Certain statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking Statements" at the end of this Item 7 for additional factors relating to such statements as well as for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

Business Overview

We provide local telecommunications and related services, IntraLATA long-distance services and wireless, data and video services within our local service area, which consists of the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We provide InterLATA long-distance services outside our local service area and switched InterLATA long-distance services (as a reseller) in all states within our local service area other than Arizona. We also provide reliable, scalable and secure broadband data, voice and video communications outside our local service area as well as globally. We previously provided directory publishing services in our local service area. In 2002, we entered into contracts for the sale of our directory publishing business. In November 2002, we closed the sale of our directory publishing business in seven of the 14 states in which we offered these services. In September 2003, we completed the sale of the directory publishing business in the remaining states. As a consequence, the results of operations of our directory publishing business are included in income from discontinued operations in our consolidated statements of operations.

Restatement of 2001 and 2000 Consolidated Financial Statements

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

The nature of the errors and the restatement adjustments that we have made to our financial statements for years ended December 31, 2001 and 2000 are described in Item 1 Business-Impact of Restatement and are set forth in Note 3-Restatement of Results to our consolidated financial statements in Item 8 of this report. This restatement resulted in, among other things, an aggregate reduction in revenue of approximately $2.5 billion and an aggregate increase in net loss of approximately $2.5 billion. The impact of the restatement adjustments is summarized as follows:

                                                               December 31. 2001
                                           ----------------------------------------------------------
                                                             Pre-Tax                        Loss Per
                                             Revenue           Loss          Net Loss        Share
                                           ------------    ------------    -------------   ----------
                                                (Dollars in millions, except per share amounts)
Previously reported                        $     19,695    $     (3,958 )  $      (4,023 ) $    (2.42 )
Net restatements                                 (1,543 )        (2,497 )         (1,580 )      (0.95 )
Reclassification of previously reported               -            (106 )              -            -
extraordinary item
Reclassification for discontinued                (1,628 )          (834 )              -            -
operations
                                           ------------    ------------    -------------   ----------
As restated                                $     16,524    $     (7,395 )  $      (5,603 ) $    (3.37 )
                                           ------------    ------------    -------------   ----------


                                                               December 31, 2000
                                               --------------------------------------------------
                                                                                        Loss Per
                                                Revenue     Pre-Tax Loss    Net Loss      Share
                                               ---------   --------------   ---------   ---------
                                                (Dollars in millions, except per share amounts)
Previously reported                            $  16,610   $          126   $     (81 ) $   (0.06 )
Net restatements                                    (945 )         (1,432 )      (956 )     (0.76 )
Reclassification for discontinued operations      (1,517 )           (728 )         -           -
                                               ---------   --------------   ---------   ---------
As restated                                    $  14,148   $       (2,034 ) $  (1,037 ) $   (0.82 )
                                               ---------   --------------   ---------   ---------

The restatements involve, among other matters, revenue recognition issues related to optical capacity asset transactions, equipment sales, directory publishing and purchase accounting. In making these restatements, we have performed an internal analysis of our accounting policies, practices, procedures and disclosures for the affected periods.

While our restatement of revenue and net loss is attributable primarily to misinterpretations or misapplications of GAAP, we believe that many of the restatement adjustments were the result of certain ineffective internal control policies and procedures. For a more detailed description of our restatement adjustments, see Note 3-Restatement of Results to our consolidated financial statements in Item 8 of this report.

Please note that our consolidated financial statements do not include financial results of pre-Merger Qwest for any period prior to the Merger. This is due to U S WEST being deemed the acquirer in the Merger for financial statement accounting purposes. With respect to certain categories of transactions (principally the optical capacity asset transactions), we are restating these transactions only with respect to periods subsequent to June 30, 2000. Certain of these transactions may have been accounted for by pre-Merger Qwest under policies and practices similar to those for which post-Merger transactions are being restated.

We have not amended our prior filings to reflect the restatement. As a result, the information previously filed in our annual reports on Form 10-K for fiscal years 2001 and 2000, our quarterly reports on Form 10-Q for the quarterly periods included in those fiscal years and for the quarter ended March 31, 2002 and any current reports on Form 8-K, or other disclosures, containing fiscal 2002, 2001 or 2000 information filed or made prior to the filing of our 2002 Form 10-K on October 16, 2003 should not be relied upon.

