Good morning. I would like to welcome everyone to the Qwest Quarter Three Conference Call. Ms. Comfort, you may begin.

Good morning everyone, and welcome to our call. We’re here to discuss our third quarter results. With us on the call this morning are Dick Notebaert, our Chairman and CEO and Oren Shaffer, 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. In addition, we do not adopt analysts’ estimates nor do we necessarily commit to updating the forward-looking statements that we make here. Also, let me mention that in order to supplement the reporting of Qwest consolidated financial information, the company will discuss certain non GAAP financial measures, including EBITDA, free cash flow and net debt. A full reconciliation of these measures is included in the quarterly earnings section of our web site. With that, I’d like to turn the call over to Dick.

Thank you, Stephanie. Good morning everyone, and welcome to our call. Today, Qwest reported its third sequential quarter of improvement in net income and earnings per share. In addition, we improved revenue sequentially, continued to expand our EBITDA margin, and delivered strong free cash flow, all in line with our goals for this year. This performance demonstrates that our value creation strategies are working and driving continued steady improvement in our fundamentals. We continue to invest in our diverse portfolio of growth products as we transition Qwest into a leading data, IP services company, with data currently representing approximately one-third of our revenue and growing at high single digit rates. We also continued to increase ARPU and bundle penetration, improve customer service and productivity, leverage our asset base, strengthen our balance sheet and reduce costs. We have set and achieved many interim goals over the last few years. We believe 2006 will represent a milestone year in the achievement of one of our longer-term goals, that is, to deliver sustainable growth and profitability along with revenue and free cash flow. The process of reaching this milestone has required discipline and perseverance to be successful, as well as, a commitment to deliver performance and value to all of our constituents. To that end we announced several weeks ago that the Board approved a $2 billion share repurchase program as a first step in our strategy to return value to our shareholders. As I said in our release, it is our intention to fully achieve this plan over the next two years, while reviewing on a regular basis opportunities to enhance shareholder returns. Let me review the highlights for the 2006 third quarter. First, we increased revenue sequentially. Revenue grew modestly sequentially and was up 1% year-over-year, netting out the impact of…

Thanks, Dick, and good morning to everyone. We are very pleased with the progress we've made in the third quarter, and as Dick has indicated, we're on track to meet our objectives for 2006 overall. The momentum in our key growth products and the improved trends in revenue, coupled with our ongoing cost containment efforts, are driving further and significant margin expansion, as well as improved profitability. We are well on our way to achieving our EBITDA target margin in the mid 30% range. We are generating significant free cash flow and have posted another quarter of improving net income. Revenue grew to $3.5 billion in the quarter, as improved trends across key growth products more than offset the impact of local losses. We benefited from strong trends in data and Internet services in our retail and wholesale channels. Across all channels, an increasing proportion of our revenue is coming from higher growth data products, such as high-speed Internet, VoIP, VPN, data integration and hosting. These are where our investment is focused on further revenue growth. In aggregate, data IP revenue grew more than 9% year-over-year and improved 3.1% sequentially with data and Internet now accounting for approximately one-third of our revenue. The mass-market channel grew 3.4% year-over-year; that is on top of two strong quarters of growth. Mass-market revenue was flat sequentially due to rate changes in regulatory and flow-through fees. Excluding these fees, the underlying revenue trend improved sequentially and more than offset local declines. The success in our bundles, the rapid growth of DIRECTV in the bundle and the migration to higher priced offerings in wireless and Internet services are driving customer ARPU higher, which has been steadily climbing each quarter. Our full product suite is allowing the up-selling of existing bundled customers into more products within…

Thank you, Oren. For 2006, we continue to believe we have the opportunity to drive modest organic revenue growth and improve EBITDA margins, especially as our growth products become a more significant part of our business and as we continue to improve our cost structure and our productivity. In closing, our strategies are working; our progress continues to be demonstrable. We have momentum that is tangible and we have a positive outlook for the future. Now I think at this point we would be happy to take questions. So, operator, we will take the first question.

(Operator Instructions). Your first question comes from John Hodulik with UBS.

Hey. Good morning.

Good morning John.

Two questions for you. First, you've showed some nice sequential improvement in margins. You talked a lot about year-over-year, but you've seen some really nice sequential improvement in margins. There seems to be a number of puts and takes in terms of some of the trends you are seeing, access line losses are accelerating and you are getting some additional traction in your growth areas, but you might have some dilution on that going forward. But again, the cost cutting seems to be ahead of schedule. How confident are you that you can continue to see sequential improvement as we go into fourth quarter and then head into 2007? And then secondly, on the free cash flow, it looks like looking back to the last year, a little less than half of your cash flow was generated in the fourth quarter of 2005. Is there anything that has changed in terms of the outlook for the CapEx in the fourth quarter or any other things we should be aware of which suggest that's not going to be the case here in 2006?

