Some day investors will be able to separate the new, good Qwest ( Q) from the old, bad one. But not today.

On Thursday, the Denver phone giant posted first-quarter results that met analysts' expectations and called for continuing sales declines well within the range of current projections. But the line that caught everyone's attention was Qwest's remark that the scope of a long-running Securities and Exchange Commission investigation has expanded yet again.

This neatly sums up Wall Street's Qwest quandary. As much as investors might like to focus on the company's intrepid financial progress, via debt reduction and cost cuts, their attention keeps drifting back to the ever-broadening probe of past management's accounting and business practices. And until Qwest is able to clear its slate with the government and make a final, definitive restatement of past numbers, the company's unlikely to win many new fans. Qwest was up 18 cents at midday to $4.88.

Halting Steps

Having swung to a modest profit from a massive year-ago loss, Qwest was able to point to some solid progress in the latest period. But as with the past several earnings reports , Qwest results are tentative pending the completion of an SEC investigation and audit. Qwest executives on an earnings call with analysts hinted that they thought the largest disclosures were well behind them, but declined to specify.

A chief investigator with the SEC's Denver office, which is heading the case, declined to offer a time frame for when the investigation could end. Nor would he comment on the new matters added to the inquiry.

Analysts don't expect any bombshells that will totally change the complexion of Qwest's past problems, but some people think more skeletons are likely to emerge. There probably won't be "changes in orders of magnitude," says Jefferies & Co. analyst Richard Klugman, who has a sell rating on the stock. "It's probably one of those things where they turn over a stone and find a whole new set of problems."

Under former CEO Joe Nacchio, Qwest became an aggressive combination of a staid regional phone business once known as U S West and an ambitious national fiber optic network project that was to mesh conventional communications services with next-generation Internet capabilities.

To help justify the costs of a vast, state-of-the-art optical network, Qwest and other speculative telcos relied on increasingly creative sales deals. Among the favored practices at the time was the exchange of network capacity -- so-called swaps -- with other telcos. Qwest had a quirky habit of recording, upfront, all the revenue from these multiyear leases, which involved arguably useless network assets at a time of a widespread capacity glut.

Qwest, under its new management team, has since eliminated the swaps and other questionable revenues from its restated financial reports.

In February, after tallying up swaps and other questionable revenues, Qwest said it had incorrectly booked $1.33 billion of revenue in 2001 and $889 million in 2000. The restatement cut its actual revenue for 2001 to $18.37 billion and for 2000 to $15.72 billion.

"It's hard to know," says Jefferies' Klugman, "until you have audited financials, that every number down to the dollar will remain the same."