(FORTUNE Magazine) – As a thick December fog starts to lift in Omaha, Qwest CEO Dick Notebaert is trying to warm up a group of 50 or so telephone repairmen, installers, and engineers packed into a break area that doubles as a conference room. The CEO moves about and shakes a few hands. "Hi, I'm Dick. I work in Denver," he tells a worker. Then, in a cheerful voice--perhaps a tad too cheery for 7:25 A.M.--he says he's eager to hear comments and answer questions. "If your cellphones are on, leave them on," he adds. "If they're off, turn 'em back on. We need the business!"

The phone-company humor falls a bit flat. But these employees don't need any prodding. Hands pop up around the room as soon as Notebaert pauses. A union representative asks about job cuts. Another employee wants to know when management will sign off on Qwest's financial statements. "Where do we stand with the SEC?" demands a fellow in the back of the room, referring to the Securities and Exchange Commission's probe of the troubled $17-billion-a-year telco.

Notebaert (pronounced NO-ta-bart) handles the queries smoothly; he's heard them all before. Instead of layoffs, he says, Qwest is asking some union folks to cut back voluntarily on hours; he can't sign off on the financials until new accountants audit the numbers; Qwest is cooperating with all the investigations, including inquiries from Congress and the Justice Department. In fact, little of what he hears during his whirlwind Omaha visit--from employees and retirees, from potential customers and state regulators, and from the Oracle of Omaha himself, Warren Buffett--is news to a CEO trying to fix one of the biggest wrecks in corporate America.

When he arrived in June, Qwest was in abject crisis. Besides the federal investigations into Qwest's financial practices, investors feared that the company would not be able to pay its bills, including interest on its $26 billion debt. Influential telecom-policy analyst Scott Cleland of the Precursor Group had issued a report predicting that Qwest would file for bankruptcy. The telephone business was eroding, and morale was terrible: Employees feared layoffs, and many worried about their retirement savings after seeing Qwest stock fall some 92% in two years.

Notebaert, 55, quickly went to work. The former CEO of Ameritech put his reputation on the line, calling in favors and drawing on relationships in the financial community to renegotiate a $3.4 billion loan and secure a new one for $750 million. He sold Qwest's Yellow Pages business for $7 billion, and in late December the company completed a controversial debt swap, reducing red ink by another $2 billion at the expense of some long-term bondholders. In the past two months Qwest's stock price climbed 40%, to about $5 a share.

That's a lot to accomplish in a short time. Yet for all these signs of life, Qwest's turnaround is far from assured. Some of the assets Notebaert had hoped to sell to raise much-needed cash--especially Qwest's wireless business--are off the block for now because they simply didn't attract a high enough bid, he acknowledged in meetings with employees. The company hasn't finished auditing the revenues it must restate. The SEC has yet to conclude its investigation. It is no surprise, then, that Wall Street remains skeptical: Ten of the 30 analysts who follow Qwest stock rate it a sell, according to Thomson First Call, and the 13% to 14% interest rates Qwest paid on its recently issued notes means bondholders still think the company is a huge risk.

The most urgent problem is the one Notebaert raised in his meeting with Omaha employees: Qwest needs business. Total revenue for the first nine months of 2002 sank 14%, and competitors on all fronts have Qwest in their sights. Cable operators and telcos like AT&T are wooing its cash-cow local-phone customers. The long-distance business faces stiff competition from healthier rivals looking to grab customers by playing up Qwest's financial woes in their sales pitches.

As a result, plenty of investors think the best outcome would be for Qwest to sell itself. Some see Notebaert's moves to cut costs and debt as evidence that he's gussying up the company for a potential buyer. "Qwest is going to be paying down debt for the next three to four years," says Paul Wright, a vice president with Loomis Sayles, which owns some Qwest shares. "The more Qwest brings the debt down, the more attractive it looks to a buyer." But it's an open question whether any of this maneuvering will get Qwest's asking price high enough so that investors and employees and customers aren't left wondering how it all went so wrong.

I wish I didn't know now what I didn't know then.' " Notebaert is quoting country singer Toby Keith at a retirees' holiday party in the Omaha Holiday Inn. It's his fifth stop of the day, following four employee visits. Well-wishers swarm around him as he walks into the cavernous ballroom, and a retiree dressed in a clown costume affixes to his cheek a decal that looks like a big red kiss. About 500 seniors have come from all over the state to hear Notebaert explain how he's going to turn Qwest around. (Not that this was a free lunch: The party's organizer called Notebaert's assistant to make sure the CEO would pay his $12.50 for Salisbury steak and sherbet.)

As his speech draws to a close, Notebaert offers a glimpse into how difficult his first six months at Qwest have been. "I heard this line yesterday from a country music song," he tells the retirees, and then he recites that Toby Keith lyric.

It turns out Notebaert has just heard the line from Warren Buffett, whose Berkshire Hathaway is rumored to have purchased Qwest bonds back in the summer. Buffett declines to comment on what Berkshire does or doesn't own, but FORTUNE knows that the two lunched together during Notebaert's swing through Omaha. Earlier in 2002, Berkshire Hathaway had invested $100 million in Qwest rival Level 3 Communications, suggesting Buffett has developed an appetite for troubled telecoms.

An hour after his speech, Notebaert is on a plane back to Denver. Munching on beef jerky--he was too busy mingling with retirees to eat his meal--he talks about the things he'd have preferred not to know. "I wish I'd never learned about lawsuits," he says. Shareholders are suing Qwest for allegedly misleading them about its financial condition. And while they later dropped the matter, some bondholders sued to block the debt swap. "I've never done a restatement before," Notebaert continues. "Hope I never have to do one again."

