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dutifully scrubs away at its shady past, investors are pondering how its bottom line will look in the future.

The scandal-plagued Denver Baby Bell continued its recent resurgence as the release of third-quarter financial results revealed nothing untoward. Qwest shares, which rose 3% Wednesday to $3.27, have put on a steady rally since this summer's liquidity-deprived low of $1.07.

But even as new management wins plaudits for cleaning house, the numbers tell a different story. Qwest's core keeps shrinking: Third-quarter business services revenue fell 5% from a year ago, while consumer services revenue fell 9%. Meanwhile, Qwest remains under the cloud of numerous investigations and its accountants still haven't finalized their audit of 2000 and 2001 numbers.

But most jarringly, Wednesday's report underlined the stark reality of the company's future: Without the cash-generating buoyancy of its soon-to-be-sold directory unit, Qwest's core phone service business will struggle to stay afloat.

Tall Order

Analysts and investors sneaking a peek at Qwest's future got that sinking feeling again Wednesday as the company discussed its 2002 projections. The company trimmed its year-end revenue target only modestly, to $17.1 billion from a $17.2 billion consensus Wednesday. But that guidance projects $4.6 billion in sales for the fourth quarter -- a hefty 8% sequential increase. This at a company that hasn't seen revenue rise from previous-quarter levels since June of 2001.

If a sudden revenue surge at a weak company in a soft economy isn't a tall enough order, consider that any rise the company does manage to report will be attributable at least in part to revenue from a business Qwest won't have for much longer -- the soon-to-be-departed Qwest Dex directory business. Without Dex, which is being sold in two parts to private investors, Qwest's fourth quarter would look flat at best.

Of course, the sale of the directory business isn't damaging only to Qwest's top line. The $1.6 billion-a-year unit typically accounts for just 8% of total revenue but 16% of cash flow. While

pawning the business may have kept Qwest in business for this year, the sale has also robbed Qwest of a rare cash cow whose steady health could offset the company's numerous ills.

Taking a Look

Without the directory business, Qwest's other cash-burning problems come into sharper focus.

To address the red ink, the company is trying to shrink or kill unprofitable businesses. Part of that process includes the financial dismantling of its wildly cash-burning national fiber optic network.

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Just two days ago, the company said that it would probably have to write down more than $40 billion worth of useless assets -- $10 billion more than originally projected. Analysts say about $9 billion of the company's $10.8 billion asset-impairment charge is directly related to the fiber-optic operations.

Qwest has also admitted to accounting "mistakes," including booking revenue from hundreds of millions of dollars in long-term optical capacity sales and swaps. The company is the subject of a number of civil and criminal investigations. Qwest said this week that it will restate about $1.48 billion in sales recorded over the past two years.

Breaking a Path

CEO Dick Notebaert, who replaced Joe Nacchio, has had the unappetizing job of trying to separate financial fact from fiction in Qwest's books. Notebaert said he was happy with the progress the company has made so far.

We are "further along the path toward restatement of our financials," Notebaert told analysts in a conference call Wednesday.

The company has completed an internal audit but will miss the

Securities and Exchange Commission

deadline for filing its quarterly earnings report as it waits for certification from its external auditors KPMG.

Investors and analysts concur that Qwest has a long and frightful journey ahead, including regulatory challenges to the directory sale and a potentially dilutive debt-for-equity swap. But some felt inclined to give new management its due.

"Hey, there are still a number of issues they face, but they've come a long way," says Dreyfus fund analyst Chuck Thomas, who has no Qwest holdings.

It's faint praise, but Qwest will eagerly take it.

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