MEDIA ONE GROUP INC, 8-K, 1998-06-18

MEDIA ONE GROUP INC
8-K, 1998-06-18
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

---------------------

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (Date of earliest event reported): JUNE 18, 1998

MEDIAONE GROUP, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
A DELAWARE CORPORATION COMMISSION FILE NUMBER IRS EMPLOYER IDENTIFICATION NO.
(STATE OF INCORPORATION) 1-8611 84-0926774
</TABLE>

188 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices)

(303) 858-3000
(Registrant's telephone number, including area code)

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<PAGE>
ITEM 5. OTHER EVENTS

MediaOne Group, Inc. (formerly U S WEST, Inc.) has issued restated
consolidated financial statements in the form attached hereto as Exhibit 99, in
connection with the Separation of U S WEST, Inc.'s Media Group and
Communications Group into two separate companies.

ITEM 7. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- - ----------- ---------------------------------------------------------------------------------------------------

<C> <S>
99a Restated Financial Statement Schedule of MediaOne Group, Inc.

99b Restated Consolidated Financial Statements of MediaOne Group, Inc.
</TABLE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

U S WEST, INC.

By: /s/ STEPHEN E. BRILZ
-----------------------------------------
Stephen E. Brilz
ASSISTANT SECRETARY

Dated: June 18, 1998

<PAGE>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareowners of MediaOne Group, Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements for the years ended December 31, 1997 and
1996 included in MediaOne Group, Inc.'s (the "Company's") Current Report on Form
8-K filed June 18, 1998, and have issued our report thereon dated June 12, 1998
appearing on page 27. Our audits were made for the purpose of forming an opinion
on those statements taken as a whole. The schedule appearing on page 2 of this
Form 8-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. The information for the years 1997
and 1996 on this schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP
Denver, Colorado,
June 12, 1998.

------------------------

Our report on the restated consolidated financial statements of MediaOne
Group, Inc. (formerly U S WEST, Inc., see Note 23 to the consolidated financial
statements) is included on page 28 of this Form 8-K. In connection with our
audit of such restated consolidated financial statements, we have also audited
the related restated consolidated financial statement schedule, (see Note a),
for the year ended December 31, 1995 listed in Item 7 of this Form 8-K.

In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.

COOPERS & LYBRAND L.L.P.

Denver, Colorado
February 12, 1996

1
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MEDIAONE GROUP, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF CHARGED TO OTHER END OF
PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES(a)
1997.............................................. $ 65 $ 73 $ 20 $ 94(b) $ 64
1996.............................................. 38 44 28 45(b) 65
1995.............................................. 21 34 13 30(b) 38

REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT (after
tax)
1997.............................................. 100 -- -- (16) 116
1996.............................................. 56 -- -- (44) 100
1995.............................................. 77 -- -- 21 56
</TABLE>

- - ------------------------------

(a) Amounts have been restated to reflect New U S WEST as a discontinued
operation. See Note 23 to the Consolidated Financial Statements.

(b) Represents credit losses written off during the period, less collection of
amounts previously written off.

<PAGE>
MEDIAONE GROUP, INC.
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues(1)..................... $ 972 $ 920 $ 3,847 $ 1,837 $ 1,330 $ 925 $ 612
Income (loss) from continuing operations(2)..... (222) (190) (827) (357) (102) 23 (139)
Income (loss) from discontinued operations(2)... 434 420 1,524 1,535 1,423 1,403 (2,667)
Net income (loss)(3)............................ 212 230 697 1,178 1,317 1,426 (2,806)
Total assets.................................... 26,895 27,585 26,783 27,727 11,847 10,331 7,923
Total debt(4)................................... 9,205 10,009 8,963 8,806 2,073 1,791 1,471
Mandatorily redeemable preferred stock and
Preferred Securities(5)....................... 1,180 1,131 1,180 1,131 651 51 --
Shareowners' equity............................. 11,352 11,485 11,324 11,549 7,948 7,382 5,861
Percentage of debt to total capital(4).......... 42.3% 44.2% 41.8% 41.0% 19.4% 19.4% 20.1%
Capital expenditures(4)......................... $ 345 $ 320 $ 1,502 $ 643 $ 370 $ 308 $ 185
Employees....................................... 16,359 17,943 16,351 17,809 6,495 6,259 4,631
MEDIA STOCK INFORMATION:(2, 3, 6, 7)
Basic and diluted loss from continuing
operations per common share................... $ (0.38) $ (0.33) $ (1.45) $ (0.74) $ (0.22)
Basic and diluted earnings from discontinued
operations per common share................... 0.14 0.13 0.57 0.58 0.52
Basic and diluted average common shares
outstanding (thousands)....................... 608,295 606,527 606,749 491,924 470,549
Number of common shareowners of record.......... 603,424 684,598 648,077 705,341 770,346
COMMUNICATIONS STOCK INFORMATION:(2, 3, 6, 7)
Basic and diluted earnings from discontinued
operations per common share................... $ 0.72 $ 0.70 $ 2.43 $ 2.62 $ 2.50
Basic and diluted average common shares
outstanding (thousands)....................... 484,964 481,341 482,751 477,549 470,716
Dividends per common share...................... $ 0.535 $ 0.535 $ 2.14 $ 2.14 $ 2.14
Number of common shareowners of record.......... 629,067 708,336 672,517 725,560 775,125
U S WEST, INC. INFORMATION:(2, 3, 6, 7)
Basic and diluted earnings (loss) from
continuing operations per common share........ $ 0.05 $ (0.33)
Basic and diluted earnings (loss) from
discontinued operations per common share...... 3.09 (6.36)
Basic average common shares outstanding
(thousands)................................... 453,316 419,365
Diluted average common shares outstanding
(thousands)................................... 453,744 --
Dividends per common share...................... $ 2.14 $ 2.14
Number of common shareowners of record.......... 816,099 836,328
</TABLE>

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(1) 1997 and 1996 sales and other revenues include $2,070 and $252,
respectively, related to the acquisition by MediaOne Group, Inc. ("MediaOne
Group" or "the Company") of Continental Cablevision, Inc. ("Continental"),
which was consummated on November 15, 1996 (the "Continental Acquisition" or
the "Acquisition").

(2) On June 4, 1998, the shareowners of U S WEST, Inc. ("Old U S WEST") approved
the separation of Old U S WEST's businesses into two independent companies
(the "Separation"). The Separation is effective June 12, 1998. Prior to the
Separation, Old U S WEST conducted its businesses through two groups: U S
WEST Media Group ("Media Group") and U S WEST Communications Group
("Communications Group"). Upon Separation, Old U S WEST was renamed MediaOne
Group and retained the businesses of Media Group, except for U S WEST Dex,
Inc. ("Dex"), the domestic directory business. The telecommunications
businesses of Communications Group became an independent public company and
retained the "U S WEST, Inc." name ("New U S WEST"). In addition, Dex was
aligned with New U S WEST. MediaOne Group has accounted for the distribution
to shareowners of New U S WEST as a discontinuance of the businesses
comprising New U S WEST. See Note 23--Discontinued Operations--to the
Consolidated Financial Statements.

1
<PAGE>
Income from continuing operations for the three month period ended March 31,
1998 includes a net gain of $10 ($0.02 per share of Media Stock) on the sale
of a domestic programming investment. Income from continuing operations for
the three month period ended March 31, 1997 includes a net gain of $31
($0.05 per share of Media Stock) on the sale of MediaOne Group's interest in
a wireless venture in France. 1997 income from continuing operations
includes net gains of $249 ($0.41 per share of Media Stock) on the sales of
various domestic and international investments, and net losses of $356
($0.59 per share of Media Stock) related to the Continental Acquisition.
1996 income from continuing operations includes net losses of $71 ($0.15 per
share of Media Stock) related to the Continental Acquisition and a charge of
$19 ($0.04 per share of Media Stock) related to the sale of MediaOne Group's
cable television interests in Norway, Sweden and Hungary. 1995 income from
continuing operations includes a gain of $95 ($0.20 per share of Media
Stock) from the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK), and costs of $9 ($0.02 per share of Media Stock) associated
with the Recapitalization Plan discussed in footnote 6 below. 1994 income
from continuing operations includes a gain of $105 ($0.23 per share) on the
partial sale of MediaOne Group's joint venture interest in Telewest, and a
gain of $41 ($0.09 per share) on the sale of MediaOne Group's paging
operations. 1993 income from continuing operations was reduced by a
restructuring charge of $45 ($0.11 per share).

(3) 1995 net income was reduced by an extraordinary item of $4 ($0.01 per share
of Media Stock) for the early extinguishment of debt. 1993 net income
includes a charge of $120 ($0.28 per share) for MediaOne Group's decision to
discontinue the operations of its capital assets segment. Discontinued
operations of the capital assets segment also provided net income of $38
($0.09 per share) during 1993.

(4) Debt at March 31, 1998, and December 31, 1997 and 1996 includes debt related
to the Continental Acquisition. Capital expenditures, debt and the
percentage of debt to total capital excludes the capital assets segment,
which has been discontinued and is held for sale, and the discontinued
operations of New U S WEST, which were distributed to shareowners effective
June 12, 1998. Percentage of debt to total capital includes
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities")
and mandatorily redeemable preferred stock as a component of total capital.

(5) Includes Preferred Securities of $1,080 at March 31, 1998 and 1997, and
December 31, 1997 and 1996, and $600 at December 31, 1995, and preferred
stock subject to mandatory redemption of $100 at March 31, 1998 and December
31, 1997, and $51 at March 31, 1997, and December 31, 1996, 1995 and 1994.

(6) The average common shares of Media Stock outstanding for the year ended
December 31, 1996 include 150,615,000 shares issued in connection with the
Continental Acquisition. Effective November 1, 1995, each share of common
stock of the Company was converted into one share each of Communications
Stock and Media Stock (the "Recapitalization Plan"). Earnings per common
share and dividends per common share for 1995 have been presented on a pro
forma basis to reflect the two classes of stock as if they had been
outstanding since January 1, 1995.

(7) In 1997, MediaOne Group adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share" which specifies new computation,
presentation and disclosure requirements for earnings per share to be
applied retroactively. SFAS No. 128 requires, among other things,
presentation of basic and diluted earnings per share. See Note 16--Earnings
Per Share-- to the Consolidated Financial Statements.

2
<PAGE>
MEDIAONE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable, and wireless
communications markets, (ii) changes in demand for the Company's products and
services, (iii) regulatory changes affecting the cable and telecommunications
industries, (iv) changes in economic conditions in the various markets served by
MediaOne Group operations, including international markets, that could adversely
affect the level of demand for cable, wireless, or other services offered by the
Company, (v) greater than anticipated competitive activity requiring new pricing
for services, (vi) higher than anticipated start-up costs associated with new
business opportunities, (vii) higher than anticipated employee levels, capital
expenditures, and operating expenses (such as costs associated with Year 2000
remediation), (viii) consumer acceptance of broadband services, including
telephony and data services, and wireless services, (ix) increases in fraudulent
activity with respect to broadband and wireless services, or (x) delays in the
development of anticipated technologies, or the failure of such technologies to
perform according to expectations.

THE SEPARATION

On June 4, 1998, the shareowners of U S WEST, Inc. ("Old U S WEST") approved
the separation of Old U S WEST's businesses into two independent public
companies, (the "Separation"). The Separation is effective June 12, 1998. Prior
to the Separation, Old U S WEST conducted its businesses through two groups: U S
WEST Media Group (the "Media Group") and U S WEST Communications Group ( the
"Communications Group"). Media Group was comprised of domestic and international
broadband communications, wireless communications and directories businesses.
The Communications Group provided telecommunications services, including local
telephone services and exchange access services, in a 14-state mountain and
western region of the United States. Upon Separation, Old U S WEST was renamed
MediaOne Group, Inc. ("MediaOne Group" or the "Company") and retained the
businesses of Media Group, except for U S WEST Dex, Inc. ("Dex"), the domestic
directory business. The telecommunications businesses of Communications Group
became an independent public company and retained the "U S WEST, Inc." name
("New U S WEST"). In addition, Dex was aligned with New U S WEST (the "Dex
Alignment").

Prior to the Separation, Old U S WEST had outstanding two separate classes
of common stock which reflected the performance of its two groups. One class of
stock, U S WEST Media Group Common Stock (the "Media Stock"), reflected the
performance of Media Group, and the other class of stock, U S WEST
Communications Group Common Stock (the "Communications Stock") reflected the
performance of the Communications Group. Upon Separation, and in accordance with
the terms of a separation agreement between MediaOne Group and New U S WEST (the
"Separation Agreement"), each outstanding share of Media Stock remains
outstanding and represents one share of MediaOne Group Common Stock, and each
issued and outstanding share of Communications Stock was redeemed for one share
of New U S WEST Common Stock. Each share of Media Stock held as treasury stock
by Old U S WEST remains outstanding as one share of MediaOne Group Common Stock
held as treasury stock by MediaOne Group. Each share of Communications Stock
held as treasury stock by Old U S WEST was canceled.

3
<PAGE>
In connection with the Dex Alignment, (i) each holder of Media Stock
received as a dividend .02731 shares of New U S WEST Common Stock for each share
of Media Stock held (the "Dex Dividend"), and (ii) $3.9 billion of Old U S WEST
debt was refinanced by New U S WEST.

The Company has accounted for the distribution of New U S WEST stock to the
holders of Communications Stock, and to the holders of Media Stock for the Dex
Alignment, as a discontinuance of the businesses comprising New U S WEST. As a
result, certain of Old U S WEST's financial information previously issued has
been restated to give effect to the classification of New U S WEST as a
discontinued operation. The measurement date for discontinued operations
accounting purposes is June 4, 1998, the date upon which Old U S WEST's
shareowners approved the Separation. The effective date of the Separation is
June 12, 1998. On the effective date, MediaOne Group Separation costs incurred
will be netted against the gain realized on the distribution of New U S WEST.
Because the distribution is non pro-rata, as compared with the businesses
previously attributed to Old U S WEST's two classes of shareowners, it was
accounted for at fair value. As of June 1, 1998, the gain on distribution of New
U S WEST (net of Separation costs) is estimated at approximately $24.6 billion.
The Company will incur Separation costs during 1998 of approximately $175, which
includes cash payments under severance agreements of $45 and financial advisory,
legal, registration fee, printing and mailing costs. Separation costs also
include a one-time payment to terminate the sale of the Minnesota cable systems
(the "Minnesota System"). Of the total Separation costs, MediaOne Group will
fund approximately $115 of such costs.

BUSINESS DESCRIPTION

The Company has domestic and international operations and investments in two
principal areas: (i) cable and broadband network businesses and (ii) wireless
communications network businesses.

CABLE AND BROADBAND. The Company is the third largest cable operator in the
United States serving 4.9 million cable customers and passing 8.4 million homes.
MediaOne Group's cable systems are organized into six operating regions,
including large clusters in Atlanta, Eastern Massachusetts, Southern California,
Southern Florida, Detroit and Minneapolis/St. Paul. The cable systems offer
customers various levels of cable programming services, including premium
programming services such as HBO, Cinemax, Showtime, The Movie Channel and
Encore, as well as pay-per-view movies and special events.

On November 15, 1996, the Company acquired Continental Cablevision, Inc.
("Continental") (the "Continental Acquisition"). The aggregate consideration
paid by the Company to shareowners of Continental consisted of 150,615,000
shares of Old U S WEST Media Stock valued at $2.59 billion, 20,000,000 shares of
Old U S WEST Series D Preferred Stock (the "Series D Preferred Stock") with a
market value of $920 and $1.15 billion in cash. In connection with the
Continental Acquisition, the Company also assumed all of Continental's
outstanding indebtedness and other liabilities as of November 15, 1996, which
approximated $7.1 billion for a total purchase price of $11.8 billion. The
Continental Acquisition was accounted for by the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values. In 1997 Continental
was renamed MediaOne Group of Delaware, Inc. ("MediaOne").

In addition to its cable operations, the Company also holds significant
domestic cable and broadband investments including an investment in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment"), the second
largest provider of cable television services in the United States, an
approximate 10 percent interest in PrimeStar, Inc. ("PrimeStar"), a provider of
direct broadcast satellite ("DBS") services, telephone access businesses in
Florida and Virginia, and interests in programming that include E! Entertainment
Television. Internationally, the Company holds an investment in Telewest
Communications plc ("Telewest"), the second-largest provider of combined cable
and broadband communications services in the United Kingdom. The Company also
holds interests in cable and broadband properties in Singapore, the Netherlands,
Belgium, the Czech Republic, Malaysia, Indonesia and Japan.

4
<PAGE>
On June 15, 1998, the Company formed a high-speed cable-modem joint venture
with Time Warner, Inc. ("Time Warner"), TWE, and Time Warner
Entertainment-Advanced/Newhouse Partnership ("TWE-A/N") whereby MediaOne Group
and Time Warner merged the MediaOne Express and Road Runner businesses, each
company's respective high-speed cable information and access services operation.
The joint venture plans to market service under the Road Runner brand.

MediaOne Group owns approximately 31 percent of common equity in the joint
venture while Time Warner, TWE, and TWE-A/N own approximately 11, 25, and 33
percent, respectively, in the joint venture. In addition, as part of the
agreement, Microsoft Corporation and Compaq Computer Corporation each
contributed $212.5 for a preferred equity investment in the joint venture,
convertible into a 10 percent ownership interest in the business for each
company on a fully-converted basis. MediaOne Group holds an approximate 25
percent interest in the joint venture on a fully-converted basis.

The Company intends to account for its investment in the joint venture under
the equity method of accounting.

WIRELESS COMMUNICATIONS. On April 6, 1998, the Company sold its domestic
wireless businesses to AirTouch Communications, Inc. ("AirTouch") in a tax
efficient transaction (the "AirTouch Transaction"). The AirTouch Transaction was
consummated pursuant to an agreement and plan of merger (the "AirTouch Merger
Agreement") dated as of January 29, 1998. The domestic wireless businesses
included cellular communication services provided to 2.6 million customers in 12
western and midwestern states and a 25 percent interest in PrimeCo Personal
Communications, L.P. ("PrimeCo"), a provider of personal communications services
("PCS"). Pursuant to the AirTouch Merger Agreement, AirTouch acquired these
cellular and PCS interests. Consideration under the AirTouch Transaction
consists of (i) debt reduction of $1.35 billion, (ii) the issuance to MediaOne
Group of $1.65 billion in liquidation preference of dividend bearing AirTouch
preferred stock (fair value of approximately $1.5 billion), and (iii) the
issuance to MediaOne Group of 59.5 million shares of AirTouch common stock.

This transaction resulted in the disposition of MediaOne Group's domestic
wireless businesses and resulted in a gain of approximately $2.2 billion, net of
deferred taxes of $1.7 billion.

MediaOne Group has retained its international wireless interests which
includes a 50 percent joint venture interest in Mercury Personal Communications
("One 2 One"), a provider of PCS services in the United Kingdom. Additionally,
the Company owns interests in wireless properties in Hungary, the Czech and
Slovak Republics, Russia, Malaysia, India and Poland.

During 1997, the Company sold Thomson Directories and U S WEST Polska, its
directory operations in the United Kingdom and Poland, respectively.

The following discussion is based on MediaOne Group Consolidated Financial
Statements prepared in accordance with generally accepted accounting principles
("GAAP"). Unless otherwise indicated, the following discussion reflects the
continuing operations of the Company.

5
<PAGE>
RESULTS OF OPERATIONS--CONTINUING OPERATIONS--FIRST QUARTER 1998 COMPARED WITH
FIRST QUARTER 1997

MEDIAONE GROUP LOSS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
BASIC LOSS PER SHARE FROM
CONTINUING OPERATIONS
-----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE INCREASE
(DECREASE) (DECREASE)
----------- -------------

<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 1997 $ % 1998 1997 $ %
- - --------------------------------------------- ----- ----- ---- ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss from continuing operations.............. $(222) $(190) $(32) 16.8 $(0.38) $(0.33) $(0.05) 15.2
Adjustments to reported loss from continuing
operations:
Gains on sales of investments.............. (10) (31) 21 (67.7) (0.02) (0.05) 0.03 (60.0)
Other--Separation costs.................... 35 -- 35 -- 0.06 -- 0.06 --
----- ----- ---- ----- ------ ------ ------ -----
Normalized loss from continuing operations... $(197) $(221) $ 24 (10.9) $(0.34) $(0.38) $ 0.04 (10.5)
----- ----- ---- ----- ------ ------ ------ -----
----- ----- ---- ----- ------ ------ ------ -----
</TABLE>

During 1998, the Company's normalized loss from continuing operations
decreased $24, or 10.9 percent, to $197. Normalized basic loss per share from
continuing operations was $0.34, a decrease of $0.04, or 10.5 percent. The
normalized decrease in loss from continuing operations was primarily a result of
lower interest expense and reductions in losses generated by unconsolidated
international ventures. During first-quarter 1998, the Company recorded a gain
on the sale of a programming investment of $10, net of tax expense of $7, and
incurred costs related to the Separation of $35, net of tax benefits of $14.

Upon consummation of the Separation, MediaOne Group Separation costs will be
netted against the gain realized upon distribution of the New U S WEST common
stock to Old U S WEST's shareowners. The estimated $24.6 billion gain on the
distribution represents the difference between the fair value of New U S WEST
and the historical investment in New U S WEST.

SALES AND OTHER REVENUES

<TABLE>
<CAPTION>
THREE MONTHS ENDED
INCREASE
MARCH 31, (DECREASE)
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 $ %
--------- --------- --- ---------
CABLE AND BROADBAND:
Domestic......................................................................... $ 619 $ 552 $ 67 12.1
International.................................................................... 5 4 1 25.0
--------- --------- --- ---------
624 556 68 12.2
WIRELESS COMMUNICATIONS:
Cellular service................................................................. 318 303 15 5.0
Cellular equipment............................................................... 23 32 (9) (28.1)
--------- --------- --- ---------
341 335 6 1.8
Other(1)........................................................................... 7 29 (22) (75.9)
--------- --------- --- ---------
Total.............................................................................. $ 972 $ 920 $ 52 5.7
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>

- - ------------------------

(1) Primarily includes international directories, which were sold in 1997.

MediaOne Group sales and other revenues increased $52, or 5.7 percent, to
$972 in 1998, primarily as a result of growth in domestic cable and broadband
services.

6
<PAGE>
CABLE AND BROADBAND. Cable and broadband revenues consist primarily of
basic cable programming and premium cable television services, the rental of
converters and remote control devices, cable installation fees, advertising and
PrimeStar DBS services.

Domestic cable and broadband revenues increased $67, or 12.1 percent, to
$619, primarily as a result of higher core cable revenue per subscriber and
continued growth in PrimeStar DBS service revenues. Excluding the one-time
effects of cable system acquisitions and dispositions and a change in
classification of late fee revenues, revenues increased $69, or 12.5 percent.
Basic cable programming services revenue increased $46, or 12.5 percent, due
primarily to a 10 percent increase in revenue per average cable subscriber and a
1.5 percent increase in basic subscribers. The increase in revenue per
subscriber is primarily a result of expanded channel offerings and rate
increases resulting from higher programming fees. PrimeStar DBS service revenues
contributed $11 to the revenue increase, due primarily to a 27 percent increase
in PrimeStar DBS subscribers since the end of first quarter 1997. Advertising
and equipment and installation revenues also contributed $11 to the increase in
domestic cable and broadband revenues. Core cable revenue per average cable
subscriber increased 7.4 percent to $39.17 in 1998, compared with $36.47 in the
first quarter of 1997. Excluding the one-time effects of cable system
acquisitions and dispositions and a change in classification of late fee
revenues, core cable revenue per average cable subscriber increased 8.3 percent.

Prior to April 1, 1998, MediaOne distributed PrimeStar DBS services to
subscribers in its service areas, and as a result, reflected consolidated
operating results with respect to such subscribers. On April 1, 1998, the
Company contributed its interest in PrimeStar Partners, L.P. ("Old PrimeStar"),
as well as its PrimeStar subscribers and certain related assets, to PrimeStar, a
newly formed entity, in exchange for an approximate 10 percent interest in
PrimeStar and approximately $80 in cash (the "PrimeStar Contribution").
Subsequent to April 1, 1998, in conjunction with the Prime Star Contribution,
MediaOne Group will no longer reflect consolidated operating results for
PrimeStar DBS services.

WIRELESS COMMUNICATIONS. Cellular service revenues increased $15, or 5.0
percent, to $318 in 1998 due to a 22 percent increase in subscribers, partially
offset by a 15 percent decrease in average revenue per subscriber to $40.46 per
month.

On April 6, 1998, the Company sold its domestic wireless businesses to
AirTouch in a tax-efficient transaction.