Notebaert carefully avoids criticizing his predecessor, Joe Nacchio, the vituperative AT&T veteran at the helm during Qwest's rapid rise and ignominious fall. Still, Notebaert didn't waste a lot of time undoing much of Nacchio's handiwork. He brought in four senior executives from Ameritech, including a new CFO, Oren Shaffer, who almost immediately paid a courtesy call to the SEC's chief accountant--the man in charge of investigating Qwest's accounting practices. (Apparently no one from Qwest had thought to do so since the SEC launched its probe.) Notebaert also restructured the business units and instilled a more disciplined attitude at headquarters in Denver. Some senior managers confide that life under Nacchio always felt chaotic, as if they were dealing with constant crises. Now, says Nacchio holdover Augie Cruciotti, "it's very intense, and we're highly focused on a few things."

The big turnback from the Nacchio years came in July, when Qwest said it would throw out its 2000 and 2001 financial statements and change the way it accounts for certain transactions--a tacit acknowledgment that the old accounting was, at best, too aggressive. The company said it would reverse nearly $1 billion in sales and associated costs related to so-called capacity swaps--deals in which Qwest sold capacity on its fiber network to other telcos and bought a similar amount in return, allegedly to inflate revenues.

None of this is to say that in the waning months of his tenure Nacchio didn't try to fix Qwest's problems. It was he and his team who initiated the sale of the Yellow Pages business, and they took several steps to shore up the company's balance sheet, most notably renegotiating a $4 billion line of credit with Qwest's bankers.

Yet that move just made things harder for the new team. When Shaffer, the new CFO, arrived in July, he realized he would have to visit those same banks to ask for more money and more time to pay it back. And he didn't have anything new to offer the lenders but his credibility. "We were going back with the same difficult story," he says. "We called on a lot of relationships."

Notebaert's and Shaffer's reputations came in handy during the summer. One Saturday night in August, just days before the company was set to announce earnings, executives at Bank of America got a phone call: Qwest's financial situation was worsening, and it would need a loan of several hundred million dollars to tide it over until the completion of the Yellow Pages sale. "With all the noise surrounding the Qwest name, bringing in the new management team played a big role," says Elton Vogel, a managing director at Bank of America, which helped underwrite the loan. "We did some checking internally and got nothing but rave reviews, which was helpful in making a decision in a short time."

Notebaert does seem to ooze sincerity. A Wisconsin native with an impish grin, he talks easily with employees about his grandchildren and his wife, Peggy. In sessions with union members, he'll trot out his labor credentials, telling how he got his start in the telecom business by washing trucks for the old Wisconsin Bell. Indeed, his resume is pure company man: He quickly moved up the ranks at Ameritech, the phone company serving five Midwestern states, to become CEO in 1994 at age 46. He sold Ameritech to SBC Communications in 1999 for more than $70 billion, and ten months later took a job as CEO of Tellabs, a telecom-equipment maker in suburban Chicago. He's got a straight man's sense of humor: When he poses as a customer to play "mystery shopper" with Qwest's sales reps, he'll sometimes identify himself as John Lennon or Paul McCartney.

Just about the only time his sunny demeanor clouds during our long day in Omaha is when I ask about the service problems that plagued Ameritech after its sale to SBC. Critics have suggested Notebaert stopped investing in the network after the companies announced the transaction, creating the service woes. Notebaert bristles at that. "I feel like the car had a full tank of gas. It was washed and waxed," he says crisply. "It was in great shape."

Not everyone is completely thrilled with Notebaert's reign at Qwest. The debt exchange upset many bondholders, which may make it tough for Qwest to go back to the debt market anytime soon. Bondholders were offered the chance to trade in their old notes for new ones with higher interest rates and a higher position in Qwest's capital structure--i.e., a better place in line should the company ever file for bankruptcy--but with only about 64% of the original face value. Those who didn't take the deal would fall in queue behind those who did. The deal was fine for anyone who bought debt recently at deflated values but lousy for long-term holders. What's more, individual investors were shut out entirely. In all, Qwest bondholders exchanged $5.2 billion in debt for $3.3 billion in new securities.

The deal nevertheless gives Notebaert breathing room to focus on his next big challenge: fixing the business. Besides standard-issue moves like cutting costs and spending time with potential customers--he is trying to position Qwest with big businesses as a backup to rivals AT&T and WorldCom--Notebaert is taking some surprising positions. For example, he says he's committed to holding on to Qwest's long-distance network, by all accounts a money loser. (He argues that it's a good asset for the long term.) He also hints at alliances with satellite-TV and cellular companies to fill in Qwest's product line. Qwest doesn't offer video in most of its service area, and its wireless network reaches only major markets in the West.

Even if such ventures help send revenues in the right direction, they might not be enough. Though analyst Cleland no longer thinks Qwest will go bankrupt, he doubts that it will survive on its own. "Long term, they need more scale. Period," he says. Wright of Loomis Sayles thinks a Qwest/BellSouth/Sprint combination would create a strong competitor with a national wireless footprint and about a third of the nation's local phone lines, putting it on a par with SBC and Verizon. Others think a Qwest/Level 3 combo would make sense, especially if there's truth to the rumors of Berkshire Hathaway's investment. One thing is for sure: Qwest is in worse shape than US West was in 1999, when management decided the company couldn't stand alone and agreed to sell it to Qwest for $38 billion.

Notebaert happens to think Qwest can go it alone. But a big part of a CEO's job today--besides meeting with employees and customers and letting reporters tag along--is making money for shareholders. At a midmorning employee rally in Omaha, someone asks about his plans to sell off rural lines. Notebaert says he's not thinking about that anymore, then volunteers the following: "If somebody came in tomorrow and said, 'I want to buy Qwest for $60 a share,' what should I say?" The crowd explodes. "Sell!" come the shouts. Seems Notebaert knows how to work a room after all.

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