You know, I would say, Oren just said it and I think I referred to it in my comments, we expect to be on track with our expectations on cash flow for the year. As far as the improvement in margins sequentially, it seems to me that what we are really seeing here is a shift in the model. We are actually; it's a product mix shift going from access line. We're getting improved penetration on HSI and growth products. We would expect that trend to continue. That modest growth, along with the productivity that we continue to get from our long-haul facility costs as well as the jobs per day and what our techs are doing, they are doing a fine job, we think that will continue on the journey to our mid 30s margin range. So, I would expect us to continue the same direction we are going. And let me ask Oren, you want to add anything to that? I didn't want to get too expansive.

At the risk of being boring, we do have nine consecutive quarters of margin expansion, basically all for the same reason. We still believe we have headroom in all of those reasons and we believe the idea of the revenue growth thing is only going to help us --.

We are taking, as you said, fixed costs out, as well as variable costs out. As long as you are getting both, I would expect the trajectory to continue.

Great. Thanks, guys.

Thanks.

Your next question comes from Jonathan Chaplin with J.P. Morgan.

Good morning. Thanks for taking the question. It looks most of the drivers that you would need to get to your aspiration of 3% to 4% top-line growth over time are on track. We saw mass-markets grow 3.5%; wholesale looks like it is recovering. The growth businesses within the enterprise business seem to be accelerating; it looks like they grew 30% this year versus 20% this quarter versus 20% year-over-year last quarter. I guess two quick questions. One is that within the 20% that is growing at 30%, what is driving the acceleration in growth we are seeing there? How much of it is coming from share gains as opposed to transitioning from legacy services to new services, as opposed to improving in the overall pricing environment? And then the other piece of enterprise revenues, it looks like the growth there or rather that piece is declining at a slightly higher rate than it did last quarter. And I'm wondering, you know, apart -- is that just a transition from legacy services to IP, or are there other puts and takes in that business as well? Thanks.

On the second half of your question, it's exactly what you said. Really our dial revenues, which we had in our enterprise space, our BMG group, continued to decline. In simple terms, we're exiting that. I don't want you to think we are just throwing the light switch, but we are getting out of that and it is the migration to broadband. And we see it very consistently. And that's what -- as the dial port business declines at a ever-increasing pace, that is a good thing, because that means our broadband is coming up, and so when I looked at it, I do see the Frame relay, the ATM. We're getting strong growth in IP, we're getting growth in our MPLS backbone and our iQ networking. So those positive trends help. I have to say what I said on the last call on the pricing. And again, my comments is anecdotal because I don't think anybody does studies. But on the pricing side, we have seen increased stability. We have not seen, by the way, that is in wholesale as well as the retail side, but on the enterprise space, we have not seen some of the things we saw before the megamergers. So we would expect that to continue to stabilize. But that said, we've all in our sector still got a few contracts that need to be priced down, so we are still going through a little bit of that. But I am encouraged by it. And if you look at the growth, like you said, with mass-market growing at 3.4% year-over-year and wholesale growing at 3.6% sequentially and 0.6% year-over-year in spite of the migration of all that traffic or the grooming of it on-net to Verizon and to T, I think it is pretty good. And enterprise is actually, in spite of that, if you exclude that large federal contract, is flat sequentially and really just barely down year-over-year. So I'm pretty encouraged by it.

Great, thank you very much.

We would expect that trend to continue.

Your next question comes from Simon Flannery with Morgan Stanley.

Okay. Thank you very much. Good morning.

Good morning Simon. How have you been?

Good thanks. How are you?

Good.

Dick, there was a comment in the press release about pursuing additional opportunities for top-line growth. I was just wondering if you could expand on your options there; M&A is one of them. I think you talked in the past about being a sort of a type provider to content providers and others. And it brings up the update on the video strategy. Are you still happy with DBS or are looking at potential IPTV or other opportunities there? Thanks.

