Good day and welcome to today's teleconference call. All participants are on the line in a listen-only mode. Please note this call may be recorded. At this time, I would like to turn the call over to Senior Vice President of Investor Relations, Ms. Stephanie Comfort. Go ahead, ma'am.

Thanks and good morning, everyone and welcome to our call. We are here to discuss our first quarter results. With us on the call this morning are Dick Notebaert, our Chairman and CEO and Oren Schaffer, our Vice Chairman and CFO. Before I turn the call over to Dick I would like to remind everyone that we will be making forward-looking statements. These statements contain risks and uncertainties, which could cause actual results to differ materially from those expressed or implied here on the call. Those risks and uncertainties are on file with the SEC. Additionally, we do not adopt analyst estimates nor do we necessarily commit to updating the forward-looking statements that we make here. Let me also mention that in order to supplement the reporting of our consolidated financial information, the Company will discuss certain non-GAAP financial measures, including EBITDA, free cash flow and net debt. A full reconciliation of non-GAAP measures is included in the quarterly earnings section of our website. With that, I'd like to turn the call over to Dick.

Thank you, Stephanie. Good morning, everybody and welcome. Qwest reached another milestone today. We reported positive earnings per share from operations in the first quarter of 2006 for the first time since mid-2000 excluding any gains on asset sales. Achieving profitability has been a critical performance metric among many for this management team since our arrival in mid-2002. We recognize that the real performance goal is sustainable profitability and we're focused on continuing to implement our strategies to deliver that goal as well. In addition, we continue to make progress on our other performance goals. Most notably, this quarter we have further expanded EBITDA and EBITDA margins moving for the first time into the low 30% range. That is consistent with our stated target. We also grew ARPU across our growth products and bundles, achieved better than peer access line trends and continued to improve customer service metrics. Our progress and performance demonstrates that our strategies are working. We are investing in our growth products, increasing ARPU and bundle penetration, improving customer service, leveraging our asset base and reducing costs. As a result, we will steadily drive achievement of our longer-term goals of sustainable growth in revenue, profitability and especially free cash flow. This has been a disciplined and steady journey for Qwest with much achieved over the past four years. This, despite a highly competitive environment. We intend to drive this performance with a focus on returning value to all of our constituents. Here are the highlights of the 2006 first quarter. We delivered the fourth consecutive quarter of year-over-year revenue growth. Strong positive trends for our high-value, higher ARPU growth products and bundle penetration across our business units offset continuing those stable retail access line lost trends. In addition, mass-market revenue grew both sequentially and year-over-year. This was…

Thanks, Dick and good morning, everyone. To reiterate, we are very pleased with the progress we made in the first quarter with the revenue trends improving and margins and income reflecting solid growth. We are equally encouraged that we are well-positioned to build on these positive trends throughout the year. Revenues totaled approximately $3.5 billion in the quarter compared to $3.4 billion in the year-ago quarter. This marks the fourth consecutive quarter of year-over-year growth and puts us squarely on the track for revenue growth this year. Some of the key drivers of the growth included strong performance in our mass market segments, an indication that our bundling strategies are working; solid growth in data helped by record high-speed Internet ads, as well as encouraging trends in the IP service area; and, we had continued solid performance in small business where we gained an impressive 25,000 lines in the quarter. Following similar trends in the fourth quarter, wireline revenues grew again in the first quarter with all retail channels up year-over-year, as well as sequentially. Mass market drove 2.5% growth with strength in high-speed Internet and long distance revenues. The most significant drivers of wireline revenue were increased bundle penetration, growth in small business and high-speed Internet. Mass market data revenues grew 34% year-over-year and 11% sequentially. High-speed Internet subscribers grew a record 13% sequentially, and that is on the heels of fourth quarter 10% sequential growth. Much of the demand reflects continued, focused efforts on improving our penetration relative to peers. As a result, our high-speed Internet penetration now stands at 13%, up significantly from just over 8% a year ago. We still have significant opportunity to close the gap to peer penetration levels. We continue to benefit from successful pricing and promotion strategies, as well as lower churn.…

Thank you, Oren. For 2006, we have the opportunity to drive modest organic revenue growth and improve EBITDA margins. In closing my remarks, our strategies are working. Our progress is demonstrable. We have momentum that is tangible and a positive outlook for the future. We believe Qwest has the opportunities through our significant customer base, strong market position and product portfolio. We have the assets, including our state-of-the-art long-haul fiber-optic network, the strategies and the commitment to deliver growth and shareholder returns over the next several years. So let me stop and now let's take questions.