Results of Operations

Overview

Our operating revenues are generated from our wireline, wireless and other segments. Our wireline segment includes revenues from the provision of voice services and data and Internet services. Voice services consist of local voice services (such as basic local exchange services), long-distance voice services
(such as IntraLATA long-distance services and InterLATA long-distance services)
and other voice services (such as operator services, public telephone service, enhanced voice services and CPE). Voice services revenues are also generated on a wholesale basis from switched-access service revenues, wholesale long-distance service revenues (included in long-distance services revenues) and wholesale access revenues (included in local voice services revenues). Data and Internet services includes data services (such as traditional private lines, wholesale private lines, frame relay, ATM and related CPE) and Internet services (such as DSL, DIA, VPN, Internet dial access, web hosting, professional services and related CPE). Revenues from optical capacity transactions are also included in revenues from data services. Depending on the product or service purchased, a customer may pay an up-front fee, a monthly fee, a usage charge or a combination of these.

Our wireless services are provided through our wholly owned subsidiary, Qwest Wireless LLC, which holds 10 MHz licenses to provide Personal Communications Service, or PCS, in most markets in our local service area. We offer wireless services to residential and business customers, providing them

the ability to use the same telephone number for their wireless phone as for their home or business phone.

In August 2003, we entered into a services agreement with a subsidiary of Sprint that allows us to resell Sprint wireless services, including access to Sprint's nationwide PCS wireless network, to consumer and business customers, primarily within our local service area. We plan to begin offering these Sprint services under our brand name in early 2004. Our wireless customers who are currently being serviced through our proprietary wireless network will be transitioned at our cost onto Sprint's network. We are still evaluating both the operational effects of this new wholesale wireless arrangement and the financial effects; however, due to the anticipated decrease in usage of our own wireless network we anticipate that we will record a charge related to an additional impairment of our wireless network. We expect that the impairment charge will be in the range of $200 million to $300 million. We have not adjusted our consolidated financial statements for the year ended December 31, 2002 for any potential impacts of this agreement.

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

Our wholly owned subsidiary, Dex, previously published telephone directories in our local service area. Virtually all of Dex's revenues were derived from the sale of advertising in its various directories. During 2002, we entered into an agreement to sell our entire directory publishing business to a third party for approximately $7.05 billion. The sale was divided into two phases, the first of which closed in November 2002. At this closing, we received approximately $2.75 billion of gross proceeds. The second phase closed in September 2003. At this closing, we received approximately $4.30 billion of gross proceeds. The results of operations from our directory publishing business for all periods presented are included in income from and gain on sale of discontinued operations in our consolidated statements of operations and, accordingly, the results of operations for all periods discussed below do not include the operating revenues or expenses of Dex. For more information regarding the sale of Dex, see Note 8-Assets Held for Sale including Discontinued Operations to our consolidated financial statements in Item 8 of this report.

Business Trends

Our results continue to be impacted by a number of factors influencing the telecommunications industry and our local service area. First, the weak economy in our local service area has continued to impact demand from both our consumer and business customers. The impacts include reduced demand for services resulting in loss of access lines, renegotiated commitments and loss of customers. We believe demand will continue to be affected because the recovery in our local service area is expected to lag the national recovery. Second, technology substitution and competition is expected to continue to lead to access line loss. However, the competitive landscape is changing as we have begun offering InterLATA services in our local service area and CLECs are increasing their use of UNE-P to gain a relative cost advantage for local voice services. Overall, as we expect industry-wide competitive factors to continue to impact our results, we have developed new strategies for offering complementary services such as satellite television and wireless. Third, our results continue to be impacted by regulatory responses to the competitive landscape for both our local and long-distance services.

In general, we expect to see a continued decrease in wireline related revenues as a result of a decrease in demand for access lines. Access lines are expected to continue decreasing primarily because of technology substitution, including wireless and cable substitution for wireline telephony, and cable modem substitution for dial-up Internet access lines. In addition, our competitors have accelerated their use of the UNE-P platform to deliver wireline voice services. Although the use of UNE-P did not have

We have experienced a decrease in wireline revenues associated with long-distance voice services out-of-region, or outside of our local service area, due to competitive pressures and a shift in product mix. Increasingly, however, we expect long-distance and DSL revenues within our local service region to offset these revenue declines.

We expect to see a continued decline in wholesale switched-access revenues due primarily to pricing changes and volume declines. Pricing declines occurred due to state regulatory actions and the 2000 CALLS order. The CALLS order capped prices for certain services, which resulted in a price decline for switched-access services. Volumes fell in 2002 due to general declines in long-distance usage. We expect that switched-access revenues will continue to decline as a result of more customers selecting Qwest as their long-distance provider and from competition from wireless and other wireline providers.

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

Beginning in 2002, we reduced capital expenditures and expect to continue at a reduced level for the foreseeable future. Given the current business environment, as discussed in Item 1 of this report, we believe that our current level of capital expenditures will sustain our business at existing levels and support our anticipated core growth requirements in areas such as in our DSL, long-distance and VoIP products. The reduced levels of capital expenditures have contributed to our ability to reduce interest bearing debt.