OTHER. During 1997, the Company sold its wholly owned international
directory and information services operations.

7
<PAGE>
OPERATING INCOME

<TABLE>
<CAPTION>
THREE MONTHS ENDED
INCREASE
MARCH 31, (DECREASE)
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 $ %
--------- --------- --------- ---------
CABLE AND BROADBAND:
Domestic................................................................... $ (48) $ (17) $ (31) --
International.............................................................. (2) (4) 2 (50.0)
--- --- --- ---------
(50) (21) (29) --
WIRELESS COMMUNICATIONS:
Domestic................................................................... 87 95 (8) (8.4)
International.............................................................. (3) (3) -- --
--- --- --- ---------
84 92 (8) (8.7)
Other(1)..................................................................... (34) (27) (7) 25.9
--- --- --- ---------
Total operating income....................................................... $ -- $ 44 $ (44) --
--- --- --- ---------
--- --- --- ---------
</TABLE>

- - ------------------------

(1) Primarily includes international directories and headquarters expenses for
shared services and divisional expenses associated with equity investments.

During 1998, the Company's operating income decreased $44, to zero. The
decrease was primarily a result of increased domestic cable and broadband
operating losses.

CABLE AND BROADBAND. Domestic cable and broadband operating losses
increased $31, to $48, as compared with 1997. Revenue increases of $67, or 12.1
percent, to $619, were more than offset by increased programming costs of $22,
or 17.3 percent, to $149, increases in operating, marketing and advertising, and
general and administrative costs of $30 or 15.0 percent, to $230, and increased
depreciation and amortization charges of $46, or 19.0 percent, to $288.

Programming cost increases were primarily a result of expanded channel
offerings and increased programming costs per subscriber as a result of rate
increases. Programming costs increased 13.4 percent excluding programming costs
related to PrimeStar services. Increases in operating, marketing and
advertising, and general and administrative costs are primarily a function of an
increase in employee costs primarily associated with customer service
initiatives, as well as costs associated with deployment of new services such as
high-speed data, and advertising costs. The termination of the sale of the
Minnesota System resulted in a one-time increase to depreciation and
amortization expense of $28 during 1998. Depreciation and amortization expense
was suspended on this property while it was held for sale in 1997.

The domestic cable and broadband business will continue to generate
operating losses for the foreseeable future due to the amortization of
intangible assets associated with the acquisition of the Company's cable
properties and depreciation associated with network upgrades.

WIRELESS COMMUNICATIONS. Domestic cellular operating income decreased $8,
or 8.4 percent, to $87 during 1998. The decrease in operating income is
primarily a result of accelerated depreciation associated with the replacement
of certain infrastructure equipment. On a per subscriber basis, revenue
decreased 15.3 percent and the costs incurred to acquire and support customers
decreased 12.8 percent.

OTHER. Other operating losses increased primarily as a result of increased
corporate costs, including costs associated with international activities.

8
<PAGE>
INTEREST EXPENSE AND OTHER

<TABLE>
<CAPTION>
THREE MONTHS ENDED
INCREASE
MARCH 31, (DECREASE)
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 $ %
--------- --------- --------- ---------
Interest expense................................................................. $ (150) $ (174) $ (24) (13.8)
Equity losses in unconsolidated ventures......................................... (136) (165) (29) (17.6)
Gains on sales of investments.................................................... 17 51 (34) (66.7)
Guaranteed minority interest expense............................................. (22) (22) -- --
Other expense--net............................................................... (37) (4) 33 --
</TABLE>

INTEREST EXPENSE. Interest expense decreased $24, or 13.8 percent, due
primarily to lower debt levels at Media One Group during 1998 as compared with
1997.

EQUITY LOSSES IN UNCONSOLIDATED VENTURES. Equity losses decreased $29, or
17.6 percent, in 1998. This decrease is comprised of a $41 decrease in
international losses offset by a $12 increase in domestic losses. The decrease
in international losses relates to foreign exchange rate improvements at
Telewest; rapid subscriber growth experienced by the central European wireless
ventures located in Hungary, the Czech and Slovak Republics, and Poland; and the
absence of losses related to ventures in Malaysia and Indonesia in the first
quarter of 1998. In 1998, equity method accounting was suspended on the
Company's investments in Malaysia and Indonesia in conjunction with a 1997
adjustment to write down the carrying value of the investment in Malaysia to its
fair value of zero and to recognize probable funding commitments in connection
with a shareholder support agreement related to the investment in Indonesia.

The Company continues to monitor its investments in Malaysia and Indonesia.
During the first quarter of 1998, the Indonesian currency declined 55 percent as
compared with the U. S. dollar; whereas, the Malaysian currency recovered
slightly. The Company funded an additional $6 pursuant to the terms of the
Indonesian venture shareholder support agreement. After such funding the
Company's contractual funding commitment is reduced to $13 and its partners'
commitments remain at $36.

Domestically, the increase in losses is attributed to the Company's
interests in PrimeCo, Time Warner Entertainment and Old PrimeStar. The Company's
interest in PrimeCo was transferred to AirTouch on April 6, 1998 pursuant to the
AirTouch Transaction, and the Company's interest in Old PrimeStar was exchanged
for an approximate 10 percent interest in PrimeStar on April 1, 1998.

GAINS ON SALES OF INVESTMENTS. During 1998, MediaOne Group sold a cable
programming investment resulting in a pretax gain of $17. During 1997, the
Company sold its 5 percent interest in a wireless venture in France resulting in
a pretax gain of $51.

OTHER EXPENSE--NET. Other expense increased primarily due to costs incurred
by the Company related to the proposed Separation totaling $49. Such costs
include the Minnesota System termination fee and settlement of related claims,
and certain filing and consulting fees as of March 31, 1998, to effect the
Separation. MediaOne Group will fund total Separation costs during 1998 of
approximately $115. On the Separation, MediaOne Group Separation costs will be
netted against the gain realized upon distribution of the New U S WEST common
stock to Old U S WEST's shareowners. The Separation costs were partially offset
by decreased foreign exchange transaction losses associated with loans to
international ventures during the quarter.

RESULTS OF OPERATIONS--CONTINUING OPERATIONS--1997 COMPARED WITH 1996

The following pro forma discussions give effect to the Continental
Acquisition as though it had occurred as of January 1, 1996.

9
<PAGE>
MEDIAONE GROUP LOSS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
BASIC LOSS PER SHARE FROM
CONTINUING OPERATIONS
-------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- ---------
1997 1996 $ % 1997(1) 1996 $
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss from continuing operations....................... $ (827) $ (357) $ (470) -- $ (1.45) $ (0.74) $ (0.71)
Adjustments to reported loss from continuing
operations:
Gains on sales of investments....................... (249) -- (249) -- (0.41) -- (0.41)
--------- --------- --------- --- --------- --------- ---------
Normalized loss from continuing operations............ $ (1,076) $ (357) $ (719) -- $ (1.86) $ (0.74) $ (1.12)
--------- --------- --------- --- --------- --------- ---------
--------- --------- --------- --- --------- --------- ---------

%
---------
<S> <C>
Loss from continuing operations....................... 95.9
Adjustments to reported loss from continuing
operations:
Gains on sales of investments....................... --
---
Normalized loss from continuing operations............ --
---
---
</TABLE>

- - ------------------------

(1) In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which specifies new computation,
presentation and disclosure requirements for earnings per share. SFAS No.
128 requires, among other things, presentation of basic and diluted earnings
per share on the face of the income statement. The following discussion and
analysis of operations is based upon basic weighted average common shares
outstanding. For the calculation of earnings (loss) per share, see Note
16--Earnings Per Share--to the Consolidated Financial Statements.

During 1997, the Company reported a normalized loss from continuing
operations of $1,076, or $1.86 per share, compared with a loss from continuing
operations of $357, or $0.74 per share, in 1996. The Continental Acquisition
contributed approximately $356, or $0.59 per share, of the increase. The
Continental Acquisition resulted in significant increases in interest and
depreciation and amortization charges. The remaining increase in loss from
continuing operations is primarily due to greater losses from unconsolidated
ventures, partially offset by increased earnings from domestic cellular
operations.

During June 1997, the Company incurred an extraordinary gain of $3 (net of
income tax expenses of $2) related to the early extinguishment of debt of
MediaOne. During August 1997, the Company incurred an extraordinary loss of $3
(net of income tax benefits of $2) related to the early extinguishment of debt.

SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE PRO INCREASE
(DECREASE) FORMA(1) (DECREASE)
-------------------- ----------- ---------
1997 1996 $ % 1996 $
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic.................................................. $ 2,323 $ 488 $ 1,835 -- $ 2,125 $ 198
International............................................. 18 6 12 -- 6 12
--------- --------- --------- --------- ----------- ---------
2,341 494 1,847 -- 2,131 210
WIRELESS COMMUNICATIONS:
Domestic:
Cellular service........................................ 1,276 1,078 198 18.4 1,078 198
Cellular equipment...................................... 152 105 47 44.8 105 47
--------- --------- --------- --------- ----------- ---------
1,428 1,183 245 20.7 1,183 245
Other....................................................... 78 160 (82) (51.2) 160 (82)
--------- --------- --------- --------- ----------- ---------
Total....................................................... $ 3,847 $ 1,837 $ 2,010 -- $ 3,474 $ 373
--------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- ----------- ---------

%
---------
<S> <C>
CABLE AND BROADBAND:
Domestic.................................................. 9.3
International............................................. --
---------
9.9
WIRELESS COMMUNICATIONS:
Domestic:
Cellular service........................................ 18.4
Cellular equipment...................................... 44.8
---------
20.7
Other....................................................... (51.2)
---------
Total....................................................... 10.7
---------
---------
</TABLE>

- - ------------------------

(1) Gives effect to the Continental Acquisition as though it had occurred on
January 1, 1996.

The pro forma increase in MediaOne Group sales and other revenues was
primarily due to growth in domestic cable and broadband and cellular service
revenues.

10
<PAGE>
CABLE AND BROADBAND. On a pro forma basis, domestic cable and broadband
revenues increased 9.3 percent, to $2,323, in 1997. Basic cable programming
services revenues increased $146, or 10.6 percent, to $1,518, primarily a result
of rate increases. Rate increases averaged approximately 6 to 8 percent and were
primarily related to an increase in programming costs and the addition of
channels. This contributed to the 4.7 percent increase in core cable revenue per
average cable subscriber to $37.76 in 1997, from $36.06 in 1996. Basic
subscriber growth of 1.6 percent, adjusted for dispositions and an acquisition,
also contributed to the increase in revenues along with growth in equipment
rental and installation revenues. Partially offsetting the increase in revenues
was a decline in premium services revenues as a result of moving the Disney
Channel to the basic service tier in several markets and discounting of premium
service packages. PrimeStar DBS services contributed $40 to the increase in
domestic cable and broadband revenues principally as a result of a 31 percent
increase in DBS customers to 181,000 at December 31, 1997.

International cable and broadband revenues reflect the consolidation of
Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech Republic, in
fourth-quarter 1996. The consolidation of Cable Plus is associated with a
restructuring in 1996 whereby the Company's ownership interest increased to 94
percent.

WIRELESS COMMUNICATIONS. Cellular service revenues increased 18.4 percent,
to $1,276 in 1997, due to a 27 percent increase in subscribers during the year,
partially offset by a 12 percent drop in average revenue per subscriber to
$46.42 per month. The increase in subscribers relates to continued growth in
demand for wireless services, as well as the 1997 introduction of digital
wireless services in several major markets.

Cellular equipment revenues increased 44.8 percent, to $152 in 1997, as a
result of a 14 percent increase in gross customer additions and the introduction
of digital handsets. These volume increases were partially offset by decreased
selling prices for analog handsets.

On April 6, 1998, the Company sold its domestic wireless businesses to
AirTouch pursuant to the AirTouch Transaction.

OTHER. The decrease in other revenues is due primarily to the sales during
1997 of the Company's wholly owned international directory and information
services operations.

OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE PRO
(DECREASE) FORMA(1)
-------------------- -----------
1997 1996 $ % 1996
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic....................................................... $ (111) $ (13) $ (98) -- $ (73)
International.................................................. (15) (7) (8) -- (7)
--------- --------- --- --------- -----
(126) (20) (106) -- (80)
WIRELESS COMMUNICATIONS:
Domestic....................................................... 353 243 110 45.3 243
International.................................................. (13) (3) (10) -- (3)
--------- --------- --- --------- -----
340 240 100 41.7 240
Other(2)......................................................... (184) (176) (8) 4.5 (176)
--------- --------- --- --------- -----
Operating income................................................. $ 30 $ 44 $ (14) (31.8) $ (16)
--------- --------- --- --------- -----
--------- --------- --- --------- -----

<CAPTION>
INCREASE
(DECREASE)
--------------------
$ %
--------- ---------
<S> <C> <C>
CABLE AND BROADBAND:
Domestic....................................................... $ (38) 52.1
International.................................................. (8) --
--- ---
(46) 57.5
WIRELESS COMMUNICATIONS:
Domestic....................................................... 110 45.3
International.................................................. (10) --
--- ---
100 41.7
Other(2)......................................................... (8) 4.5
--- ---
Operating income................................................. $ 46 --
--- ---
--- ---
</TABLE>

- - ------------------------

(1) Gives effect to the Continental Acquisition as though it had occurred on
January 1, 1996.

(2) Primarily includes international directories and headquarters expenses for
shared services and divisional expenses associated with equity investments.

11
<PAGE>
MediaOne Group pro forma operating income increases were due primarily to
growth in domestic wireless, partially offset by higher domestic cable operating
losses.

CABLE AND BROADBAND. Domestic cable and broadband operating losses
increased 52.1 percent, or $38, to $111, as compared with pro forma 1996.
Revenue growth of $198, or 9.3 percent, to $2,323, was more than offset by
increases in programming costs, including programming for PrimeStar DBS
services, of $71, or 15.6 percent, to $525, increases in operating, marketing
and advertising, and general and administrative costs of $89, or 11.4 percent,
to $868, and increases in depreciation and amortization expense of $76, or 7.9
percent, to $1,041.

Programming cost increases are primarily a result of rate increases and
subscriber growth. Increases in operating, marketing and advertising, and
general and administrative costs are primarily a function of customer service
initiatives, costs associated with deployment of new services such as high-speed
data, advertising costs to implement the "MediaOne" brand and increased
professional fees. A reduction in the estimated remaining useful lives of
certain assets in accordance with planned re-build activities resulted in a
depreciation adjustment of $61 which accounts for the majority of the increase
in depreciation and amortization expense during 1997.

The domestic cable and broadband business will continue to generate
operating losses for the foreseeable future due to the amortization of
intangible assets associated with the Continental Acquisition and depreciation
associated with network upgrades.

WIRELESS COMMUNICATIONS. Domestic cellular operating income increased 45.3
percent, to $353, in 1997. The increase in operating income is a result of
revenue increases associated with the expanding subscriber base combined with
efficiency gains. These increases were somewhat offset by a decline in revenue
per subscriber, caused primarily by promotional pricing to retain subscribers
and remain competitive with other wireless service providers. On a per
subscriber basis, the 1997 decline in revenue of 11.6 percent has been more than
offset by a combined decrease of 19.4 percent in the costs incurred to acquire
and support customers. Support costs per subscriber declined 17.6 percent in
1997. The decline is generally a result of the efficiencies gained from an
expanding customer base without corresponding increases in headcount and
infrastructure.

Competitive activity increased in the Company's domestic cellular markets in
the second half of the year, particularly with the introduction of new PCS
wireless services in several markets. In many cases, discounted cellular service
price plans were offered in response to competition. This resulted in slowing
operating income growth during the fourth quarter of 1997.

Domestic cellular depreciation and amortization increased 22.4 percent, to
$180, largely as a result of network upgrades.

OTHER. Other operating losses include the Company's wholly owned
international directory and information services operations, which were sold
during 1997, as well as costs related to managing the various MediaOne Group
operations, predominantly the international operations. Other operating losses
also include costs related to general and administrative services provided by
the Company to its subsidiaries, including executive management, legal,
accounting and auditing, tax, treasury, strategic planning, and public policy.

The 1997 results include a $30 charge for management changes and moving
costs related to relocating MediaOne's operations from Boston to Denver. This
charge was partially offset by savings associated with lower international staff
levels in 1997, combined with a 1996 charge of $10 related to the staff
reductions at international headquarters.

12
<PAGE>
INTEREST EXPENSE AND OTHER

<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
<S> <C> <C> <C> <C>
1997 1996 $ %
--------- --------- --------- ---------
Interest expense................................................................. $ (678) $ (164) $ 514 --
Equity losses in unconsolidated ventures......................................... (909) (346) 563 --
Gains on sales of investments.................................................... 421 -- 421 --
Guaranteed minority interest expense............................................. (87) (55) 32 58.2
Other income (expense)--net...................................................... 16 (16) 32 --
</TABLE>

INTEREST EXPENSE. Interest expense increased $514, to $678, primarily as a
result of assuming, at market value, $6.5 billion of debt related to the
Continental Acquisition. MediaOne Group's weighted average borrowing cost was
6.95 percent in 1997, compared with 6.80 percent in 1996.

EQUITY LOSSES IN UNCONSOLIDATED VENTURES. Equity losses increased $563 in
1997, predominantly a result of greater losses generated from international
ventures and the domestic investment in PrimeCo. PrimeCo launched service in
November 1996, and losses associated with this venture have increased $68 as a
result of start-up and other costs.

International equity losses increased $455 in 1997. Ventures located in
Asia, which includes Indonesia, India, Malaysia, Japan and Singapore,
contributed $397 to the increase. During the twelve month period ending December
31, 1997, the value of the Malaysian currency declined 36 percent and the
Indonesian currency declined 57 percent as compared with the U. S. dollar. As a
result of this significant decline, the Company reviewed its investments in
Malaysia and Indonesia for impairment. Management concluded that each of its
investments in Malaysia and Indonesia was impaired and in each case the fair
value of the investment was zero as of December 31, 1997. The Company recorded
pretax charges of $145 and $55 related to the ventures in Malaysia and
Indonesia, respectively.

In the case of Malaysia, the charge of $145 was to recognize that the
investment was impaired and to write down the carrying value of the investment
to its fair value of zero. The following factors were considered by management
in determining that the investment was impaired:

- The venture has negative cash flow and no ability to meet its debt
obligations of $482 due in 1998. Total venture debt and vendor payables
exceeded $800 at December 31, 1997. The venture debt is subject to cross
default provisions so that failure to pay any material obligation is
highly likely to accelerate the total balance due. Management has no
intention of funding future operating losses or debt obligations. The
venture debt is primarily denominated in U. S. dollars with the revenues
and operating expenses of the business denominated in local currency.

- As determined on a U. S. GAAP basis, the venture's liabilities exceeded
its assets as of December 31, 1997, making the venture insolvent at that
time.

- The business plan for the venture contemplated a significant contribution
to cash flows from the wireline business. The actual and potential cash
flows of the venture have been severely diminished by the inability of the
venture to effectively establish the wireline business. The venture has
other lines of business (gateway switch, satellite and wireless
communications) which do not generate sufficient cash flow to fund the
operations and to retire the debt. Management believes that such condition
is other than temporary and its investment is impaired as of December 31,
1997.

13
<PAGE>
The following table shows summarized financial information for the Malaysian
venture, Binariang SDN BHD:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues............................................................ $ 268 $ 90 $ 20
Operating losses.................................................... (72) (73) (145)
Net loss............................................................ (361) (120) (139)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
FINANCIAL POSITION
Current assets............................................................... $ 151 $ 99
Property, plant and equipment--net........................................... 695 671
Other assets................................................................. 23 15
--------- ---------
Total assets................................................................. $ 869 $ 785
--------- ---------
--------- ---------
Current liabilities and current debt......................................... $ 891 $ 302
Long-term debt............................................................... -- 282
Equity (deficit)............................................................. (22) 201
--------- ---------
Total liabilities and equity (deficit)....................................... $ 869 $ 785
--------- ---------
--------- ---------
</TABLE>

In the case of Indonesia, the net book value of the venture had been reduced
to its fair value of zero through recognition of $43 of equity losses during
1997. The $55 charge was to recognize probable funding commitments in connection
with a shareholder support agreement. The probable funding commitments consist
of the Company's remaining contractual commitment under the shareholder support
agreement of $19 and its partners' remaining commitments of $36. Under the terms
of the shareholder support agreement, each shareholder is responsible for the
full unfunded liability if the other shareholders do not meet their
proportionate obligations. Although the lenders have not formally declared
default, the venture is in default of its debt agreements. Management believes
that it is probable that default will be declared by the lenders and that the
other shareholders will not meet their proportionate obligations. As a result,
the Company has accrued for its partners' share of the commitment under the
shareholder support agreement.

The following factors were considered by management in determining that the
Indonesian investment was impaired and that accrual of the Company's and its
partners' funding liabilities were necessary:

- As determined on a U. S. GAAP basis, the venture's liabilities,
predominantly U. S. dollar denominated debt, exceeded its assets as of
December 31, 1997.

- Management believes the venture is not viable given the political and
economic uncertainties in Indonesia.

- The venture has ceased funding capital projects.

The Company's other ventures in Asia, located in Japan, Singapore and India,
were evaluated for impairment at December 31, 1997. Such evaluation indicated
there was no impairment as the fair value of these ventures exceeded their
recorded values.

GAINS ON SALES OF INVESTMENTS. During 1997, the Company sold: (i) its 90
percent interest in Fintelco, S.A. ("Fintelco"), a cable and telecommunications
venture located in Argentina, for a pretax gain of $135 ($80 after tax), (ii)
its shares of Teleport Communications Group, Inc. ("TCG"), acquired in the
Continental Acquisition, for a pretax gain of $162 ($96 after tax), (iii) its
shares of Time Warner, acquired in the Continental Acquisition, for a pretax
gain of $44 ($25 after tax), (iv) its five percent interest in a

14
<PAGE>
French wireless venture, for a pretax gain of $51 ($31 after tax), and (v) U S
WEST Polska, its wholly owned directory operation in Poland, for a pretax gain
of $29 ($17 after tax).

GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense
reflects an increase of $32 related to the October 29, 1996 issuance of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities")
totaling $480.

OTHER INCOME--NET. Other income increased $32, to other income of $16, in
1997, due primarily to a 1996 pretax charge of $31 associated with the sale of
the Company's cable television interests in Norway, Sweden and Hungary.
Partially offsetting this increase was greater foreign exchange transaction
losses associated with loans to international ventures.

BENEFIT FROM INCOME TAXES FOR CONTINUING OPERATIONS

<TABLE>
<CAPTION>
INCREASE
--------------------
<S> <C> <C> <C> <C>
1997 1996 $ %
--------- --------- --------- ---------
Benefit for income taxes.......................................................... $ 380 $ 180 $ 200 --
Effective tax rate................................................................ 31.5% 33.5% -- --
</TABLE>

The decrease in the effective tax rate is primarily a result of the effects
of goodwill amortization associated with the Continental Acquisition.

RESULTS OF OPERATIONS--CONTINUING OPERATIONS--1996 COMPARED WITH 1995

MEDIAONE GROUP LOSS FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
BASIC LOSS PER SHARE FROM
CONTINUING OPERATIONS
------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- --------------------
1996 1995 $ % 1996 1995 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss from continuing operations before
extraordinary item......................... $ (357) $ (102) $ (255) -- $ (0.74) $ (0.22) $ (0.52) --
Adjustments to reported loss from continuing
operations:
Merger of joint venture(1).............. -- (95) 95 -- (0.20) 0.20 --
Recapitalization cost................... -- 9 (9) -- -- 0.02 (0.02) --
--------- --------- --------- --- --------- --------- --------- ---
Normalized loss from continuing operations
before extraordinary item.................. $ (357) $ (188) $ (169) 89.9 $ (0.74) $ (0.40) $ (0.34) 85.0
--------- --------- --------- --- --------- --------- --------- ---
--------- --------- --------- --- --------- --------- --------- ---
</TABLE>

- - ------------------------

(1) Relates to the merger of Telewest with SBC CableComms (UK).

During 1996, the Company recorded a loss from continuing operations of $357,
or $0.74 per share, compared to a normalized loss from continuing operations
before extraordinary item of $188, or $0.40 per share, in 1995. The Continental
Acquisition contributed approximately $88, or $0.18 per share, of the increase.
The remaining increase in 1996 normalized loss from continuing operations is
primarily due to higher equity losses related to international and domestic
growth initiatives, partially offset by improvement in domestic cellular
operations.