(Operator Instructions) Your first question comes from Jonathan Chaplin - JP Morgan.

Thank you very much for taking the question. Just two quick ones. I am wondering if you could give us a little bit of color on what you're seeing in terms of enterprise pricing. Actually, in terms of pricing in the long haul business generally and where we are with capacity utilization, both in your network and where you think it might be for the industry overall? Secondly, if you could touch on what incremental margins are in this business. It seems to me that you have tremendous operating leverage in this business, so any increase in revenue should ultimately be very accretive to EBITDA and free cash flow. I'm wondering if you could touch a little bit on M&A. I know you have looked at IXC and CLEC acquisitions in the past. Level 3 has done a string of these acquisitions over the course of the last few months. I am wondering how that feeds into an improving pricing environment and whether there are opportunities for you to do similar acquisitions on the horizon. Thank you.

Let me try and take a run at them and then Oren, you can jump in. First of all, on the pricing environment, I think there are four factors occurring in the enterprise space today. There is good momentum in the marketplace and that is refreshing. It feels good, and we can feel it. Volumes are strong, particularly in the data and in the IP area and I think Oren and I both mentioned we are benefiting from that. By the way, that includes Metro Ethernet, private line, VoIP and our IQ services, which I mentioned in my opening remarks. When you think about it, if you look at our growth on our MPLS backbone, we are in that 4 billion range per month and if you go back and look at our prior calls, that has had meaningful growth. I also think that there is a real opportunity we haven't seen for quite a while and that is a technology migration. We are continuing to move from that circuit switch, that legacy network, to an IP-based service and that gives companies like Qwest an opportunity to capture through a suite of services -- you've got to look at our IQ and our Web hosting and everything -- to capture revenue. Finally I think the pricing environment remains competitive. I don't think we should deny that, especially in the high-end enterprise space. We are seeing, and I know it is anecdotal, but we are seeing signs of stabilization of rationality. That is a good thing. On the capacity areas, I think all of this translates into increased demand for our data and IP products. Volumes are strong, particularly in those two areas, and in the Ethernet and our IQ services. Let me assure everybody; we do not have capacity constraints.…

No. I think your answer was very complete. So everyone understands, we continue to have a very disciplined approach to this. We look at, I believe, everything that is out there. We are not surprised by any opportunities nor are we surprised when someone else makes an acquisition, but we just haven't found anything that fits our measurement criteria.

Thank you very much.

Our next question comes from Jeff Halpern, Sanford Bernstein.

Good morning, guys. My question related to the ability to push high bandwidth connectivity to consumers in small businesses. To date, you have focused primarily on increasing DSL availability to consumers in the region. Dick, first, if you could philosophize a little bit about where you want to see your ability to deliver high bandwidth services going over the next five years. How much bandwidth do you think is necessary? Then technologically, how do you see achieving that goal, which of course predisposes that you believe you need more bandwidth to the consumer either in the double-digit or even triple-digit megabit level per second? Oren, if you could just tag onto that a comment on whether or not you believe you can execute whatever strategy Dick articulates within the constraints of the spending levels that we are currently seeing on CapEx? Thanks.

