<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 1O-Q

(Mark One)
   [X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

                                       OR

   [ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        FOR THE TRANSITION PERIOD FROM TO


                           COMMISSION FILE NO. 1-15343


                       WILLIAMS COMMUNICATIONS GROUP, INC.
             (Exact name of registrant as specified in its charter)


                   DELAWARE                               73-1462856
        (State or other jurisdiction of                (I.R.S. Employer
        incorporation or organization)                Identification No.)


             ONE TECHNOLOGY CENTER                          74103
                TULSA, OKLAHOMA                           (Zip Code)
   (Address of principal executive offices)

               Registrant's Telephone Number, Including Area Code:
                                 (918) 547-6000

                                    NO CHANGE
      (Former name, former address and former fiscal year, if changed since
                                  last report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.



               CLASS                         OUTSTANDING AT JULY 31, 2002
    Common Stock, $0.01 par value                 496,106,054 Shares



<PAGE>

                                      INDEX

<Table>
<Caption>
                                                                                                                       PAGE
                                                                                                                       ----
<S>                                                                                                                    <C>
PART I.  FINANCIAL INFORMATION

   ITEM 1.  FINANCIAL STATEMENTS
     Forward-Looking Statements....................................................................................      2
     Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001...............................      4
     Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002
       and 2001....................................................................................................      5
     Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and
       2001........................................................................................................      6
     Notes to Condensed Consolidated Financial Statements..........................................................      7
   ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................     34
   ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................     46

PART II. OTHER INFORMATION

   ITEM 1.  LEGAL PROCEEDINGS......................................................................................     46
   ITEM 3.  DEFAULTS UPON SENIOR SECURITIES........................................................................     48
   ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.......................................................................     48
</Table>



                                       1
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.
                           FORWARD-LOOKING STATEMENTS

    Certain matters discussed in this report, excluding historical information,
include forward-looking statements, which are statements that discuss the
expected future results of Williams Communications Group, Inc. ("WCG" and,
together with its direct and indirect subsidiaries, the "Company") based on
current and pending business operations. The Company makes these forward-looking
statements in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995.

    Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled," or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to a number of
risks, assumptions, and uncertainties that could cause the Company's actual
results to differ materially from those projected. In addition to risk factors
set forth in the Company's other filings with the Securities and Exchange
Commission ("SEC"), the following important factors could cause actual results
to differ materially from any results projected, forecasted, estimated, or
budgeted:

    o   The Settlement Agreement (discussed in Note 2 to the condensed
        consolidated financial statements) may not be approved by the Bankruptcy
        Court.

    o   The Company might fail to meet the various deadlines set forth in the
        Restructuring Agreement discussed in Note 2 to the condensed
        consolidated financial statements, causing a termination of such
        agreement and an event of default under the Company's Credit Agreement.

    o   The Company might default in its obligations under the Credit Agreement
        or not achieve certain financial covenants in the Credit Agreement,
        which could lead to a termination of the Restructuring Agreement.

    o   The Plan, filed with and described in the Disclosure Statement filed
        with the Bankruptcy Court, might not receive the requisite creditor
        votes and might not be confirmed by the Bankruptcy Court.

    o   The conditions precedent to Leucadia's obligation to fund the New
        Investment might not be satisfied.

    o   The Company might have difficulty in maintaining existing or creating
        new relationships with suppliers or vendors as a result of the Company's
        Chapter 11 Case; suppliers to the Company might stop providing supplies
        or services to the Company or provide such supplies or services only on
        "cash on delivery," "cash on order," or other terms that could have an
        adverse impact on the Company's cash flow.

    o   The possibility of further deterioration in the health of capital
        markets and the telecommunications industry and the ability of the
        Company to adapt to such conditions, particularly as a result of the
        perceived oversupply of bandwidth.

    o   The risk of competitors gaining competitive advantages by successfully
        completing a restructuring or bankruptcy reorganization process.

    o   The possibility that uncertainty or adverse publicity concerning the
        Company's efforts to restructure its balance sheet will hinder its
        ability to obtain new customers or undermine its commercial relationship
        with existing customers.

    o   The possibility that capital market and regulatory constraints may
        further hinder "last mile" development and slow the growth in demand for
        bandwidth at the retail level.

    o   The effects of and changes in political and/or economic conditions,
        including inflation, interest rates and monetary conditions, and in
        communications, trade, monetary, fiscal and tax policies in the United
        States and in foreign markets, including Asia, Australia, Europe and
        South America.



                                       2
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.
                    FORWARD-LOOKING STATEMENTS - (CONTINUED)


    o   The Company's ability to raise capital in a cost-effective way, manage
        cash, make capital expenditures, generate operating cash flow and meet
        debt obligations, as well as the Company's ability to manage operating
        costs and capital spending without limiting revenue growth.

    o   The Company's ability to collect proceeds from the sale of the Solutions
        business.

    o   The financial health of the Company's customers and the ability to
        collect revenues from customers.

    o   Changes in the technological, regulatory, or business environment
        applicable to the Company or the telecommunications industry generally.

    o   Termination of the SBC Communications Inc. ("SBC") strategic alliance or
        SBC's inability to obtain regulatory approval to provide long-distance
        telecommunications services within markets in which it currently
        provides local services.

    o   The Company may not be able to obtain the required consents from SBC to
        effect its reorganization as planned.

    o   The potential loss of a high-volume Network customer.

    o   High levels of competition, lack of customer diversification, and
        general uncertainties of government regulation in the telecommunications
        industry.

    o   The Company's ability to deploy sophisticated technologies on a
        local-to-global basis.

    o   The Company's ability to expand and enhance the network in response to
        customer demands and industry changes.

    o   Network's ability to timely turn up service requests and minimize
        service interruptions.

    o   The Company's ability to obtain additional capacity for its network from
        other providers.

    o   The risk that current capacity providers will no longer provide capacity
        at economically justifiable rates.

    o   The possibility of adverse effects from rapid and significant
        developments or changes in the technology used by the Company or its
        customers.

    o   The Company's ability to successfully market capacity on its network.

    o   The ability of each operating segment to implement successfully key
        systems, such as order entry systems and service delivery systems,
        within currently estimated time frames and budgets.

    o   The Company's ability to develop its brand.

    o   The Company's ability, in a cost-effective way, to maintain necessary
        rights-of-way for its network.

    o   The realization of revenues from products and services in the early
        stages of development or operation.

    o   Significant competition on pricing and product offerings.

    o   Changes in external competitive market factors that might affect results
        of operations.

    o   The effect of changes in accounting policies.

    o   The need to record additional impairment charges.

    o   The Company's ability to attract and retain essential employees.

    o   The cost and effects of current and future legal and administrative
        claims and proceedings against the Company.



                                       3
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                    JUNE 30,        DECEMBER 31,
                                                                                      2002              2001
                                                                                  ------------      ------------
                                                                                          (IN THOUSANDS)
<S>                                                                               <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                      $    180,258      $    116,038
   Short-term investments                                                              469,997           904,813
   Receivables less allowance of $46,787,000 ($41,362,000 in
     2001)                                                                             201,738           243,075
   Notes receivable less allowance of $4,652,000 ($12,000,000
     in 2001)                                                                           54,624           178,601
   Net assets held for sale                                                             17,525            20,659
   Other                                                                                37,740            21,768
                                                                                  ------------      ------------
Total current assets                                                                   961,882         1,484,954
Investments                                                                              7,987            11,555
Property, plant and equipment, net                                                   4,084,644         4,353,213
Other assets and deferred charges, net                                                  89,639           142,304
                                                                                  ------------      ------------
Total assets                                                                      $  5,144,152      $  5,992,026
                                                                                  ============      ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Current liabilities not subject to compromise:
     Accounts payable                                                             $    199,433      $    363,670
     Deferred income                                                                    71,746            75,286
     Accrued liabilities                                                               209,679           373,119
     Long-term debt due within one year                                              1,033,654            72,488
                                                                                  ------------      ------------
   Total current liabilities not subject to compromise                               1,514,512           884,563
   Current liabilities subject to compromise                                           243,505                --
                                                                                  ------------      ------------
Total current liabilities                                                            1,758,017           884,563
Long-term debt                                                                          74,775         5,838,779
Long-term deferred income                                                              364,256           401,546
Other liabilities                                                                       42,883            28,935
Long-term liabilities subject to compromise                                          4,602,867                --
Minority interest in consolidated subsidiary                                            41,396            44,907
Contingent liabilities and commitments
6.75% redeemable cumulative convertible preferred stock, $0.01 par value per
   share, 500.0 million preferred shares authorized, 5.0 million 6.75%
   redeemable cumulative convertible shares outstanding in 2002 and 2001;
   aggregate liquidation preference
   of $250,000,000                                                                     250,000           242,338
Stockholders' deficit:
   Class A common stock, $0.01 par value, 1 billion shares authorized, 493.2
     million shares and 491.0 million shares outstanding in 2002 and
     2001, respectively                                                                  4,932             4,910
   Capital in excess of par value                                                    3,901,200         3,862,465
   Accumulated deficit                                                              (5,881,287)       (5,304,906)
   Accumulated other comprehensive loss                                                (14,887)          (11,511)
                                                                                  ------------      ------------
Total stockholders' deficit                                                         (1,990,042)       (1,449,042)
                                                                                  ------------      ------------
Total liabilities and stockholders' deficit                                       $  5,144,152      $  5,992,026
                                                                                  ============      ============
</Table>

                             See accompanying notes.



                                       4
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<Table>
<Caption>
                                                          THREE MONTHS ENDED               SIX MONTHS ENDED
                                                               JUNE 30,                        JUNE 30,
                                                      --------------------------      --------------------------
                                                         2002            2001            2002            2001
                                                      ----------      ----------      ----------      ----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>             <C>             <C>             <C>
Revenues                                              $  293,111      $  281,338      $  591,704      $  557,402

Operating expenses:
   Cost of sales                                         258,220         246,739         517,621         501,597
   Selling, general and administrative                    52,836          76,171         121,097         151,186
   Provision for doubtful accounts                         3,976           5,774          11,523           8,436
   Depreciation and amortization                         145,153         107,418         285,299         192,631
   Restructuring charges                                   2,172              --          13,333              --
   Other expense (income), net                            31,646          (7,969)          9,736          (8,022)
                                                      ----------      ----------      ----------      ----------
     Total operating expenses                            494,003         428,133         958,609         845,828
                                                      ----------      ----------      ----------      ----------
Loss from operations                                    (200,892)       (146,795)       (366,905)       (288,426)
Interest accrued (contractual interest was $136.2
   million and $213.4 million for the three and six
   months ended June 30, 2002, respectively)             (49,048)       (140,233)       (175,339)       (256,735)
Interest capitalized                                       1,102          21,643           3,600          55,662
Investing income (loss):
   Interest and other                                      8,869          18,490          18,077          21,212
   Equity losses                                            (543)         (3,307)         (1,712)         (9,208)
   Income (loss) from investments                            557           7,132           1,517         (31,405)
Minority interest in loss of consolidated
   subsidiary                                              3,903           6,583           8,587          13,191
Other income, net                                            200              25             256             143
Reorganization items, net                                (56,306)             --         (63,599)             --
                                                      ----------      ----------      ----------      ----------
Loss before income taxes                                (292,158)       (236,462)       (575,518)       (495,566)
Provision for income taxes                                  (922)         (9,278)           (863)        (52,348)
                                                      ----------      ----------      ----------      ----------
Net loss                                                (293,080)       (245,740)       (576,381)       (547,914)
Preferred stock dividends and amortization of
   preferred stock issuance costs                         (1,075)         (4,349)         (5,473)         (8,765)
                                                      ----------      ----------      ----------      ----------
Net loss attributable to common stockholders          $ (294,155)     $ (250,089)     $ (581,854)     $ (556,679)
                                                      ==========      ==========      ==========      ==========

Basic and diluted loss per share:
   Net loss attributable to common stockholders       $     (.59)     $     (.51)     $    (1.17)     $    (1.16)
                                                      ==========      ==========      ==========      ==========

   Weighted average shares outstanding                   496,545         490,136         496,351         481,959
</Table>


                             See accompanying notes.