15
<PAGE>
SALES AND OTHER REVENUES

<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic..................................................................... $ 488 $ 215 $ 273 --
International................................................................ 6 -- 6 --
--------- --------- --------- ---
494 215 279 --

WIRELESS COMMUNICATIONS:
Domestic:
Cellular service........................................................... 1,078 845 233 27.6
Cellular equipment......................................................... 105 96 9 9.4
--------- --------- --------- ---
1,183 941 242 25.7

Other.......................................................................... 160 174 (14) (8.0)
--------- --------- --------- ---
Total.......................................................................... $ 1,837 $ 1,330 $ 507 38.1
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>

MediaOne Group sales and other revenues increased 38.1 percent, to $1,837 in
1996 due primarily to the Continental Acquisition and to strong growth in
cellular service revenue. Excluding the effects of the Continental Acquisition,
sales and other revenues increased 19.2 percent.

CABLE AND BROADBAND. Domestic cable and broadband revenues increased $273,
to $488 in 1996, due primarily to the Continental Acquisition. Excluding the
effects of the Continental Acquisition, domestic cable and broadband revenues
increased $21, or 9.8 percent, to $236. The normalized increase was due to
higher revenues from the Company's cable systems in Atlanta, as a result of a
3.9 percent increase in revenue per subscriber to $39.36 per month and a basic
subscriber increase of 4.5 percent. The increase in revenue per subscriber was
primarily a result of price increases of 6 to 7 percent.

International cable and broadband revenues reflect the consolidation in the
fourth quarter of 1996 of Cable Plus.

WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year.
The increase in subscribers was partially offset by a 12 percent drop in average
revenue per subscriber to $53.00 per month. The increase in subscribers relates
to continued growth in demand for wireless services, especially among consumers.

Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment prices. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.

16
<PAGE>
OPERATING INCOME

<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic....................................................................... $ (13) $ 23 $ (36) --
International.................................................................. (7) -- (7) --
--------- --------- --- ---------
(20) 23 (43) --

WIRELESS COMMUNICATIONS:
Domestic....................................................................... 243 147 96 65.3
International.................................................................. (3) -- (3) --
--------- --------- --- ---------
240 147 93 63.3

Other(1)......................................................................... (176) (101) (75) 74.3
--------- --------- --- ---------
Operating income................................................................. $ 44 $ 69 $ (25) (36.2)
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>

- - ------------------------

(1) Primarily includes headquarters expenses for shared services and divisional
expenses associated with equity investments.

During 1996, MediaOne Group operating income decreased 36.2 percent, to $44,
due primarily to the Continental Acquisition and a change in cost allocation
policy reflected in other operating income. Strong subscriber growth in wireless
operations partially offset the decreases in operating income. Excluding the
effects of the Continental Acquisition, operating income would have been flat.

CABLE AND BROADBAND. Domestic cable and broadband operating income
decreased $36, to a loss of $13, in 1996 due primarily to the Continental
Acquisition. Continental contributed losses of $25 since the date of the
Continental Acquisition. The Atlanta cable systems contributed operating income
of $12 in 1996, compared with $23 in 1995. An increase in depreciation expense
related to system upgrade activity at the Atlanta cable systems contributed to
the decrease in operating income.

International cable and broadband operating losses reflect the
fourth-quarter 1996 consolidation of Cable Plus.

WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers.

OTHER. Other operating losses increased in 1996 primarily as a result of a
change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies. Other operating
losses also include a charge of $10 related to staff reductions at international
headquarters in 1996.

17
<PAGE>
INTEREST EXPENSE AND OTHER

<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense................................................................ $ (164) $ (98) $ 66 67.3
Equity losses in unconsolidated ventures........................................ (346) (207) 139 67.1
Gain on merger of joint venture interest........................................ -- 157 (157) --
Guaranteed minority interest expense............................................ (55) (14) 41 --
Other expense--net.............................................................. (16) (1) 15 --
</TABLE>

INTEREST EXPENSE. Interest expense increased primarily as a result of
assuming, at market value, $6.5 billion of debt related to the Continental
Acquisition.

EQUITY LOSSES. Equity losses increased primarily due to: (1) network
expansion and additional financing costs at Telewest and One 2 One, (2) rapid
customer growth at One 2 One, (3) start-up and other costs associated with new
international investments located in Poland and Malaysia, and (4) losses related
to Continental's cable and telecommunications investments. Domestically,
improved results from the TWE partnership, related to improvements in cable and
programming operations, were more than offset by increased losses at PrimeCo
which launched service in the fourth quarter of 1996.

GAIN ON MERGER OF JOINT VENTURE INTEREST. During 1995, Telewest merged with
SBC CableComms (UK) resulting in a pretax gain of $157.

GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense
reflects an increase of $34 related to the September 11, 1995 issuance of
Preferred Securities totaling $600, and an increase of $7 related to an
additional $480 issuance of Preferred Securities on October 29, 1996.

OTHER EXPENSE--NET. Other expense increased primarily as a result of a
pretax charge of $31, associated with the sale of the Company's cable television
interests in Norway, Sweden and Hungary. Partially offsetting the increase in
other expense were foreign currency translation gains associated with loans to
international ventures and costs incurred in 1995 associated with the Company's
decision to convert each share of Old U S WEST common stock into one share each
of Media Stock and Communications Stock.

BENEFIT (PROVISION) FOR INCOME TAXES FOR CONTINUING OPERATIONS

<TABLE>
<CAPTION>
DECREASE
--------------------
%
1996 1995 $ --
--------- --------- ---------
<S> <C> <C> <C> <C>
Benefit (provision) for income taxes................................................ $ 180 $ (8) $ (188) --
Effective tax rate.................................................................. 33.5% 8.5% -- --
</TABLE>

The increase in the effective tax rate is primarily a result of increased
tax losses and a one-time benefit associated with the leveraged lease portfolio.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31,
---------------------- -------------------------------
1998 1997 1997 1996 1995
----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash provided by operating activities...................................... $ 52 $ 134 $ 995 $ 431 $ 395
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>

18
<PAGE>
The decrease in the Company's cash provided by operating activities during
the three months ended March 31, 1998, as compared with the same period in 1997
is primarily due to the timing of interest payments in 1998, a one-time payment
for the termination of the Minnesota System sale and increased tax payments.

During 1997, the Company's operating cash flow increased primarily due to
the effects of the Continental Acquisition. Partially offsetting the increase
were higher financing costs resulting from greater debt levels associated with
the Continental Acquisition.

Effective June 12, 1998, New U S WEST will no longer be part of the
consolidated tax return of MediaOne Group. MediaOne Group expects to recover tax
benefits for expected consolidated tax losses in 1998 and 1999 from the
carryback of the losses to the 1996 and 1997 consolidated tax returns. MediaOne
Group does not expect to be able to recover tax benefits in the year 2000 if it
incurs a tax loss for that year.

INVESTING ACTIVITIES

Total capital expenditures at MediaOne Group, on a cash basis, were $355 and
$363 during the three months ended March 31, 1998 and 1997, respectively, and
$1,522, $627 and $331 during 1997, 1996 and 1995, respectively. The majority of
the capital expenditures in 1998 were devoted to upgrading the domestic cable
network and preparing for the provision of new and enhanced services. In 1998,
capital expenditures are expected to approximate $1.7 billion. Of that amount,
$1.6 billion will be for domestic cable capital expenditures. The Company
anticipates capital expenditures will accelerate during the remainder of 1998.

The Company has invested $64 and $55 in domestic ventures during the three
months ended March 31, 1998 and 1997, respectively, and $249, $164 and $320 in
1997, 1996 and 1995, respectively. Of such investments, $64 and $39 related to
contributions to PrimeCo during the three months ended March 31, 1998 and 1997,
respectively, and $213, $132 and $286 in 1997, 1996 and 1995, respectively.
During 1997 and 1996, such funding was for network build activities, and during
1995, for the purchase of PCS licenses in 11 markets. On April 6, 1998, the
Company sold its investment in PrimeCo in conjunction with the AirTouch
Transaction.

Investing activities of the Company include equity investments in
international ventures. The Company invested $45 and $48 in international
ventures during the three month periods ended March 31, 1998 and 1997,
respectively, and $334, $257 and $691 in 1997, 1996 and 1995, respectively.
Investments during the first quarters of 1998 and 1997 were primarily capital
contributions to a cable investment in Belgium and a wireless venture in India,
respectively. Investments in 1997 included an additional 40 percent interest in
Fintelco and capital contributions to a wireless venture in India. Investments
in 1996 included loans provided to One 2 One, the purchase of a 23 percent
interest in Polska Telefonia Cyfrowa, a venture to provide wireless service in
Poland, and the purchase of a 28 percent interest in Telenet Flanders, a venture
in Belgium to provide telephony services on the cable network. In 1995, the
Company invested $691 in international ventures in Malaysia, the Netherlands,
the Czech Republic and the United Kingdom. The Company anticipates that
investments in international ventures will approximate $240 in 1998 to fund
continued expansion in India, Japan and Belgium.

On March 29, 1998, Telewest announced that merger discussions were underway
for Telewest to acquire General Cable plc ("General Cable") for Telewest shares
and cash. General Cable shareholders will receive 1.243 new Telewest shares and
65 pence in cash for each General Cable share (or an aggregate

19
<PAGE>
of approximately L409 million in Telewest shares and L240 million in cash).
Telewest intends to raise the cash portion of the purchase price through a
rights offering to Telewest's existing shareholders, including MediaOne Group.
MediaOne Group and certain of Telewest's other principal shareholders may
purchase any Telewest shares not purchased by Telewest's other shareholders in
the rights offering. There can be no assurance that any transaction involving
the acquisition of General Cable will be consummated.

During the first quarter of 1997, the Company paid the cash portion of the
Continental Acquisition consideration of $1,150 to the Continental shareowners.

During the first quarter of 1998, MediaOne Group sold various cable
investments resulting in proceeds of $71. During the first quarter of 1997, the
Company sold domestic and international investments for total proceeds of $176
comprised of the following: (a) shares of TCG, for net proceeds of $121, (b) a
five percent interest in a French wireless venture, for proceeds of $29, and (c)
miscellaneous assets, for proceeds of $26.

Throughout 1997, the Company pursued a plan to monetize nonstrategic assets,
including various domestic and international investments. Such asset sales
generated total proceeds of $2,058. Proceeds from sales of international
investments totaled $887, domestic investments totaled $931, assets held for
sale totaled $231, and disposals of property, plant and equipment totaled $9.
International sales consisted of: (a) a five percent interest in a French
wireless venture for proceeds of $81, (b) a 90 percent interest in Fintelco for
proceeds of $641, (c) Thomson Directories, the directory operation in the United
Kingdom, and U S WEST Polska, the directory operation in Poland, for net
proceeds of $121 and $27, respectively, and (d) other miscellaneous
international investment sales for proceeds of $17. Domestic sales were
comprised of the sale of shares of TCG, for net proceeds of $678, shares of TWX,
for net proceeds of $220, and miscellaneous asset sales, for proceeds of $33.

FINANCING ACTIVITIES

DIVIDENDS

The Company paid dividends on the Communications Stock totaling $259 and
$237 during the three months ended March 31, 1998 and 1997, respectively, and
$992, $939, and $926 in 1997, 1996 and 1995, respectively. Subsequent to the
Separation, MediaOne Group will no longer pay Communications Stock dividends.

CASH FROM DISCONTINUED OPERATIONS

Cash from discontinued operations was $214 and $327 during the three months
ended March 31, 1998 and 1997, respectively, and $1,091, $1,149 and $1,116 in
1997, 1996 and 1995. Such amounts consisted primarily of fundings to MediaOne
Group for common dividends paid to Communications Stock shareowners, dividends
paid by Dex to MediaOne Group, proceeds from the issuance of Communications
Stock, and debt fundings and repayments between MediaOne Group and New U S WEST.

DEBT ACTIVITY

Total debt at March 31, 1998 was $9,205, an increase of $242 compared with
December 31, 1997. Including debt associated with the capital assets segment of
$364 and Preferred Securities of $1,080, total indebtedness at March 31, 1998
was $10,649. Excluding debt associated with the capital assets segment and

20
<PAGE>
the discontinued operations of New U S WEST, MediaOne Group's percentage of debt
to total capital at March 31, 1998, was 42.3 percent compared with 41.8 percent
at December 31, 1997. Including debt associated with the capital assets segment,
Preferred Securities and mandatorily redeemable preferred stock, MediaOne
Group's percentage of debt to total capital at March 31, 1998, was 48.6 percent
compared with 48.1 percent at December 31, 1997.

During 1997, the Company redeemed its zero coupon subordinated notes, which
had a recorded value of $268. In addition, MediaOne redeemed a 10 5/8 percent
senior subordinated note with a recorded value of $110, including a premium of
$10. The Company financed both redemptions with floating-rate commercial paper.

In June 1997, the Company acquired cable systems serving approximately
40,000 subscribers in Michigan for cash of $25 and the issuance of approximately
$50 in liquidation value of Old U S WEST Series E Preferred Stock (the "Series E
Preferred Stock"). Effective with the Separation, the Series E Preferred Stock
remains outstanding and represents shares of preferred stock of MediaOne Group.
The Series E Preferred Stock is redeemable at the Company's option beginning
five years from the date of issuance. The stockholders have the right to elect
cash upon redemption, or to convert their shares into MediaOne Group Stock based
on a predetermined formula.

In 1996, Old U S WEST issued $254 of exchangeable notes, or Debt
Exchangeable for Common Stock ("DECS"), due May 15, 1999. Effective with the
Separation, the DECS became the obligation of MediaOne Group. Upon maturity,
each such DECS will be exchanged by MediaOne Group for shares of common stock of
Financial Security Assurance Holdings Ltd. ("FSA") held by the Company or, at
the Company's option, redeemed at the cash equivalent. On December 31, 1997, the
capital assets segment held approximately 42.1 percent of the outstanding FSA
common stock. On October 29, 1996, Old U S WEST refinanced commercial paper
through the issuance of 8.25 percent Preferred Securities totaling $480. The
payment of interest and redemption amounts to holders of the Preferred
Securities are fully and unconditionally guaranteed by the Company. In 1995, Old
U S WEST issued $130 of DECS due December 31, 1998. Effective with the
Separation, the DECS became the obligation of MediaOne Group. Upon maturity,
each such DECS will be exchanged by the Company for shares of Enhance Financial
Services Group, Inc. ("Enhance") or, at the Company's option, redeemed at the
cash equivalent. At December 31, 1997, the capital assets segment currently
holds approximately 29.2 percent of the outstanding Enhance common stock.

During 1995, increases in debt were partially offset by reductions in debt
related to the Company's investment in TWE and a refinancing of commercial paper
by issuing $600 of 7.96 percent Preferred Securities.

MEDIAONE GROUP CREDIT RATINGS

On May 7, 1998, Duff & Phelps announced credit ratings for MediaOne Group
Funding, Inc. ("MediaOne Funding"), the newly created financing subsidiary of
MediaOne Group. MediaOne Funding's senior unsecured indebtedness will be rated
BBB, its commercial paper will be rated D-2, and MediaOne Group's Preferred
Securities will be rated BBB-. In addition, MediaOne's senior indebtedness will
be assigned a rating of BBB.

On May 15, 1998 Standard & Poor's announced MediaOne Funding's senior
unsecured indebtedness will be rated BBB and its commercial paper will be rated
A-2, and MediaOne Group's preferred securities will be rated BBB-. In addition,
MediaOne's senior indebtedness was downgraded from BBB+ to BBB and its
subordinated indebtedness was downgraded from BBB to BBB-.

On May 19, 1998, Moody's announced MediaOne Funding's senior unsecured
indebtedness will be rated Baa2 and its commercial paper will be rated P-2, and
MediaOne Group's preferred securities will be rated ba3. In addition, MediaOne's
senior indebtedness rating of Baa3 was confirmed and its subordinated
indebtedness was downgraded from Ba1 to Ba2.

21
<PAGE>
OTHER

MediaOne Group commitments and debt guarantees associated with its
international and domestic investments totaled approximately $650 and $100,
respectively, at December 31, 1997. In addition, a MediaOne Group subsidiary
guarantees debt, nonrecourse to the Company, associated with its international
investment in the principal amount of approximately $600.

In May 1998, MediaOne Group entered into 365-day and 5-year revolving bank
credit facilities totaling $4.0 billion to support its commercial paper program
and to provide financing in conjunction with the refinancing of substantially
all of the indebtedness issued or guaranteed by Old U S WEST. As of June 12,
1998, $2.2 billion was available on the facilities.

Under registration statements filed with the Securities and Exchange
Commission as of December 31, 1997, the Company was permitted to issue up to
approximately $580 of new debt securities.

MediaOne Group from time to time engages in preliminary discussions
regarding restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of the
Company. There is no assurance that any such discussions will result in the
consummation of any such transaction.

RISK MANAGEMENT

On occasion, the Company may be exposed to market risks arising from changes
in interest rates, foreign exchange rates and equity prices. Derivative
financial instruments are used to selectively manage these risks. MediaOne Group
does not use derivative financial instruments for trading purposes.

INTEREST RATE RISK MANAGEMENT. The objective of the interest rate risk
management program is to minimize the total cost of debt over time and the
interest rate variability. This is achieved through the use of interest rate
swaps, which adjust the ratio of fixed- to variable-rate debt.

In conjunction with the AirTouch Transaction, MediaOne Group received $1.65
billion in liquidation preference of dividend bearing AirTouch preferred stock.
As of May 29, 1998, the market value of the AirTouch preferred stock was
approximately $1.5 billion. The market value of the AirTouch preferred stock is
exposed to market risks associated with fluctuations in interest rates. The
Company has reduced its exposure to fluctuations in the market value of the
AirTouch preferred stock by entering into an interest rate swap which locks in
the treasury rate component of the market value of the AirTouch preferred stock.
As a result, a hypothetical 25 basis point change in interest rates would not
have a material effect on the combined market value of the AirTouch preferred
stock and the interest rate swap.

At December 31, 1997, approximately $270 of the Company's floating rate debt
was exposed to changes in interest rates. Such exposure was primarily linked to
the 30-day commercial paper rate. A hypothetical 10 percent change in the 30-day
commercial paper rate would not have had a material effect on the annual
earnings of the Company.

FOREIGN EXCHANGE RISK MANAGEMENT. MediaOne Group selectively enters into
forward and purchased option contracts to manage the market risks associated
with fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and purchased
option contracts allows the Company to fix or cap the cost of firm foreign
investment commitments, the amount of foreign currency proceeds from sales of
foreign investments, the repayment of foreign currency denominated receivables
and the repatriation of dividends. The market values of the foreign exchange
positions, including the hedging instruments, are continuously monitored and
compared with predetermined levels of acceptable risk. All foreign exchange
contracts have maturities of one year or less. The use of such contracts was
limited in 1997 and as of December 31, 1997, the market value of foreign
exchange contracts outstanding was not material.

22
<PAGE>
MediaOne Group is exposed to foreign exchange risk associated with its cash
deposits and notes receivable and payable denominated in foreign currencies. As
of December 31, 1997, the Company had British pound-denominated notes receivable
and cash deposits in the translated amount of $245, a Czech Koruna-denominated
note receivable and cash deposits in the translated amount of $50 and a Czech
Koruna-denominated note payable in the translated amount of $17.

A hypothetical adverse change of 10 percent in the British Pound and Czech
Koruna exchange rates as compared with the U. S. dollar would reduce the market
value of the cash deposits and notes receivable and payable by $28 as of
December 31, 1997.

EQUITY-PRICE RISK MANAGEMENT. MediaOne Group is exposed to market risks
associated with fluctuations in equity security prices related to its
investments in available for sale marketable equity securities. On a selective
basis, the Company enters into option contracts to manage the market risks
associated with fluctuations in equity security prices.

In conjunction with the AirTouch Transaction, MediaOne Group received 59.5
million shares of AirTouch common stock. As of May 29, 1998, the market value of
the AirTouch common stock was approximately $2.8 billion. A hypothetical 10
percent decrease in the price of AirTouch common stock would decrease the market
value of Media One Group's investment in AirTouch common stock by approximately
$280.

At December 31, 1997, the Company had sold call options to complete exit
strategies with regard to certain individual marketable equity securities. A
hypothetical 10 percent decline in equity security prices related to the
Company's combined position in marketable equity securities and option contracts
would reduce the market value of the combined position at December 31, 1997, by
$12.

The changes in interest rates, foreign exchange rates and equity security
prices are based on hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. Future gains and
losses will be affected by actual changes in interest rates, foreign exchange
rates and equity security prices and market exposures, and changes in derivative
financial instruments employed during the year.

EFFECTS OF THE SEPARATION, THE REFINANCING AND THE AIRTOUCH TRANSACTION

At March 31, 1998, prior to giving effect to the AirTouch Transaction,
MediaOne Group and its subsidiaries (including the capital assets segment, but
excluding the discontinued operations) had outstanding approximately $11.0
billion of indebtedness. Such indebtedness consisted of approximately $8.1
billion of indebtedness issued or guaranteed by Old U S WEST (the "Old U S WEST
Indebtedness"), $2.7 billion of MediaOne indebtedness and $200 million of
Financial Services indebtedness. The approximate $8.1 billion of Old U S WEST
Indebtedness included $5.4 billion of medium and long-term debt securities, $1.1
billion of commercial paper, $500 million of other indebtedness and $1.08
billion of Preferred Securities.

In connection with the Separation, MediaOne Group and New U S WEST
refinanced substantially all of the Old U S WEST Indebtedness through a
combination of tender offers, prepayments, defeasance, consent solicitations
and/or exchange offers (the "Refinancing").

As part of the Refinancing, Old U S WEST offered to holders of Preferred
Securities the right to exchange their Preferred Securities for an equal amount
of new preferred securities guaranteed by MediaOne Group or cash (the "Exchange
Offer"). Effective June 12, 1998, the Exchange Offer resulted in $538 of
Preferred Securities being redeemed for cash, while $479 of Preferred Securities
were exchanged for new preferred securities guaranteed by MediaOne Group and $63
of Preferred Securities were assumed by MediaOne Group. The cash redemption
amount totaled $570.

The Preferred Securities represented two share issuances: (i) 24,000,000
shares of 7.96 percent Preferred Securities and (ii) 19,200,000 shares of 8.25
percent Preferred Securities. Of the total

23
<PAGE>
7.96 percent Preferred Securities outstanding, 10,658,108 shares were exchanged
for $274 market value of 9.30 percent preferred securities of MediaOne Finance
Trust I ("Finance I"), a wholly-owned subsidiary of MediaOne Group, due 2025. Of
the total 8.25 percent Preferred Securities, 8,520,289 shares were exchanged for
$224 market value of 9.50 percent preferred securities of MediaOne Finance Trust
II ("Finance II"), a wholly-owned subsidiary of MediaOne Group, due 2036. In
addition, Finance I issued $9 of common stock and Finance II issued $7 of common
stock to MediaOne Group. Finance I used the proceeds from such issuance and
exchange to purchase from MediaOne Funding $283 principal amount of MediaOne
Funding 9.30 percent Subordinated Deferrable Interest Notes (the "Subordinated
Debt Securities") due 2025, the obligations under which are fully and
unconditionally guaranteed by MediaOne Group (the "Debt Guarantees"). The sole
assets of Finance I are and will be the Subordinated Debt Securities and the
Debt Guarantees. Finance II used the proceeds from such issuance and exchange to
purchase from MediaOne Funding $231 principal amount of MediaOne Funding 9.50
percent Subordinated Deferrable Interest Notes due 2036, the obligations under
which are fully and unconditionally guaranteed by MediaOne Group. The sole
assets of Finance II are and will be the Subordinated Debt Securities and the
Debt Guarantees.

Also as part of the Refinancing, Old U S WEST made offers to purchase for
cash $5.2 billion of medium and long-term debt securities (the "Cash Tender
Offer"). Effective June 12, 1998, $5.0 billion of notional debt was tendered
pursuant to the Cash Tender Offer. The remaining debt securities were assumed by
MediaOne Group. The total cash redemption amount was $5.5 billion.

The Exchange Offer and the Cash Tender Offer were partially financed with
$1.7 billion of commercial paper issued by MediaOne Group. The remaining balance
of $4.4 billion was redeemed by New U S WEST, of which $3.9 billion related to
the Dex Alignment.

Total Refinancing costs were $370 (net of income tax benefits of $247),
which included debt extinguishment costs of $328 (net of income tax benefits of
$219). In addition to refinancing costs, such costs included the difference
between the market and face value of the Old U S WEST Indebtedness and a charge
for unamortized debt issuance costs. Refinancing costs also included $42 (net of
income tax benefits of $28) related to the refinancing of Preferred Securities.
Such costs will reduce MediaOne Group equity and earnings available for common
stock.