Good question, Jeff. One thing I would like to point out, we talk about availability and Oren mentioned it, but we also over half of our customers now can get that 5 megabit and we've got a large segment of our customers that can get 7 megabit today. That sometimes get missed in what we're doing. Our strategy is one of just-in-time bandwidth delivery. So, Jeff, if you wake up tomorrow morning and you want 10 meg, hopefully we put it in tonight so tomorrow morning it is there for you. We are really working on this return on invested capital. We have to be very disciplined and rather than just put it out there and they will come, we are really try to measure our customers, talk to our customers and when they need 7 meg, it is there and when they need 10 meg, it is there and 20 meg, it is there. So this just-in-time bandwidth delivery really impacts our capital deployment. We are getting towards the end of our plan on reaching out to customers when we get to that 80% point and then we will have to look at WiMAX and the other issues or other technologies that are available. So just-in-time bandwidth delivery is very important to us. Over the next five years, we can see this moving forward, but remember it is not just the buzzword of 10 meg or 20 meg, it is what does the server do, what does your streaming do, what are the applications you're going to run on it and so far taking just over 30% of our CapEx and putting it into that bandwidth -- don't think about putting RTs out there -- think about the bandwidth delivery just-in-time. Increasing that bandwidth as customers want it has served us well. So I think our strategy is right as long as we stay close to the customer and see the world through the eyes of the customer. Oren, do you want to answer his CapEx question?

No, I think thankfully the strategy issue you laid out is the one we are working on. My answer to the CapEx question will be very easy. Jeff, we continue to have this very, very tight link between marketplace needs and our capital spend. As you can see, we are already increasing the percentage of CapEx that we spend on broadband, moving it from probably some 20% of the total a year ago to 30% and now beyond 35%. And what is important to remember there is as the footprint becomes enabled, which we believe by the end of the year it will essentially be enabled, all of that capital simply goes to improving the speed and the capacity. I think that in our current capital spending pattern, we can certainly support and our models have shown that we can support the strategy that Dick just laid out for us.

On the fiber issue, we do, as we've said before, put that in the greenfield starts. We do look at, whenever we need to reinforce a remote terminal or an RT, whether or not we need fiber and we can use an existing asset. So I think this ROIC and just-in-time bandwidth delivery is key.

Thanks, guys.

Our next question comes from Simon Flannery, Morgan Stanley.

Dick, if I could just follow up on the bandwidth and in terms of exactly or be a little bit more specific about the kind of services, the kind of agreements we might see. Are you basically saying that you will enable other people's sites other people's content or might you be an aggregator yourself? I don't whether it is iTTV or something that looks a little bit like that. How far away is this? Is this something where we might see some agreements from you in the next quarter or two or is this more a couple of years out? Thanks.

Thanks, Simon. We are already an aggregator. We would remind everybody on the call that we have cable TV availability and we do aggregation both in the Denver area, down in Phoenix and in Omaha, Nebraska. So we have all of those contracts and relationships with the entertainment providers ranging from the networks to the non-networks. So we are already there. If we wanted to turn something on, we just hook it up to the head or add a head in. So that is not an issue for us. The real question is that as you look out in the future, do you want a la carte channel selection or do you want a la carte programming selection? For example, some of us watched the Olympics on the Internet. It was kind of fun and we got more venues and I thought just as good of coverage. You could have watched the NCAA playoffs from the beginning through there and on the Internet or streaming. That was a lot to do and we have seen recently where Disney has started to make not just their library, but some of their programming available. I think we're going to see a change. I think there will still be a need for some aggregation in the near term, but over the long haul, using a hosting center to put the entertainment on there once you get used to time shifting, at TIVO style device, you will be very comfortable with it. What you will not see from us is an announcement of our intention. What you will see from us is an announcement of what we're doing. In other words, when it is market ready, when the silicon and the set-tops and the middleware and everything is functioning correctly -- if it does, which it will -- then at the appropriate time you'll see us roll it out because that's when customers buy it. It is all driven on revenue and return on invested capital. So thanks for the question, Simon.

Our next question comes from John Hodulik, UBS.

Good morning, everyone. Two questions. First on the revenues, we are four months into the year and can you give us an update on how you think the revenue trends are going to trend throughout the remaining quarters? I guess a quick question for Dick. There would seem to be some restatements of last year's numbers. Could you just give us some input on why that was? Finally, Dick, I didn't quite catch the comments you made earlier on the return of capital. I think you tied it to a certain extent to giving customers new capabilities or services. You are obviously going to have a lot of cash on the books by the second half of the year. Could you just talk about your thought processes on how you might go about returning that to shareholders in the form of either buybacks or dividends?