                                       5
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                         SIX MONTHS ENDED
                                                                              JUNE 30,
                                                                   ------------------------------
                                                                       2002              2001
                                                                   ------------      ------------
                                                                          (IN THOUSANDS)
<S>                                                                <C>               <C>
OPERATING ACTIVITIES
Net loss                                                           $   (576,381)     $   (547,914)
Adjustments to reconcile net loss to net cash provided by
 (used in) operating activities:
   Depreciation and amortization                                        285,299           192,631
   Provision for deferred income taxes                                      854            52,322
   Non-cash reorganization items, net                                    36,797                --
   Provision for loss on investments                                         --            93,741
   Provision for doubtful accounts                                       11,523             8,436
   Equity losses                                                          1,712             9,208
   Gain on sale of  assets                                               (3,067)               --
   Gain on sales of investments                                            (608)          (62,336)
   Minority interest in loss of consolidated subsidiary                  (8,587)          (13,191)
   Cash provided by (used in) changes in:
     Receivables                                                        177,065           (54,112)
     Other current assets                                               (12,917)          (14,930)
     Accounts payable                                                   (27,884)          (72,722)
     Current deferred income                                             (9,028)           33,334
     Accrued liabilities                                                 86,629            82,795
     Long-term deferred income                                          (20,133)           88,543
     Other                                                              (17,749)              329
                                                                   ------------      ------------
Net cash used in operating activities                                   (76,475)         (203,866)
FINANCING ACTIVITIES
Proceeds from long-term debt                                              5,369         2,188,348
Payments on long-term debt                                             (220,185)         (325,354)
Proceeds from issuance of common stock, net of expenses                   9,404            12,478
Debt issue costs                                                           (531)          (39,624)
Preferred stock dividends paid                                           (4,161)           (9,705)
Contribution to subsidiary from minority interest shareholders               --            31,694
                                                                   ------------      ------------
Net cash provided by (used in) financing activities                    (210,104)        1,857,837
INVESTING ACTIVITIES
Property, plant and equipment:
   Capital expenditures                                                 (39,706)         (792,710)
   Proceeds from net tax refunds, settlements and sales                  34,756            20,852
   Changes in accrued liabilities                                       (78,820)         (108,060)
Purchase of investments                                                (219,091)       (1,452,443)
Proceeds from sales of investments                                      654,567           502,368
Other                                                                      (907)              363
                                                                   ------------      ------------
Net cash provided by (used in) investing activities                     350,799        (1,829,630)
DISCONTINUED OPERATIONS
Net cash provided by operating activities                                    --            66,985
Net cash provided by investing activities                                    --           133,592
                                                                   ------------      ------------
Net cash provided by discontinued operations                                 --           200,577

Increase in cash and cash equivalents                                    64,220            24,918
Cash and cash equivalents at beginning of period                        116,038           213,888
                                                                   ------------      ------------
Cash and cash equivalents at end of period                         $    180,258      $    238,806
                                                                   ============      ============
</Table>

                             See accompanying notes.



                                       6
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIS OF PRESENTATION

    The interim condensed consolidated financial statements of the Company do
not include all notes in annual financial statements and therefore should be
read in conjunction with the consolidated financial statements and notes thereto
in the Company's Annual Report on Form 10-K. The financial statements have not
been audited by independent auditors but include all normal recurring
adjustments and others, which, in the opinion of the Company's management, are
necessary to present fairly its financial position as of June 30, 2002, results
of operations for the three and six months ended June 30, 2002 and 2001 and cash
flows for the six months ended June 30, 2002 and 2001.

    WCG is a non-operating holding company whose principal asset is 100% of the
membership interests in Williams Communications, LLC ("WCL"). WCL is an
operating company whose business comprises the Network and Emerging Markets
segments. In addition, WCL is the direct or indirect parent of all the remaining
subsidiaries of the Company, including CG Austria, Inc. (formerly known as
Williams Communications Global Holdings, Inc.) ("CG Austria"), a non-operating
holding company with direct and indirect interests in certain foreign
subsidiaries of the Company.

    On April 22, 2002, WCG and CG Austria (collectively, the "Debtors")
commenced cases (collectively, the "Chapter 11 Case") under chapter 11 of title
11 of the United States Code (the "Bankruptcy Code"). No chapter 11 case has
been commenced for WCL and its remaining subsidiaries, and those entities
continue to operate in the ordinary course of business outside of bankruptcy.

    The interim condensed consolidated financial statements have been prepared
on a going concern basis of accounting, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
ability of the Company to continue as a going concern is dependent upon, among
other things, the outcome of the Chapter 11 Case, future profitable operations
and the ability to generate sufficient cash from its operations and financing
arrangements to meet its obligations. Management believes that the restructuring
plan that it is developing, if successfully implemented, will provide sufficient
liquidity to allow the Company to operate as a going concern. However, there can
be no assurance that the sources of liquidity will be available or sufficient to
meet the Company's needs, and accordingly, there is substantial doubt about the
Company's ability to continue as a going concern. Substantial doubt about the
Company's ability to continue as a going concern was expressed in an explanatory
paragraph in the Company's report from its independent public accountants which
accompanied the Company's Annual Report on Form 10-K. The condensed consolidated
interim financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

    WCG became subject to the provisions of Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
upon commencement of the Chapter 11 Case. SOP 90-7 requires, among other things,
that pre-petition liabilities that are subject to compromise be segregated in
the condensed consolidated balance sheet. In addition, revenues, expenses,
realized gains and losses and provisions for losses resulting from the
reorganization and restructuring of the company are reported separately as
reorganization items in the condensed consolidated statement of operations.
Interest expense on liabilities subject to compromise and preferred stock
dividends ceased to accrue upon commencement of the Chapter 11 Case.

    Upon emerging from chapter 11, the Company will implement fresh start
accounting under the provisions of SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Under SOP 90-7, the reorganization
fair value of the Company will be allocated to its assets and liabilities, its
accumulated deficit will be eliminated, and new equity will be issued according
to the Plan. As part of this process, the Company will be



                                       7
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


required to adjust deferred revenue balances currently recorded on its balance
sheet to fair value and will also record liabilities and assets for long term
commitments not representative of current market conditions. In addition,
changes in accounting principles that would be required in the financial
statements within twelve months following emergence from chapter 11 will be
adopted in the Company's financial statements at emergence.

     In conjunction with formulating its plan of reorganization, the Company has
been required to estimate its post-confirmation going concern value. The
Company's financial advisors have assisted in the valuation utilizing
methodologies representing hypothetical reorganized enterprise values assuming
the implementation of the business plan as well as other significant
assumptions. Based upon this analysis, upon emergence from chapter 11, the
estimated enterprise value for the Company is approximately $1.4 billion, and
the indebtedness of the Company is projected to be $675 million, substantially
all of which is expected to be classified as long-term. After deducting this
amount from the enterprise value, the estimated total equity value of the
Company is approximately $725 million. These amounts are based on preliminary
valuation information and, as such, the final reorganization fair value of the
Company that will be allocated to its assets and liabilities may vary.

    The Company is still evaluating the impact of adopting fresh start
accounting. However, the Company anticipates that the adoption of fresh start
accounting will have a material effect on its financial statements because of
the revised valuation of the company, the valuation of assets and liabilities to
fair value and the potential adoption of new accounting rules upon emergence
from chapter 11.

2. BANKRUPTCY PROCEEDINGS

    As stated above, on April 22, 2002 (the "Petition Date"), the Debtors
commenced the Chapter 11 Case by filing petitions for relief under chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Since the Petition Date, the Debtors have continued to manage their
property as debtors in possession, subject to the supervision of the Bankruptcy
Court and in accordance with the provisions of the Bankruptcy Code. An immediate
effect of the filing of the Chapter 11 Case is the imposition of the automatic
stay under section 362 of the Bankruptcy Code, which, with limited exceptions,
enjoined the commencement or continuation of: (i) all collection efforts by
creditors; (ii) enforcement of liens against any assets of the Debtors; and
(iii) litigation against the Debtors. Described below are certain significant
parties and important events that have occurred in the Chapter 11 Case.

    Pursuant to section 1102 of the Bankruptcy Code, the United States Trustee
formed the unsecured creditors committee (the "Committee") on May 2, 2002 by
appointing the following members: Pacific Investment Management Company, LLC;
The Income Fund of America, Inc.; Wilmington Trust Company, as Successor
Indenture Trustee; PPM America; Creedon, Keller Partners, Inc; Strome Hedgecap
Fund, L.P.; R2 Investments, LDC; Wells Fargo Bank, N.A.; and The Williams
Companies, Inc.

    On May 17, 2002, the Bankruptcy Court entered an order (the "Cash Collateral
Order") granting the Debtors' motion pursuant to sections 105(a), 361, 363,
503(b), and 507(b) of the Bankruptcy Code and Bankruptcy Rule 4001(b) for an
order (a) authorizing use of the cash collateral of the lenders (the "Lenders")
under the Company's Amended and Restated Credit Agreement dated as of September
8, 1999 (the "Credit Agreement") and (b) granting adequate protection and
administrative expense priority to the Lenders. Pursuant to the Cash Collateral
Order, the Debtors are authorized to use the Lenders' cash collateral pursuant
to an established budget. The Debtors' authorization to use the cash collateral
will terminate (subject to applicable notice requirements) upon the occurrence
of certain conditions, including: (a) the failure of the Debtors' to confirm a
plan of reorganization and have such plan become effective by October 15, 2002;
(b) the dismissal of the Debtors' Chapter 11 Case or its conversion to a case
under chapter 7 of the Bankruptcy Code; (c) the entry of an order granting
relief from the



                                       8
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


automatic stay with respect to the Lenders' collateral without the Lenders'
consent; (d) the occurrence of an event of default under the Credit Agreement;
or (e) the entry of an order approving the terms of any debtor-in-possession
financing for the Debtors.

    On June 5, 2002, a group of WCG shareholders filed a motion requesting the
appointment of an equity committee. Objections were filed by the Debtors, the
United States Trustee, the Committee, the Lenders and WCG's former parent, The
Williams Companies Inc. ("TWC"). Hearings were held on June 27, 2002 and July
24, 2002, and the motion was denied.

    On July 15, 2002, the Debtors filed a motion under sections 362 and 105(a)
of the Bankruptcy Code to establish notification procedures regarding (1) the
applicability of the automatic stay enjoining certain transfers of claims and
(2) approval procedures for trading in claims against WCG in order to preserve
WCG's ability to utilize its consolidated net operating losses for U.S. federal
income tax purposes. A hearing on the motion was held on July 24, 2002, and the
motion was granted.

    On July 30, 2002, pursuant to section 1125 of Bankruptcy Code, the Debtors
filed their first amended disclosure statement (the "Disclosure Statement") with
respect to the first amended joint plan of reorganization of the Debtors dated
July 26, 2002, proposed by the Debtors, the Committee, and Leucadia National
Corporation ("Leucadia").

    On August 13, 2002, the Debtors will request the Bankruptcy Court to enter
an order approving the Disclosure Statement as containing "adequate information"
of a kind and in sufficient detail adequate to enable a hypothetical reasonable
investor typical of the holders of claims or equity interests to make an
informed judgment about the Plan.

    THE PLAN OF REORGANIZATION

    On July 30, 2002, pursuant to section 1125 of Bankruptcy Code, the Debtors
filed the Disclosure Statement with respect to the first amended joint plan of
reorganization of the Debtors dated July 26, 2002 (the "Plan"), proposed by the
Debtors, the Committee, and Leucadia. The Plan and the transactions contemplated
therein represent the culmination of many months of investigations and
negotiations undertaken by and among the Company and each of its primary
creditor constituencies. Through the Plan, the interdependent requirements of
the Settlement Agreement (filed as an exhibit to Form 8-K on July 31, 2002 and
described in greater detail below) and a prepetition Restructuring Agreement
(described in greater detail below) are meshed in a manner that the Debtors
believe will maximize value and recoveries for all parties in interest. By
implementing both the Settlement Agreement and the Restructuring Agreement, the
Plan provides the certainty and resolution of potential claims of and against
the Company necessary to raising a $150 million new investment from Leucadia
that will allow the Company to further reduce its secured debt without
sacrificing working capital.

    The Plan reflects the three central components of the Company's planned
restructuring (i) an overall balance sheet restructuring that will eliminate
future debt service on approximately $5 billion of existing unsecured
obligations in exchange for equity in a newly-created successor entity ("New
WCG") without the need to seek chapter 11 protection or otherwise impair WCL's
customer and business relationships; ii) the resolution of all disputes among
the Company, its creditors, and TWC pursuant to the Settlement Agreement
negotiated by and among the Debtors, the Committee, TWC, and Leucadia, on terms
that the Company and the Committee believe are favorable to the Company and its
creditors; and (iii) a significant reduction in the amount outstanding under the
Credit Agreement from $975 million at the outset of the restructuring process to
$525 million upon the Debtors' emergence from chapter 11 by paying cash of $450
million and the amendment of the Credit Agreement terms to reflect the Company's
current financial and operating performance forecasts.



                                       9
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    Upon consummation of the Plan, approximately 45% of the equity in New WCG
will be issued to Leucadia and approximately 55% of the equity in New WCG will
be issued to unsecured creditors other than TWC. Existing equity securities of
WCG will be cancelled and existing stockholders will receive nothing under the
Plan on account of their shares.