After the Separation and related Refinancing and after giving effect to the
AirTouch Transaction, MediaOne Group will have approximately $5.4 billion of
debt and preferred securities, which will include $2.7 billion of MediaOne
indebtedness and $2.7 billion of debt and preferred securities issued or
guaranteed by MediaOne Group, which includes new debt incurred by MediaOne Group
Funding to refinance a portion of the Old U S WEST Indebtedness. In addition,
the capital assets segment, which will remain with MediaOne Group, has
approximately $400 million of indebtedness. MediaOne Funding's bank debt
includes certain additional terms and covenants which are generally included in
the bank indebtedness of cable companies. In addition, any senior indebtedness
issued by MediaOne Funding after the Separation will be guaranteed by MediaOne
and, as a result, will rank PARI PASSU with MediaOne's senior indebtedness. To
the extent the Preferred Securities are tendered for cash pursuant to the
Exchange Offers, it is anticipated that the Company will issue additional
preferred securities following the Separation so that it will have approximately
$1 billion of preferred securities outstanding. Following the Separation, the
Company intends to monetize the AirTouch securities it received in the AirTouch
Transaction and use a portion of the proceeds to reduce its commercial paper and
commercial bank debt.

COMPETITIVE AND REGULATORY ENVIRONMENT

CABLE AND BROADBAND. MediaOne Group's cable television systems generally
compete for viewer attention with other providers of video programming,
including DBS systems, multipoint multichannel distributions services ("MMDS")
systems, local multipoint distribution services ("LMDS") systems, satellite
master antenna service ("SMATV") systems and other cable companies providing
services in areas where the Company operates. In addition, certain local
exchange carriers ("LECs"), including Regional

24
<PAGE>
Bell Operating Companies ("RBOCs"), are beginning to offer video programming in
competition with the Company's cable services. In the past, federal
cross-ownership restrictions have limited entry by LECs into the cable
television business. The Telecommunications Act of 1996 (the "Telecommunications
Act") has eliminated many of these barriers, thereby enhancing the ability of
LECs to provide video programming in competition with the MediaOne Group. The
cable television services offered by the Company also face competition for
viewers and advertising from other communications and entertainment media,
including off-air television broadcasting services, movie theaters, video tape
rentals and live sporting events. The competition faced by the Company's cable
systems may increase in the future with the development and growth of new
technologies.

As MediaOne Group begins to offer additional services over its hybrid
fiber-coax ("HFC") networks, MediaOne will face additional competition.
Telephone services offered by MediaOne Group will face competition from other
providers of local exchange services, including RBOCs, LECs, IXCs and other
providers of local exchange services. The degree of competition will be
dependent upon the state and federal regulations concerning entry,
interconnection requirements and the degree of unbundling of the LECs networks.
Competition will be based upon price, service quality and breadth of services
offered. Internet access and high-speed data services offered by the Company
compete with other providers of such services, including LECs, IXCs, Internet
service providers ("ISPs") and other on-line service providers.

The products and services of the Company are subject to varying degrees of
regulation. Under the Telecommunications Act, the regulation of all but basic
tier cable rates will be discontinued effective March 31, 1999, or earlier if
competition exists. The Telecommunications Act also (i) eliminates certain
cross-ownership restrictions among cable operations, broadcasters and MMDS
operations, (ii) removed barriers to competition with LECs, and (iii) eliminated
restrictions that previously applied to the Company relating to long-distance
services.

The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") authorizes the Federal Communications Commission ("FCC") to
set standards for governmental authorities to regulate the rates for certain
cable television services, except for services offered on a per-channel or
per-program basis, and equipment. Pursuant to authority granted under the 1992
Cable Act, the FCC adopted a series of rate regulations. The FCC also publicly
announced that it would consider "social contracts" as an alternative form of
rate regulation for cable operators. Continental's social contract with the FCC
was adopted by the FCC on August 3, 1995 and amended on August 21, 1996 and July
3, 1997 to include certain systems acquired by Continental. The social contract
is a six-year agreement covering most of Continental's franchises, including
those that were unregulated, and settled Continental's cost of service rate
cases and benchmark cable programming service tier rate cases for the covered
systems. Benchmark basic service tier rate cases in the covered systems are
subject to review by local franchise authorities. As part of the resolution,
Continental agreed to, among other things, invest at least $1.7 billion in
domestic system rebuilds and upgrades through the year 2000 to expand channel
capacity and improve system reliability and picture quality. At December 31,
1997, the investment commitment has been substantially met. Under the social
contract, Continental also reduced its basic service tier rates for most of the
subscribers covered by the social contract. These reductions were offset by a
revenue neutral increase in cable programming service tier rates. The social
contract allows for the funding of system rebuilds and upgrades by increasing
cable programming service tier rates annually by one dollar per subscriber from
1997 through 1999 in most franchises, and from 1996 through 1999 for the systems
incorporated under the 1996 amendment to the social contract. Rate adjustments
are also allowed for inflation and external costs such as programming. The
social contract also provides that, if the laws and regulations applicable to
services offered in any Continental franchise change in a manner that would have
a material favorable financial impact on Continental, the Company may petition
the FCC to terminate the social contract.

Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction,

25
<PAGE>
safety, rate regulation, customer service standards, billing practices,
community-related programming and services, franchise renewal and imposition of
franchise fees.

INTERNATIONAL. The Company's international broadband and wireless
communications businesses also face competition in their respective markets.
Telewest's cable television services compete with broadcast television stations,
DBS services, satellite master antenna service systems and certain narrowband
operators in the United Kingdom. Telewest's telecommunications services compete
with domestic telephone companies in the United Kingdom, such as British
Telecommunications plc. One 2 One competes with two cellular operators and one
PCS operator in the United Kingdom. Competition is based upon price, geographic
coverage and the quality of the services offered.

YEAR 2000 COSTS

The Company uses software and related technologies throughout its businesses
that will be affected by the date change in the Year 2000. MediaOne Group has
established accountabilities and priorities for addressing the issue. The
Company is now in the process of finalizing its assessment of the impact of the
Year 2000 date change on its operations. An internal study is underway to
determine the full scope of the issue and related costs. The Company's
assessment should be complete by the third quarter of 1998. The Company
anticipates that costs related to Year 2000 remediation will begin to be
incurred in 1998.

NEW ACCOUNTING STANDARDS

In 1998, the Company will adopt SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires, among other
things, the reporting of detailed operating segment information of an enterprise
for annual periods beginning in 1998 and for interim periods beginning in 1999.

In the year 2000, the Company will adopt SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. Among other things, the statement requires that an entity recognize
all derivative instruments on the balance sheet as either assets or liabilities,
and to account for those instruments at fair value. The Company will be
evaluating the impact of SFAS No. 133.

Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. Adoption of SOP 98-1 is required as of
January 1, 1999, but earlier adoption is allowed. The Company is currently
evaluating the impact of SOP 98-1.

SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in
April 1998. SOP 98-5 requires, among other things, that the costs related to
start-up activities of a new entity, facility, product or service be expensed.
Adoption of SOP 98-5 is required as of January 1, 1999, but earlier adoption is
allowed. The Company is currently evaluating the impact of SOP 98-5.

26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareowners of MediaOne Group, Inc.:

We have audited the accompanying Consolidated Balance Sheets of MediaOne
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related Consolidated Statements of Operations and Cash Flows
for the years then ended. These consolidated financial statements and the
Supplementary Selected Proportionate Results of Operations referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and supplementary
information based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MediaOne Group,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

We have also audited the Supplementary Selected Proportionate Results of
Operations for the years ended December 31, 1997 and 1996, presented on page 82.
The Supplementary Selected Proportionate Results of Operations have been
prepared by management to present relevant financial information that is not
provided by the consolidated financial statements and is not intended to be a
presentation in conformity with generally accepted accounting principles. In our
opinion, the Supplementary Selected Proportionate Results of Operations referred
to above fairly states, in all material respects, the information set forth
therein on the basis of accounting described on page 82.

ARTHUR ANDERSEN LLP
Denver, Colorado,
June 12, 1998.

27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareowners of MediaOne Group, Inc.:

We have audited the accompanying restated consolidated statements of
operations and cash flows of MediaOne Group, Inc. (formerly U S WEST, Inc., see
Note 23) for the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations of MediaOne Group,
Inc. and its cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996, except for Note 23 as to which
the date is June 12, 1998

28
<PAGE>
MEDIAONE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Operating expenses:
Cost of sales and other revenues................................ 317 305 1,255 563 380
Selling, general and administrative............................. 307 277 1,305 844 656
Depreciation and amortization................................... 348 294 1,257 386 225
--------- --------- --------- --------- ---------
Total operating expenses...................................... 972 876 3,817 1,793 1,261
--------- --------- --------- --------- ---------

Operating income.................................................. -- 44 30 44 69

Interest expense.................................................. (150) (174) (678) (164) (98)
Equity losses in unconsolidated ventures.......................... (136) (165) (909) (346) (207)
Gains on asset sales:
Investments..................................................... 17 51 421 -- --
Merger of joint venture interest................................ -- -- -- -- 157
Guaranteed minority interest expense.............................. (22) (22) (87) (55) (14)
Other income (expense)--net....................................... (37) (4) 16 (16) (1)
--------- --------- --------- --------- ---------
Loss from continuing operations before income taxes............... (328) (270) (1,207) (537) (94)
Benefit (provision) for income taxes.............................. 106 80 380 180 (8)
--------- --------- --------- --------- ---------
Loss from continuing operations................................... (222) (190) (827) (357) (102)
Income from discontinued operations--net of income tax expense
(See Note 23)................................................... 434 420 1,524 1,535 1,423
--------- --------- --------- --------- ---------
Income before extraordinary item.................................. 212 230 697 1,178 1,321

Extraordinary item--early extinguishment of debt--net of tax...... -- -- -- -- (4)
--------- --------- --------- --------- ---------
NET INCOME........................................................ $ 212 $ 230 $ 697 $ 1,178 $ 1,317
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends on preferred stock...................................... (13) (13) (52) (9) (3)
--------- --------- --------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK............................... $ 199 $ 217 $ 645 $ 1,169 $ 1,314
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

29
<PAGE>
MEDIAONE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
MEDIA STOCK BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
SHARE: (See Note 16)
Loss from continuing operations.......................... $ (0.38) $ (0.33) $ (1.45) $ (0.74) $ (0.22)
Income from discontinued operations(1)................... 0.14 0.13 0.57 0.58 0.52
Extraordinary item--early extinguishment of debt......... -- -- -- -- (0.01)
--------- --------- --------- --------- ---------
Media Stock basic and diluted earnings (loss) per common
share.................................................... $ (0.24) $ (0.20) $ (0.88) $ (0.16) $ 0.29
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
MEDIA STOCK BASIC AND DILUTED AVERAGE COMMON SHARES
OUTSTANDING.............................................. 608,295 606,527 606,749 491,924 470,549
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMMUNICATIONS STOCK BASIC AND DILUTED EARNINGS PER COMMON
SHARE: (See Note 16)
Income from discontinued operations(2)................... $ 0.72 $ 0.70 $ 2.43 $ 2.62 $ 2.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMMUNICATIONS STOCK BASIC AND DILUTED AVERAGE COMMON
SHARES OUTSTANDING....................................... 484,964 481,341 482,751 477,549 470,716
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

- - ------------------------------

(1) Represents the operations of U S WEST Dex, Inc., the domestic directory
business, which has been aligned with New U S WEST.

(2) Represents the operations attributable to Communications Stock, which have
been discontinued.

The accompanying notes are an integral part of the Consolidated Financial
Statements.

30
<PAGE>
MEDIAONE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) DECEMBER 31,
----------- --------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 148 $ 184 $ 121
Marketable securities........................................................ -- -- 58
Accounts and notes receivable, less allowance for credit losses of $62, $64
and $65, respectively...................................................... 498 604 529
Inventories and supplies..................................................... 23 29 15
Tax receivable............................................................... 37 -- --
Deferred tax asset........................................................... 92 102 28
Prepaid and other............................................................ 65 48 59
Net investment in assets of discontinued operations.......................... 4,450 4,367 4,085
----------- --------- ---------
Total current assets........................................................... 5,313 5,334 4,895

Property, plant and equipment--net............................................. 4,405 4,272 4,192
Investment in Time Warner Entertainment........................................ 2,487 2,486 2,477
Net investment in international ventures....................................... 771 742 1,548
Net investment in assets held for sale......................................... 441 419 409
Intangible assets--net......................................................... 12,442 12,597 12,594
Other assets................................................................... 1,036 933 1,612
----------- --------- ---------
Total assets................................................................... $ 26,895 $ 26,783 $ 27,727
----------- --------- ---------
----------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

31
<PAGE>
MEDIAONE GROUP, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) DECEMBER 31,
----------- --------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt.............................................................. $ 958 $ 735 $ 171
Accounts payable............................................................. 297 395 396
Due to Continental Cablevision shareowners................................... -- -- 1,150
Employee compensation........................................................ 86 109 113
Deferred revenue and customer deposits....................................... 116 108 86
Dividends payable............................................................ 9 9 6
Other........................................................................ 729 832 592
----------- --------- ---------
Total current liabilities...................................................... 2,195 2,188 2,514

Long-term debt................................................................. 8,247 8,228 8,635
Postretirement and other postemployment benefit obligations.................... 37 36 30
Deferred income taxes.......................................................... 3,261 3,276 3,627
Deferred credits and other..................................................... 623 551 241

Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures........................... 1,080 1,080 1,080
Preferred stock subject to mandatory redemption................................ 100 100 51

Shareowners' equity:
Series D Preferred Stock--$1.00 per share par value, 20,000,000 shares
authorized, 19,999,478 shares issued and outstanding....................... 923 923 920
Common shares--
Media Stock--$0.01 per share par value, 2,000,000,000 shares authorized,
627,774,082, 626,565,410 and 624,782,710 issued, and 608,601,460,
607,807,934 and 608,863,327 outstanding, respectively....................
Communications Stock--$0.01 per share par value, 2,000,000,000 shares
authorized, 485,382,766, 484,522,015 and 480,460,536 issued, and
484,977,542, 484,515,415 and 480,457,336 outstanding, respectively....... 10,871 10,876 10,741
Retained earnings (deficit).................................................. (417) (359) 17
LESOP guarantee.............................................................. (46) (46) (91)
Accumulated other comprehensive income (loss)................................ 21 (70) (38)
----------- --------- ---------
Total shareowners' equity...................................................... 11,352 11,324 11,549
----------- --------- ---------
Total liabilities and shareowners' equity...................................... $ 26,895 $ 26,783 $ 27,727
----------- --------- ---------
----------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

32
<PAGE>
MEDIAONE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Net income.................................................. $ 212 $ 230 $ 697 $ 1,178 $ 1,317
Adjustments to net income:
Discontinued operations................................... (434) (420) (1,524) (1,535) (1,423)
Depreciation and amortization............................. 348 294 1,257 386 225
Equity losses in unconsolidated ventures.................. 136 165 909 346 207
Gains on asset sales:
Investments............................................. (17) (51) (421) -- --
Merger of joint venture interest........................ -- -- -- -- (157)
Deferred income taxes and amortization of investment tax
credits................................................. (31) (48) (149) (68) 94
Provision for uncollectibles.............................. 22 19 74 44 33
Changes in operating assets and liabilities:
Accounts and notes receivable............................. 75 14 (163) (83) (75)
Inventories, supplies and other current assets............ (2) (15) (44) 14 (20)
Accounts payable and accrued liabilities.................. (249) (62) 239 114 21
Other--net.................................................. (8) 8 120 35 173
--------- --------- --------- --------- ---------
Cash provided by operating activities....................... 52 134 995 431 395
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.............. (355) (363) (1,522) (627) (331)
Payment to Continental Cablevision shareowners.............. -- (1,150) (1,150) -- --
Investments in international ventures....................... (45) (48) (334) (257) (691)
Investments in domestic ventures............................ (64) (55) (249) (164) (320)
Proceeds from sales of investments.......................... 71 176 1,827 28 106
Cash from net investment in assets held for sale............ 13 29 231 213 1
Other--net.................................................. (33) 4 (25) -- 1
--------- --------- --------- --------- ---------
Cash used for investing activities.......................... (413) (1,407) (1,222) (807) (1,234)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt........... 388 (2,910) (3,556) 3,829 (387)
Repayments of long-term debt................................ -- (1) (379) (4,217) (724)
Proceeds from issuance of Preferred Securities--net......... -- -- -- 465 581
Proceeds from issuance of long-term debt.................... -- 4,090 4,123 360 1,085
Proceeds from issuance of common stock...................... 30 30 106 136 87
Purchases of treasury stock................................. (35) (53) (53) (297) (63)
Dividends paid on common stock.............................. (259) (237) (992) (939) (926)
Dividends paid on preferred stock........................... (13) (11) (50) (9) (3)
--------- --------- --------- --------- ---------
Cash provided by (used for) financing operations............ 111 908 (801) (672) (350)
--------- --------- --------- --------- ---------
Cash provided by discontinued operations.................... 214 327 1,091 1,149 1,116
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
(Decrease) increase......................................... (36) (38) 63 101 (73)
Beginning balance........................................... 184 121 121 20 93
--------- --------- --------- --------- ---------
Ending balance.............................................. $ 148 $ 83 $ 184 $ 121 $ 20
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

33
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997, AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

NOTE 1: THE SEPARATION

On June 4, 1998, the shareowners of U S WEST, Inc. ("Old U S WEST") approved
the separation of Old U S WEST's businesses into two independent public
companies, (the "Separation"). The Separation will be effective June 12, 1998.
Prior to the Separation, Old U S WEST conducted its businesses through two
groups: U S WEST Media Group (the "Media Group") and U S WEST Communications
Group ( the "Communications Group"). Media Group was comprised of domestic and
international broadband communications, wireless communications and directories
businesses. The Communications Group provided telecommunications services,
including local telephone services and exchange access services, in a 14-state
mountain and western region of the United States. Upon Separation, Old U S WEST
was renamed MediaOne Group, Inc. ("MediaOne Group" or the "Company") and
retained the multimedia businesses of Media Group, except for U S WEST Dex, Inc.
("Dex"), the domestic directory business. The telecommunications businesses of
Communications Group became an independent public company and retained the "U S
WEST, Inc." name ("New U S WEST"). In addition, Dex was aligned with New U S
WEST (the "Dex Alignment").

The Company has accounted for the distribution of New U S WEST stock to the
holders of Communications Group common stock, and to the holders of Media Group
common stock for the Dex Alignment as a discontinuance of the businesses
comprising New U S WEST. As a result, certain of Old U S WEST's financial
information previously issued has been restated to give effect to the
classification of New U S WEST as a discontinued operation. See Note
23--Discontinued Operations--to the Consolidated Financial Statements.

EQUITY--COMMON STOCK

Prior to the Separation, Old U S WEST had outstanding two separate classes
of common stock which reflected the performance of its two groups. The
performance of Media Group was reflected by the U S WEST Media Group Common
Stock (the "Media Stock") and the performance of the Communications Group was
reflected by the U S WEST Communications Group Common Stock (the "Communications
Stock"). Upon Separation, and in accordance with the terms of a separation
agreement between MediaOne Group and New U S WEST (the "Separation Agreement"),
each outstanding share of Media Stock remains outstanding and represents one
share of MediaOne Group Common Stock, and each issued and outstanding share of
Communications Stock was redeemed for one share of New U S WEST Common Stock.
Each share of Media Stock held as treasury stock by Old U S WEST remains
outstanding as one share of MediaOne Group Common Stock held as treasury stock
by MediaOne Group. Each share of Communications Stock held as treasury stock by
Old U S WEST was canceled.

In connection with the Dex Alignment, (i) each holder of Media Stock
received as a dividend .02731 shares of New U S WEST Common Stock for each share
of Media Stock held (the "Dex Dividend"), and (ii) $3.9 billion of Old U S WEST
debt was refinanced by New U S WEST.

THE REFINANCING

In connection with the Separation, MediaOne Group and New U S WEST are
refinancing substantially all of the indebtedness issued or guaranteed by Old U
S WEST (the "Old U S WEST

34
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: THE SEPARATION (CONTINUED)
Indebtedness") through a combination of tender offers, prepayments, defeasance,
consent solicitations and/or exchange offers (the "Refinancing").

At March 31, 1998, prior to giving effect to the sale of its domestic
wireless businesses to AirTouch Communications, Inc. ("AirTouch"), MediaOne
Group and its subsidiaries (including the capital assets segment, but excluding
the discontinued operations) had outstanding approximately $11.0 billion of
indebtedness. Such indebtedness consisted of approximately $8.1 billion of Old U
S WEST Indebtedness, $2.7 billion of MediaOne of Delaware, Inc. ("MediaOne")
indebtedness and $200 million of indebtedness of U S WEST Financial Services,
Inc. ("Financial Services"), a member of the capital assets segment. The
approximate $8.1 billion of Old U S WEST Indebtedness included $5.4 billion of
medium and long-term debt securities, $1.1 billion of commercial paper, $500
million of other indebtedness and $1.08 billion of Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
Company-guaranteed debentures ("Preferred Securities").

The Preferred Securities represented two share issuances: (i) 24,000,000
shares of 7.96 percent Preferred Securities and (ii) 19,200,000 shares of 8.25
percent Preferred Securities. Of the total 7.96 percent Preferred Securities
outstanding, 10,658,108 shares were exchanged for $274 market value of 9.30
percent preferred securities of MediaOne Group Finance Trust I ("Finance I"), a
wholly-owned subsidiary of MediaOne Group, due 2025. Of the total 8.25 percent
Preferred Securities, 8,520,289 shares were exchanged for $224 market value of
9.50 percent preferred securities of MediaOne Group Finance Trust II ("Finance
II"), a wholly-owned subsidiary of MediaOne Group, due 2036. In addition,
Finance I issued $9 of common stock and Finance II issued $7 of common stock to
MediaOne Group. Finance I used the proceeds from such issuance and exchange to
purchase from MediaOne Group Funding, Inc. ("Media One Funding"), a newly formed
financing subsidiary of the Company, $283 principal amount of MediaOne Funding
9.30 percent Subordinated Deferrable Interest Notes (the "Subordinated Debt
Securities") due 2025, the obligations under which are fully and unconditionally
guaranteed by MediaOne Group (the "Debt Guarantees"). The sole assets of Finance
I are and will be the Subordinated Debt Securities and the Debt Guarantees.
Finance II used the proceeds from such issuance and exchange to purchase from
MediaOne Funding $231 principal amount of MediaOne Funding 9.50 percent
Subordinated Deferrable Interest Notes due 2036, the obligations under which are
fully and unconditionally guaranteed by MediaOne Group. The sole assets of
Finance II are and will be the Subordinated Debt Securities and the Debt
Guarantees.

Also as part of the Refinancing, Old U S WEST made offers to purchase for
cash (the "Cash Tender Offer") $5.2 billion of medium and long-term debt
securities. Effective June 12, 1998, $5.0 billion of notional debt was tendered
pursuant to the Cash Tender Offer. The remaining debt securities were assumed by
MediaOne Group. The total cash redemption amount was $5.5 billion.

35
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: THE SEPARATION (CONTINUED)
Total Refinancing costs were $370 (net of income tax benefits of $247),
which included debt extinguishment costs of $328 (net of income tax benefits of
$219). In addition to refinancing costs, such costs included the difference
between the market and face value of the Old U S WEST Indebtedness and a charge
for unamortized debt issuance costs. Refinancing costs also included $42 (net of
income tax benefits of $28) related to the refinancing of Preferred Securities.
Such costs will reduce MediaOne Group equity and earnings available for common
stock.

After the Separation and related Refinancing and after giving effect to the
sale of the Company's wireless businesses, MediaOne Group will have
approximately $5.4 billion of debt and preferred securities, which includes $2.7
billion of MediaOne indebtedness and $2.7 billion of debt and preferred
securities issued or guaranteed by the Company, including new debt incurred by
MediaOne to refinance a portion of the Old U S WEST Indebtedness. In addition,
the capital assets segment, which remained with the Company, will have
approximately $400 million of indebtedness. MediaOne Funding's bank debt
includes certain additional terms and covenants which are generally included in
the bank indebtedness of cable companies. In addition, any senior indebtedness
issued by MediaOne Funding after the Separation will be guaranteed by MediaOne
and, as a result, will rank pari passu with MediaOne's senior indebtedness.
Following the Separation, the Company intends to monetize the AirTouch
securities it received in the sale of its wireless businesses to AirTouch, and
use a portion of the proceeds to reduce its commercial paper and commercial bank
debt. See Note 21--Subsequent Events--to the Consolidated Financial Statements.

In May 1998, MediaOne Group entered into 364-day and 5-year revolving bank
credit facilities totaling $4.0 billion to support its commercial paper program
and to provide financing in conjunction with the Refinancing. As of June 12,
1998, $2.2 billion was available on the facilities.