Let me do the last one first. What we have said consistently is that as we accumulate this cash and the cash flow that Oren has talked about, free cash flow, and then we will keep a cushion on the balance sheet, we will make an evaluation later this year as to the best way to reward our equity holders. I think if you are a bondholder, you feel pretty good about what has happened with your experience with Qwest. As I talk to bondholders and as Oren talks to bondholders, that's the feedback we get. On the equity holders, it is just a question of how do they get rewarded? As we did when we were talking about debt, there are only a few vehicles to do this with and we will of course review or listen to the inputs from our shareholders that will help us make that determination later this year. But we will definitely use it to reward shareholders.

As far as the restatement goes, the only thing I can think of is that we have got mass market and some previous DSL subscribers. When somebody says restatement around us, we are little… We pay very close attention when you talk about that. What restatement are you talking about?

Right.

What restatement are you talking about?

We can just follow up offline. Just that the revenue numbers from a year ago looked a little different than what we had in the model.

The only thing we did different is we have got a fellow that is very good named Pat Lewis, and we moved his mid-market and we moved some of the lower-end single-line businesses out of our mass-market into our BMG group. So that is the only thing I can think of where the numbers… but again, we would be happy to answer the question. Was there another question in there, John?

Just on revenue trends, it looks like you had about 0.8% growth. Do you think that can accelerate throughout the year based on the competitive trends you're seeing?

Well, I do. I think we can do better at this. We have that opportunity. So I would say based on the opportunity, we feel we have a shot at doing that. The other thing is, and I think this is when you look at the Q and I think I said it in my remarks, although maybe too obliquely. The wholesale business, with the mega mergers a lot of the wholesale minutes that we were getting from those large companies moved on net. In other words, you know, they consolidated. Therefore, they had the network capacity so they moved the minutes that we might have been providing them on a wholesale basis on net. So our wholesale group which had basically flat revenue increased margins was able to make up the majority of that loss of business by finding other sources, as Oren said; rebillers, et cetera. So the fact that it was flat it really amazing because if we wouldn't have had those mergers, then in fact we would have had significant, meaningful growth in that segment. Keeping it flat and making it up that quickly after those mergers, I think is a pretty darn good accomplishment by Roland Thornton and his team in our wholesale group. But we've made that up pretty much, and now I think we expect to see growth there which you couldn't really get at. In the consumer, I think we will continue to see good trends. Our BMG on the VoIP and data can only get better. Our IQ services are really very attractive. Oren, do you want to add anything on the revenue?

No.

May I follow up just quick on that wholesale stuff? Did guys said how much of revenues you have from those that you expect to fall out as a result of the mergers? Like you said, you did a great job in replacing that revenue this quarter. So do you think you'll be able to keep up with those trends as more and more of that traffic shifts away?

Well, we have been so far, and there is lots of opportunity out there and we are very focused. You know, at Qwest we have always viewed wholesale as a channel that we really value. I mean they are great customers, and we embrace them just as we would our retail distribution outlets. So yes, I think so. Again, it's those two mega mergers, and I think the team has done pretty darn good. We expect to see growth in that area, now that we have overcome the loss of that business.

Our next question comes from Frank Louthan - Raymond James.

Great, thank you. Just a couple of other questions. I apologize if you already addressed this, but where do you stand as far as the out-of-region business, maybe lowering costs and doing some network grooming? What sort of initiatives do you have to continue that? Then you mentioned hitting the basic industry metrics. You have thrown out a few of your potential revenue opportunities you could get from that. Where do you stand on making progress towards those from a revenue standpoint? How much more do you think that you have to go just getting to the industry average in a lot of those metrics? Thank you.