    RESTRUCTURING AGREEMENT

    On April 19, 2002, an agreement was executed by the Company, over 90% of its
Lenders, and holders of approximately $875 million of WCG's Senior Redeemable
Notes in which each agreed, among other things, to support a chapter 11 plan for
the Debtors that would not require WCL to seek chapter 11 protection. Other
material terms of the Restructuring Agreement include the following:

    o   Prepayment of Amounts Outstanding Under the Credit Agreement. WCL agreed
        to prepay a total of $450 million in upcoming scheduled principal
        payments under the WCL Credit Agreement. Of that amount, $200 million
        was prepaid by WCL on April 22, 2002, $50 million was prepaid by WCL on
        July 15, 2002, and the remaining $200 million will be payable by WCL as
        a condition to consummation of the Plan. These prepayments will be
        applied to reduce scheduled principal payments under the WCL Credit
        Agreement in the direct chronological order of maturity, thus obviating
        the need for further principal payments by WCL until the fourth quarter
        2004.

    o   New Investment. The Restructuring Agreement requires that the Company
        obtain, prior to the voting deadline for the Plan, a commitment for an
        investment in the amount of $150 million that is acceptable to a
        majority of the Lenders and reasonably acceptable to the Committee (the
        "New Investment"). The proceeds of the New Investment will be used to
        fund, in part, the $200 million in prepayments under the WCL Credit
        Agreement that are required under the Restructuring Agreement upon
        consummation of the Plan.

    o   Amendments to the WCL Credit Agreement. The Lenders agreed to certain
        interim amendments to the WCL Credit Agreement and to the material terms
        of a Restated Credit Agreement to be executed upon consummation of the
        Plan.

    o   Treatment of Claims Under a Chapter 11 Plan. The Debtors agreed to use
        their reasonable best efforts to propose, solicit acceptances to and
        obtain confirmation of a chapter 11 plan that would contain the
        following treatment for claims against the Debtors: (i) holders of
        allowed unsecured claims against the Debtors would receive their pro
        rata share of 100% of the New WCG Common Stock issued by New WCG; (ii)
        the Lenders' Prepetition Secured Guarantee Claims against the Debtors
        would be unimpaired unless the Lenders agreed otherwise; and (iii)
        claims against the Debtors arising from rescission of a purchase or sale
        of WCG's securities, or for reimbursement or contribution on account of
        such claims, would receive no distribution and be discharged.

    o   Agreement to Vote for the Debtors' Plan. Subject to the receipt of an
        approved disclosure statement, each Lender and noteholder who signed the
        Restructuring Agreement agreed to vote to accept a chapter 11 plan
        conforming to the requirements of the Restructuring Agreement.

    o   Lock-Up Noteholder Shares. The Restructuring Agreement requires that the
        chapter 11 plan contain a provision entitling the holders of Senior
        Redeemable Notes who sign that agreement (the "Lock-Up Noteholders") to
        receive separate consideration for their agreement to enter into the
        Restructuring Agreement equal to 5% of the stock of New WCG that is
        distributed to all holders of Senior Redeemable Notes (the "Lock-Up
        Noteholder Shares"). In other words, in addition to the New WCG Common
        Stock that these holders will receive on account of their Senior
        Redeemable Notes, they will be issued an additional 5% of the total
        amount of New WCG Common Stock on account of Senior Redeemable Notes,
        which they will divide among them on a proportional basis, based on the
        amount of Senior Redeemable Notes they held when executing the
        Restructuring Agreement. Pursuant to such a provision, the consideration
        received by all holders of Senior Redeemable Notes will be reduced by
        the dilutive effect of



                                       10
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


        the issuance of the Lock-Up Noteholder Shares. The Restructuring
        Agreement provides, however, that the provision for issuance of Lock-Up
        Noteholder Shares can be stricken from the chapter 11 plan if either (i)
        the provision is found to violate the provisions of the Bankruptcy Code,
        or (ii) a majority in number of, or one-third of the amount held by,
        those noteholders voting on the plan indicate on their ballots a
        disapproval of the extra distribution to Lock-Up Noteholders.

    o   Termination Events. The Restructuring Agreement terminates under certain
        circumstances. The termination events that are currently in effect are:

        o   the Debtors do not prosecute the chapter 11 plan in good faith;

        o   the chapter 11 plan is not consummated by October 15, 2002;

        o   a chapter 11 plan proposed by the Debtors contains terms materially
            inconsistent with or less favorable than those described in the
            Restructuring Agreement, or the plan is modified in any way that
            makes it materially inconsistent with or less favorable than the
            terms set forth in the Restructuring Agreement;

        o   WCG fails to procure a commitment for the New Investment on terms
            that are satisfactory to the Lenders by the date of the voting
            deadline;

        o   the Debtors' authorization to use Cash Collateral is terminated;

        o   an Event of Default occurs under the WCL Credit Agreement and is
            continuing without waiver;

        o   the Company seeks or another person obtains a judicial order or
            judgment that affects adversely or alters in any respect the rights
            and remedies of the Lenders with respect to WCL or its property; or

        o   the Debtors fail to propose the separate classification of claims
            arising under the Senior Redeemable Notes (other than those
            subordinated pursuant to section 510(b) of the Bankruptcy Code) in a
            chapter 11 plan.

    The Debtors believe that their Plan satisfies each of the requirements of
the Restructuring Agreement Plan in all material respects and that the Lenders
and noteholder parties are thus obligated to vote to accept and support
confirmation of the Plan.

    NEW INVESTMENT

    On July 26, 2002, Leucadia and WCG entered into an investment agreement (the
"Leucadia Agreement") providing for a commitment by Leucadia, subject to certain
conditions, to make the New Investment of $150 million in exchange for 20.45% of
the equity in New WCG (the "Investment Shares"). The New Investment is being
made in connection with the other transactions contemplated by the Plan and is
conditioned on the successful completion of those transactions and the Plan,
including but not limited to Leucadia's purchase of TWC's Claims (described
below) for $180 million and receipt of approximately 24.55% of the equity in New
WCG on account thereof.

    Leucadia's obligation to purchase the Investment Shares is subject to the
satisfaction or waiver of the following conditions:

    o   the Company Rights Agreement, dated as of September 30, 1999, shall have
        been terminated, and no stockholder or former stockholder of WCG shall
        have any rights thereunder or receive any distribution under the Plan in
        respect of any rights under the Company Rights Agreement;

    o   the Certificate of Incorporation and Bylaws of New WCG, each
        substantially in the form filed with the Plan (the "New Charter" and
        "New Bylaws," respectively) shall have been adopted and are in effect;

    o   SBC shall have consented to the transactions contemplated by the
        Leucadia Investment Agreement, the Plan, and the spin-off of the Company
        from TWC (and this consent is in form and substance reasonably
        satisfactory to Leucadia), or a court shall have entered an order
        reasonably satisfactory to Leucadia that SBC does not have the right to
        terminate the Master Alliance Agreement with WCL as a result of such
        transactions;



                                       11
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    o   Leucadia's two designees to New WCG's Board of Directors (the "New WCG
        Board") shall have been appointed to the New WCG Board and any
        committees of such Board, as required by the Stockholders Agreement to
        be entered into between Leucadia and WCG as of the closing date of the
        New Investment and the Plan;

    o   the Plan shall be in the form attached to the Leucadia Investment
        Agreement in all material respects unless otherwise approved by
        Leucadia, and the Plan shall have been implemented in a manner at least
        as favorable to Leucadia in all material respects as contemplated
        thereby; and

    o   the agreement with the Lenders for amending the WCL Credit Agreement
        shall be reasonably acceptable to Leucadia in all material respects
        (such acceptance not to be unreasonably withheld or delayed).

    SETTLEMENT AGREEMENT

     The Settlement Agreement enables the crucial minority investment from
Leucadia to be made while materially enhancing the recovery to unsecured
creditors. A hearing on the motion for the Bankruptcy Court to approve the
Settlement Agreement is scheduled for August 22, 2002. Based upon the alleged
amount of TWC claims against WCG arising from, among other things, the ADP
Claims, the Senior Reset Note and the Pre-Spin Services Claims (collectively,
the "TWC Assigned Claims"), which are discussed below, the claims of TWC
approximate the total outstanding amount of publicly held Senior Redeemable
Notes. Hence, if the TWC claims were to be allowed, the distributions on account
of the TWC claims would be roughly the same as distributions on account of the
Senior Redeemable Notes. Thus, TWC, on the one hand, and the holders of the
Senior Redeemable Notes, on the other, would share roughly 50:50 in the equity
of the reorganized Company and would be equally subject to dilution for the New
WCG Common Stock to be issued on account of Leucadia's $150 million investment.
In addition, without the Settlement Agreement, TWC would retain its rights under
the sale and subsequent leaseback transaction. Instead, by virtue of the
Settlement Agreement, (i) the unsecured creditors would receive an enhanced
distribution of 55%, even after giving effect to the New WCG Common Stock
distributable on account of Leucadia's New Investment of $150 million, (ii) the
Company would unwind the sale and subsequent leaseback transaction and modify
the TWC Continuing Contracts, and (iii) TWC would receive $180 million in cash
from Leucadia for certain of the rights associated with the TWC Assigned Claims.
The TWC Assigned Claims of $2.4 billion consist of the following:

    o   ADP Claims: On September 2, 1998, the Company, and TWC (as guarantor),
        entered into an asset defeasance program (the "ADP") pursuant to which
        certain lenders provided approximately $750 million with which the
        Company purchased fiber-optic network equipment as the agent and lessee
        of a trust created for the lenders' benefit (the "ADP Trust"). Pursuant
        to its terms, the Company had the option to acquire fee title to the
        such network assets at any time upon payment of an amount roughly equal
        to the original purchase price, and TWC was expressly obligated to pay
        such purchase price under an intercreditor agreement entered into by TWC
        in connection with the WCL Credit Agreement (see Note 12).

        In March 2002, the Company exercised its purchase option and TWC paid
        approximately $754 million to the ADP Trust. In exchange for such
        payment, the intercreditor agreement provided that TWC was entitled to
        either the issuance of equity or unsecured subordinated (to the Lenders)
        debt of WCG, each on terms reasonably acceptable to the Lenders. On
        March 29, 2002, WCG tendered an unsecured note to TWC for approximately
        $754 million. TWC had delivered to WCG a letter reserving all of its
        rights with respect to the transaction and such unsecured note. Any and
        all causes of action of TWC or any of its direct or indirect
        subsidiaries (each, a "TWC Entity") against a Debtor relating to the ADP
        are referred to herein as the "ADP Claims" and are to be resolved
        pursuant to the terms of the Settlement Agreement.



                                       12
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    o   Senior Reset Note Claim: In a March 2001 private placement transaction,
        WCG Note Trust, a wholly-owned subsidiary of WCL, and WCG Note Corp.,
        Inc., a wholly owned special purpose subsidiary of WCG Note Trust
        (collectively, the "Issuers") issued approximately $1.4 billion in
        principal amount of senior secured notes (the "Trust Notes"). The
        proceeds from the sale of the Trust Notes were (i) transferred to WCG in
        exchange for WCG's $1.5 billion 8.25% senior reset note due 2008 (the
        "Senior Reset Note") and (ii) contributed by WCG as capital to WCL to
        provide liquidity following the tax-free spin-off from TWC. The Issuers'
        obligations under the Trust Notes are secured by the Senior Reset Note
        and are effectively guaranteed by TWC who, prior to the spin-off,
        provided indirect credit support through a commitment to issue equity
        and make available the proceeds therefrom upon the occurrence of certain
        trigger events.

        In March 2002, pursuant to a consent solicitation, TWC obtained
        sufficient consents from holders of the Trust Notes to amend certain
        provisions of the indenture related to the Trust Notes to eliminate a
        WCG bankruptcy filing and certain other events from the enumerated list
        of events that would cause an acceleration of the Trust Notes. TWC also
        entered into a payment agreement with WCG Note Trust that (i) affirms
        TWC's direct obligation to make all payments due under the Trust Notes
        if WCG Note Trust fails to make such payments and (ii) allows TWC to
        fund these payments from any available sources and not solely from the
        proceeds of issued equity.

        On June 3, 2002, TWC commenced an exchange offer to exchange up to $1.4
        billion of new senior unsecured notes of TWC (the "New TWC Notes") for
        up to $1.4 billion of the outstanding Trust Notes. According to TWC, as
        of July 15, 2002, TWC successfully exchanged New TWC Notes for
        substantially all of the outstanding Trust Notes. As such, TWC, as agent
        to the indenture trustee under the Trust Notes indenture, has the right
        to sell the Senior Reset Note in such a manner as will achieve the
        highest reasonably available market price. Pursuant to the Plan, the
        Debtors, the Committee and Leucadia are requesting that the Bankruptcy
        Court find that the TWC sale of the TWC Assigned Claims to Leucadia
        meets this requirement.

    o   Pre-Spin Services Claims: On September 30, 1999, the Company entered
        into the Pre-Spin Services Agreement, under which, among other things,
        TWC and certain of its affiliates agreed to perform payroll,
        administrative, and related services on behalf of WCG and certain of the
        WCG affiliates. WCG has incurred approximately $100 million plus accrued
        interest for services rendered prior to the spin-off from TWC under the
        Pre-Spin Services Agreement (collectively, "Pre-Spin Services Claims").

