Income tax benefit (expense)		(18	)		2			3			1			3			(4	)		27			18			(136	)		3
Income (loss) before cumulative effect of accounting change—net		117			88			(506	)		(144	)		(164	)		57			(139	)		(569	)		(776	)		(310	)
Cumulative effect of accounting changes—net		—			—			(22	)		—			—			—			—			—			—			—
Net income (loss)	$	117		$	88		$	(528	)	$	(144	)	$	(164	)	$	57		$	(139	)	$	(569	)	$	(776	)	$	(310	)