On the metrics, I think we narrowed the gap versus our peer group in DSL, with penetration increasing to 13% from 8% a year ago. We had a slowdown in LD adds due to pricing increases in the first quarter. But I think there again, we're closing the gap on the ARPU which is just as important, to have a zero-based customer versus getting the higher ARPU customers is very important. So I think that, from a revenue point of view, continues to be a good opportunity. If you look at line loss and you compare us to the peer group, you know, we were equal to or better than. I mean we did pretty good on that, although you hate to have any line loss. On wireless the fact that we continue to gain subs. Now, some people may look at that and say, gosh, you didn't have the growth that somebody else had. But remember, four quarters ago we were losing customers at a pretty strong clip, and our ARPU was below $50. In fact, our ARPU was in that $48 range. Now that ARPU has moved into the $50 range and we have had three quarters of growth, and as we said on the call, our wireless effort is now considered ready to cross over to profitability. I mean, it is basically flat or breakeven. So I think on that, we have made pretty good progress. You are never satisfied. I mean, and bundled penetration is up. We just aren't satisfied with it, but I think the momentum is there and we're picking it up. The first part of your question was lower cost opportunities on the long-haul. Quite candidly, I think we have got a lot of opportunity there. One of the things we have looked…

Well, I agree with you and obviously it is a higher priority to try and recover that.

It's just a question of grooming, how fast can we groom it? That's all.

Okay great. Thank you.

We are just going to take one more question.

Our next question comes from David Barden - Banc of America Securities.

Thanks for taking the question. We have gone through a lot, maybe a couple of housekeeping questions if we could. The first would be the depreciation change ticked down pretty healthily. I think it contributed to the earnings number this quarter, Oren. Could you talk a little bit about the run rate there? The second would be in terms of tying out the cash flow statement this quarter, I was looking at EBITDA less interest expense, less the one-time items and I get to an operating cash number that should be somewhere in the $400 million range versus the $140 million you reported. Could you talk about what other moving parts were going on in the cash flow line here? Dick, we have been talking for a while about getting positive EPS and making decisions about using cash for the benefit equity holders. I know that there is a range of options on the table, but could you give us a timeframe when you would like to make that decision not just later in the year; but is it a third-quarter decision, a fourth-quarter decision? When are we going to make those choices? Thanks a lot.

I will think about that while Oren answers the first two.

The depreciation is just coming down and that is a sustainable parameter. There hasn't been any significant change in our policy on depreciable asset lives or anything like that. It is just depreciation will continue to trend down and, as you correctly point out, was a good contributor to the net income number. On the cash flow, I quite frankly would agree with you that the cash flow seems to be closer to $400 million than what we have said. It is in the balance sheet movements and, as I said in my remarks, that was simply a repetition of what we said earlier in the year, that we expect the balance sheet to be neutral year-over-year. In the first quarter, it uses, and it always seems to use, a significant amount of cash and it has to do with this year, for example, we had an extra payroll in the period versus the previous quarter. An extra payroll for us is about $100 million. We also had a more significant change shall we say than the previous year in the switcharound in the payables. It is $250 million. So these things are, like I say, they were expected. We have no reason now to change our view on cash flow for the year and also no reason to change our view that the balance sheet usage or source of funds will essentially be neutral year-over-year. So you are right about the $400 million and your arithmetic is correct.

It was a rather pointed question on the timing of it and as I sit here and ponder that, I think we're better off staying with what we have said in my opening remarks and that is that as the cash accumulation increases, which you can see where it is going and we have been pretty straightforward talking about this for the last I don't know how many calls, that as the year unfolds, that we will make a recommendation to our Board and discuss it with our Board in full and then announce it. I think we're better off not giving you the date or the week or the month of it because then if we slip it 24 hours somebody will be on me. Well, you know how it is. Let me just close this out by saying that we are very committed to rewarding the equity holders and I think this four-year journey that we have been on has benefited across all the constituencies and I think we need to find a way to reward utilizing that cash in the most effective manner. So thanks for the question.

Thanks, Dick.

Now let me just end this call by thanking everybody for being on the call, for the commitment and the support that we have gotten from all the different constituencies. As you can tell, for us this was a major milestone. This was another chapter for us on our journey and we feel very good and our team -- I wish everybody, all 38,000 plus people -- could be on this call and tell you how they feel because we're very proud of what we've been able to accomplish. So thank you for being on the call.