    Purchase of headquarters building

    Pursuant to an agreement between WCG and TWC, among others, dated July 26,
2002 (the "Real Property Purchase and Sale Agreement"), the Company will
purchase the WCG headquarters building (the "Headquarters Building") and certain
related real and personal property currently subject to the sale and subsequent
leaseback transaction from TWC for the aggregate amount of $150 million (the
"Purchase Price"). As of June 30, 2002, the Company's obligation under the sale
and subsequent leaseback agreement was approximately $251.9 million. The
settlement also resolves the Company's defaults under the sale and subsequent
leaseback transaction as a result of WCG's bankruptcy filing, and avoids any
threat or risk that the Company would be evicted or otherwise lose possession of
its headquarters.

    The Purchase Price consists of approximately $50 million (subject to
reductions in the amount of $5.2 million reflecting net credits in favor of the
Company under a related construction agreement) to be paid to TWC pursuant to a
promissory note payable over 18 months and $100 million to be evidenced by a
promissory note payable over 90 months, both notes being issued by Williams
Technology Center, LLC ("WTC"), New WCG and



                                       13
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


WCL to TWC for such amount (the "OTC Notes"). The obligations of WTC, New WCG
and WCL under the OTC Notes may be subject to reduction, depending on the
disposition of certain aircraft leases described further in the Real Property
Purchase and Sale Agreement (the "Aircraft Dry Leases"). WTC's, New WCG's and
WCL's obligations under the OTC Notes will be secured by and pursuant to a
mortgage agreement (the "OTC Mortgage"), under which WTC will grant a first
priority mortgage lien and security interest in all of its right, title and
interest in, to and under the Headquarters Building and such related real and
personal property to TWC. The Settlement Agreement also contemplates that the
Lenders will receive a second priority mortgage lien and security interest in
these same assets. As described in the Real Property Purchase and Sale
Agreement, WCL, WTC, and New WCG will be obligors under the OTC Notes, and the
OTC Mortgage as set forth in the Real Property Purchase and Sale Agreement.

    The Real Property Purchase and Sale Agreement further provides that if,
within one year after the Settlement Agreement is executed, WTC exchanges or
disposes of or enters into an agreement to exchange or dispose of any or all of
the Headquarters Building or the related real or personal property for an
aggregate sales price in an amount greater than $150 million, WTC shall be
required to prepay the OTC Notes in full and pay to WHBC an amount equal to the
product of (x) 50% multiplied by (y) the excess of the aggregate sales price
over (A) $150 million less (B) the amount equal to (i) the aggregate
consideration received by TWC in connection with the disposition of the Aircraft
Dry Leases or (ii) the amount of proceeds received by the Company in connection
with the refinancing of the aircraft currently subject to the Aircraft Dry
Leases pursuant to the terms of the Real Property Purchase and Sale Agreement.
The OTC Notes and the OTC Mortgage are still being negotiated by the Company at
this time.

    Trademark rights

    Under the Settlement Agreement, TWC will transfer to the Company all of its
rights in the "WilTel" and "WilTel Turns Up Worldwide" marks, and in exchange
the Company will agree to amend the term of the existing Trademark License
Agreement, dated April 23, 2001, between TWC and WCG, to two years from the
effective date of the Plan (the "Effective Date"), at which time WCG and its
majority-owned subsidiaries would no longer have the right to use the "Williams"
mark, the "Williams Communications" mark, and certain other "Williams" related
marks. The transfer of these rights will be effectuated through an Assignment of
Rights Agreement between Williams Information Services Corporation ("WISC") and
WCL pursuant to which WISC will agree to grant, sell, and convey to WCL all of
its right, title, and interest in the United States and Canada to the trademarks
"WilTel" and "WilTel Turns Up Worldwide."

    Amendments to TWC continuing contracts

    The Company has various administrative service and support contracts with
TWC containing provisions that are favorable to the Debtors but which could
expire or be altered upon a change of control of the Debtors. The Settlement
Agreement provides for the continuation of only those contracts between the
Company and the TWC entities that the Company views as favorable (the "TWC
Continuing Contracts"), as well as modification to certain of those TWC
Continuing Contracts to waive any rights to an unfavorable alteration of
contract terms due to the New Investment or the transactions contemplated by the
Plan. As a result of this modification, New WCG would retain the benefits of
numerous commercially favorable contracts for the provision of various operating
services from TWC, which the reorganized Company would otherwise lose. In
addition to the administrative service and support agreements, the Settlement
Agreement provides for the continuation of other advantageous agreements between
the Company and the TWC entities. Several of these agreements relate to shared
use of rights of way, leases, and other operational matters. Other agreements
generate revenue for the Company in return for providing various services and
leases. Moreover, all outstanding disputes under all the TWC Continuing
Contracts would be resolved.



                                       14
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    Mutual releases

    Pursuant to the Settlement Agreement, the Company, the Company's current and
former directors and officers, and the Committee would release TWC and its
current and former directors, officers, and agents. TWC would release the
Company and the Company's current and former directors and officers, including
the claims TWC alleges it has against WCG's non-debtor subsidiaries.

    Channeling injunction

    The Settlement Agreement provides for and is conditioned upon an injunction
in the confirmation order with respect to the Plan (a) channeling all personal
claims of current unsecured creditors against TWC and deeming them satisfied
from the consideration provided by TWC under the Settlement Agreement; and (b)
channeling all remaining securities actions against WCG's officers and directors
to a "fund" consisting of up to 2% of the New WCG Common Stock and/or the right
to collect under the WCG officer/director liability insurance policies.

    NEW WCG

    On the Effective Date, New WCG would be incorporated in the State of Nevada
while WCG would continue to exist as a separate corporate entity in the State of
Delaware in order to liquidate any residual assets and wind up its affairs. CG
Austria would continue to exist as a separate corporate entity in the State of
Delaware.

    Immediately following the Effective Date, the initial New WCG Board of
Directors would be composed of nine individuals, consisting of the Chief
Executive Officer of WCG, at least one director of WCG to be selected by the WCG
Board of Directors, two individuals to be selected by Leucadia, and five
individuals to be selected by the Committee after consultation with Leucadia. In
addition, the initial officers of New WCG would be those individuals serving as
officers of WCG immediately prior to the Effective Date.

    Pursuant to the New Charter, New WCG would have authorized 200 million
shares of New WCG Common Stock of which 72,500,000 would be issued under the
Plan and outstanding, and 100 million shares of preferred stock, of which no
shares would be issued and outstanding. During the period beginning on the
Effective Date until the fifth anniversary thereof, Leucadia would be required
to vote all voting securities it beneficially owns that represent more than 33%
(subject to increase) of the outstanding voting securities in proportion to the
votes cast by the non-Leucadia shareholders. The 33% voting threshold may be
increased if the New WCG Board of Directors approves a sale of 10% or more of
the Corporation Securities to any person other than Leucadia. The increase would
be 2% for every percentage above 10% included in such approved sale. In
addition, Leucadia may not acquire or agree to acquire any New WCG security
except in connection with: (i) the New Investment, (ii) prior approval by a
majority of the members of the New WCG Board of Directors that are independent
or by holders of a majority of the New WCG voting securities that are not owned
by Leucadia voting together as a single class, (iii) for certain other
acquisitions so long as Leucadia would not hold in excess of 49% of the New WCG
voting securities following such acquisition and (iv) after the second
anniversary of the Effective Date.



                                       15
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


3. DEBTORS' FINANCIAL INFORMATION

    The condensed combined financial information for the Debtors as of and for
the three and six months ended June 30, 2002 is as follows:

                        CONDENSED COMBINED BALANCE SHEET
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                            JUNE 30,
                                                                                              2002
                                                                                          ------------
                                                                                         (IN THOUSANDS)
<S>                                                                                      <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                              $        418
   Short-term investments                                                                       24,496
   Receivables                                                                                     553
   Other                                                                                           339
                                                                                          ------------
 Total current assets                                                                           25,806
Investments:
   Equity in wholly-owned subsidiary                                                         3,122,872
   Receivable from wholly-owned subsidiary                                                      50,000
Employee notes receivable                                                                       19,916
Security deposits                                                                                3,550
                                                                                          ------------
Total assets                                                                              $  3,222,144
                                                                                          ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Current liabilities not subject to compromise:
     Accounts payable                                                                     $        186
     Accrued liabilities:
        Retention accruals                                                                       2,152
        Other                                                                                      589
                                                                                          ------------
   Total current liabilities not subject to compromise                                           2,927
   Current liabilities subject to compromise                                                   243,505
                                                                                          ------------
Total current liabilities                                                                      246,432
Long-term retention accruals                                                                    11,850
Other long-term liabilities                                                                      1,037
Long-term liabilities subject to compromise                                                  4,702,867
6.75% redeemable cumulative convertible preferred stock, $0.01 par value, 500
   million preferred shares authorized, 5.0 million 6.75% redeemable cumulative
   convertible shares outstanding, aggregate liquidation preference of $250.0 million          250,000
Stockholders' deficit:
   Class A common stock, $0.01 par value, 1 billion shares authorized, 493.2 million
     shares outstanding                                                                          4,932
   Capital in excess of par value                                                            3,901,200
   Accumulated deficit                                                                      (5,881,287)
   Accumulated other comprehensive loss                                                        (14,887)
                                                                                          ------------
Total stockholders' deficit                                                                 (1,990,042)
                                                                                          ------------
Total liabilities and stockholders' deficit                                               $  3,222,144
                                                                                          ============
</Table>



                                       16
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


                   CONDENSED COMBINED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                  THREE MONTHS       SIX MONTHS
                                                                     ENDED             ENDED
                                                                    JUNE 30,          JUNE 30,
                                                                      2002              2002
                                                                  ------------      ------------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE
                                                                             AMOUNTS)
<S>                                                              <C>                <C>
Operating expenses:
   Selling, general and administrative expenses                   $     (2,375)     $     (2,375)
   Restructuring charges                                                (1,119)           (1,119)
                                                                  ------------      ------------
     Total operating expenses                                           (3,494)           (3,494)
Investing income                                                           327               327
Reorganization items, net                                                  875               875
                                                                  ------------      ------------
Loss before equity in net loss of wholly-owned subsidiary               (2,292)           (2,292)
Equity in net loss of wholly-owned subsidiary                         (290,788)         (574,089)
                                                                  ------------      ------------
Net loss                                                              (293,080)         (576,381)
Preferred stock dividends and amortization of preferred stock
issuance costs                                                          (1,075)           (5,473)
                                                                  ------------      ------------
Net loss attributable to common stockholders                      $   (294,155)     $   (581,854)
                                                                  ============      ============

Basic and diluted loss per share:
   Net loss attributable to common stockholders                   $       (.59)     $      (1.17)
                                                                  ============      ============

   Weighted average shares outstanding                                 496,545           496,351
</Table>



                                       17
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


                   CONDENSED COMBINED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                    SIX MONTHS
                                                                                       ENDED
                                                                                     JUNE 30,
                                                                                       2002
                                                                                   ------------
                                                                                  (IN THOUSANDS)
<S>                                                                               <C>
OPERATING ACTIVITIES
Net loss                                                                           $   (576,381)
Adjustments to reconcile net loss to net cash provided by (used in) operating
   activities:
   Non-cash reorganization items, net                                                    (1,270)
   Equity in net loss of wholly-owned subsidiary                                        574,089
   Cash provided by (used in) changes in:
     Receivables                                                                           (293)
     Other current assets                                                                   113
     Accounts payable                                                                     2,214
     Accrued liabilities                                                                    439
     Other                                                                                  978
                                                                                   ------------
Net cash used in operating activities                                                      (111)

FINANCING ACTIVITIES
Change in receivable from wholly-owned subsidiary                                        (5,218)
Proceeds from issuance of common stock, net of expenses                                   9,404
Preferred stock dividends paid                                                           (4,161)
                                                                                   ------------
Net cash provided by financing activities                                                    25

INVESTING ACTIVITIES
Payments received on receivable of wholly-owned subsidiary                               25,000
Purchase of short-term investments                                                      (24,896)
Proceeds from sales of investments                                                          400
                                                                                   ------------
 Net cash provided by financing activities                                                  504

Increase in cash and cash equivalents                                                       418
Cash and cash equivalents at beginning of period                                             --
                                                                                   ------------
Cash and cash equivalents at end of period                                         $        418
                                                                                   ============
</Table>

RECEIVABLE FROM WHOLLY-OWNED SUBSIDIARY

    As of June 30, 2002, WCG's receivable from WCL consists of an eight-year
promissory note entered into on November 1, 1999. The note does not currently
bear interest. On April 22, 2002, WCG contributed $9.6 billion of this
promissory note to member's equity of WCL leaving a balance of $75.0 million. In
addition, on April 22, 2002, WCL paid to WCG $25 million, leaving a balance of
$50.0 million, in order to fund the expenses of the Chapter 11 Case in
accordance with the Cash Collateral Order.