SEPARATION AGREEMENT

In connection with the Separation, Old U S WEST's existing employee benefit
and incentive compensation plans were amended and adjusted. In addition,
MediaOne Group and New U S WEST entered into a series of agreements governing
the allocation of tax and certain other liabilities and obligations arising from
periods prior to the Separation. Following is a summary of the more significant
items:

- STOCK INCENTIVE PLANS. Stock options, whether held by those individuals
who became employees of MediaOne Group or New U S WEST, continue to be
outstanding as stock options for MediaOne Group and New U S WEST Common
Stock following the Separation. In the case of MediaOne Group, the number
of shares subject to and the exercise price of such stock options will be
adjusted to reflect the fact that holders of such stock options did not
receive the Dex Dividend.

- PENSION PLAN. Effective immediately prior to the Separation, New U S WEST
assumed sponsorship of the Old U S WEST pension plan (the "New U S WEST
Pension Plan"). Effective as of the Separation date, MediaOne Group
established a new defined benefit pension plan for eligible Company
employees (the "MediaOne Group Pension Plan"). In connection with the
Separation, a portion of the existing assets of the Old U S WEST pension
plan were transferred at fair value to the MediaOne Group Pension Plan
such that, immediately following consummation of the Separation, the ratio
of plan assets to plan liabilities, calculated on a projected benefit
obligations basis as determined by independent actuaries, was the same for
the MediaOne Group Pension Plan and the New U S WEST Pension Plan. As of
April 30, 1998, Old U S WEST's pension plan had approximately $13 billion
of assets. Subject to final adjustments, the MediaOne Group Pension Plan

36
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: THE SEPARATION (CONTINUED)
will receive approximately $200 of such assets, with the remainder of such
assets being retained by the New U S WEST Pension Plan. It is currently
anticipated that the benefit expense and required cash contributions by
the Company to the MediaOne Group Pension Plan after the Separation will
be substantially the same as the benefit expense and required cash
contributions of the Media Group to the Old U S WEST pension plan prior to
the Separation.

- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. Old U S WEST maintained an
employee welfare benefit program that included retiree medical and life
insurance benefits for its employees. Under such program, Old U S WEST
maintained three funded retiree medical and life insurance benefits
trusts. One of these trusts covered hourly employees only and was
transferred in its entirety to New U S WEST. The remaining two trusts were
transferred to New U S WEST, and MediaOne Group established new trusts. A
portion of the assets of the Old U S WEST trusts were transferred at fair
value to the MediaOne Group trusts based upon the same methodology used to
transfer assets of the Old U S WEST pension plan to the MediaOne Group
Pension Plan, except that the liabilities were calculated by independent
actuaries using the accumulated postretirement benefit obligations basis.
As of April 30, 1998, it is anticipated that approximately $2 and $2,
respectively, will be transferred by the Old U S WEST trusts to the
MediaOne Group trusts out of the total assets of $259 and $656,
respectively, of the Old U S WEST trusts.

- TAX SHARING AGREEMENT. MediaOne Group and New U S WEST entered into a tax
sharing agreement that will govern the allocation between MediaOne Group
and New U S WEST of federal, state, local and foreign tax liabilities that
pertain to taxable periods ending on or prior to the Separation. The tax
sharing agreement also governs related tax matters such as the preparation
and filing of tax returns and the conduct of audits and other tax
proceedings for periods before and after the Separation. In general, the
tax sharing agreement provides that (i) the Company will be responsible
for and will indemnify New U S WEST against tax liabilities relating to
the Media Group for taxable periods ending on or prior to the Separation,
and (ii) New U S WEST will be responsible for and will indemnify MediaOne
Group against tax liabilities relating to the Communications Group for
taxable periods ending on or prior to the Separation.

NOTE 2: BUSINESS OVERVIEW

The Company is comprised of MediaOne; MediaOne Group, Inc. (a Colorado
corporation), which owns an investment in Time Warner Entertainment Company,
L.P., ("TWE" or "Time Warner Entertainment"); and MediaOne International
Holdings, Inc., which primarily owns investments in international cable and
broadband, wireless communications and directory publishing operations. MediaOne
is the third largest cable operator in the United States, organized into six
operating regions including large clusters in Atlanta, Eastern Massachusetts,
Southern California, Southern Florida, Detroit, and Minneapolis/St. Paul.

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The Consolidated Financial Statements include the
accounts of the Company and its majority-owned subsidiaries, except for the
capital assets segment, which is held for sale. All significant intercompany
amounts and transactions within continuing operations have been eliminated.
Investments in less than majority-owned ventures are generally accounted for
using the equity method.

37
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The interim Consolidated Financial Statements have been prepared by the
Company pursuant to the interim reporting rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally accompanying financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such SEC rules and regulations. In the opinion of the
Company's management, the interim Consolidated Financial Statements include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial information set forth therein.

Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.

USE OF ESTIMATES. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.

INVENTORIES AND SUPPLIES. Inventories are carried at the lower of cost or
market on a first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred.

MediaOne provides for depreciation of certain property, plant and equipment
using various straight-line group methods and remaining economic lives. When
depreciable property, plant and equipment accounted for on the group methods is
retired or sold, the original cost less the net salvage value is generally
charged to accumulated depreciation. The Company's remaining assets are
depreciated using the straight-line method. Gains or losses on disposal are
included in income.

The Company depreciates buildings between 10 to 40 years, cable distribution
systems between 3 to 15 years, cellular systems between 5 to 15 years, and
general purpose computers and other between 3 to 20 years.

Depreciation expense was $727, $255 and $149 for the years ended 1997, 1996
and 1995, respectively.

Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized were $36, $38 and $33 for the years
ended 1997, 1996 and 1995, respectively.

COMPUTER SOFTWARE. MediaOne capitalizes computer software, whether
purchased or developed internally. Capitalized software costs are amortized over
five years. The Company expenses all other computer software costs.

Capitalized computer software of $24 and $27 at December 31, 1997 and 1996,
respectively, is recorded in property, plant and equipment. MediaOne amortized
capitalized computer software costs of $10, $1 and $1 in 1997, 1996 and 1995,
respectively.

38
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their net tangible assets. The costs of
identified intangible assets and goodwill are amortized by the straight-line
method over periods ranging from 5 to 40 years. These assets are evaluated for
impairment, with other related assets, using the methodology as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."

INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and marketable equity
securities are classified as available for sale and are carried at fair market
value with unrealized gains and losses included in equity.

FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international
subsidiaries and investments are translated at year-end exchange rates, and
income statement items are translated at average exchange rates for the year.
Resulting translation adjustments are recorded as a separate component of
equity. Gains and losses resulting from foreign currency transactions are
included in income.

FINANCIAL INSTRUMENTS. Synthetic instrument accounting is used for interest
rate swaps if the index, maturity, and amount of the instrument match the terms
of the underlying debt. Net interest accrued is recognized over the life of the
instruments as an adjustment to interest expense and is a component of cash
provided by operating activities. Any gain or loss on the termination of an
instrument that qualifies for synthetic instrument accounting would be deferred
and amortized over the remaining life of the original instrument.

Hedge accounting is used for foreign currency forward and purchased option
contracts which qualify for and are designated as hedges of firm equity
investment commitments and for forward and purchased option contracts which
qualify as hedges of future debt issues or investments in equity securities. To
qualify for hedge accounting, the contracts must have a high inverse correlation
to the exposure being hedged, and reduce the risk or volatility associated with
changes in foreign exchange rates, interest rates or equity prices. Qualified
foreign exchange contracts and equity contracts are carried at market value with
gains and losses recorded in equity until sale of the investment. Qualified
interest rate contracts are associated with the related debt and amortized as
yield adjustments. Any gain or loss on the termination of a contract that
qualifies for hedge accounting would be deferred and accounted for with the
underlying transaction being hedged.

Market value accounting is used for derivative contracts which do not
qualify for synthetic instrument or hedge accounting. Market value accounting is
also used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income (expense). The Company does not enter into derivative financial
instruments for trading purposes.

STOCK OPTIONS. MediaOne Group accounts for its stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Effective January 1, 1996, MediaOne Group
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." See Note 17--Stock Incentive Plans--to the
Consolidated Financial Statements.

REVENUE RECOGNITION. Wireless communications and cable television services
are generally billed monthly in advance, and revenues are recognized the
following month when services are provided.

39
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues derived from other cable television services, including pay-per-view
and advertising, and wireless airtime usage are recognized as the service is
provided.

ADVERTISING COSTS. Costs related to advertising are expensed as incurred.
Advertising expense was $206, $73 and $47 in 1997, 1996 and 1995, respectively.

INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods.

EARNINGS PER COMMON SHARE. In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." This accounting standard specifies new computation,
presentation and disclosure requirements for earnings per share to be applied
retroactively. SFAS No. 128, among other things, requires presentation of basic
and diluted earnings per common share on the face of the income statement. See
Note 16--Earnings Per Share--to the Consolidated Financial Statements. Unless
otherwise indicated, all per share amounts in the notes to the Consolidated
Financial Statements are computed on basic weighted average common shares
outstanding.

For 1995, earnings per share for Media Stock and Communications Stock have
been presented on a pro forma basis to reflect the two classes of stock as if
they had been outstanding since January 1, 1995. Old U S WEST created the Media
Stock and the Communications Stock effective November 1, 1995 under a
recapitalization plan (the "Recapitalization Plan"). Shares of common stock of
Old U S WEST outstanding on such date were converted into one share each of
Media Stock and Communications Stock. For periods prior to the Recapitalization
Plan, the average common shares outstanding are assumed to be equal to the
average common shares outstanding for Old U S WEST.

NEW ACCOUNTING STANDARDS. In 1998, the Company will adopt SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires, among other things, the reporting of detailed operating segment
information of an enterprise for annual periods beginning in 1998 and for
interim periods beginning in 1999.

40
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4: CONTINENTAL ACQUISITION

On November 15, 1996, the Company acquired Continental Cablevision, Inc.
("Continental"), the third largest cable operator in the United States (the
"Continental Acquisition" or the "Acquisition"). The aggregate consideration
paid by the Company to shareowners of Continental consisted of 150,615,000
shares of Media Stock valued at $2.59 billion, 20,000,000 shares of Old U S WEST
Series D Preferred Stock ("Series D Preferred Stock") with a market value of
$920 and $1.15 billion in cash. In connection with the Acquisition, the Company
also assumed all of Continental's outstanding indebtedness and other liabilities
as of November 15, 1996, which approximated $7.1 billion for a total purchase
price of $11.8 billion.

The Acquisition was accounted for by the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Because Continental
was acquired late in 1996 and is a large and complex operation, a comprehensive
appraisal of asset values and liabilities was not completed until 1997. The
determination of the final fair value resulted in an increase to intangibles and
a decrease to property, plant and equipment. The $8.7 billion excess of purchase
price over net tangible assets acquired and goodwill related to a deferred
income tax liability of $3.0 billion are being amortized over 25 years.
Intangible amortization related to Continental's equity method investments is
recorded as a component of equity losses in unconsolidated ventures. The
intangible assets acquired consist principally of the cable television
franchises of Continental and goodwill. Continental's results of operations have
been included in the consolidated results of operations since the Acquisition
date.

Following are summarized, combined, unaudited pro forma results of
operations for the Company for the years ended December 31, 1996 and 1995.
Amounts are before non-recurring items directly attributable to the Acquisition
and assume that the Acquisition occurred as of the beginning of the respective
periods.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- - --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues................................................................... $ 3,543 $ 3,101
Loss from continuing operations............................................ (801) (598)
MediaOne Group basic and diluted loss from continuing operations per common
share.................................................................... (1.37) (1.04)
</TABLE>

In May 1997, pursuant to a Federal Communications Commission ("FCC") order,
the Company entered into an agreement to sell its cable systems in Minnesota
(the "Minnesota System") for proceeds of $600. Under the terms of the agreement,
the Company had the right to terminate the agreement at any time upon payment of
a $30 termination fee. As a result of the Separation, the Company will no longer
be prohibited by federal law from owning the Minnesota System. In February 1998,
in response to Old U S WEST's petition, the FCC granted a waiver which permitted
the Company to retain the Minnesota System. The Company terminated the agreement
to sell the Minnesota System and otherwise settled all claims related thereto.

Prior to April 1, 1998, the Company held a 10.4 percent interest in
PrimeStar Partners, L.P. ("Old PrimeStar"). In addition, MediaOne distributed
PrimeStar direct broadcast satellite ("DBS") services to subscribers in its
service areas and, as a result, reflected consolidated operating results with
respect to such subscribers. On April 1, 1998, the Company contributed its
interest in Old PrimeStar, as well as its

41
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4: CONTINENTAL ACQUISITION (CONTINUED)
PrimeStar subscribers and certain related assets, to PrimeStar, Inc.
("PrimeStar"), a newly formed entity, in exchange for an approximate 10 percent
interest in PrimeStar and approximately $80 in cash (the "PrimeStar
Contribution").

NOTE 5: INDUSTRY SEGMENTS

The Company operates in the cable and broadband and wireless communications
industry segments. The operations of New U S WEST have been discontinued and the
capital assets segment is held for sale. The cable and broadband segment
consists of cable television properties serving 4.9 million domestic subscribers
and passing 8.4 million domestic homes. The wireless communications segment
provides information products and services over wireless networks in 12 western
and midwestern states, and internationally. Corporate and other includes
discontinued operations of New U S WEST, capital assets, which is held for sale,
international directory operations, investments in domestic interactive services
and corporate overhead.

Effective April 6, 1998, the Company sold its domestic wireless business.
See Note 21--Subsequent Event--to the Consolidated Financial Statements.

On June 4, 1997, the Company sold Thomson Directories, its directory
operation in the United Kingdom, for proceeds of $121. On October 1, 1997, the
Company sold U S WEST Polska, its directory operation in Poland, for proceeds of
$30, and a pretax gain of $29. These sales have resulted in the disposition of
the Company's wholly owned international directory operations.

42
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:

<TABLE>
<CAPTION>
CORPORATE
CABLE AND WIRELESS AND
BROADBAND(1) COMMUNICATIONS(2) OTHER(3, 4) CONSOLIDATED
------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C>
1997
Sales and other revenues............................. $ 2,341 $ 1,428 $ 78 $ 3,847
Operating income (loss).............................. (126) 340 (184) 30
Identifiable assets.................................. 18,798 2,527 5,458 26,783
Depreciation and amortization........................ 1,050 182 25 1,257
Capital expenditures................................. 1,232 258 12 1,502

1996
Sales and other revenues............................. 494 1,183 160 1,837
Operating income (loss).............................. (20) 240 (176) 44
Identifiable assets.................................. 20,146 2,371 5,210 27,727
Depreciation and amortization........................ 212 150 24 386
Capital expenditures................................. 353 266 24 643

1995
Sales and other revenues............................. 215 941 174 1,330
Operating income (loss).............................. 23 147 (101) 69
Identifiable assets.................................. 5,163 2,000 4,684 11,847
Depreciation and amortization........................ 77 121 27 225
Capital expenditures................................. 64 277 29 370
</TABLE>

- - ------------------------

(1) Includes results for Continental since the Acquisition date. Includes
revenues of $18 and $6, operating losses of $15 and $7, and identifiable
assets of $103 and $122 associated with cable operations in the Czech
Republic for 1997 and 1996, respectively.

(2) Includes operating losses from wireless communication operations in Russia
of $(13) and $(3), and identifiable assets of $105 and $121 in 1997 and 1996
respectively.

(3) Includes revenues from directory publishing activities in Europe of $48,
$139 and $122, operating income (loss) of $(11), $2, and $(1) for 1997, 1996
and 1995, respectively, and identifiable assets of $154 and $133 in 1996 and
1995, respectively.

(4) Identifiable assets include the net investment in assets of discontinued
operations of New U S WEST of $4,367, $4,085 and $3,657 in 1997, 1996, and
1995, respectively.

Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes.

A portion of general and administrative costs, including executive
management, legal, tax, accounting and auditing, treasury, strategic planning
and public policy services, are directly assigned to the Company's subsidiaries
based on actual utilization or are allocated based on operating expenses, number
of employees, external revenues, average capital and/or average equity.

Corporate and other operating losses not directly assigned include costs
related to services provided by the Company to the subsidiaries. Also included
are the Company's international directories operations and costs related to the
management of its domestic investments in interactive services. Corporate and
other operating losses increased in 1996 primarily as a result of a change in
cost allocation policy.

Identifiable assets are those assets and investments that are used in, or
pertain to, each segment's operations. Corporate and other assets consist
primarily of cash, debt and equity securities; net assets of

43
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
discontinued operations and assets held for sale; assets of international
directories and other international operations; investments in domestic
interactive services; and other corporate assets.

NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT

On September 15, 1993, the Company acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment for an aggregate purchase price of $2.553 billion. TWE owns and
operates substantially all of the entertainment assets previously owned by Time
Warner, Inc. ("Time Warner"), consisting primarily of its filmed entertainment,
programming-HBO and cable television businesses.

The Company has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or the Company may elect that the exercise price
for the option be paid with partnership interests rather than cash.

Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the general partners); A preferred priority capital (held pro rata by the
general and limited partners); B preferred priority capital (held by the general
partners); and residual equity capital (held pro rata by the general and limited
partners). Of the $2.553 billion contributed by the Company, $1.658 billion
represents A preferred priority capital and $895 represents residual equity
capital. The TWE Partnership Agreement provides for special allocations of
income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' residual equity capital accounts according to their
residual partnership interests. To the extent partnership income is insufficient
to satisfy all special allocations in a particular accounting period, the
unearned portion is carried over until satisfied out of future partnership
income. Partnership losses generally are allocated in reverse order, first to
eliminate prior allocations of partnership income, except senior preferred and
special tax income, next to reduce initial capital amounts, other than senior
preferred, then to reduce the senior preferred account and finally, to eliminate
special tax allocations.

44
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:

<TABLE>
<CAPTION>
PRIORITY LIMITED PARTNERS
CAPITAL RATES (OWNERSHIP %)
OF RETURN(D) TIME ----------------------
UNDISTRIBUTED CUMULATIVE (% PER ANNUM WARNER MEDIA
CONTRIBUTED PRIORITY COMPOUNDED GENERAL TIME ONE
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL(B) QUARTERLY) PARTNERS WARNER GROUP
- - ------------------------------------------ --------------- ----------- --------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Senior preferred.......................... $ 900 $ 1,100(c) 8.00% 100.00% -- --
A Preferred priority capital.............. 5,600 11,300 13.00% 63.27% 11.22% 25.51%
B Preferred priority capital.............. 2,900 6,000 13.25% 100.00% -- --
Residual equity capital................... 3,300 3,300 -- 63.27% 11.22% 25.51%
</TABLE>

- - ------------------------

(a) Represents the estimated fair value of net assets contributed as of
formation of TWE, excluding partnership income or loss allocated thereto.

(b) Cumulative priority capital is not necessarily indicative of the fair value
of the underlying priority capital interests.

(d) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the A preferred capital and the B preferred
capital are 11% and 11.25%, respectively.

Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions are paid to the partners on a
current basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the general partners receive
their full share of distributions. No cash distributions have been made to the
Company.

Through the TWE management committee, the Company and Time Warner jointly
direct the businesses and affairs of TWE cable systems, subject in certain cases
to regulatory approval. The TWE management committee has full discretion and
final authority with respect to the businesses and affairs of such cable
systems. The TWE management committee consists of six voting members, of which
three members are designated by the Company and three members are designated by
Time Warner. Each voting member of the TWE management committee has one vote.
Any action required or permitted to be taken by the TWE management committee
must be approved by a majority of its members. Determinations of the TWE
management committee are binding upon TWE and the TWE board of representatives.

The Company accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by the Company's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
The Company's recorded share of TWE operating results represents allocated TWE
net income or loss adjusted for the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, the Company's
recorded pretax share of TWE operating results before extraordinary item was
$11, $(4) and $(31) in 1997, 1996 and 1995, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. The
Company's share of this extraordinary loss was $4, net of income tax benefits of
$2.

As consideration for its expertise and participation in the cable operations
of TWE, the Company earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in each of 1997, 1996 and 1995. The

45
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Consolidated Balance Sheets include management fee receivables of $42 and $56 at
December 31, 1997 and 1996, respectively. In addition, MediaOne purchases cable
television programming from TWE at market prices. These services totaled $110,
$23 and $10 in 1997, 1996 and 1995, respectively.

Summarized financial information for TWE is presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1997 1996 1995
- - ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................................... $ 11,318 $ 10,852 $ 9,517
Operating expenses(1, 2).......................................................... 9,874 9,774 8,557
Interest and other expense, net(3, 4)............................................. 722 798 777
Income before income taxes and extraordinary item................................. 722 280 183
Income before extraordinary item.................................................. 637 210 97
Net income........................................................................ 614 210 73
</TABLE>

- - ------------------------

(1) Includes depreciation and amortization of $1,370, $1,235, and $1,039 in
1997, 1996 and 1995, respectively.

(2) 1997 operating expenses are reflected net of approximately $200 of net gains
related to the sale or exchange of certain cable television systems.

(3) Includes corporate services of $72, $69 and $64 in 1997, 1996 and 1995,
respectively, and minority interest expense of $305, $207 and $133 in 1997,
1996 and 1995, respectively.

(4) 1997 interest and other expense includes a gain of approximately $250
related to the sale of TWE's interest in E! Entertainment Television, Inc.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1997 1996
- - ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets(5).............................................................................. $ 3,622 $ 3,146
Noncurrent assets(6)........................................................................... 17,109 16,827
Current liabilities............................................................................ 3,974 4,075
Noncurrent liabilities, including minority interest............................................ 9,306 7,781
Senior preferred capital....................................................................... 1,118 1,543
Partners' capital(7)........................................................................... 6,333 6,574
</TABLE>

- - ------------------------

(5) Includes cash of $322 and $216 at December 31, 1997 and 1996, respectively.

(6) Includes a loan receivable from Time Warner of $400 at December 31, 1997 and
1996.

(7) Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partners' capital as reflected in
this Summarized Financial Position, which is based on the historical cost of
the contributed net assets.

46
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES

COMBINED FINANCIAL RESULTS OF INTERNATIONAL EQUITY INVESTMENTS. The
following table shows summarized combined financial information for the
Company's investments in international ventures, including Binariang SDN BHD,
accounted for on the equity method:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED RESULTS OF OPERATIONS 1997 1996 1995
- - ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues........................................................ $ 3,353 $ 1,869 $ 1,163
Operating losses................................................ (601) (540) (373)
Net loss........................................................ (1,696) (857) (514)
</TABLE>

-------------------------------

Note: Combined Results of Operations for Continental ventures have been
included since the date of Acquisition.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1997 1996
- - --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets............................................................. $ 1,140 $ 1,126
Property, plant and equipment--net......................................... 6,625 5,105
Other assets............................................................... 1,610 2,226
--------- ---------
Total assets............................................................... $ 9,375 $ 8,457
--------- ---------
--------- ---------
Current liabilities........................................................ $ 1,570 $ 1,275
Long-term debt............................................................. 5,527 3,880
Other liabilities.......................................................... 389 478
Equity..................................................................... 1,889 2,824
--------- ---------
Total liabilities and equity............................................... $ 9,375 $ 8,457
--------- ---------
--------- ---------
</TABLE>

During the first quarter of 1997, the Company sold its five percent interest
in a French wireless venture for proceeds of $81. The Company recognized a gain
of $31, net of income tax expenses of $20.

On October 27, 1997, the Company sold its 90 percent interest in Fintelco,
S.A. ("Fintelco"), a cable and telecommunications venture located in Argentina,
for proceeds of $641. The Company acquired a 50 percent interest in Fintelco in
connection with the Continental Acquisition and then acquired an additional 40
percent interest in August 1997, to bring its total interest in Fintelco to 90
percent. The Company recognized a gain on the sale of $80, net of income tax
expenses of $55.

On October 2, 1995, Telewest Communications plc ("Telewest") and SBC
CableComms (UK) completed a merger of their UK cable television and
telecommunications interests, creating the largest provider of combined cable
and broadband services in the United Kingdom. The Company recognized a gain of
$95, net of $62 in deferred income taxes, in conjunction with the merger.

Telewest, which is the only equity method investment of the Company for
which a quoted market price is available, had a market value of $464 and $786 at
December 31, 1997 and 1996, respectively.