I think the number one source for us organically is the product mix shift, both in the mass-market and in the enterprise space. In simple terms, it is going from moving over to VoIP, moving over to high-speed Internet as we lose access lines and being able to make that migration and pick up more HSI than we lose access lines. That is really a balancing act, and I think our mass-market group has done a good job. In the enterprise space it is moving away from Frame and ATM, not that we are -- we are going to support those and take care of our customers with outstanding service. But if we can, again, product mix shift over to the MPLS, the iQ networking and VoIP, then I think we've got a good shot organically to get the growth. On the M&A side, I don't think we're going to change our very disciplined approach to what we are doing. For us, we are looking, we're scanning, there is no shortage of beachfront property left. And so we are looking at it. But for us to pay some exorbitant multiple of EBITDA or give up what we would create in the future value to the existing owner of a piece of property, that is not good for our shareholders and that is who we work for. On the wholesale side, the guys have done a good job. You remember we did the price increases and then we lost that traffic on the megamergers and we brought it back with the rebillers and the resellers. We've also picked up some with the cable area. We're doing hosted VoIP. We're making some progress here. So, we have, I guess, aspirations and expectations on this. We have the opportunity if we can execute. I think we've got the ability, the opportunity to do that modest top-line growth.

Is IPTV an option or you are really happy with satellite right now?

Well, I think Oren's numbers on the satellite would show you -- we are at about 5% penetration, if you take our total entertainment, what I would call our entertainment that would be our own cable assets as well as DBS, and 5% penetration puts us in good shape. On the IPTV, we are, as we have said to everybody, drafting, letting somebody else break new snow. We are watching with a great deal of anticipation what is going on at AT&T and we will analyze that. We are getting franchises, but we really need to be very disciplined in how we approach it. So I don't think we have pulled a trigger on that.

Thank you.

Thank you for the question.

Your next question comes from Richard Klugman with Prudential.

Thank you. Good morning, guys.

Good morning. Haven't talked to you in a while, how have you been?

I've been here plugging away.

Okay.

I wanted to ask, on the free cash flow guidance, I know you reiterated it. But there was some comment in the past about it being potentially outside the range, which we interpreted potentially to beat that number. Is that still the case?

I think the exact words and Oren I'm sure will correct me, the exact words were that we expected our free cash flow to be up, we gave a range, and we said there could be variability within and outside of the range. And so -- Oren, do want to add to that?

No, I think what we said in the remarks are probably the best place to stay right now, that we feel very confident on the 1.3 to 1.5 range. And that, probably coupled with the earlier question about the percent of cash flow that we generate in the fourth quarter, probably takes care of that.

I think people -- you'll have to make your own judgment on that.

Okay, thanks for that clarification. On wireless, you talked about promotional activity, but the wireless subs were only up slightly. So I was curious if you could just clarify that for us, what is happening in wireless and should we expect to see a bigger drive in subscribers going forward due to the promotional activity you described?

Let me start by just setting the stage. We only do wireless as part of our bundle. We don't intend and have never had an expectation that we would compete with those people that are strictly in the wireless business. If you look at the fact that we did grow the number of customers, we had some specials going in our bundle. We also had on the profitability side, we had some adjustments. We had an insurance adjustment. We had just puts and takes and that is why we were just slightly negative. We would expect to continue to grow it. We have also been eliminating lower priced plans. In other words, as customers come out to renew their plan, they were on a plan that might not have had the profitability or the margin that we expected, so we basically said to those customers, we would expect you to switch plans. So as we have made that adjustment, we've seen a little bit of pressure on it. But still, I think positive growth is better than we were a couple of years ago and it is in much better shape.

Great. Thank you.

Your next question comes from Tom Seitz with Lehman Brothers.

Thanks. Thanks for taking the question. Maybe just to ask the flip side of Simon's question. The bulk of your lines are in metropolitan regions, but you do have some whole states with more rural lines. And I was wondering, given the valuations today of the RLECs, is it a good time to look at perhaps selling assets as opposed to buying, given the price appreciation in assets that could help you grow your out-of-region enterprise business? Maybe a more politically correct way of saying this is are you content with your ILEC properties as they exist or are all options on the table? Thanks.

I think all options would be on the table. It depends, you know, you said favorable valuations of RLECs. You have to go back and say what are people paying for access lines. I've only seen one transaction recently that involved the acquisition of some access lines over in Pennsylvania. I haven't seen much of that. So what we've done, and I think it is safe to say we would continue down this path, is the phone lines are open and if someone makes us a proposal that is better than we can, we feel has greater value to the shareowner than we can create, we have an obligation to consider it. I think we will just stay on that path. The phones haven't been ringing on people buying access lines.

Thank you.

Thanks for the question.

Your next question comes from Frank Louthan with Raymond James.

Good morning. You mentioned that some of the long distance growth coming from price increases. Can you give us an idea of what percentage of the long distance growth is coming from the price increases versus just more growing the business overall, and is there room to raise those prices any more? And you have been successful with some special access wholesale pricing increases. Have you made any more recently and any change in reaction over the last 12 months to those price increases? Thanks.