                                       18
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


LIABILITIES SUBJECT TO COMPROMISE

    Liabilities of the Debtors subject to compromise consisted of the following:


<Table>
<Caption>
                                                             AS OF JUNE 30,
                                                                  2002
                                                             --------------
                                                             (IN THOUSANDS)
<S>                                                          <C>
Current liabilities subject to compromise:
   Accounts payable                                          $      102,257
   Interest accrued                                                 136,701
   Preferred stock dividends accrued                                  4,547
                                                             --------------
       Total current liabilities subject to compromise              243,505

 Long-term liabilities subject to compromise:
   Long-term debt:
     Senior Redeemable Notes                                      2,449,000
     ADP Claims                                                     753,867
     Senior Reset Note                                            1,500,000
                                                             --------------
       Total long-term liabilities subject to compromise          4,702,867
                                                             --------------

Total liabilities subject to compromise                      $    4,946,372
                                                             ==============
</Table>

    Senior Redeemable Notes

    The Senior Redeemable Notes are unsecured obligations of WCG. On April 1,
2002, WCG did not make interest payments totaling approximately $91 million due
under the terms of one of the Senior Redeemable Notes indentures. The failure to
make that payment resulted in a default under that indenture. In addition, the
filing of WCG's voluntary petition under chapter 11 resulted in a default under
each of the indentures governing the Senior Redeemable Notes. As discussed in
Note 2, under the Plan as contemplated, the senior redeemable noteholders will
receive approximately 55% of the new equity of New WCG.

    ADP Claims

    This note is included in the Settlement Agreement (see Note 2).

    Senior Reset Note

    This note is included in the Settlement Agreement (see Note 2).

REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK

    The Company has paid its preferred stock dividends through January 2002. As
of the commencement of the Chapter 11 Case, WCG ceased accruing dividends on its
preferred stock. Because of the priority requirements of the Bankruptcy Code, if
the Plan is consummated as discussed above, the holders of the preferred stock
will receive no distribution under the Plan and the preferred stock will be
cancelled.



                                       19
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


REORGANIZATION ITEMS, NET -- DEBTORS

<Table>
<Caption>
                                             THREE MONTHS AND
                                             SIX MONTHS ENDED
                                              JUNE 30, 2002
                                             ----------------
                                              (IN THOUSANDS)
<S>                                          <C>
Reorganization items, net:
   Gain on forgiveness of interest           $         69,773
   Write-off of deferred financing costs              (58,448)
   Write-off of debt discounts                        (10,055)
   Professional fees and other                         (1,372)
   Interest income                                        977
                                             ----------------
                                             $            875
                                             ================
</Table>

    As discussed in Note 2, in March 2002, certain provisions of the indenture
related to the Trust Notes were amended. The amendment, among other things,
provided that TWC would make the required March and September 2002 interest
payments totaling approximately $115 million on behalf of WCG to WCG Note Trust,
and WCG would not be required to reimburse TWC for these interest payments.
Since the interest accrued on these notes was not a claim in the Chapter 11
Case, WCG recognized a gain of $69.8 million.

    WCG wrote off deferred financing costs and debt discounts associated with
liabilities subject to compromise to reorganization items in accordance with SOP
90-7 since the deferred financing costs and debt discount do not have a
remaining useful life due to the Chapter 11 Case.

    Professional fees and other primarily consists of professional fees for
legal and financial advisory services.

    The Company recognized interest income of $1.0 million for the three and six
months ended June 30, 2002 on accumulated cash that the Company did not disburse
as a result of the Chapter 11 Case.

4. SEGMENT REVENUES AND LOSS

    The Company evaluates performance based upon segment loss from operations
which is operating EBITDA. Operating EBITDA as defined by the Company,
represents earnings before interest, income taxes, depreciation and amortization
and other unusual, non-recurring or non-cash items, such as asset impairments
and restructuring charges, equity earnings or losses and minority interest.
Operating EBITDA for 2001 also excludes lease costs attributable to the
Company's operating lease agreement covering a portion of the Company's
fiber-optic network (operating lease costs). A reconciliation of operating
EBITDA to loss from operations is provided below. Intercompany sales are
generally accounted for as if the sales were to unaffiliated third parties.



                                       20
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


<Table>
<Caption>
                                                                  EMERGING
                                                NETWORK           MARKETS            OTHER          ELIMINATIONS         TOTAL
                                              ------------      ------------      ------------      ------------      ------------
                                                                                 (IN THOUSANDS)
<S>                                           <C>               <C>               <C>               <C>               <C>
THREE MONTHS ENDED JUNE 30, 2002
Revenues:
   Capacity and other                         $    256,207      $     36,904      $         --      $         --      $    293,111
   Intercompany                                     10,305                38                --           (10,343)               --
                                              ------------      ------------      ------------      ------------      ------------
Total segment revenues                        $    266,512      $     36,942      $         --      $    (10,343)     $    293,111
                                              ============      ============      ============      ============      ============
Costs of sales:
   Capacity and other                         $    232,475      $     25,745      $         --      $         --      $    258,220
   Intercompany                                         38            10,305                --           (10,343)               --
                                              ------------      ------------      ------------      ------------      ------------
Total cost of sales                           $    232,513      $     36,050      $         --      $    (10,343)     $    258,220
                                              ============      ============      ============      ============      ============

Operating EBITDA:
   Loss from operations                       $   (171,783)     $    (28,978)     $       (131)     $         --      $   (200,892)
   Adjustments to reconcile loss from
     operations to operating EBITDA:
     Depreciation                                  128,265            16,888                --                --           145,153
     Other:
       Settlement accruals and gains, net           32,556                --                --                --            32,556
       Restructuring charges                         1,514               606                52                --             2,172
                                              ------------      ------------      ------------      ------------      ------------
Operating EBITDA                              $     (9,448)     $    (11,484)     $        (79)     $         --      $    (21,011)
                                              ============      ============      ============      ============      ============
</Table>


<Table>
<Caption>
                                                              EMERGING
                                            NETWORK           MARKETS            OTHER          ELIMINATIONS         TOTAL
                                          ------------      ------------      ------------      ------------      ------------
                                                                             (IN THOUSANDS)
<S>                                       <C>               <C>               <C>               <C>               <C>
THREE MONTHS ENDED JUNE 30, 2001
Revenues:
   External customers:
     Dark fiber                           $      1,250      $         --      $         --      $         --      $      1,250
     Capacity and other                        240,298            39,790                --                --           280,088
                                          ------------      ------------      ------------      ------------      ------------
   Total external customers                    241,548            39,790                --                --           281,338
   Intercompany                                 13,547               104                --           (13,651)               --
                                          ------------      ------------      ------------      ------------      ------------
Total segment revenues                    $    255,095      $     39,894      $         --      $    (13,651)     $    281,338
                                          ============      ============      ============      ============      ============
Costs of sales:
   Dark fiber                             $        534      $         --      $         --      $         --      $        534
   Capacity and other                          222,803            23,402                --                --           246,205
   Intercompany                                    104            13,547                --           (13,651)               --
                                          ------------      ------------      ------------      ------------      ------------
Total cost of sales                       $    223,441      $     36,949      $         --      $    (13,651)     $    246,739
                                          ============      ============      ============      ============      ============

Operating EBITDA:
   Loss from operations                   $   (129,247)     $    (16,096)     $     (1,452)     $         --      $   (146,795)
   Adjustments to reconcile loss from
     operations to operating EBITDA:
     Depreciation and amortization              99,217             8,076               125                --           107,418
     Operating lease costs                       9,619                --                --                --             9,619
                                          ------------      ------------      ------------      ------------      ------------
Operating EBTIDA                          $    (20,411)     $     (8,020)     $     (1,327)     $         --      $    (29,758)
                                          ============      ============      ============      ============      ============
</Table>



                                       21
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


<Table>
<Caption>
                                                                  EMERGING
                                                NETWORK           MARKETS            OTHER          ELIMINATIONS         TOTAL
                                              ------------      ------------      ------------      ------------      ------------
                                                                                 (IN THOUSANDS)
<S>                                           <C>               <C>               <C>               <C>               <C>
SIX MONTHS ENDED JUNE 30, 2002
Revenues:
   Capacity and other                         $    515,955      $     75,749      $         --      $         --      $    591,704
   Intercompany                                     21,396               102                --           (21,498)               --
                                              ------------      ------------      ------------      ------------      ------------
Total segment revenues                        $    537,351      $     75,851      $         --      $    (21,498)     $    591,704
                                              ============      ============      ============      ============      ============
Costs of sales:
   Capacity and other                         $    464,336      $     53,285      $         --      $         --      $    517,621
   Intercompany                                        102            21,396                --           (21,498)               --
                                              ------------      ------------      ------------      ------------      ------------
Total cost of sales                           $    464,438      $     74,681      $         --      $    (21,498)     $    517,621
                                              ============      ============      ============      ============      ============

Operating EBITDA:
   Loss from operations                       $   (308,236)     $    (58,183)     $       (486)     $         --      $   (366,905)
   Adjustments to reconcile loss from
     operations to operating EBITDA:
     Depreciation                                  256,131            29,168                --                --           285,299
     Other:
       Settlement accruals and gains, net           28,644                --                --                --            28,644
       Restructuring charges                        10,094             2,810               429                --            13,333
                                              ------------      ------------      ------------      ------------      ------------
Operating EBITDA                              $    (13,367)     $    (26,205)     $        (57)     $         --      $    (39,629)
                                              ============      ============      ============      ============      ============
</Table>

<Table>
<Caption>
                                                              EMERGING
                                            NETWORK           MARKETS            OTHER          ELIMINATIONS         TOTAL
                                          ------------      ------------      ------------      ------------      ------------
                                                                             (IN THOUSANDS)
<S>                                       <C>               <C>               <C>               <C>               <C>
SIX MONTHS ENDED JUNE 30, 2001
Revenues:
   External customers:
     Dark fiber                           $      9,101      $         --      $         --      $         --      $      9,101
     Capacity and other                        468,183            80,118                --                --           548,301
                                          ------------      ------------      ------------      ------------      ------------
   Total external customers                    477,284            80,118                --                --           557,402
   Intercompany                                 26,634               199                --           (26,833)               --
                                          ------------      ------------      ------------      ------------      ------------
Total segment revenues                    $    503,918      $     80,317      $         --      $    (26,833)     $    557,402
                                          ============      ============      ============      ============      ============
Costs of sales:
   Dark fiber                             $      3,488      $         --      $         --      $         --      $      3,488
   Capacity and other                          449,744            48,365                --                --           498,109
   Intercompany                                    199            26,634                --           (26,833)               --
                                          ------------      ------------      ------------      ------------      ------------
Total cost of sales                       $    453,431      $     74,999      $         --      $    (26,833)     $    501,597
                                          ============      ============      ============      ============      ============

Operating EBITDA:
   Loss from operations                   $   (254,398)     $    (31,587)     $     (2,441)     $         --      $   (288,426)
   Adjustments to reconcile loss from
     operations to operating EBITDA:
     Depreciation and amortization             177,002            15,406               223                --           192,631
     Operating lease costs                      21,466                --                --                --            21,466
                                          ------------      ------------      ------------      ------------      ------------
Operating EBTIDA                          $    (55,930)     $    (16,181)     $     (2,218)     $         --      $    (74,329)
                                          ============      ============      ============      ============      ============
</Table>



                                       22
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


<Table>
<Caption>
                             TOTAL ASSETS
                     -----------------------------
                       JUNE 30,       DECEMBER 31,
                         2002             2001
                     ------------     ------------
                            (IN THOUSANDS)
<S>                  <C>              <C>
Network              $  4,147,790     $  4,446,479
Emerging Markets          218,102          230,155
Other                     778,260        1,315,392
                     ------------     ------------

  Total              $  5,144,152     $  5,992,026
                     ============     ============
</Table>

5. RESTRUCTURING CHARGES

    Restructuring charges include restructuring charges of $1.2 million and
$12.3 million for the three and six months ended June 30, 2002, respectively,
relating to workforce reductions of approximately 750 employees in conjunction
with the restructuring of the Company's balance sheet and charges of $1.0
million for the three and six months ended June 30, 2002 relating to an
executive's restructuring retention bonus.

6. OTHER OPERATING INCOME, NET

    Transactions included in segment loss

    For the three and six months ended June 30, 2002, the Company recorded other
operating income, net of $0.9 million and $18.9 million, respectively, which
includes cash settlement gains of $17.7 million for the six months ended related
to various agreements.