47
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The Company's equity method investments in international ventures follow:

<TABLE>
<CAPTION>
PERCENTAGE
OF
OWNERSHIP
DECEMBER 31,
------------
VENTURE 1997 1996
- - -------------------------------------------------- ---- ----
<S> <C> <C>
CABLE AND BROADBAND
Telewest Communications, United Kingdom........... 26.8 26.8
Binariang SDN BHD, Malaysia....................... 19.0(1) 20.0
A2000 (KTA), Netherlands.......................... 50.0 50.0
Fintelco, S.A., Argentina......................... -- 50.0
Telenet Flanders, Belgium......................... 25.0(1) 28.0
Aria WEST, Indonesia.............................. 35.0 35.0
Singapore Cablevision, Singapore.................. 25.0 25.0
Titus Communications Corp., Japan................. 25.0 25.0
Chofu Cable Television, Japan..................... 19.1 19.1

WIRELESS
One 2 One, United Kingdom......................... 50.0 50.0
Delta Telecommunications, Russia(2)............... 42.5 42.5
Moscow Cellular Communications, Russia(2)......... 22.0 22.0
Westel Radiotelefon, Hungary...................... 49.0 49.0
Westel 900 GSM Mobile Telecommunications,
Hungary......................................... 46.6 46.6
Eurotel Praha, Czech Republic..................... 24.5 24.5
Eurotel Bratislava, Slovak Republic............... 24.5 24.5
Polska Telefonia Cyfrowa, Poland.................. 22.5 22.5
U S WEST BPL Cellular Telecommunications Services
Company, India.................................. 49.0 49.0

DIRECTORY
Listel, Brazil.................................... 50.0 50.0
</TABLE>

-------------------------------

(1) Decrease in ownership reflects venture equity issuances in 1997.
Through its representation on the board of directors and participation
in management of the operations, the Company believes it has
significant influence with regards to the Malaysian venture and
applied the equity method of accounting.

(2) Investments are held by Russian Telecommunications Development
Corporation owned 66.5 percent by the Company.

At December 31, 1997 and 1996, the difference between the carrying amount
and the Company's interest in the underlying equity of the international
ventures was approximately $23 and $365, respectively. This difference has been
allocated primarily to licenses and is being amortized over lives ranging from 5
to 20 years.

FOREIGN CURRENCY TRANSACTIONS. The Company selectively enters into forward
and purchased option contracts to manage the market risks associated with
fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and purchased
option contracts allows the Company to fix or cap the cost of firm foreign
investment commitments, the amount of foreign currency proceeds from sales of
foreign investments, the repayment of foreign currency denominated receivables
and the repatriation of dividends. All foreign exchange contracts have
maturities of one year or less. The use of such contracts was limited in 1997
and 1996. As of

48
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
December 31, 1997, the market value of foreign exchange contracts outstanding
was not material and there were none outstanding at December 31, 1996.

Forward contracts were selectively used to hedge foreign denominated
proceeds from the sale of foreign investments and foreign denominated
receivables during 1997 and 1996. Foreign currency pretax hedging gains of $5
and pretax hedging losses of $24 were included in earnings in the years ended
December 31, 1997 and 1996, respectively.

The counterparties to these contracts are major financial institutions. The
Company is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.

Foreign currency transaction pretax losses of $40 and pretax gains of $27
were included in earnings in the years ended December 31, 1997 and 1996,
respectively.

EVALUATION OF ASIAN INVESTMENTS. During the twelve month period ending
December 31, 1997, the value of the Malaysian currency declined 36 percent and
the Indonesian currency declined 57 percent as compared with the U. S. dollar.
As a result of this significant decline, the Company reviewed its investments in
Malaysia and Indonesia for impairment. Management concluded that each of its
investments in Malaysia and Indonesia was impaired and in each case the fair
value of the investment was zero as of December 31, 1997. The Company recorded
pretax charges of $145 and $55 related to the ventures in Malaysia and
Indonesia, respectively.

- As determined on a U. S. GAAP basis, the venture's liabilities exceeded
its assets as of December 31, 1997, making the venture insolvent at that
time.

49
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The following table shows summarized financial information for the Malaysian
venture, Binariang SDN BHD:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
FINANCIAL POSITION
Current assets................................................................ $ 151 $ 99
Property, plant and equipment--net............................................ 695 671
Other assets.................................................................. 23 15
--------- ---------
Total assets.................................................................. $ 869 $ 785
--------- ---------
--------- ---------
Current liabilities and current debt.......................................... $ 891 $ 302
Long-term debt................................................................ -- 282
Equity (deficit).............................................................. (22) 201
--------- ---------
Total liabilities and equity (deficit)........................................ $ 869 $ 785
--------- ---------
--------- ---------
</TABLE>

The following factors were considered by management in determining that the
Indonesian investment was impaired and that accrual of the Company's and its
partners' funding liabilities were necessary:

- As determined on a U. S. GAAP basis, the venture's liabilities,
predominantly U. S. dollar denominated debt, exceeded its assets as of
December 31, 1997.

- Management believes the venture is not viable given the political and
economic uncertainties in Indonesia.

- The venture has ceased funding capital projects.

50
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The Company's other ventures in Asia, located in Japan, Singapore and India,
were evaluated for impairment at December 31, 1997. Such evaluation indicated
there was no impairment as the fair value of these ventures exceeded their
recorded values.

The Company continues to monitor its investments in Malaysia and Indonesia.
During the first quarter of 1998, the Indonesian currency declined 55 percent as
compared with the U. S. dollar; whereas, the Malaysian currency recovered
slightly. The Company funded an additional $6 pursuant to the terms of the
Indonesian venture shareholder support agreement. After such funding, the
Company's contractual funding commitment is reduced to $13 and its partners'
commitments remain at $36.

NOTE 8: PROPERTY, PLANT AND EQUIPMENT

The composition of property, plant and equipment follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land and buildings......................................................... $ 321 $ 289
Cable distribution systems................................................. 2,787 2,640
Cellular systems........................................................... 1,124 897
General purpose computers and other........................................ 857 661
Construction in progress................................................... 482 411
--------- ---------
5,571 4,898
Less accumulated depreciation.............................................. 1,299 706
--------- ---------
Property, plant and equipment--net......................................... $ 4,272 $ 4,192
--------- ---------
--------- ---------
</TABLE>

Property, plant and equipment balances at December 31, 1997 include the
results of a comprehensive appraisal conducted on the Continental properties. As
compared with estimated amounts recorded at December 31, 1996, cable
distribution systems decreased approximately $630.

NOTE 9: INTANGIBLE ASSETS

The composition of intangible assets follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Identified intangibles, primarily franchise value....................... $ 9,185 $ 8,388
Goodwill................................................................ 4,159 4,464
--------- ---------
13,344 12,852
Less accumulated amortization........................................... 747 258
--------- ---------
Total intangible assets--net............................................ $ 12,597 $ 12,594
--------- ---------
--------- ---------
</TABLE>

Intangible balances at December 31, 1997 include the results of a
comprehensive appraisal conducted on the Continental cable properties. As
compared with estimated amounts recorded at December 31, 1996, franchise value
increased approximately $770 and goodwill decreased approximately $300.
Amortization expense for 1997, 1996 and 1995 was $530, $131 and $76,
respectively.

51
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10: DEBT

SHORT-TERM DEBT

The components of short-term debt follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Notes payable:
Commercial paper............................................................ $ 750 $ 141
Bank loan................................................................... 17 --
Other....................................................................... -- 55
Current portion of long-term debt............................................. 266 166
Allocated to the capital assets segment-net................................... (100) (146)
Allocated to discontinued operations.......................................... (198) (45)
--------- ---------
Total......................................................................... $ 735 $ 171
--------- ---------
--------- ---------
</TABLE>

The weighted-average interest rate on commercial paper was 6.15 percent and
5.76 percent at December 31, 1997 and 1996, respectively.

The bank loan at December 31, 1997 is a floating-rate loan denominated in
Czech Koruna. Other notes payable at December 31, 1996 included $50 associated
with the Company's increase in ownership of Cable Plus a.s., a cable operator in
the Czech Republic. This note was repaid in January 1997.

In January 1997, the Company paid the cash portion of the Continental
Acquisition consideration totaling $1,150. This payment was financed with
commercial paper.

In 1995, Old U S WEST issued $130 of Debt Exchangeable for Common Stock
("DECS"), due December 15, 1998, in the principal amount of $24.00 per note. The
notes bear annual interest at 7.625 percent. Effective with the Separation, the
DECS became the obligation of MediaOne Group. Upon maturity, the DECS will be
redeemed by the Company for shares of Enhance Financial Services Group, Inc.
("Enhance") held by MediaOne Group or the cash equivalent, at MediaOne Group's
option. The number of shares to be delivered at maturity varies based on the per
share market price of Enhance. If the market price is $24.00 per share or less,
one share of Enhance will be delivered for each note; if the market price is
between $24.00 and $28.32 per share, a fractional share equal to $24.00 is
delivered; if the market price is greater than $28.32 per share, .8475 of a
share is delivered for each note. At December 31, 1997, the Enhance shares had a
market price of $59.50 per share. As of December 31, 1997, the capital assets
segment owned 29.2 percent of the outstanding Enhance common stock.

LONG-TERM DEBT

On November 15, 1996, the Company assumed Continental debt totaling $6,525
(at market value) in conjunction with the Acquisition. Concurrently, the Company
refinanced $3,657 of the assumed debt with commercial paper. In January 1997,
the Company issued medium- and long-term debt totaling $4.1 billion, at a
weighted-average interest rate of 7.47 percent. The net proceeds were used to
refinance outstanding commercial paper. At December 31, 1996, such commercial
paper was classified as long-term debt in the accompanying Consolidated Balance
Sheets and the following table.

52
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10: DEBT (CONTINUED)
The components of long-term debt follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Senior unsecured notes, debentures, medium-term notes and refinanced
commercial paper......................................................... $ 7,275 $ 7,230
Zero coupon subordinated notes, 7.3 percent yield to maturity convertible
at any time into equal shares of Communications Stock and Media Stock.... -- 718
Senior subordinated debt................................................... 300 400
Debt exchangeable for common stock......................................... 254 384
Insurance company notes.................................................... 36 68
Leveraged employee stock ownership plans (LESOP)........................... -- 53
Capital lease obligations.................................................. 6 12
Other...................................................................... 81 67
Unamortized discount-net................................................... (8) (471)
Unamortized premium-net.................................................... 284 335
Allocated to the capital assets segment-net................................ -- (161)
--------- ---------
Total...................................................................... $ 8,228 $ 8,635
--------- ---------
--------- ---------
</TABLE>

Senior unsecured notes and debentures and senior subordinated debt totaling
$2.3 billion as of December 31, 1997 were assumed by the Company in connection
with the Continental Acquisition and are not guaranteed by the Company. These
notes and debentures limit MediaOne's ability to, among other things, pay
dividends, create liens, incur additional debt, dispose of property, investments
and leases, and require certain minimum ratios of cash flow to debt and cash
flow to related fixed charges.

During 1997, the Company redeemed its zero coupon subordinated notes due
June 25, 2011. Upon redemption, the notes had a recorded value of $268. The debt
extinguishment resulted in a loss of $3 (net of income tax benefits of $2)
primarily related to the write-off of deferred debt issuance costs. Also during
1997, MediaOne redeemed a 10 5/8 percent senior subordinated note with a
recorded value of $110, including a premium of $10. The debt extinguishment
resulted in a gain of $3 (net of income tax expenses of $2). The Company
financed the redemptions with floating-rate commercial paper.

On May 13, 1996, Old U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear annual interest at 7.625
percent. Effective with the Separation, the DECS became the obligation of
MediaOne Group. Upon maturity, the DECS will be mandatorily redeemed by the
Company for shares of Financial Security Assurance Holdings Ltd. ("FSA") held by
MediaOne Group or the cash equivalent, at MediaOne Group's option. The number of
shares to be delivered at maturity varies based on the per share market price of
FSA. If the market price is $26.63 per share or less, one share of FSA will be
delivered for each note; if the market price is between $26.63 and $32.48 per
share, a fractional share is delivered so that the value at maturity is equal to
$26.63; if the market price is greater than $32.48 per share, .8197 of a share
is delivered for each note. At December 31, 1997, the FSA shares had a market
price of $48.25 per share. As of December 31, 1997, the capital assets segment
owned approximately 42.1 percent of the outstanding FSA common stock.

53
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10: DEBT (CONTINUED)
Interest rates and maturities of long-term debt at December 31 follow:

<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1999 2000 2001 2002 THEREAFTER 1997 1996
- - ----------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Above 5% to 6%........................... $ -- $ -- $ -- $ -- $ 10 $ 10 $ 140
Above 6% to 7%........................... 309 47 37 762 1,343 2,498 2,484
Above 7% to 8%........................... -- -- -- 10 2,720 2,730 3,419
Above 8% to 9%........................... 2 -- 240 -- 1,475 1,717 1,768
Above 9% to 10%.......................... 15 25 10 -- 525 575 575
Above 10%................................ 35 -- -- -- 300 335 467
--------- --------- --------- --------- ----------- --------- ---------
$ 361 $ 72 $ 287 $ 772 $ 6,373 7,865 8,853
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other...... 87 79
Unamortized discount--net................ (8) (471)
Unamortized premium--net................. 284 335
Allocated to the capital assets
segment--net........................... -- (161)
--------- ---------
Total.................................... $ 8,228 $ 8,635
--------- ---------
--------- ---------
</TABLE>

Interest payments, net of amounts capitalized, were $572, $232 and $139 for
1997, 1996 and 1995, respectively, of which $47, $59 and $87, respectively,
related to the capital assets segment.

INTEREST RATE RISK MANAGEMENT

The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the interest rate variability. This is
achieved through the use of interest rate swaps, which adjust the ratio of
fixed- to variable-rate debt.

Under an interest rate swap, the Company agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the fixed-
and variable-rate terms of the swap agreements.

The following table summarizes terms of swaps and interest rate contracts.
Variable rates are indexed to two- and ten-year constant maturity U. S. Treasury
and 30-day commercial paper rates:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------- ----------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE RATE AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed.................. $ 545 1998-2004 5.75 7.12 $ 1,055 1997-2004 5.73 7.06
</TABLE>

During fourth-quarter 1996, the Company purchased $1.5 billion notional of
put options on U. S. Treasury Bonds to protect against an increase in interest
rates in conjunction with the 1997 debt refinancing. The contracts closed in
January 1997 and a deferred gain of $5 was recognized.

The counterparties to swaps or other interest rate contracts are major
financial institutions. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. The Company manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and

54
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10: DEBT (CONTINUED)
term limitations which correspond to the respective credit rating of each
counterparty. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.

NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.

The carrying values of mandatorily redeemable preferred stock and long-term
receivables approximate the fair values based on quoted market prices or
discounting future cash flows. The carrying value of foreign exchange contracts
approximate the fair values based on estimated amounts the Company would receive
or pay to terminate such agreements. It is not practicable to estimate the fair
value of financial guarantees because there are no quoted market prices for
similar transactions.

The fair values of interest rate swaps are based on estimated amounts the
Company would receive or pay to terminate such agreements taking into account
current interest rates and creditworthiness of the counterparties.

The fair values of long-term debt, including debt associated with the
capital assets segment, Preferred Securities and Series D Preferred Stock, are
based on quoted market prices where available or, if not available, are based on
discounting future cash flows using current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1997 1996
---------------------- ----------------------

<CAPTION>
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 9,335 $ 9,910 $ 9,287 $ 9,350
Interest rate swap agreements--assets.................................... -- -- -- (5)
Interest rate swap agreements--liabilities............................... -- 19 17 37
----------- --------- ----------- ---------
Debt--net................................................................ $ 9,335 $ 9,929 $ 9,304 $ 9,382
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Preferred Securities..................................................... $ 1,080 $ 1,110 $ 1,080 $ 1,074
Series D Preferred Stock................................................. 923 1,234 920 960
</TABLE>

Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt securities have various maturity
dates through the year 2002. The market value of these securities is based on
quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.

55
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The amortized cost and estimated market value of debt and equity securities
follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES
- - ---------------------------------- --- ------------- ------------- --------- --------- ------------- -------------
Equity securities................. $ 21 $ 19 $ -- $ 40 $ 713 $ 2 $ --
Debt securities................... 18 -- -- 18 20 -- --
Securitized loan.................. 55 -- (3) 52 55 -- (6)
--- --- --- --------- --------- --- ---
Total............................. $ 94 $ 19 $ (3) $ 110 $ 788 $ 2 $ (6)
--- --- --- --------- --------- --- ---
--- --- --- --------- --------- --- ---

<S> <C>

FAIR
SECURITIES VALUE
- - ---------------------------------- ---------
Equity securities................. $ 715
Debt securities................... 20
Securitized loan.................. 49
---------
Total............................. $ 784
---------
---------
</TABLE>

During 1997, the Company received proceeds of $898 from the sales of
Teleport Communications Group, Inc. ("TCG") and Time Warner shares and realized
pretax gains totaling $206. Net unrealized gains and losses on marketable
securities are included in equity. The 1997 net unrealized gains were $13 (net
of deferred taxes of $6). The 1996 net unrealized gains were $1 (net of deferred
taxes).

NOTE 12: LEASING ARRANGEMENTS

The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $74, $42 and
$41 in 1997, 1996 and 1995, respectively. Future minimum lease payments as of
December 31, 1997, under noncancelable operating leases, follow:

<TABLE>
<CAPTION>
YEAR
- - --------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................. $ 52
1999.................................................................................. 42
2000.................................................................................. 31
2001.................................................................................. 21
2002.................................................................................. 14
Thereafter............................................................................ 34
---------
Total................................................................................. $ 194
---------
---------
</TABLE>

NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES

On October 29, 1996, U S WEST Financing II ("Financing II"), a wholly owned
subsidiary of Old U S WEST, issued $480 of 8.25 percent Preferred Securities and
$15 of common securities. Old U S WEST held all of the outstanding common
securities. Financing II used the proceeds from such issuance to purchase from U
S WEST Capital Funding, Inc. ("Capital Funding"), a wholly owned subsidiary of
Old U S WEST, $495 principal amount of Capital Funding's 8.25 percent
Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") due
2036, the obligations under which are fully and unconditionally guaranteed by
Old U S WEST (the "Debt Guarantee"). The sole assets of Financing II are and
will be the Subordinated Debt Securities and the Debt Guarantee.

56
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
(CONTINUED)

On September 11, 1995, U S WEST Financing I ("Financing I"), a wholly owned
subsidiary of Old U S WEST, issued $600 of 7.96 percent Preferred Securities and
$19 of common securities. Old U S WEST holds all of the outstanding common
securities of Financing I. Financing I used the proceeds from such issuance to
purchase from Capital Funding $619 principal amount of Capital Funding's 7.96
percent Subordinated Debt Securities due 2025, the obligations under which are
fully and unconditionally guaranteed by Old U S WEST. The sole assets of
Financing I are and will be the Subordinated Debt Securities and the Debt
Guarantee.

Old U S WEST has guaranteed the payment of interest and redemption amounts
to holders of Preferred Securities when Financing I and II have funds available
for such payments (the "Payment Guarantee") as well as Capital Funding's
undertaking to pay all of Financing I and II's costs, expenses and other
obligations (the "Expense Undertaking"). The Payment Guarantee and the Expense
Undertaking, including Old U S WEST's guarantee with respect thereto, considered
together with Capital Funding's obligations under the indenture and Subordinated
Debt Securities and Old U S WEST's obligations under the indenture, declaration
and Debt Guarantee, constitute a full and unconditional guarantee by Old U S
WEST of Financing I and II's obligations under the Preferred Securities. The
interest and other payment dates on the Subordinated Debt Securities correspond
to the distribution and other payment dates on the Preferred Securities. Under
certain circumstances, the Subordinated Debt Securities may be distributed to
the holders of Preferred Securities and common securities in liquidation of
Financing I and II.

The 7.96 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing I is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 24,000,000 shares of the 7.96 percent Preferred Securities were
outstanding.

The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 19,200,000 shares of the 8.25 percent Preferred Securities were
outstanding.

NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION

On June 30, 1997, Old U S WEST acquired cable systems serving approximately
40,000 subscribers in Michigan for cash of $25 and the issuance of 994,082
shares of Old U S WEST Series E Preferred Stock (the "Series E Preferred
Stock"). Dividends are payable quarterly at the annual rate of 6.34 percent.
Effective with the Separation, the Old U S WEST Series E Preferred Stock remains
outstanding and represents shares of MediaOne Group Series E Preferred Stock.
The Series E Preferred Stock was recorded at fair value of $50.00 per share at
June 30, 1997, which was equal to its liquidation value. Upon redemption, the
preferred stockholders may elect to receive cash or convert their Series E
Preferred Stock into MediaOne Group Stock. Cash redemption is equal to the
Series E Preferred Stock's liquidation value of $50.00 per share, plus accrued
dividends. The number of shares of MediaOne Group Stock to be

57
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED)
received upon conversion is $47.50 per share divided by the then current market
price of MediaOne Group Stock. The conversion rate is subject to adjustment by
the Company under certain circumstances.

The Series E Preferred Stock is redeemable as follows: (a) the Company may
call for redemption all or any part of the Series E Preferred Stock beginning on
June 30, 2002; (b) on a yearly basis beginning August 1, 2007, and continuing
through August 1, 2016, the Company will redeem 49,704 shares of Series E
Preferred Stock, and on June 30, 2017, all of the remaining outstanding shares
of Series E Preferred Stock; or (c) all of the outstanding Series E Preferred
Stock shall be redeemed upon the occurrence of certain events, including the
dissolution or sale of all or substantially all of MediaOne Group.

On September 2, 1994, Old U S WEST issued to Fund American Enterprises
Holdings Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred Stock") for a total of $50.
See Note 22--Net Investment in Assets Held for Sale--to the Consolidated
Financial Statements. Effective with the Separation, the Series C Preferred
Stock remains outstanding and represents Series C Preferred Stock of MediaOne
Group. The Series C Preferred Stock was recorded at the fair market value of $51
at the issue date. The Company has the right commencing September 2, 1999, to
redeem the shares for one thousand dollars per share plus unpaid dividends and a
redemption premium. The shares are mandatorily redeemable in 2004 at face value
plus unpaid dividends. At the option of FFC, the preferred stock also can be
redeemed for common shares of FSA. The market value of the option was $71 and
$35 (based on the Black-Scholes model) at December 31, 1997 and 1996,
respectively, with no carrying value.

The Series E and Series C Preferred Stocks rank senior to all classes of
MediaOne Group's common stock, are subordinated to any senior debt and the
Preferred Securities, and rank equally with the Series D Preferred Stock.

NOTE 15: SHAREOWNERS' EQUITY

COMPREHENSIVE INCOME. During first quarter-1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires, among other
things, that the components and total amount of comprehensive income be
displayed in the financial statements for interim and annual periods beginning
in 1998.