We raised prices, this is in the wholesale business not in the retail side we raised them twice. We are now in a position where we are looking at it LATA-by-LATA, and in some LATAs, we are raising them, and other LATAs, we are reducing them. Those first two price increases, depending on the LATA, some of them were 25% to 30% increases in aggregate. So what we are doing now is Roland Thornton and his team are looking at it LATA-by-LATA and looking at what the competition is and adjusting those prices, again, I'll repeat myself, up and down. So I wouldn't look at it and say there is overall price increase in that space, but there are adjustments. The other thing is the team has done a great job of putting in place a trading desk, which works real-time for our IDDD efforts. And so that is a constant buy-and-sell arbitrage that we are working with our international partners to make happen. So I think it is just these guys are really paying attention to detail, and it is down, again, at the LATA level.

Okay, great. And if you mentioned this, I apologize, but what was the workforce productivity improvements that you've gotten with some of the operations and issues you've taken since February?

I think, Oren, you said overall productivity improvement was 6. --

6.3%

6.3across the company.

That is great. Thank you very much.

Next question comes from David Barden with Banc of America Securities.

Hey guys. Good morning, thanks.

Good morning.

Good morning.

Okay, two questions maybe, first question would be, I know it is probably a little early days for this question, but about a year ago, you guys set out a benchmark for the consideration of returning cash flow to stockholders, which was the reaching of breakeven, sustainable breakeven earnings profitability. As you, Dick, were mentioning that we are in the early steps of working through the return of cash to stockholders, are there any kind of things that we could look out for down the road in our models or as we think strategically about the company, when the next kind of mile marker might be on the issues of returning cash to stockholders. What are the things that we have to see happen before it would be plausible to anticipate the next event? The second question would be if we could talk a little bit more about the severance payment this quarter. I guess in the past, a lot of the margin improvement has come from workforce attrition, and, as you mentioned, facility space savings, etc., network grooming. You know, here we've got a relatively sizable severance payment that is part of the margin improvement we are seeing. Are we getting to the point where we need to start paying people to leave to get some of the incremental margin improvement that we are seeing come through and how should we think about the cash portion of this severance agreement? Thanks a lot.

On the return of value to the shareowners, I think we'll stay with what I said in my opening comments and what was in our press release when we announced the buyback, which is our Board will continue to evaluate as we go forward further steps and further opportunities to create value for equity holders. I think it would be a mistake for us to set an expectation or a timeline. But I can tell you that our Board is very supportive of the direction we've gone. And if you think about the last year, we started talking about this, I think Oren and I did back in November, December, a year ago. And we were very methodical and very disciplined and we did exactly what we said. And so again, I'll go back to the last sentence in the press release when we announced the stock buyback, and I would reiterate to everybody that was a well thought-out, well-constructed sentence that says it all. On the severance, before Oren gives you detail, I would just tell you that what is happening is that our productivity improvements continue to, I think, improve, which and means as we've balanced our workforce at all levels, management, all levels, it has outpaced our ability to attrit. So we had to step up to it. And then I want to come back to the grooming on the long-haul. But go ahead, Oren, on the severance.

On the severance thing, David, we actually had two pockets, if you will, in the company that just were not going to attrit off. One of them we were closing and the workforce at that particular site were you could not rely on attrition to get them out. And the other one was another pocket of workforce that had to be downsized and could not actually wait for attrition. But I think in remarks, if you notice, we did indicate that the attrition levels or the efficiencies coming from attrition on headcount are expected to approximate last year's. And we continue to have headroom on the attrition; we continue to believe that is not only the most economical way to manage headcount, but we also believe it is the most humane way to manage headcount. And we will continue to do that. I couldn't today look forward and say there is going to be another pocket that will not, I mean that just has to be closed down as opposed to attrit it off. I just don't see any. But that is what caused the severance in this quarter.

And, Oren, what is the cash portion of that $43 million?

It is actually, the part, it's all cash, but it will go out over time as they actually attrit off the payroll. We took the reserve as the accounting rules require, once you've identified the people, then apply the jobs you need to set up the reserve, it will attrit off over the next few months.

In cash?

The cash go out over the next few months.

And then I wanted to just add on the grooming facility costs, which we used to get the questions on every quarter, there is still lots of opportunity for us. We've actually, as you remember a few years ago, I think, $0.80 on the dollar is about what we were spending on facility costs. We are down below $0.60 now and there is still, we're at $0.59, to be exact, and there is still lots of opportunity. And we were looking at it yesterday discussing it, and for every $0.05 we take off, that is worth a couple hundred million dollars of reduced expense. So if you go back and remember prior to the mergers of MCI and AT&T, they were running between mid $0.30s and low $0.50 on a dollar. So we believe we have the opportunity to execute and get it down in the $0.50 range. So you can see that we still have lots of expense opportunity just on facilities grooming.