    WCG recorded other operating income of $8.0 million in second quarter 2001
relating to a settlement of a claim.

    Transactions excluded from segment loss

    Other operating expense, net of $32.5 million for the three months ended
June 30, 2002 includes a $35.0 million accrual for contingent liabilities and
$1.0 million in expenses related to revisions of estimated costs associated with
the sale of SUSA fiber in fourth quarter 2001, partially offset by a non-cash
settlement gain of $3.5 million.

    Other operating expense, net of $28.6 million for the six months ended June
30, 2002 includes a $35.0 million accrual for contingent liabilities partially
offset by a non-cash settlement gain of $3.5 million and income of $2.9 million
related to revisions of estimated costs associated with the sale of SUSA fiber
in fourth quarter 2001.

7. INCOME FROM INVESTMENTS

    Income from investments for the three and six months ended June 30, 2002 was
not significant.

    The Company sold portions of its investments in certain marketable equity
securities for gross realized gains of $37.5 million and $61.9 million for the
three and six months ended June 30, 2001, respectively, and gross realized
losses of $12.5 million and $40.5 million for the three and six months ended
June 30, 2001, respectively.



                                       23
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    The Company recognized a loss of $34.5 million and $93.7 million for the
three and six months ended June 30, 2001, respectively, related to write-downs
of certain investments resulting from management's determination that the
decline in the value of these investments was other than temporary.

    The Company also recorded income of $16.6 million and $40.9 million for the
three and six months ended June 30, 2001, respectively, from the change in
market value of cashless collars on certain marketable equity securities in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended since the cashless collars did not qualify as a hedge.
Cashless collars were terminated during the three and six months ended June 30,
2001 yielding proceeds of $16.6 million and $40.9 million, respectively.

8. REORGANIZATION ITEMS, NET

<Table>
<Caption>
                                             THREE MONTHS       SIX MONTHS
                                                ENDED              ENDED
                                               JUNE 30,          JUNE 30,
                                                 2002              2002
                                             ------------      ------------
                                                     (IN THOUSANDS)
<S>                                          <C>               <C>
Reorganization items, net:
   Gain on forgiveness of interest           $     69,773      $     69,773
   Write-off of deferred financing costs          (92,391)          (92,391)
   Write-off of debt discounts                    (10,055)          (10,055)
   Professional fees and other                    (24,610)          (31,903)
   Interest income                                    977               977
                                             ------------      ------------
                                             $    (56,306)     $    (63,599)
                                             ============      ============
</Table>

    As discussed in Note 2, in March 2002, certain provisions of the indenture
related to the Trust Notes were amended. The amendment, among other things,
provided that TWC would make the required March and September 2002 interest
payments totaling approximately $115 million on behalf of WCG to WCG Note Trust,
and WCG would not be required to reimburse TWC for these interest payments.
Since the interest accrued on these notes was not a claim in the Chapter 11
Case, WCG recognized a gain of $69.8 million in accordance with SOP 90-7.

    The Company wrote off deferred financing costs and debt discounts associated
with liabilities subject to compromise and a portion of the deferred financing
costs associated with the Credit Agreement to reorganization items in accordance
with SOP 90-7 since the deferred financing costs and debt discount do not have a
remaining useful life due to the Chapter 11 Case.

    Professional fees and other primarily consists of professional fees for
legal and financial advisory services.

    The Company recognized interest income of $1.0 million for the three and six
months ended June 30, 2002 on accumulated cash that the Company did not disburse
as a result of the Chapter 11 Case.



                                       24
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


9. PROVISION FOR INCOME TAXES

    The provision for income taxes includes:

<Table>
<Caption>
                             THREE MONTHS ENDED               SIX MONTHS ENDED
                                  JUNE 30,                        JUNE 30,
                         --------------------------      --------------------------
                            2002            2001            2002            2001
                         ----------      ----------      ----------      ----------
                                               (IN THOUSANDS)
<S>                      <C>             <C>             <C>             <C>
Current:
   Federal               $       --      $       --      $       --      $       --
   State                         (4)              3              (9)            (26)
   Foreign                       --              --              --              --
                         ----------      ----------      ----------      ----------
                                 (4)              3              (9)            (26)
Deferred:
   Federal                     (777)         (7,531)           (723)        (43,832)
   State                       (141)         (1,754)           (131)         (8,494)
   Foreign                       --               4              --               4
                         ----------      ----------      ----------      ----------
                               (918)         (9,281)           (854)        (52,322)
                         ----------      ----------      ----------      ----------
     Total provision     $     (922)     $   (9,278)     $     (863)     $  (52,348)
                         ==========      ==========      ==========      ==========
</Table>

    The tax provision for all periods shown above reflect fully reserving,
through a valuation allowance, the Company's net deferred tax assets for which
utilization has not been demonstrated.

    The tax provision for all periods is significantly different than the
benefit expected from applying the federal statutory rate to pre-tax losses
primarily due to a valuation allowance established for the Company's net
deferred tax assets. The valuation allowance fully reserves the Company's net
deferred tax assets, primarily resulting from net operating loss carryforwards,
as the Company does not believe it is more likely than not that the net deferred
tax asset will be realized. Reductions to the fair value of marketable equity
securities reduced the associated deferred tax liabilities creating additional
net deferred tax assets for which the utilization has not yet been demonstrated.
The deferred tax provisions for these periods result from a valuation allowance
created to fully reserve these additional net deferred tax assets.

     Effective with the spin-off of WCG from TWC in April 2001, the existing tax
sharing agreement with TWC was amended to address pre spin-off tax attributes.
Under the amendment, TWC retains all rights and obligations with respect to tax
attributes of WCG for all periods prior to WCG's initial public offering. In the
event of any final determination with respect to a WCG tax attribute that arose
from the time of WCG's initial public offering to the date of the spin-off of
WCG from TWC, WCG will pay TWC for any determination resulting in a detriment as
compared to previous amounts filed and TWC shall pay WCG for any determination
resulting in favorable tax consequences as compared to amounts filed. Tax
attributes of WCG arising subsequent to the spin-off date are rights and
obligations of WCG. Under the Settlement Agreement as contemplated, WCG would
replace the tax sharing agreement with a tax cooperation agreement which would
eliminate WCG's responsibility for indemnification of TWC for pre-spin-off tax
items.

10. LOSS PER SHARE

    For the periods presented, diluted loss per common share is the same as the
basic calculation as the inclusion of any stock options and convertible
preferred stock would be antidilutive since the Company reported a net loss for
these periods. Stock options and convertible preferred stock of 8.8 million
shares for the three and six months ended June 30, 2002 and 15.6 million shares
and 12.2 million shares for the three and six months ended June 30, 2001,
respectively, have been excluded from the computation of diluted loss per common
share.



                                       25
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


11. NOTES RECEIVABLE

    In February 2002, America Movil, S.A. de C.V. prepaid its non-interest
bearing note of $90.0 million from the sale of Algar Telecom Leste, S.A. ("ATL")
by paying a discounted amount of $88.8 million.

    In March 2002, the Company settled a note receivable for proceeds of $19.3
million of which $6.1 million was recorded as other operating income.

    In April 2002, Platinum Equity LLC paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001.

12. DEBT AND OTHER FINANCING ARRANGEMENTS NOT SUBJECT TO COMPROMISE

    Debt consisted of the following:

    <Table>
    <Caption>
                                                               WEIGHTED-
                                                                AVERAGE
                                                                INTEREST           JUNE 30,        DECEMBER 31,
                                                                 RATE*               2002              2001
                                                              ------------       ------------      ------------
<S>                                                           <C>                <C>               <C>
                                                                                         (IN THOUSANDS)

Senior Redeemable Notes, 10.7% - 11.875%, due 2007 - 2010               --       $         --      $  2,438,692
Trust Notes due 2004                                                    --                 --         1,400,000
Credit Agreement                                                       6.4%           775,000           975,000
ADP                                                                     --                 --           750,000
Sale and subsequent leaseback to TWC                                   4.8%           251,874           269,194
Other                                                                  8.8%            81,555            78,381
                                                                                 ------------      ------------
                                                                                    1,108,429         5,911,267
Less current maturities                                                            (1,033,654)          (72,488)
                                                                                 ------------      ------------
Long-term debt                                                                   $     74,775      $  5,838,779
                                                                                 ============      ============
</Table>

----------

*  As of June 30, 2002

    See discussion of long-term debt that is subject to compromise in Note 3.

    Credit Agreement

    WCL is the obligor under the Credit Agreement and has pledged substantially
all of its assets to secure its obligations under that agreement. In addition,
WCL's obligations are guaranteed by WCG and secured by substantially all of the
assets of WCG. In connection with the Restructuring Agreement, WCL and the
Consenting Lenders entered into an amendment of the Credit Agreement (the
"Interim Amendment"). The Interim Amendment will be effective until the Debtors
consummate a chapter 11 plan of reorganization containing the terms and
conditions contemplated in the Restructuring Agreement (a "Restructuring
Agreement Plan"), at which time the Lenders will execute a permanent amendment
and restatement of the Credit Agreement according to the terms set forth in the
Restructuring Agreement. Among other things, the Interim Amendment provides for:

    o   A principal prepayment of $200 million under the outstanding Credit
        Agreement to be made by WCL upon the effectiveness of the amendment. WCL
        made this payment on April 22, 2002.

    o   An additional principal prepayment of $250 million to be made by WCL
        upon the effective date of a Restructuring Agreement Plan.

    o   A waiver under the Credit Agreement of all defaults and events of
        default occurring prior to April 22, 2002, so long as there is no
        occurrence of a subsequent default, as well as the amendment of certain
        other



                                       26
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


        provisions of the Credit Agreement to avoid the occurrence of events of
        default as a result of the commencement of the Chapter 11 Case.

    o   The removal of the lenders' obligations under the Credit Agreement to
        make any revolving loans, although WCL may still request the limited
        issuance of cash-collateralized letters of credit up to $45 million less
        the amount of any deposits made to third parties.

    o   The addition of certain reporting requirements on WCG and WCL and the
        requirement that WCL fund its operations in accordance with certain
        rolling 13 week cash forecasts as well as its business plan provided to
        the lenders under the Credit Agreement in March 2002.

    o   The repayment by WCL of $25 million of certain intercompany debt owed to
        WCG, which is being used to fund WCG's expenses during the Chapter 11
        Case, so long as such expenses are funded in accordance with the budget
        and other terms described in the Cash Collateral Order entered by the
        Bankruptcy Court.

    o   The elimination of substantially all financial covenants except for the
        requirement that WCL maintain a minimum cash balance, including amounts
        classified as short-term investments, in accounts controlled by the
        lenders of $350 million until June 30, 2002 and $200 million thereafter,
        and meet certain targets, including EBITDA results, as defined.

    o   An increase in the interest rate by 1.5%.

    o   The addition of certain additional restrictions on new investments by
        WCG and WCL in unrestricted subsidiaries and foreign subsidiaries as
        well as restrictions on other types of investments and the incurrence of
        additional debt.

    o   The addition of new events of default under the Credit Agreement,
        including but not limited to:

        o   the dismissal or conversion of the Chapter 11 Case to a case under
            chapter 7 of the Bankruptcy Code;

        o   the appointment of a chapter 11 trustee in the Chapter 11 Case;

        o   the granting of relief from the automatic stay in the Chapter 11
            Case to anyone other than the Lenders;

        o   the failure of the Restructuring Agreement Plan set forth in the
            Restructuring Agreement to become effective by July 15, 2002,
            provided that such date may automatically be extended to October 15,
            2002 if (i) WCL makes an additional principal prepayment of $50
            million under the Credit Agreement on July 15, 2002 (which
            prepayment will reduce the $250 million prepayment that is required
            to be made by WCL on the effective date of WCG's plan of
            reorganization), (ii) EBITDA, as defined, for second quarter 2002,
            is within certain permitted parameters, (iii) WCG has filed and is
            diligently prosecuting the Restructuring Agreement Plan, and (iv) a
            hearing has been scheduled to consider a disclosure statement
            respecting the Restructuring Agreement Plan;

        o   the Cash Collateral Order has not been entered by the Bankruptcy
            Court by May 20, 2002;

        o   the Restructuring Agreement is breached by WCG or WCL or a
            termination event (as defined in the Restructuring Agreement)
            occurs; and

        o   not reaching an agreement with the administrative agent of the bank
            group with respect to the ultimate amount, timing, conditions
            precedent and individuals covered for any amounts to be paid
            pursuant to an executive employee retention program.

    In July 2002, WCL made the $50 million prepayment under the Credit Agreement
and satisfied the other conditions required pursuant to the Interim Amendment to
automatically extend the date on or prior to which the Restructuring Agreement
Plan is to become effective from July 15, 2002 to October 15, 2002.