Although wireless revenues were similar in 2002 to 2001, during 2002 we began to experience net subscriber losses due to our decision to de-emphasize marketing of wireless services and changes to customer credit requirements, coupled with intense industry competition and the impact of the economic slowdown. We expect these same factors to continue in 2003, and expect that the continued loss of subscribers will cause wireless revenues to decline during 2003.

Starting in 2004, we expect to expand our wireless offerings through our new arrangement with Sprint. Prior to entering this arrangement, we concluded that our wireless services were provided at a competitive disadvantage to other national wireless carriers because our wireless network was limited to areas within our 14-state region, which did not allow for our customers to use their wireless service in a cost effective manner when they traveled out of these areas. Our wireless network also had certain technological capability limitations compared to other wireless carriers. This new arrangement will enable us to utilize Sprint's nationwide digital wireless network to offer our customers new voice and data capabilities, but it does not give us exclusive rights to resell Sprint service within our 14-state region. We expect this agreement, along with an expansion of distribution channels and a resumption of wireless marketing efforts, to have a positive impact on future wireless revenue. Although we expect our gross margins specific to the arrangement with Sprint will be lower, we expect the reduced margin to be offset by increased sales and lower network costs on a company-wide basis than would have been incurred without this agreement.

Merger with U S WEST

On June 30, 2000, we merged with U S WEST, Inc. The discussion and analysis of the results of operations for the years 2002, 2001 and 2000 reflects the transition that took place as a result of the Merger.

At the time of the Merger, we anticipated that the Merger would essentially enable us to extend our broadband Internet leadership position. The Merger was expected to allow us to reach more consumer and business customers through expanded broadband local connectivity and, in doing so, implement our strategy of becoming the premier end-to-end provider of advanced broadband Internet-based communications worldwide. The Merger was also expected to provide significant economies of scale and cost savings through the avoidance or elimination of duplicate operating costs and expenditures. Since the consummation of the Merger, we have realized certain operating benefits. such as the aforementioned elimination of duplicate costs through employee reductions and facilities consolidation. However, we have not achieved all of the benefits expected by management at the time of the Merger primarily due to a decline in the economy and the resulting over-capacity that occurred in the industry. We did not experience the anticipated growth in demand for network capacity, Internet-related services, web hosting and application service provider business. In addition, we experienced delays in our anticipated timing for obtaining approval to re-enter the long-distance business in our local service area which has delayed our ability to implement the overall strategy.

The Merger has been accounted for as a reverse acquisition, which means that, even though from a legal standpoint Qwest acquired U S WEST, the merger was accounted for as if U S WEST acquired Qwest. The transaction was recorded under the purchase method of accounting. As a result, the assets and liabilities of the acquired entity (Qwest) were recorded at their fair values. The difference between the purchase price and the fair values of the assets and liabilities was recognized as goodwill. Additionally, our consolidated statements of operations and cash flows reflect the operating activity of U S WEST prior to the merger date and U S WEST and Qwest combined after the merger date. In connection with the Merger, each outstanding share of U S WEST common stock was converted into the right to receive 1.72932 shares of Qwest common stock (and cash in lieu of fractional shares). In addition, all outstanding U S WEST stock options and warrants were converted into options and warrants to acquire Qwest common stock at the same ratio. All share and per share amounts presented for 2000 have been restated to give retroactive effect to the exchange ratio. We have restated the previously reported value of consideration in the Merger, primarily because it had been based upon an improper valuation of the fair value of stock options and warrants. Following the restatement, the total value of the consideration was approximately $41.5 billion (as restated), which was allocated to the estimated fair values of our identifiable tangible and intangible assets and liabilities, including $32.4 billion to goodwill. For more information on the Merger with U S WEST, including the restatements to the Merger consideration and the allocation of purchase price, see Note 4-Merger to our consolidated financial statements in Item 8 of this report.

Presentation

The results for 2001 and 2000 presented below are "As Restated." Please refer to Note 3-Restatement of Results to our consolidated financial statements in Item 8 of this report. The analysis is organized in a way that provides the information required, while highlighting the information that we believe will be instructive for understanding the relevant trends going forward. In addition to the discussion of the historical information that reviews the current reporting presentation of our financial statements, an overview of the segment results is provided in "Segment Results" below. The segment discussion below reflects the way we reported our segment results to our Chief Executive Officer following a change in December 2002. Unless otherwise indicated, all information is presented in accordance with GAAP.