Total comprehensive income and the components of comprehensive income
follow:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income..................................................... $ 212 $ 230
Other comprehensive income, before tax:
Foreign currency translation adjustments..................... 16 12
Unrealized gains (losses) on debt and equity securities...... 118 (63)
Reclassification for losses realized in net income........... -- (3)
Income tax (provision) benefit related to items of other
comprehensive income......................................... (53) 22
--------- ---------
Total comprehensive income..................................... $ 293 $ 198
--------- ---------
--------- ---------
</TABLE>

58
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
MEDIA OLD U S COMMON PREFERRED RETAINED
COMMUNICATIONS STOCK WEST STOCK STOCK EARNINGS
STOCK SHARES SHARES SHARES AMOUNT AMOUNT (DEFICIT)
----------------- --------- ----------- ----------- ------------- -----------
SHARES IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994........ 469,343 $ 8,056 $ (428)
Issuance of common stock....... 2,791 117
Benefit trust contribution
(OPEB)....................... 1,500 61
Purchase of treasury stock..... (1,705) (63)
Other.......................... 3
November 1, 1995
Recapitalization Plan.......... 471,929 471,922 (471,929)
Recapitalization Plan
dissenters(1)................ (6)
Issuance of Communications
Stock........................ 1,712 52
Issuance of Media Stock........ 392 7
Net income..................... 1,317
Common dividends declared
($2.14 per Communications
share)....................... (1,010)
Preferred dividends............ (3)
Market value adjustment for
debt securities..............
Foreign currency translation...
Other.......................... (5) 3
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1995........ 473,635 472,314 -- 8,228 -- (121)
Issuance of Communications
Stock........................ 6,822 216
Issuance of Media Stock for
Continental Acquisition...... 150,615 2,590
Other issuances of Media
Stock........................ 1,853 38
Issuance of Series D Preferred
Stock........................ $ 920
Purchase of treasury stock..... (15,919) (297)
Net income..................... 1,178
Common dividends declared
($2.14 per Communications
share)....................... (1,024)
Preferred dividends............ (9)
Market value adjustment for
debt and equity securities...
Foreign currency translation...
Other.......................... (34) (7)
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1996........ 480,457 608,863 -- 10,741 920 17
Issuance of Communications
Stock........................ 4,058 138
Issuances of Media Stock....... 1,783 40
Purchase of treasury stock..... (2,838) (53)
Net income..................... 697
Common dividends declared
($2.14 per Communications
share)....................... (1,034)
Preferred dividends............ (52)
Market value adjustment for
debt and equity securities...
Foreign currency translation...
Other.......................... 10 3 13
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1997........ 484,515 607,808 -- $ 10,876 $ 923 $ (359)
------- --------- ----------- ----------- ----- -----------
------- --------- ----------- ----------- ----- -----------

<CAPTION>
ACCUMULATED
COMPREHENSIVE LESOP
INCOME GUARANTEE
----------------- -------------

<S> <C> <C>
Balance December 31, 1994........ $ (59) $ (187)
Issuance of common stock.......
Benefit trust contribution
(OPEB).......................
Purchase of treasury stock.....
Other..........................
November 1, 1995
Recapitalization Plan..........
Recapitalization Plan
dissenters(1)................
Issuance of Communications
Stock........................
Issuance of Media Stock........
Net income.....................
Common dividends declared
($2.14 per Communications
share).......................
Preferred dividends............
Market value adjustment for
debt securities.............. 36
Foreign currency translation... (9)
Other.......................... 60
--- -----
Balance December 31, 1995........ (32) (127)
Issuance of Communications
Stock........................
Issuance of Media Stock for
Continental Acquisition......
Other issuances of Media
Stock........................
Issuance of Series D Preferred
Stock........................
Purchase of treasury stock.....
Net income.....................
Common dividends declared
($2.14 per Communications
share).......................
Preferred dividends............
Market value adjustment for
debt and equity securities... (6)
Foreign currency translation... (1)
Other.......................... 1 36
--- -----
Balance December 31, 1996........ (38) (91)
Issuance of Communications
Stock........................
Issuances of Media Stock.......
Purchase of treasury stock.....
Net income.....................
Common dividends declared
($2.14 per Communications
share).......................
Preferred dividends............
Market value adjustment for
debt and equity securities... 35
Foreign currency translation... (56)
Other.......................... (11) 45
--- -----
Balance December 31, 1997........ $ (70) $ (46)
--- -----
--- -----
</TABLE>

- - ------------------------------

(1) Under the Recapitalization Plan, Media Stock was not issued to shareowners
who elected to receive cash rather than Communications Stock and Media
Stock. Dissenting shareowners were paid $47.9375 per Old U S WEST share on
December 15, 1995.

59
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
SERIES D PREFERRED STOCK. On November 15, 1996, Old U S WEST issued
19,999,478 shares of 4.5 percent, 20 year, Series D Preferred Stock to
Continental shareowners. Dividends are payable quarterly on the nonvoting Series
D Preferred Stock as and when declared by the Board of Directors of MediaOne
Group (the "Board of Directors") out of funds legally available. Effective with
the Separation, the Series D Preferred Stock remains outstanding and represents
shares of preferred stock of MediaOne Group. The Series D Preferred Stock has a
liquidation value of $50 per share and was recorded at the November 15, 1996
fair value of $46 per share. The Series D Preferred Stock is currently
convertible, at the option of the holder, into shares of MediaOne Group Stock at
$26.25 per share. Since holders of the Series D Preferred Stock did not
participate in the Dex Dividend upon Separation, the Board of Directors adjusted
the conversion rate of the Series D Preferred Stock to $25.24 per share. Between
November 15, 1999 and November 15, 2001, the Series D Preferred Stock is
redeemable at par, at the option of the Company, into shares of MediaOne Group
Stock if the market price of MediaOne Group common shares have closed at $35.44
per share for at least 20 of the 30 consecutive trading days prior to the notice
of redemption. After November 15, 2001, the Series D Preferred Stock is
redeemable at par, at the option of the Company, in cash, MediaOne Group Stock,
or any combination of cash and stock. If MediaOne Group Stock is elected, the
number of shares to be issued will be determined based on the average market
price for the ten consecutive trading days ending on the third business day
prior to redemption, reduced by five percent. On November 15, 2016, the Company
is required to redeem the Series D Preferred Stock, at its election, for cash,
MediaOne Group Stock, or any combination of cash and stock. Upon certain events,
including the disposition of all or substantially all of the properties and
assets attributed to MediaOne Group, the Series D Preferred Stock becomes
mandatorily redeemable. The Series D Preferred Stock ranks senior to all classes
of MediaOne Group common stock, is subordinated to any senior debt and the
Preferred Securities, and ranks equally with the Series E and C Preferred
Stocks.

COMMON STOCK. In connection with the November 15, 1996, Continental
Acquisition, the Company issued 150,615,000 shares of Old U S WEST Media Stock
to Continental shareowners, valued at $2,590.

SHARE REPURCHASE. During 1997 and 1996, the Company purchased and placed
into treasury 2,838,000 and 15,919,000 shares of Old U S WEST Media Stock, at an
average price per share of $18.71 and $18.66, and a cost basis of $53 and $297,
respectively. Under the Recapitalization Plan, shares of Old U S WEST's stock
held in treasury as of November 1, 1995, were canceled.

LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). Old U S WEST maintains a
defined contribution savings plan for substantially all management and
occupational employees of Old U S WEST, except for employees of the Atlanta
cable systems and foreign national employees. The Company matches a percentage
of eligible employee contributions with shares of Media Stock and/or
Communications Stock in accordance with participant elections. Participants may
also elect to reallocate past contributions between Media Stock and
Communications Stock. In 1989, Old U S WEST established two LESOPs to provide
Old U S WEST stock for matching contributions to the savings plan. Shares in the
LESOP are released as principal and interest are paid on the debt. At December
31, 1997, 12,100,791 shares of Media Stock and 11,966,157 shares of
Communications Stock had been allocated from the LESOP to participants'
accounts, while 1,050,657 and 918,494 shares of Media Stock and Communications
Stock, respectively, remained unallocated.

The borrowings associated with the LESOP, which are unconditionally
guaranteed by Old U S WEST, are included in the accompanying Consolidated
Balance Sheets and corresponding amounts have been recorded as reductions to
shareowners' equity. The borrowings associated with the LESOP were repaid in

60
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
May 1998. Contributions from Old U S WEST as well as dividends on unallocated
shares held by the LESOP ($3, $5 and $8 in 1997, 1996 and 1995, respectively)
are used for debt service. Beginning with the dividend paid in fourth-quarter
1995, dividends on allocated shares are being paid annually to participants.
Previously, dividends on allocated shares were used for debt service with
participants receiving additional shares from the LESOP in lieu of dividends.

The Company recognizes expense based on the cash payments method. The
Company contributions to the plan (excluding dividends) were $9, $10 and $14 in
1997, 1996 and 1995, respectively, of which $1, $2 and $3, respectively, have
been classified as interest expense.

SHAREHOLDER RIGHTS PLAN. The Board of Directors has adopted a shareholder
rights plan which, in the event of a takeover attempt, would entitle existing
shareowners to certain preferential rights. The rights expire on April 6, 1999,
and are redeemable by MediaOne Group at any time prior to the date they would
become effective.

NOTE 16: EARNINGS PER SHARE

In 1997, Old U S WEST adopted SFAS No. 128, "Earnings Per Share," which
specifies new computation, presentation and disclosure requirements for earnings
per share to be applied retroactively. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per common share on the face of the
income statement. The following reflects the computation of basic and diluted
earnings (loss) per share for Media Stock and Communications Stock.

61
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16: EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
SHARES IN THOUSANDS
<S> <C> <C> <C> <C> <C>
MEDIA STOCK:
Loss from continuing operations............................ $ (222) $ (190) $ (827) $ (357) $ (102)
Preferred stock dividends.................................. (13) (13) (52) (9) (3)
--------- --------- --------- --------- ---------
Loss from continuing operations available to Media Stock
shareowners used for basic and diluted earnings per
share.................................................... $ (235) $ (203) $ (879) $ (366) $ (105)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income from discontinued operations available to Media
Stock shareowners used for basic and diluted earnings per
share(1)................................................. $ 87 $ 81 $ 347 $ 286 $ 247
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Extraordinary item--early extinguishment of debt-- net of
tax...................................................... $ -- $ -- $ -- $ -- $ (4)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of Media Stock shares used for
basic and diluted earnings (loss) per share.............. 608,295 606,527 606,749 491,924 470,549
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Media Stock basic and diluted loss per share from
continuing operations.................................... $ (0.38) $ (0.33) $ (1.45) $ (0.74) $ (0.22)
Media Stock basic and diluted earnings per share from
discontinued operations(1)............................... 0.14 0.13 0.57 0.58 0.52
Media Stock basic and diluted loss per share from
extraordinary item....................................... -- -- -- -- (.01)
--------- --------- --------- --------- ---------
Media Stock basic and diluted (loss) earnings per share.... $ (0.24) $ (0.20) $ (0.88) $ (0.16) $ 0.29
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMMUNICATIONS STOCK:
Income from discontinued operations available to
Communications Stock shareowners used for basic and
diluted earnings per share(2)............................ $ 347 $ 339 $ 1,177 $ 1,249 $ 1,176
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of Communications Stock shares used
for basic and diluted earnings per share................. 484,964 481,341 482,751 477,549 470,716
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Communications Stock basic and diluted earnings per share
from discontinued operations(2).......................... $ 0.72 $ 0.70 $ 2.43 $ 2.62 $ 2.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

- - ------------------------------

(1) Represents the operations of Dex, which has been aligned with New U S WEST.

(2) Represents the operations of Communications Group, which have been
discontinued and included with New U S WEST.

Diluted earnings and loss per share amounts do not include potential share
issuances associated with stock options, convertible zero coupon subordinated
notes and the convertible Series D Preferred Stock because the effect would have
been antidilutive on the loss from continuing operations. The zero coupon
subordinated notes were redeemed in August 1997.

62
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17: STOCK INCENTIVE PLANS

Old U S WEST maintained stock incentive plans for executives and other
employees and nonemployees, primarily members of the Board of Directors. The
Amended 1994 Stock Plan (the "Plan") was approved by shareowners on October 31,
1995, in connection with the Recapitalization Plan. The Plan is a successor plan
to the Old U S WEST Stock Incentive Plan and Old U S WEST 1991 Stock Incentive
Plan (the "Old U S WEST Plans"). No further grants of options or restricted
stock may be made under the Old U S WEST Plans. The Plan is administered by the
Human Resources Committee of the Board of Directors with respect to officers,
executive officers and outside directors and by a special committee with respect
to all other eligible employees and eligible nonemployees.

Effective November 1, 1995, each outstanding Old U S WEST stock option was
converted into one Communications Stock option and one Media Stock option.
Subsequent to November 1, 1995, each group granted options primarily to its own
employees. Effective on the Separation, stock options, whether held by
individuals who became MediaOne Group or New U S WEST employees, continue to be
outstanding as stock options for MediaOne Group and New U S WEST. The number of
MediaOne Group stock options and the exercise prices were also adjusted to
preserve the economic value of the options before and after the Dex Dividend.

As of December 31, 1997, the maximum aggregate number of shares of Media
Stock and Communications Stock that could have been granted in any calendar year
for all purposes under the Plan was three-quarters of one percent (0.75 percent)
and nine-tenths of one percent (0.90 percent), respectively, of the shares of
such class outstanding (excluding shares held in Old U S WEST's treasury) on the
first day of such calendar year. In the event that fewer than the full aggregate
number of shares of either class available for issuance in any calendar year
were issued in any such year, the shares not issued would have been added to the
shares of such class available for issuance in any subsequent year or years.
Options granted vest over periods up to three years and may be exercised no
later than 10 years after the grant date.

During 1995, Old U S WEST modified the Plan to allow employees who terminate
and are eligible for a full service pension, or who terminate under the
long-term disability plan, to exercise their existing stock options according to
their original terms. Additionally, Old U S WEST allowed employees who separate
under a management separation plan to retain unvested stock options. The
compensation cost that has been included in income in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," was zero, $1 and $3
in 1997, 1996 and 1995, respectively, all of which related to the Plan
modifications.

Old U S WEST has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but continues to account for the Plan
under APB Opinion No. 25. Had compensation cost for the Plan been determined
consistent with the fair value based accounting method under SFAS No. 123, the
pro forma net income and earnings per share for Old U S WEST and both the Media
Stock and Communications Stock would have been the following.

63
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
------------------------ ------------------------ ------------------------

<CAPTION>
BASIC BASIC
EARNINGS EARNINGS BASIC
NET INCOME (LOSS) PER NET INCOME (LOSS) PER EARNINGS
(LOSS) SHARE (LOSS) SHARE NET INCOME PER SHARE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MEDIA STOCK:
As reported.................................... $ (480) $ (0.88) $ (71) $ (0.16) $ 141 $ 0.29
Pro forma...................................... (501) (0.91) (82) (0.18) 140 0.29
COMMUNICATIONS STOCK:
As reported.................................... 1,177 2.43 1,249 2.62 1,176 2.50
Pro forma...................................... 1,164 2.41 1,247 2.61 1,178 2.50
</TABLE>

The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.

Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
during 1997, 1996 and 1995:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
MEDIA STOCK:
Risk-free interest rate.................................................... 6.40% 6.30% 6.00%
Expected life.............................................................. 5.0 years 5.0 years 5.0 years
Expected volatility........................................................ 30.0% 28.5% 28.5%
COMMUNICATIONS STOCK:
Risk-free interest rate.................................................... 6.40% 6.50% 6.00%
Expected dividend yield.................................................... 5.80% 6.70% 6.70%
Expected life.............................................................. 4.0 years 4.5 years 4.5 years
Expected volatility........................................................ 25.0% 19.6% 19.6%
</TABLE>

64
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:

<TABLE>
<CAPTION>
MEDIA STOCK COMMUNICATIONS STOCK OLD U S WEST
------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES* PRICE
------------ ----------- ------------ ----------- ----------- -----------
Outstanding January 1, 1995.......... 7,386,037 $ 38.66
----------- -----------
Granted(1)......................... 4,814,856 41.12
Exercised.......................... (430,631) 34.03
Canceled or expired(1)............. (1,927,083) 37.02
----------- -----------
Outstanding October 31, 1995......... 9,843,179 $ 40.39
----------- -----------
Recapitalization Plan................ 9,843,179 $ 16.28 9,843,179 $ 24.11 (9,843,179) $ (40.39)
------------ ----------- ------------ ----------- ----------- -----------
----------- -----------
Granted............................ 71,580 18.51 138,309 32.16
Exercised.......................... (191,243) 14.71 (543,037) 21.23
Canceled or expired................ (15,350) 16.82 (15,350) 24.91
------------ ----------- ------------ -----------
Outstanding December 31, 1995........ 9,708,166 $ 16.33 9,423,101 $ 24.39
------------ ----------- ------------ -----------
Granted............................ 5,523,728 19.36 3,624,602 30.97
Exercised.......................... (507,329) 14.93 (1,205,730) 22.37
Canceled or expired................ (610,471) 17.86 (429,058) 25.01
------------ ----------- ------------ -----------
Outstanding December 31, 1996........ 14,114,094 $ 17.49 11,412,915 $ 26.67
------------ ----------- ------------ -----------
Granted............................ 8,733,782 20.33 9,491,642 34.87
Exercised.......................... (1,371,529) 16.30 (2,648,569) 25.41
Canceled or expired................ (1,027,388) 18.35 (637,411) 27.54
------------ ----------- ------------ -----------
Outstanding December 31, 1997........ 20,448,959 $ 18.74 17,618,577 $ 31.23
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>

- - ------------------------

* Includes options granted in tandem with stock appreciation rights.

(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e., stock grant).

The number of exercisable options under the Plan and the weighted-average
exercise prices follow:

<TABLE>
<CAPTION>
MEDIA STOCK COMMUNICATIONS STOCK
----------------------- -----------------------
<S> <C> <C> <C> <C>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISABLE OPTIONS AT: OF SHARES PRICE OF SHARES PRICE
- - ----------------------------------------------------------------- ---------- ----------- ---------- -----------
December 31, 1995................................................ 3,021,166 $ 14.89 2,672,666 $ 22.22
December 31, 1996................................................ 4,867,207 16.74 3,881,100 25.71
December 31, 1997................................................ 7,235,685 16.54 5,299,955 25.72
</TABLE>

65
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1997:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- - ---------------------------------------------------------- ------------ --------------- ----------- ---------- -----------
MEDIA STOCK
$10.86 - $16.13........................................... 4,632,940 5.88 $ 14.92 3,994,271 $ 14.73
$16.17 - $18.50........................................... 6,009,898 8.46 18.06 1,627,574 17.59
$18.54 - $20.50........................................... 4,276,400 8.00 19.56 1,477,907 19.89
$20.56 - $22.13........................................... 4,241,765 8.69 21.32 135,933 20.65
$22.31 - $28.88........................................... 1,287,956 9.80 24.47 -- --
------------ --- ----------- ---------- -----------
Total................................................... 20,448,959 7.91 $ 18.74 7,235,685 $ 16.54
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
COMMUNICATIONS STOCK
$16.08 - $26.11........................................... 4,449,954 6.63 $ 23.71 3,518,013 $ 23.12
$26.34 - $33.13........................................... 4,238,914 7.99 31.03 1,577,356 30.30
$33.25.................................................... 4,637,013 9.31 33.25 6,375 33.25
$33.63 - $46.13........................................... 4,292,696 9.19 37.02 198,211 35.36
------------ --- ----------- ---------- -----------
Total................................................... 17,618,577 8.28 $ 31.23 5,299,955 $ 25.72
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>

A total of 8,733,782, 5,523,728 and 4,886,436 Media Stock options and
9,491,642, 3,624,602 and 4,953,165 Communications Stock options were granted in
1997, 1996 and 1995, respectively. Included in the total grants were 249,827 and
1,751,936 of modified Media Stock options and 198,027 and 1,751,936 of modified
Communications Stock options revalued as new grants during 1996 and 1995,
respectively. The modified Media or Communications Stock options were not
significant during 1997. The weighted-average grant date fair value of Media and
Communications Stock options granted during the year, inclusive of modified
options, using the Black-Scholes option-pricing model was $7.10 and $3.87,
respectively, for 1996, and $6.07 and $3.19, respectively, for 1995. Excluding
the modifications, the weighted-average grant date fair value was $7.81 and
$5.70, respectively, for 1997, $7.23 and $3.67, respectively, for 1996, and
$6.45 and $2.92, respectively, for 1995. The exercise price of Media and
Communications Stock options, excluding modified options, equals the market
price on the grant date. The exercise prices of modified stock options may be
greater or less than the market price on the revaluation date.

Approximately 2,700,000 and 2,200,000 of Media Stock and 3,100,000 and
2,950,000 shares of Communications Stock were available for grant under the
plans in effect at December 31, 1997 and 1996, respectively. Approximately
23,150,000 shares of Media Stock and 20,720,000 shares of Communications Stock
were reserved for issuance under the Plan at December 31, 1997.

66
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18: EMPLOYEE BENEFITS

PENSION PLAN

Old U S WEST sponsors a defined benefit pension plan covering substantially
all of its management and occupational employees, except for foreign national
employees. Effective January 1, 1997, Continental's defined benefit pension plan
was merged into Old U S WEST's plan. On April 1, 1997, employees of the cable
systems in Atlanta, Georgia joined Old U S WEST's plan. Management benefits are
based on a final pay formula while occupational benefits are based on a flat
benefit formula. Old U S WEST uses the projected unit credit method for the
determination of pension cost for financial reporting purposes and the aggregate
cost method for funding purposes. Old U S WEST's policy is to fund amounts
required under the Employee Retirement Income Security Act of 1974 and no
funding was required in 1997, 1996 and 1995.

The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follow:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Details of pension cost:
Service cost--benefits earned during the period................................. $ 189 $ 203 $ 173
Interest cost on projected benefit obligation................................... 612 575 558
Actual return on plan assets.................................................... (1,996) (1,509) (1,918)
Net amortization and deferral................................................... 1,159 726 1,185
--------- --------- ---------
Net pension credit................................................................ (36) (5) (2)
Less: Discontinued operations..................................................... 33 5 2
--------- --------- ---------
Net pension (credit) cost--continuing operations.................................. $ (3) $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>

The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1997, 1996 and 1995.

The funded status of Old U S WEST's plan follows. Since both MediaOne Group
and New U S WEST belonged to a single plan, historical plan assets cannot be
segregated. At Separation, plan

67
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
assets were allocated so that the ratio of plan assets to plan liabilities
(calculated on a projected obligation basis) was the same for MediaOne Group and
New U S WEST.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Accumulated benefit obligation, including vested benefits of $7,404 and $6,544,
respectively.............................................................................. $ 8,278 $ 7,446
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds(1).................................... $ 12,260 $ 10,958
Less: Projected benefit obligation.......................................................... 9,167 8,310
--------- ---------
Plan assets in excess of projected benefit obligation....................................... 3,093 2,648
Unrecognized net (gain)..................................................................... (1,966) (1,502)
Prior service cost not yet recognized in net periodic pension cost.......................... 6 31
Balance of unrecognized net asset at January 1, 1987........................................ (546) (626)
--------- ---------
Prepaid pension cost........................................................................ $ 587 $ 551
--------- ---------
--------- ---------
</TABLE>

- - ------------------------------

(1) Pension plan assets include Media Stock and Communications Stock of $8 and
$12, respectively, in 1997, and $7 and $8, respectively, in 1996.

The actuarial assumptions used to calculate the projected benefit obligation
follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Discount rate.................................................................................. 7.00% 7.50%
Weighted-average rate of compensation increase................................................. 5.50% 5.50%
</TABLE>

Anticipated future benefit changes have been reflected in the above
calculations.

ALLOCATION OF PENSION COSTS. The Company's allocation policy is to: 1)
offset MediaOne Group's service cost, interest cost and amortization by the
return on plan assets, and 2) allocate the remaining net pension cost (credit)
to MediaOne Group based on the ratio of actuarially determined service cost of
the Company to total service cost of plan participants. The Company believed
allocating net pension cost on service cost was reasonable since service cost is
a primary factor in determining pension cost. Net pension credits allocated to
MediaOne Group were $(3) in 1997, and zero in both 1996 and 1995. The service
and interest costs attributed to MediaOne Group were $13 and $43 in 1997, $14
and $40 in 1996 and $12 and $39 in 1995, respectively. The projected benefit
obligation was $761 and $582 at December 31, 1997 and 1996, respectively.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Old U S WEST and most of its subsidiaries provided certain health care and
life insurance benefits to retired employees. In conjunction with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," Old U S
WEST immediately recognized the accumulated postretirement benefit obligation
for current and future retirees.

68
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
Old U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Service cost--benefits earned during the period.......................................... $ 66 $ 70 $ 65
Interest on accumulated benefit obligation............................................... 296 259 267
Actual return on plan assets............................................................. (394) (231) (415)
Net amortization and deferral............................................................ 211 68 286
--------- --------- ---------
Net postretirement benefit costs......................................................... 179 166 203
Less: Discontinued operations............................................................ 175 164 201
--------- --------- ---------
Net postretirement benefit costs--continuing operations.................................. $ 4 $ 2 $ 2
--------- --------- ---------
--------- --------- ---------
</TABLE>

The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1997, 1996 and 1995.

The funded status of the plans follows. Since both MediaOne Group and New U
S WEST belonged to a single plan, historical plan assets cannot be segregated.
At Separation, plan assets were allocated so that the ratio of plan assets to
plan liabilities (calculated on an accumulated obligation basis) was the same
for MediaOne Group and New U S WEST.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................................... $ 2,403 $ 2,255
Fully eligible plan participants........................................................... 820 347
Other active plan participants............................................................. 1,183 1,289
--------- ---------
Total accumulated postretirement benefit obligation.......................................... 4,406 3,891
Unrecognized net gain........................................................................ 631 534
Unamortized prior service cost............................................................... (160) 32
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..................... (2,413) (2,063)
--------- ---------
Accrued postretirement benefit obligation.................................................... $ 2,464 $ 2,394
--------- ---------
--------- ---------
</TABLE>

- - ------------------------------

(1) Medical plan assets include Communications Stock and Media Stock of $155 and
$94, respectively, in 1996.

The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Discount rate.................................................................................. 7.00% 7.50%
Medical cost trend rate*....................................................................... 8.00% 8.00%
</TABLE>

- - ------------------------------

* Medical cost trend rate gradually declines to an ultimate rate of 5.5
percent in 2011.

69
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1997 net postretirement benefit cost by approximately $11 and
increased the 1997 accumulated postretirement benefit obligation by
approximately $394.

Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.