    Sale and subsequent leaseback to TWC

    In September 2001, the Company sold its Technology Center building and other
ancillary assets to TWC for approximately $276 million in cash. Concurrent with
the sale, the Company leased the Technology Center building for a period of ten
years and other ancillary assets for a period of three to ten years with varying
payment terms. As discussed in Note 2, the sale and subsequent leaseback
agreement will be terminated due to the



                                       27
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


purchase of the Technology Center and other ancillary assets for $150 million as
contemplated in the Settlement Agreement.

    On April 25, 2002, TWC notified the Company that the commencement of the
Chapter 11 Case is an event of default under certain agreements with TWC
including the sale and subsequent leaseback agreements. However, any claim TWC
may have had against WCG would be resolved upon the consummation of the
Settlement Agreement. Because there can be no assurances that the Settlement
Agreement will be confirmed as contemplated or that the Company can remain in
compliance with all of its covenants, the Company has classified its liabilities
under the sale and subsequent leaseback agreements and the Credit Agreement as
current. TWC has not exercised any remedies, there are no existing events of
default under the Credit Agreement and the Plan does not assume having to pay
either debt on accelerated terms.

    Other

    In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan in order to satisfy
certain conditions of the restructuring plan with its bank group due to
PowerTel's violation of two covenant requirements for the three months ending
December 31, 2001. In March 2002, as part of an approved restructuring plan with
its bank group, PowerTel received waivers from its bank group related to the
covenant violations. Under the approved restructuring plan, PowerTel will have
access to its remaining bank facility, subject to meeting certain covenants with
its lenders, beginning September 1, 2002, which has been reduced by 50 million
Australian dollars leaving a remaining balance of approximately 29 million
Australian dollars.

13. COMPREHENSIVE LOSS

    Comprehensive loss is as follows:

<Table>
<Caption>
                                                          THREE MONTHS ENDED               SIX MONTHS ENDED
                                                               JUNE 30,                        JUNE 30,
                                                      --------------------------      --------------------------
                                                         2002            2001            2002            2001
                                                      ----------      ----------      ----------      ----------
                                                                           (IN THOUSANDS)
<S>                                                   <C>             <C>             <C>             <C>
Net loss                                              $ (293,080)     $ (245,740)     $ (576,381)     $ (547,914)
   Other comprehensive loss:
       Unrealized loss on securities                      (2,367)        (25,502)         (6,379)       (198,970)
       Less: reclassification adjustment for net
          losses (gains) realized in net loss               (557)        (10,452)           (605)         52,323
                                                      ----------      ----------      ----------      ----------
        Net unrealized loss                               (2,924)        (35,954)         (6,984)       (146,647)
        Foreign currency translation adjustments             796         (15,180)          2,753         (34,541)
                                                      ----------      ----------      ----------      ----------
   Other comprehensive loss before taxes                  (2,128)        (51,134)         (4,231)       (181,188)
   Income tax benefit on other comprehensive loss            918          12,383             855          55,304
                                                      ----------      ----------      ----------      ----------

Comprehensive loss                                    $ (294,290)     $ (284,491)     $ (579,757)     $ (673,798)
                                                      ==========      ==========      ==========      ==========
</Table>



                                       28
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


14. CONTINGENCIES

    LITIGATION

    The Company is subject to various types of litigation in connection with its
business and operations.

    Williams' Securities Litigation

    On January 29, 2002, the first of numerous putative federal securities class
actions was filed in the U.S. District Court for the Northern District of
Oklahoma, against WCG, TWC, Keith Bailey, the former Chairman of TWC, Howard
Janzen, the Chairman, President, and CEO of WCG, and Scott Schubert, the CFO of
WCG. The putative class members in all of the cases are purchasers of the common
stock of TWC and/or the WCG Class A common stock between July 24, 2000, and
January 29, 2002. The complaints allege that the defendants violated federal
securities acts by issuing a series of misrepresentations to the market between
July 24, 2000, and January 29, 2002. WCG believes that the allegations are
without merit.

    Recently, the Court entered an order bifurcating the case into two groups of
plaintiffs. The first group consists of owners of WCG securities against WCG,
Howard Janzen, and Scott Schubert. The second group consists of owners of TWC
securities against TWC and Keith Bailey. Alex Meruelo has been named the lead
plaintiff in the WCG case and is represented by Milberg, Weiss, Bershad, Hynes &
Lerach, LLP and other firms as lead counsel. HGK Asset Management has been named
the lead plaintiff in the TWC case and is represented by Schoengold & Sporn and
other firms as lead counsel. The action against WCG has been stayed due to WCG's
bankruptcy filing.

    Both TWC and WCG have asserted indemnification rights to each other with
respect to these lawsuits and other similar claims and causes of actions.

    Right of Way Class Action Litigation

    A number of suits attempting to achieve class action status seek damages and
other relief from the Company based on allegations that the Company installed
portions of its fiber-optic cable without all necessary landowner consents.
These allegations relate to use of rights of way licensed by railroads, state
departments of transportation and others controlling pre-existing right-of-way
corridors. The putative members of the class in each suit are those owning the
land underlying or adjoining the right-of-way corridors. Similar actions have
been filed against all major carriers with fiber-optic networks. It is likely
that additional actions will be filed. The Company believes it obtained
sufficient rights to install its cable. It also believes that the class action
suits are subject to challenge on procedural grounds. TWC is also a defendant
or a related party in certain of these lawsuits. The TWC Entities have asserted
that they are entitled to indemnity or contribution from WCG, with respect to
each of the above lawsuits and any other similar claims or causes of action.

    The Company and other major carriers are seeking to settle the class action
claims referenced above relating to the railroad rights of way through an agreed
class action styled Zografos et. al. vs. Qwest Communications Corp., et. al.,
filed in the U.S. District Court for the District of Oregon on January 31, 2002.
On that same day, the plaintiffs and defendants jointly asked the Court to
approve a settlement. The settlement would have settled the majority of the
claims in the putative nationwide and statewide class actions referenced above.
However, the case was dismissed on July 12, 2002, creating significant
uncertainty regarding the ultimate resolution of this matter.

    Platinum Equity Dispute

    On August 28, 2001, Platinum Equity LLC sent formal notice that it believes
the Company owes it approximately $47 million arising from a recalculation of
the net working capital of the domestic, Mexican, and Canadian professional
services operations of the Solutions segment sold to Platinum. Pursuant to the
provisions of the sale agreement, the parties submitted the dispute to binding
arbitration before an independent public accounting firm.



                                       29
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    Thoroughbred Technology and Telecommunications, Inc. vs. WCL

    On July 24, 2001, Thoroughbred Technology and Telecommunications, Inc.
("TTTI") filed suit against WCL in the U.S. District Court for the Northern
District of Georgia for claims that include breach of contract with respect to a
fiber-optic fiber installation project that TTTI was constructing for itself and
others, including WCL. TTTI seeks specific performance that includes payment of
in excess of $36 million in damages plus pre-judgment interest and to require
WCL to take title to a three (3) conduit system constructed between Cleveland,
Ohio and Boyce, Virginia. WCL alleges various defenses, including significant
warranty and breach of contract claims on the part of TTTI. On May 9, 2002, the
Court granted TTTI's motion for partial summary judgment on the issue of WCL's
liability, finding that WCL did not have the right to terminate the contract.
WCL's warranty and breach of contract claims remain pending. The Court's order
stated the amount of damages would not be established until a ruling is made
regarding the remaining claims of both parties. However, recently TTTI filed a
motion with the Court seeking to require WCL to close on the Cleveland to Boyce
transaction and to enter judgment in TTTI's favor for in excess of $38 million.
WCL has objected to the motion and the issue remains pending with the Court.
Should the Court grant TTTI's motion and require WCL to close on the Cleveland
to Boyce conduit segment and enter judgment in favor of TTTI, it is likely that
WCL will be unable to post a bond or other security in which case WCL would be
required to pay the amount within 30 days or risk a default under WCL's existing
credit agreements. WCL remains confident of the validity of its counterclaims
and that such claims, if proven, will reduce the amount of any potential
judgment that TTTI may obtain. Moreover, WCL believes the Court erred in
granting TTTI's motion for partial summary judgment and WCL has sought
reconsideration of the order with the Court. Should the Court not reconsider its
ruling, then WCL believes the order granting partial summary judgment to TTTI is
likely to be overturned on appeal. However, should TTTI prevail in this
litigation, there is a possibility that WCL's counterclaims would not reduce the
amount of TTTI's claims to a level which is below certain monetary triggers in
WCL's existing credit agreements, thus creating a default by WCL, which would,
in turn, terminate the Restructuring Agreement. In recent correspondence, TTTI
has indicated its intention to raise additional claims in the litigation against
WCL in the stated amount of as much as $43 million. WCL has reviewed these
potential claims based upon the limited information available to date and
believes they are without merit.

    Oklahoma Department of Securities Investigation

    On April 26, 2002, the Oklahoma Department of Securities (the "Department")
issued an Order of Investigation to both WCG and TWC. In that order, the
Department expressed its intention to investigate unspecified allegations that
WCG and TWC may have violated the Oklahoma Securities Act. The Company is
cooperating fully with the Department. At this time, neither the scope of the
Department's investigation nor the likely outcome of any such investigation can
be determined. The Company believes that all of its actions and disclosures have
been in full compliance with the Oklahoma Securities Act.

    The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Except for the material claims
listed above, in the opinion of management upon advice from legal counsel, the
ultimate resolution of all claims, legal actions and complaints after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements is not expected to have a materially adverse effect upon the
Company's future financial position, results of operations or cash flows.

    OTHER

    SBC

    SBC, the Company's largest customer (37 percent of Network's 2001 revenues
as disclosed in the Company's 2001 10-K), may terminate its provider agreements
with the Company if any of the following occurs:

    o   The Company begins to offer retail long distance voice transport or
        local exchange services on its network except in limited circumstances;



                                       30
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


    o   The Company materially breaches its agreements with SBC causing a
        material adverse effect on the commercial value of the relationship to
        SBC; or

    o   The Company has a change of control without SBC's consent (regarding
        which, SBC has notified the Company that it reserves its right to claim
        that the spin-off of the Company from TWC constituted a change of
        control).

        The Company is currently seeking an agreement with SBC to resolve the
        change in control issue; however the Company cannot provide assurance
        that an agreement will be reached in a timely fashion. If a timely
        agreement cannot be reached, the Company may seek judicial resolution.

    The Company may terminate the provider agreements if any of the following
occurs:

    o   SBC has a change of control

    o   There is a material breach by SBC of the agreements, causing a material
        adverse effect on the commercial value of the relationship to the
        Company.

    Either party may terminate a particular provider agreement if the action or
failure to act of any regulatory authority materially frustrates or hinders the
purpose of that agreement. There is no monetary remedy for such a termination.
In the event of termination due to its actions, the Company could be required to
pay SBC's transition costs of up to $200 million. Similarly, in the event of
termination due to SBC's actions, SBC could be required to pay the Company's
transition costs of up to $200 million, even though the Company's costs may be
higher.

    Worldcom, Inc.

    WCG currently has a prepaid capacity agreement with WorldCom, Inc.
("WorldCom") of approximately $97 million valued on its balance sheet as of June
30, 2002. WCG cannot determine at this time what financial impact, if any, the
WorldCom bankruptcy filing will have on the recoverability of this asset.
Developments in the WorldCom bankruptcy proceedings could impair WCG's ability
to realize or recover this asset, leading to an impairment charge against
earnings for some or all of the currently recorded value.

15. RECENT ACCOUNTING STANDARDS

    Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, adoption of SFAS No. 142 is required in fiscal
years beginning after December 15, 2001. As of December 31, 2001, the Company
has fully impaired its goodwill and other intangible assets. There was no impact
on the Company's results of operations and financial position upon adopting SFAS
No. 142.

    In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement
requires companies to record a liability for asset retirement obligations in the
period in which they are incurred, which typically could be upon completion of
construction or shortly thereafter. The FASB decided to limit the scope to legal
obligations and the liability will be recorded at fair value. The Company will
implement this statement as part of its fresh start accounting as required by
SOP 90-7. The effect of adopting this standard on the Company's results of
operations and financial position is currently being evaluated.

    In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement, effective for
fiscal years beginning after December 15, 2001, provides a single accounting
model for long-lived assets to be disposed of and replaces SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company's
approach for impairment under SFAS No. 121


                                       31
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


is consistent with the provisions under SFAS No. 144. Accordingly, the effect of
adopting this standard on the Company's results of operations and financial
position was not different than had the Company continued to operate under SFAS
No. 121.

    In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, the Statement rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion 30 will
now be used to classify those gains and losses. The Company will implement this
statement as part of its fresh start accounting as required by SOP 90-7. The
Company anticipates no impact on the Company's results of operations and
financial position upon adopting SFAS No. 145.