Appreciate it, guys. Thanks much.

We will take one more question, operator.

Yes. Your final question comes from Mike McCormack with Bear Stearns.

Thanks, guys. Just a couple of questions, first, on free cash flow. It looks like the number in the current quarter came in a little bit below my expectations and yet the EBITDA margin was nice; CapEx was actually a little bit lower than expectations. Are puts and takes in working capital that we should be paying attention to this quarter? And also on the access line loss, it looks like we have a pretty good tick-up, at least in the year-over-year change. Now, some of that could be lack of UNE-P win-back opportunity, but just wondering if there is any change, also, in Comcast. I know they have rolled out more aggressively nationwide, and seeing if you are having an impact there as well? Thanks.

I'll take the second part of the question, and Oren can take the first part. We've been competing against these guys for a number of years. Cox and Comcast have both had circuits switched, not just IP and so we really, their $99 bundle or $33 per item in the triple-play, we're at $97. The advertising for both of us, I think, has been aggressive but respectful. We haven't seen anybody do anything crazy. The one thing that I did here, which I am encouraged about to give us an opportunity, is that they run a lot of specials for 90 days, you can get Comcast does you can get a lower price. And then at the end of 90 days, the price just jacks right back up. And I heard one of their executives make a comment that they would expect to see $20 to $30 improvement in ARPU as they bring people off of these specials onto their normal retail. That is a great opportunity for us. So I don't think we are seeing anything we didn't expect. And again, we expected to lose some access lines and we talked about earlier on this call about the product mix shift. And people concentrate on access lines, but I don't hear many people talking about how we're getting all those HSI lines, which a few years ago we didn't have access to. So I think we are making pretty good improvement on it.

As far as, I mean, residential primary lines, I think, are still a decent indicator of overall health of a company. Are there pressures beyond Comcast and UNE-P; are there other things we should be thinking about?

I think there is, you know, we've said for the last few years the biggest pressure is wireless. I mean, I really, I'm an example of it. How many times are you in your home, you're in a hotel room, you're in an apartment or you're somewhere else, and you are using your cell phone? And if you are a college student at Colorado University or at Notre Dame or any other university, a lot of them are just using their cell phones and not even hooking up the primary line. That is why we went to stand-alone DSL, because students were talking to us. So I think wireless and the migration to wireless is very real. Now our hope is that people will keep the security and the safety of having a fixed wire into their home for telephony. But a lot of people, we sell a lot of stand-alone, high-speed Internet. Oren, you want to take the first part of the question?

Yes, Mike, the free cash flow -- we were on our targets in the third quarter. The only thing I would mention to you about if you want usual things that happen in a quarter is that and we said this in the past that we do have a fairly significant amount of our debt on semi-annual interest kind of payments, which causes a couple hundred million dollars in first and third quarter swings. But it was in our projections and as I say, we feel very pretty confident about our objectives for the year. Balance sheet as a use or release of working capital cash was pretty much neutral, which is very consistent with the guidance that we had given earlier in the year, that I said that for this year at least we ought to just look at the balance sheet as a non-provider and a non-user of cash; just have it kind of neutral. And most of the improvement that we will get versus the previous year would come from the $300 million of reduced interest expense and the improved operations. And so far, so far, that has been the case. And I guess the fourth quarter and the year kind of looks like that trend will continue. So we feel pretty good about the objectives.

We basically think it's going to have the same kind of lumpiness that it did last year. And if you look at the quarters, it is pretty much tracked, although at an increased level.

At increased levels. I mean, the levels are higher; you got the same swing.

What about the settlement deposit, Oren? I was expecting something this quarter on that. Is that going to be a fourth quarter for the second half of that?

The settlement deposit or you mean the actual payment of the settlements or --

Right.

Well, we are not masters, if you will, of the exact date that we have to pay those out. We have a -- we -- it is a bit of, the courts have to decide that everything is fair and everything which they've done, set payment dates. So we continue to be conservative and try and anticipate them as early as we think they might happen. We just -- it didn't happen in the third quarter. It's more than likely something will go out in the fourth quarter. But again, we may be overly conservative there and it won't happen until next year.

Great. Thanks, guys.

I'd like to thank everybody for being on the call this morning. We appreciate your support, your questions. And as I said earlier, we would expect to continue our journey in a positive way, the momentum, sustainability and predictability that we aspire to, we have the opportunity to accomplish those goals. So thank you, everybody.

Thank you. This concludes today's conference call. You may now disconnect.