The Merger significantly impacts the comparison of the results of operations between 2001 and 2000. The financial results of pre-Merger Qwest for the first six months of 2000 are not included in the 2000 statements of the combined entity. Consequently, the 2001 results include a full twelve months of pre-Merger Qwest's business, compared to six months in 2000. After the Merger, we immediately began the process of integrating the two companies, including merging responsibilities. Consequently, we are unable to precisely separate the results of the two companies for any period after the Merger and analyze the business results of each company in the context of the Merger. However, in order to analyze 2001 versus 2000 revenues and expenses, we estimated the impact of the Merger by assuming that the revenues and expenses for the first six months of 2001 for pre-Merger Qwest were equal to the first six months of 2000 excluding certain non-recurring items (certain optical capacity asset and equipment transactions). While we believe these assumptions are appropriate under the circumstances, different assumptions could lead to different impacts to our analysis.

                                 Year ended December 31,              Absolute Change       Percentage Change
                        -----------------------------------------   --------------------   --------------------
                                        2001            2000         2002 v      2001v      2002 v       2001v
                          2002       As restated     As restated      2001        2000       2001        2000
                        ---------   -------------   -------------   ---------   --------   --------     -------
                                (Dollars in millions, except per share amounts)
Operating revenues      $  15,385   $      16,524   $      14,148   $  (1,139 ) $  2,376         (7 )%       17 %
Operating expenses,
excluding goodwill
and asset impairment
charges                    15,274          18,647          14,082      (3,373 )    4,565        (18 )%       32 %
Goodwill impairment
charge                      8,483               -               -       8,483          -         nm          nm
Asset impairment
charges                    10,525             251             340      10,274        (89 )       nm         (26 )%
                        ---------   -------------   -------------   ---------   --------   --------     -------
Operating loss            (18,897 )        (2,374 )          (274 )   (16,523 )   (2,100 )       nm          nm
Other expense-net           1,228           5,021           1,760      (3,793 )   (3,261 )      (76 )%      185 %
                        ---------   -------------   -------------   ---------   --------   --------     -------
Loss before income
taxes, discontinued
operations, and
cumulative effect of
changes in accounting
principles                (20,125 )        (7,395 )        (2,034 )   (12,730 )   (5,361 )      172 %       264 %
Income tax benefit          2,500           1,257             592       1,243        665         99 %       112 %
                        ---------   -------------   -------------   ---------   --------   --------     -------
Loss from continuing
operations                (17,625 )        (6,138 )        (1,442 )   (11,487 )   (4,696 )      187 %       326 %
Income from and gain
on sale of
discontinued
operations, net of
tax                         1,957             511             446       1,446         65        283 %        15 %
                        ---------   -------------   -------------   ---------   --------   --------     -------
Loss before
cumulative effect of
changes in accounting
principles                (15,668 )        (5,627 )          (996 )   (10,041 )   (4,631 )      178 %        nm
Cumulative effect of
changes in accounting
principles, net of
tax                       (22,800 )            24             (41 )   (22,824 )       65         nm          nm
                        ---------   -------------   -------------   ---------   --------   --------     -------
Net loss                $ (38,468 ) $      (5,603 ) $      (1,037 ) $ (32,865 ) $ (4,566 )       nm          nm
                        ---------   -------------   -------------   ---------   --------   --------     -------
Basic and diluted
loss per share          $  (22.87 ) $       (3.37 ) $       (0.82 ) $  (19.50 ) $  (2.55 )       nm          nm
                        ---------   -------------   -------------   ---------   --------   --------     -------


--------------------------------------------------------------------------------
nm-not meaningful

                                       38

--------------------------------------------------------------------------------
     Operating Revenues

                                      Year ended December 31,              Absolute Change      Percentage Change
                              ----------------------------------------   -------------------   --------------------
                                             2001            2000         2002 v      2001v     2002 v       2001v
                                2002      As restated     As restated      2001       2000       2001        2000
                              --------   -------------   -------------   ---------   -------   --------     -------
                                                   (Dollars in millions)
Voice services                $ 10,815   $      11,876   $      10,955   $  (1,061 ) $   921         (9 )%        8 %
Data and Internet services       3,819           3,901           2,720         (82 )   1,181         (2 )%       43 %
                              --------   -------------   -------------   ---------   -------   --------     -------
   Total wireline revenue     $ 14,634   $      15,777   $      13,675   $  (1,143 ) $ 2,102         (7 )%       15 %
Wireless                           694             688             422           6       266          1 %        63 %
Other services                      57              59              51          (2 )       8         (3 )%       16 %
                              --------   -------------   -------------   ---------   -------   --------     -------
   Total operating revenues   $ 15,385   $      16,524   $      14,148   $  (1,139 ) $ 2,376         (7 )%       17 %
                              --------   -------------   -------------   ---------   -------   --------     -------

. . .