POSTRETIREMENT MEDICAL AND LIFE COSTS. The service and interest components
of net postretirement medical benefit costs are calculated for the Company based
on the population characteristics of the group. Since funding of postretirement
costs is voluntary, return on assets is attributed to the MediaOne Group based
on historical funding. MediaOne Group has historically funded the maximum annual
tax deductible contribution for management employees. MediaOne Group
periodically reviews its funding strategy and future funding amounts, if any,
will be based on its cash requirements.

Net postretirement life costs, and funding requirements, if any, are
allocated to MediaOne Group in the same manner as pension costs. MediaOne Group
will generally fund the amount allowed for tax purposes. No funding of
postretirement life insurance occurred in 1997, 1996 and 1995. MediaOne Group
believes its method of allocating postretirement life costs is reasonable.

Net postretirement medical benefit and life costs recognized for MediaOne
Group for 1997, 1996 and 1995 were $4, $2 and $2, respectively. The percentage
of postretirement medical assets attributed to MediaOne Group at December 31,
1997 and 1996, based on historical voluntary contributions was one percent. The
aggregate accumulated postretirement medical and life benefit obligation
attributable to MediaOne Group was $76 and $102 at December 31, 1997 and 1996,
respectively.

NOTE 19: INCOME TAXES

The components of the provision for income taxes follow:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
FEDERAL:
Current............................................................ $ (210) $ (96) $ (78)
Deferred........................................................... (137) (88) 41
--------- --------- ---
(347) (184) (37)
--------- --------- ---
STATE AND LOCAL:
Current............................................................ (20) (17) (14)
Deferred........................................................... (26) (11) 20
--------- --------- ---
(46) (28) 6
--------- --------- ---
FOREIGN:
Current............................................................ (1) 2 6
Deferred........................................................... 14 30 33
--------- --------- ---
13 32 39
--------- --------- ---
(Benefit) provision for income taxes................................. $ (380) $ (180) $ 8
--------- --------- ---
--------- --------- ---
</TABLE>

70
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 19: INCOME TAXES (CONTINUED)
The Company paid $636, $693 and $566 for income taxes in 1997, 1996 and
1995, respectively, inclusive of the discontinued operations of New U S WEST and
the capital assets segment. Income taxes paid for the discontinued operations of
New U S WEST were $906, $814 and $658, in 1997, 1996 and 1995, respectively.

The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------

<CAPTION>
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate............................................. 35.0 35.0 35.0
State income taxes--net of federal effect.............................. 2.5 3.3 (3.7)
Foreign taxes--net of federal effect................................... (0.7) (3.9) (27.0)
Goodwill amortization.................................................. (4.7) (2.4) (8.4)
Other.................................................................. (0.6) 1.5 (4.4)
--- --- ---------
Effective tax rate..................................................... 31.5 33.5 (8.5)
--- --- ---------
--- --- ---------
</TABLE>

The components of the net deferred tax liability follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Intangible assets.......................................................... $ 2,605 $ 2,413
Property, plant and equipment.............................................. 270 377
State deferred taxes--net of federal effect................................ 667 958
Leases..................................................................... 585 663
Investments................................................................ -- 390
Other...................................................................... 253 53
--------- ---------
Deferred tax liabilities................................................. 4,380 4,854
--------- ---------
Postemployment benefits, including pension................................. 23 --
State deferred taxes--net of federal effect................................ 74 93
Restructuring, assets held for sale and other.............................. 45 121
Investments................................................................ 203 --
Net operating loss and tax credit carryforwards............................ 155 466
Valuation allowance........................................................ (320) (387)
Other...................................................................... 357 291
--------- ---------
Deferred tax assets...................................................... 537 584
--------- ---------
Net deferred tax liability................................................. $ 3,843 $ 4,270
--------- ---------
--------- ---------
</TABLE>

In connection with the Continental Acquisition, the Company has net
operating loss carryforwards of approximately $300 for federal income tax
purposes, expiring in various years through 2011. The Company also acquired
investment tax credit carryforwards of approximately $50, expiring in various
years through 2005. A valuation allowance of $320 has been established for the
carryforwards and a deferred tax asset associated with an investment due to
potential limitations on utilization which may exist for the Company.

71
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 19: INCOME TAXES (CONTINUED)
If in future periods the realization of the carryforwards or deferred tax asset
becomes more likely than not, any reduction in the valuation allowance will be
allocated to reduce goodwill and acquired intangible assets.

The current portion of the deferred tax asset was $102 and $28 at December
31, 1997 and 1996, respectively, resulting primarily from compensation-related
items and other accrued expenses. The net deferred tax liability includes $669
and $671 in 1997 and 1996, respectively, related to the capital assets segment.
Foreign operations contributed pretax losses of $604, $362, and $35 during 1997,
1996 and 1995, respectively.

NOTE 20: COMMITMENTS AND CONTINGENCIES

MediaOne Group commitments and debt guarantees associated with its
international and domestic investments totaled approximately $650 and $100,
respectively, at December 31, 1997. In addition, a MediaOne Group subsidiary
guarantees debt, non-recourse to MediaOne Group, associated with its
international investment in the principal amount of approximately $600.

NOTE 21: SUBSEQUENT EVENT

SALE OF DOMESTIC WIRELESS BUSINESSES

On April 6, 1998, the Company sold its domestic wireless businesses to
AirTouch in a tax-efficient transaction (the "AirTouch Transaction"). The
AirTouch Transaction was consummated pursuant to the terms of an agreement and
plan of merger (the "AirTouch Merger Agreement") dated as of January 29, 1998.
The domestic wireless businesses included cellular communication services
provided to 2.6 million customers in 12 western and midwestern states and a 25
percent interest in PrimeCo Personal Communications, L.P. ("PrimeCo"), a
provider of personal communications services ("PCS"). Pursuant to the AirTouch
Merger Agreement, AirTouch acquired these cellular and PCS interests.
Consideration under the AirTouch Transaction consisted of (i) debt reduction of
$1.35 billion, (ii) the issuance to MediaOne Group of $1.65 billion in
liquidation preference of dividend bearing AirTouch preferred stock (fair value
of approximately $1.5 billion), and (iii) the issuance to MediaOne Group of 59.5
million shares of AirTouch common stock.

This transaction resulted in the disposition of MediaOne Group's domestic
wireless businesses. Applying the terms of the AirTouch Merger Agreement, this
transaction resulted in a gain of approximately $2.2 billion, net of deferred
taxes of $1.7 billion.

In connection with this transaction, MediaOne Group and AirTouch have
entered into an investment agreement, pursuant to which AirTouch has agreed to
provide to MediaOne Group registration rights with respect to the shares of
AirTouch preferred stock and AirTouch common stock which MediaOne Group received
in the AirTouch Transaction and to assist MediaOne Group in the monetization of
such shares.

72
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 21: SUBSEQUENT EVENT (CONTINUED)

In order to minimize MediaOne Group's exposure to fluctuations in the market
value of its investment in AirTouch preferred stock, the Company entered into an
interest rate swap transaction on April 6, 1998, in the notional amount of $1.5
billion, terminating on September 30, 1998. Such transaction requires that the
Company either pay or receive the difference between the fixed interest rate of
5.865 percent and a floating rate which is indexed to the 30-year U. S. Treasury
Bond rate. The contract qualifies for hedge accounting and is carried at market
value with gains and losses recorded in equity until sale of the investment.

Prior to April 6, 1998, MediaOne Group and AirTouch were parties to a
multi-phased joint venture pursuant to which they had agreed to combine their
domestic cellular businesses. The AirTouch Transaction was consummated in lieu
of such joint venture.

NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE

The Consolidated Financial Statements include the discontinued operations of
the capital assets segment. In 1993, the Board of Directors approved a plan to
dispose of the capital assets segment through the sale of segment assets and
businesses. The capital assets segment includes activities related to financial
services and financial guarantee insurance operations. Also included in the
segment is MediaOne Real Estate, Inc., for which disposition was announced in
1991.

Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, which
requires discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
"net investment in assets held for sale." The net realizable value of the assets
is evaluated on an ongoing basis with adjustments to the existing reserve, if
any, charged to continuing operations. No such adjustment was required in 1997,
1996 or 1995.

In second-quarter 1996, the Company received proceeds of $98 from the sale
of 3,750,000 shares of FSA common stock. This sale reduced the Company's
ownership in FSA to approximately 40 percent. Also in second-quarter 1996, Old U
S WEST issued DECS due May 15, 1999. Upon Separation, such DECS became the
obligation of MediaOne Group. The shares of FSA to be delivered upon maturity of
the DECS, combined with the exercise of outstanding options held by Fund
American Enterprises Holdings, Inc. to purchase FSA shares would, if
consummated, substantially dispose of MediaOne Group's ownership in FSA. See
Note 10--Debt and Note 14--Preferred Stock Subject to Mandatory Redemption--to
the Consolidated Financial Statements.

In fourth-quarter 1995, Old U S WEST issued DECS to reduce its investment in
Enhance by December 1998. Upon Separation, such DECS became the obligation of
MediaOne Group. During 1997, in order to monetize unrealized gains associated
with its investment in Enhance, the Company sold options for the purchase of
828,000 residual shares of Enhance common stock at the DECS maturity. At
December 31, 1997, an unrecognized loss of $10 (net of income tax benefits of
$7) was included in equity related to these contracts. The shares of Enhance to
be delivered upon maturity of the DECS combined with the option would, if
consummated, result in a complete disposition of the Company's ownership in
Enhance. See Note 10--Debt--to the Consolidated Financial Statements.

MediaOne Real Estate, Inc. has sold various assets for proceeds of $88, $156
and $120 in each of the three years ended December 31, 1997, respectively. The
sales proceeds were in line with estimates. Proceeds from sales were primarily
used to repay related debt. the Company expects to substantially

73
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
complete the liquidation of this portfolio by the end of 1998. The balance of
real estate and related assets subject to sale is approximately $213, net of
reserves, as of December 31, 1997.

Building sales and operating revenues of the capital assets segment were $63
and $57 for the three months ended March 31, 1998 and 1997, respectively, and
$116, $223 and $237 in 1997, 1996 and 1995, respectively. Income or losses from
the capital assets segment are being deferred and are included within the
reserve for assets held for sale.

The assets and liabilities of the capital assets segment have been
separately classified on the Consolidated Balance Sheets as net investment in
assets held for sale.

The components of net investment in assets held for sale follow:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31,
------------- --------------------
1998 1997 1996
------------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 65 $ 54 $ 21
Finance receivables--net................................... 774 777 869
Investment in real estate--net of valuation allowance...... 107 156 182
Bonds, at market value..................................... 118 119 146
Investment in FSA.......................................... 397 365 326
Other assets............................................... 206 197 165
------ --------- ---------
Total assets............................................... $ 1,667 $ 1,668 $ 1,709
------ --------- ---------
------ --------- ---------

LIABILITIES
Debt....................................................... $ 364 $ 372 $ 481
Deferred income taxes...................................... 683 669 671
Accounts payable, accrued liabilities and other............ 168 197 137
Minority interests......................................... 11 11 11
------ --------- ---------
Total liabilities.......................................... 1,226 1,249 1,300
------ --------- ---------
Net investment in assets held for sale..................... $ 441 $ 419 $ 409
------ --------- ---------
------ --------- ---------
</TABLE>

Finance receivables primarily consist of contractual obligations under
long-term leases that Old U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.

74
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of finance receivables follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Receivables.................................................................... $ 719 $ 821
Unguaranteed estimated residual values......................................... 431 444
--------- ---------
1,150 1,265
Less: Unearned income.......................................................... 355 380
Credit loss and other allowances.......................................... 18 16
--------- ---------
Finance receivables--net....................................................... $ 777 $ 869
--------- ---------
--------- ---------
</TABLE>

Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of equity.

The amortized cost of $117 and $147 at December 31, 1997 and 1996,
respectively, of investments in debt securities approximates market value. Total
net unrealized gains in 1997 of $22 (net of deferred taxes of $16) and 1996 net
unrealized losses of $7 (net of deferred taxes of $5) are included in equity.

DEBT

Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------
INTEREST RATES 1998 1999 2000 2001 2002 THERE- AFTER
- - ---------------------------------------------- ----- --------- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Above 6% to 7%................................ $ -- $ -- $ -- $ -- $ -- $ --
Above 7% to 8%................................ 12 12 -- -- 1 148
Above 8% to 9%................................ -- 95 4 -- -- --
Above 9% to 10%............................... -- -- -- -- -- --
--- --------- --- --- --- -----
$ 12 $ 107 $ 4 $ -- $ 1 $ 148
--- --------- --- --- --- -----
--- --------- --- --- --- -----
Allocated to the capital assets segment--
net.........................................
Total.........................................

TOTAL TOTAL
INTEREST RATES 1997 1996
- - ---------------------------------------------- --------- ---------
<S> <C> <C>
Above 6% to 7%................................ $ -- $ 15
Above 7% to 8%................................ 173 --
Above 8% to 9%................................ 99 154
Above 9% to 10%............................... -- 5
--------- ---------
272 174

Allocated to the capital assets segment--
net......................................... 100 307
--------- ---------
Total......................................... $ 372 $ 481
--------- ---------
--------- ---------
</TABLE>

75
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK--FINANCIAL GUARANTEES

MediaOne Group retained certain risks in asset-backed obligations related to
the commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS OF MATURITY 1997 1996
- - ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
0 to 5 Years.................................................................. $ 449 $ 416
5 to 10 Years................................................................. 266 436
10 to 15 Years................................................................ -- 8
--------- ---------
Total......................................................................... $ 715 $ 860
--------- ---------
--------- ---------
</TABLE>

Concentrations of collateral associated with insured asset-backed
obligations follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1997 1996
- - ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate...................................................... $ 319 $ 341
Corporate secured........................................................... 396 519
--------- ---------
Total......................................................................... $ 715 $ 860
--------- ---------
--------- ---------
</TABLE>

ADDITIONAL FINANCIAL INFORMATION

Information for Financial Services, a member of the capital assets segment,
follows:

<TABLE>
<CAPTION>
YEAR ENDED OR AS OF DECEMBER
31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1997 1996 1995
- - ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 23 $ 26 $ 44
Net finance receivables.......................................... 824 859 931
Total assets..................................................... 1,208 1,058 1,085
Total debt....................................................... 363 236 274
Total liabilities................................................ 1,121 998 1,024
Equity........................................................... 87 60 61
</TABLE>

In September 1997, Financial Services pledged certain finance receivables as
collateral for a nonrecourse loan totaling $173. The loan bears interest at an
annual rate of 7.2 percent and matures in the year 2009.

NOTE 23: DISCONTINUED OPERATIONS

In accordance with Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements have been restated to
reflect New U S WEST as a discontinued operation. See Note 1--The Separation--to
the Consolidated Financial Statements. The assets and liabilities, revenues and
expenses, and the cash flows of

76
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 23: DISCONTINUED OPERATIONS (CONTINUED)
New U S WEST have been separately classified in the Consolidated Balance Sheets,
Statements of Operations, and Statements of Cash Flows.

The Company has accounted for the distribution of New U S WEST common stock
to the holders of Communications Stock, and to the holders of Media Stock for
the Dex Alignment as a discontinuance of the businesses comprising New U S WEST.
The measurement date for discontinued operations accounting purposes is June 4,
1998, the date upon which Old U S WEST's shareowners approved the Separation.
The effective date of the Separation is June 12, 1998. On the effective date,
MediaOne Group Separation costs incurred will be netted against the gain
realized on the distribution of New U S WEST. Because the distribution was non
pro-rata, as compared with the businesses previously attributed to Old U S
WEST's two classes of shareowners, it was accounted for at fair value. As of
June 1, 1998, the gain on distribution of New U S WEST (net of Separation costs)
is estimated at approximately $24.6 billion. Old U S WEST will incur Separation
costs during 1998 of approximately $175, which includes cash payments under
severance agreements of $45 and financial advisory, legal, registration fee,
printing and mailing costs. Separation costs also include a one-time payment to
terminate the sale of the Minnesota cable systems. Of the total Separation
costs, MediaOne Group will fund approximately $115 of such costs.

77
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 23: DISCONTINUED OPERATIONS (CONTINUED)
Listed below is summary financial information for the discontinued
operations:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31
---------------- --------------------
SUMMARIZED FINANCIAL POSITION 1998 1997 1996
- - -------------------------------------------------------------------------- ---------------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................................. $ 373 $ 27 $ 80
Accounts and notes receivable--net........................................ 1,616 1,717 1,644
Property, plant and equipment--net........................................ 14,251 14,308 14,089
Other assets.............................................................. 1,373 1,344 1,281
------- --------- ---------
Total assets.............................................................. $ 17,613 $ 17,396 $ 17,094
------- --------- ---------
------- --------- ---------
LIABILITIES
Debt...................................................................... $ 5,855 $ 5,715 $ 6,545
Accounts payable, accrued liabilities and other........................... 4,196 4,260 3,477
Postretirement and other postemployment benefit obligation................ 2,525 2,534 2,449
Deferred income taxes and credits......................................... 587 520 538
------- --------- ---------
Total liabilities......................................................... 13,163 13,029 13,009
------- --------- ---------
Net investment in assets of discontinued operations....................... $ 4,450 $ 4,367 $ 4,085
------- --------- ---------
------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
(UNAUDITED) DECEMBER 31
-------------------- -------------------------------
SUMMARIZED OPERATING RESULTS 1998 1997 1997 1996 1995
- - ------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 3,009 $ 2,867 $ 11,479 $ 11,168 $ 10,508
Operating income............................................. 815 777 2,776 2,812 2,577
Income before income taxes, extraordinary items and
cumulative effect of change in accounting principle........ 693 670 2,429 2,377 2,248
Income tax expense........................................... 259 250 902 876 817
Net income of discontinued operations........................ 434 420 1,524 1,535 1,423
</TABLE>

78
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Sales and other revenues................................................... $ 920 $ 981 $ 974 $ 972
Loss from continuing operations before income taxes........................ (270) (252) (342) (343)
Loss from continuing operations............................................ (190) (181) (226) (230)
Income from discontinued operations--net of tax(1)......................... 420 416 420 268
Net income................................................................. 230 238 191 38
MEDIA STOCK:
Basic and diluted loss from continuing operations per common share....... $ (0.33) $ (0.31) $ (0.40) $ (0.40)
Basic and diluted earnings from discontinued operations per common
share.................................................................. 0.13 0.14 0.14 0.16
----------- ----------- ----------- -----------
Total basic and diluted loss per Media Stock common share................ $ (0.20) $ (0.17) $ (0.26) $ (0.24)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
COMMUNICATIONS STOCK:
Basic and diluted earnings from discontinued operations per common
share.................................................................. $ 0.70 $ 0.69 $ 0.69 $ 0.35
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

- - ------------------------------

(1) Income from discontinued operations for the first, second, third and fourth
quarters of 1997 includes $81, $84, $84 and $98 related to Dex,
respectively, and $339, $332, $336 and $170 related to the Communications
Group, respectively.

1997 first-quarter net income includes a gain of $31 ($0.05 per share of Media
Stock) related to the sale of MediaOne Group's wireless interest in France. 1997
second-quarter net income includes a gain of $25 ($0.04 per share of Media
Stock) related to the sales of TCG and Time Warner shares and a gain of $3 (no
per share Media Stock impact) on the early extinguishment of debt. 1997
third-quarter net income includes a gain of $7 ($0.01 per share of Media Stock)
related to sales of TCG shares and a charge of $3 (no per share Media Stock
impact) for the early extinguishment of debt. 1997 fourth-quarter net income
includes a $120 charge ($0.20 per share of Media Stock) related to Asian
investments. Also included is a gain of $89 ($0.15 per share of Media Stock)
related to the sale of TCG shares, a gain of $80 ($0.13 per share of Media
Stock) on the sale of Fintelco, and a gain of $17 ($0.03 per share of Media
Stock) from the sale of an international directories investment.

79
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Sales and other revenues................................................... $ 342 $ 380 $ 419 $ 696
Loss from continuing operations before income taxes........................ (93) (117) (62) (265)
Loss from continuing operations............................................ (66) (83) (43) (165)
Income from discontinued operations--net of tax(1)......................... 398 395 348 394
Net income................................................................. 332 312 305 229
MEDIA STOCK:
Basic and diluted loss from continuing operations per common share....... $ (0.14) $ (0.18) $ (0.09) $ (0.31)
Basic and diluted earnings from discontinued operations per common
share.................................................................. 0.14 0.15 0.13 0.15
----------- ----------- ----------- -----------
Total basic and diluted loss per Media Stock common share................ $ -- $ (0.03) $ 0.04 $ (0.16)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
COMMUNICATIONS STOCK:
Basic and diluted earnings from discontinued operations per common
share.................................................................. $ 0.69 $ 0.68 $ 0.60 $ 0.65
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

- - ------------------------------

(1) Income from discontinued operations for the first, second, third and fourth
quarters of 1996 includes $70, $71, $62 and $83 related to Dex,
respectively, and $328, $324, $286 and $311 related to the Communications
Group, respectively.

1996 second-quarter net income includes a charge of $19 ($0.04 per share of
Media Stock) related to the sale of MediaOne Group's cable television interests
in Norway, Sweden and Hungary. 1996 fourth-quarter net income includes losses of
$71 and losses available for common stock of $77 ($0.15 per share of Media
Stock) related to the Continental Acquisition.

80
<PAGE>
MEDIAONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
MARKET PRICE
----------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- - ------------------------------------------------------------------ ---------- ---------- ---------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
1997
MEDIA STOCK
First quarter................................................... $ 20.6250 $ 17.6250 $ 18.5000 $ --
Second quarter.................................................. 22.3750 16.0000 20.2500 --
Third quarter................................................... 24.2500 19.8125 22.3125 --
Fourth quarter.................................................. 29.1250 22.3125 28.8750 --
COMMUNICATIONS STOCK
First quarter................................................... $ 37.2500 $ 31.7500 $ 33.8750 $ 0.5350
Second quarter.................................................. 38.5000 31.1250 37.6875 0.5350
Third quarter................................................... 39.4375 35.6250 38.5000 0.5350
Fourth quarter.................................................. 46.9375 36.8750 45.1250 0.5350

1996
MEDIA STOCK
First quarter................................................... $ 23.0000 $ 18.8750 $ 20.6250 $ --
Second quarter.................................................. 21.0000 16.8750 18.2500 --
Third quarter................................................... 18.8750 14.3750 16.8750 --
Fourth quarter.................................................. 19.8750 15.3750 18.3750 --
COMMUNICATIONS STOCK
First quarter................................................... $ 37.5000 $ 30.2500 $ 32.3750 $ 0.5350
Second quarter.................................................. 34.6250 31.1250 32.0000 0.5350
Third quarter................................................... 32.2500 27.2500 29.8750 0.5350
Fourth quarter.................................................. 33.6250 29.2500 32.2500 0.5350
</TABLE>

81
<PAGE>
MEDIAONE GROUP, INC.
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)

The Company believes that proportionate financial data facilitates the
understanding and assessment of its Consolidated Financial Statements. The
following proportionate accounting table reflects the relative weight of
MediaOne Group's ownership interest in its domestic and international investment
in cable and broadband and wireless and international directories. The financial
information included below departs materially from GAAP because it aggregates
the revenues and operating income of entities not controlled by the Company with
those of the consolidated operations of MediaOne Group. This table is not
intended to replace the Consolidated Financial Statements prepared in accordance
with GAAP.

The Company considers earnings before interest, taxes, depreciation,
amortization and other ("EBITDA") an important indicator of the operating
performance of its businesses. This calculation of EBITDA may not be comparable
to other similarly titled measures of other companies. EBITDA, however, should
not be considered as an alternative to operating or net income as an indicator
of performance, or as an alternative to cash flows from operating activities as
a measure of liquidity, in each case determined in accordance with GAAP.

<TABLE>
<CAPTION>
1997 1996
--------- --------- 1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Sales and other revenues....................................................... $ 7,911 $ 5,249 $ 4,071
Operating expenses............................................................. 5,893 4,283 3,344
--------- --------- -----------
EBITDA......................................................................... 2,018 966 727
Depreciation and amortization.................................................. 2,099 978 649
--------- --------- -----------
Operating income (loss)........................................................ (81) (12) 78

Loss from continuing items before income taxes................................. (1,185) (520) (85)
Benefit (provision) for income taxes........................................... 358 163 (17)
--------- --------- -----------
Loss from continuing operations................................................ (827) (357) (102)
Income from discontinued operations--net of taxes.............................. 1,524 1,535 1,423
Extraordinary item--net of taxes............................................... -- -- (4)
--------- --------- -----------
NET LOSS....................................................................... $ (697) $ (1,178) $ (1,317)
--------- --------- -----------
--------- --------- -----------
</TABLE>