    In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between Statement 146 and Issue 94-3 relates to Statement 146's requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. Statement 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. A fundamental
conclusion reached by the FASB in this Statement is that an entity's commitment
to a plan, by itself, does not create an obligation that meets the definition of
a liability. Therefore, this Statement eliminates the definition and
requirements for recognition of exit costs in Issue 94-3. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. The Company will implement this statement as part of its fresh start
accounting as required by SOP 90-7. The effect of adopting this standard on the
Company's results of operations and financial position is currently being
evaluated.

16. RELATED PARTY TRANSACTIONS

    As disclosed in the Company's Form 10-K for the year 2001, the Compensation
Committee of the board of directors of WCG established a program to award annual
retention bonuses over a period of five years in the aggregate amount of $13
million to certain executives to be applied, after deduction of applicable
withholding taxes, solely against their respective outstanding principal loan
balances. The agreements executed under this program have subsequently been
amended in conjunction with finalizing the Plan. In addition, certain amendments
were executed that are conditioned on the purchase by Leucadia of shares of New
WCG Common Stock pursuant to the Plan, and will only take effect provided that
the purchase is consummated pursuant to and in accordance with the terms and
conditions of the Leucadia Investment Agreement by February 28, 2003.

    Under the amended retention bonus agreements, any outstanding bonus amounts
remaining at the time of the effective date of the Plan will be paid out in four
equal payments on each of the first through fourth anniversaries of the
restructuring date. Payments accelerate for events such as normal retirement,
rejection of the retention bonus agreement under federal bankruptcy laws, an
involuntary termination or a change in control (in the latter case, acceleration
occurs only with respect to accrued, unpaid amounts for the year in which the
change in control occurs). Interest payments owed by the executives beginning as
of January 1, 2002 will be reimbursed by the Company, and the Company will pay
all taxes associated with interest and principal payments under the retention
bonus agreements, as well as any taxes incurred as a result of the payment of
taxes by the Company.

    Under a separate amendment conditioned on the transaction with Leucadia, as
described above, all retention bonus payments would vest upon consummation of
the transactions contemplated by the Plan or, if earlier, termination without
cause of a given executive, but would still be paid out over the first through
fourth



                                       32
<PAGE>

                       WILLIAMS COMMUNICATIONS GROUP, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)


anniversaries of the restructuring date. Payment would only accelerate upon
death or disability or the rejection of the retention bonus agreement under
federal bankruptcy laws. The payment of associated taxes would be limited to an
aggregate total of $20 million for all participants. Under the Leucadia
agreement, any officers who are parties to retention bonus agreements would not
be eligible to participate in the Company's otherwise applicable change in
control severance plan.

    As disclosed in the Company's Form 10-Q for first quarter 2002, WCG's board
of directors approved the funding of a $30 million trust by WCL to fund certain
incentive and retention programs through the completion of the bankruptcy
process. Subsequently, the Administrative Agent for the Lenders requested that
no payments be made out of the Trust. As a result, the Trust has been dissolved
and all funds have reverted back to the general assets of WCL.

    Under previous compensation policies, each director received $1,000 per
meeting of the board and between $500 and $750 per committee meeting, depending
on the committee. On April 18, 2002, following consultation with an outside
compensation consultant, the board of directors altered the form and amount of
director compensation to be $1,000 per meeting, regardless of whether it is a
meeting of the board or any given committee, effective January 1, 2002.



                                       33
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    The following discussion contains forward-looking statements that reflect
WCG's plans, estimates and beliefs. WCG's actual results could materially differ
from those discussed in these forward-looking statements. Factors that could
cause or contribute to those differences include, but are not limited to, those
discussed below and elsewhere in this Quarterly Report on Form 10-Q,
particularly in "Forward-Looking Statements."

BALANCE SHEET RESTRUCTURING

    See Notes 2 and 12 to the condensed consolidated financial statements
discussing the Chapter 11 Case, which is incorporated herein by reference.

CRITICAL ACCOUNTING POLICIES

    Accounting standards require information in financial statements about the
accounting principles and methods used and the risks and uncertainties inherent
in significant estimates. The Company believes that its financial statements and
footnote disclosures present fairly, in all material respects, an accurate
application of generally accepted accounting principles ("GAAP"). In an effort
to reconcile the technical application of GAAP to the communication and
disclosure of important information to facilitate and enhance an investor's
understanding of a company's financial status, and the possibility and
implication of changes in the financial and operating status of a company, the
SEC issued Financial Reporting Release No. 60 (FR-60) in which it stated that it
is considering new rules during 2002 to elicit more precise disclosures about
the accounting policies that management believes are the most critical; that is,
they are both most important to the portrayal of the company's financial
condition and results, and they require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. In addition, the SEC issued
FR-61 to remind public companies of existing disclosure requirements and to
suggest steps for meeting those requirements. In response to FR-60 and FR-61,
and in anticipation of new rules, the Company is making the following comments,
all of which should be read in conjunction with the financial statements
including the accompanying footnotes:

    Adoption of fresh start accounting

    Upon emerging from chapter 11, the Company will implement fresh start
accounting under the provisions of SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Under SOP 90-7, the reorganization
fair value of the Company will be allocated to its assets and liabilities, its
accumulated deficit will be eliminated, and new equity will be issued according
to the Plan. As part of this process, the Company will be required to adjust
deferred revenue balances currently recorded on its balance sheet to fair value
and will also be recording liabilities and assets for long term commitments not
representative of current market conditions. In addition, changes in accounting
principles should be adopted in fresh start accounting that would be required in
the financial statements within twelve months following emergence from chapter
11.

    In conjunction with formulating the Plan, the Company has been required to
estimate its post-confirmation going concern value. The Company's financial
advisors have assisted in the valuation utilizing methodologies representing
hypothetical reorganized enterprise values assuming the implementation of the
business plan as well as other significant assumptions. Based upon this
analysis, the estimated enterprise value for the Company at the effective date
of the Plan is approximately $1.4 billion. The indebtedness of the Company at
the effective date of the Plan is projected to be $675 million, substantially
all of which is expected to be classified as long-term. After deducting this
amount from the enterprise value, the estimated total equity value of the
Company is approximately $725 million. These amounts are based on preliminary
valuation information and, as such, the final reorganization fair value of the
Company that will be allocated to its assets and liabilities may vary.

    The Company is still evaluating the impact of adopting fresh start
accounting. However, the Company anticipates that the adoption of fresh start
accounting will have a material effect on its financial statements



                                       34
<PAGE>

because of the revised valuation of the company, the valuation of assets and
liabilities to fair value and the potential adoption of new accounting rules
upon emergence from chapter 11.

    Impairments of long-lived assets

    Accounting standards require the Company to evaluate and test recoverability
of long-lived assets or asset groups including goodwill and other intangibles
whenever events or changes in circumstances indicate that its carrying value
amount may not be recoverable. Whenever these "impairment indicators" are
present, the company must estimate the future cash flows attributable to the
assets and determine whether or not future cash flows, net of direct cash flows
attributable to the generation of those revenues, result in recovery of the
company's basis in those assets. If so, there is no impairment. If not, then the
company must record an impairment charge equal to the difference between its
basis in the assets and the fair value of the assets. The rules further require
the company to determine whether it plans to use the assets or hold the assets
for sale.

    During first and second quarters 2002, the Company prepared impairment tests
on a going concern basis, and its remaining basis at the end of these periods in
its long-lived assets was determined to be recoverable through future cash
flows. Further adjustments to the carrying value may be necessary because of
further revisions of the underlying cash flow assumptions or revised assumptions
of underlying assets to be held for use versus assets to be sold prior to
adopting fresh start accounting. Upon emergence and adoption of fresh start
accounting, the Company anticipates it will reduce its carrying value of
long-lived assets by approximately $2.5 billion.

    WCG currently has a prepaid capacity agreement with WorldCom of
approximately $97 million valued on its balance sheet as of June 30, 2002. WCG
cannot determine at this time what financial impact, if any, the WorldCom
bankruptcy filing will have on the recoverability of this asset. Developments in
the WorldCom bankruptcy proceedings could impair WCG's ability to realize or
recover this asset, leading to a impairment charge against earnings for some or
all of the currently recorded value.

    Debt, preferred stock obligations and covenant compliance

    Despite the commencement of the Chapter 11 Case, the Company has agreements
with the lenders under the Credit Agreement that are not directly affected by
the Chapter 11 Case because no chapter 11 case has been commenced for WCL. These
agreements contain various terms and calculations (collectively referred to as
covenants) that require subjective and legal interpretations. The Company's
ability to continue to classify the non-current portion of these obligations as
long-term is dependent on its ability to continue to meet the covenant
requirements listed in these debt agreements or obtain waivers or amendments in
the event the Company cannot comply with its covenants or cure any instances of
noncompliance. As discussed in Note 12 to the condensed consolidated financial
statements, the Company has secured agreements and waivers for events of default
occurring on, before or associated with its Chapter 11 Case with respect to its
obligations under the Credit Agreement.

    Events of default occurring subsequent to the Company's commencement of the
Chapter 11 Case are not covered by the waivers under the Credit Agreement. On
April 25, 2002, TWC notified the Company that the commencement of the Chapter 11
Case is an event of default under certain agreements with TWC including the sale
and subsequent leaseback agreements. If TWC was to exercise its remedies under
the sale and subsequent leaseback agreements and demand payment of amounts owed,
or if the Company was unable to meet the conditions of the Restructuring
Agreement, there would be a termination event under the terms of the
Restructuring Agreement. A termination event would allow the Company's creditors
to declare all amounts outstanding, including accrued interest or other
obligations, to be immediately due and payable and allow them to proceed against
the collateral granted to them, if any, to secure the debt. The Company does not
have existing liquidity sufficient to pay all amounts that would become due as a
result of defaults under its debt agreements and, thus, would have to find other
means of liquidity, enter into separate agreements to restructure its debt
agreements, or commence a chapter 11 case at the operating company level in
order to avoid the material adverse effects associated with creditors
foreclosing or exercising other remedies.



                                       35
<PAGE>

    However, any claim TWC may have had against WCG would be resolved upon the
consummation of the Settlement Agreement. Because there can be no assurances
that the Settlement Agreement will be confirmed as contemplated or that the
Company can remain in compliance with all of its covenants, the Company has
classified its liabilities under the sale and subsequent leaseback agreements
and the Credit Agreement as current. TWC has not exercised any remedies, there
are no existing events of default under the Credit Agreement and the Plan does
not assume having to pay either debt on accelerated terms.

    On April 1, 2002, WCG did not make interest payments totaling approximately
$91 million due under the terms of one of the Senior Redeemable Notes
indentures. The failure to make that payment resulted in a default under that
indenture. In addition, the filing of WCG's voluntary petition under chapter 11
resulted in a default under each of the indentures governing the Senior
Redeemable Notes. All actions with respect to enforcement of rights under the
Senior Redeemable Notes are stayed by virtue of the commencement of the Chapter
11 Case.

    As of June 30, 2002, PowerTel has 71 million Australian dollars (or $40.0
million) outstanding under its bank facility. As of December 31, 2001, PowerTel
was in violation of two covenant requirements and was in the process of
negotiating a restructuring plan with its bank group. In February 2002, the
Company advanced PowerTel 16 million Australian dollars (or $8.3 million) in the
form of a subordinated loan in order to satisfy certain conditions of the
restructuring plan. In March 2002, as part of the approved restructuring plan
with its bank group, PowerTel received waivers from its bank group related to
the covenant violations for the three months ending December 31, 2001. Under the
approved restructuring plan, PowerTel will have access to its remaining bank
facility, subject to meeting certain covenants with its lenders, beginning
September 1, 2002. PowerTel's violation of covenant requirements does not cause
any cross-defaults to the Company's other debt obligations.

    The Company has redeemable cumulative convertible preferred stock
outstanding as of June 30, 2002 of approximately $250 million. The Company has
paid its preferred stock dividends through January 2002. As of the commencement
of the Chapter 11 Case, WCG ceased accruing dividends on its preferred stock.
Because of the priority requirements of the Bankruptcy Code, if the Plan is
consummated as discussed in Note 2, the holders of the preferred stock will
receive no distribution under the Plan and the preferred stock will be
cancelled. In accordance with existing GAAP, the preferred stock is classified
on its balance sheet as mezzanine financing, meaning it is neither debt nor
equity. Pending rules before the FASB would require classifying this security as
debt, due in 2012.

    Collections on notes receivable

    As of June 30, 2002, the Company has notes receivable outstanding of
approximately $55 million primarily related to the sale of its Solutions
business. In April 2002, Platinum Equity LLC paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. The Company is involved in a dispute with the
purchaser of its Solutions business regarding the calculation of net working
capital as defined in the agreement in which the purchaser claims that the
Company owes approximately $47 million. The Company denies that a working
capital adjustment of this magnitude is required. The matter has been submitted
to an independent public accounting firm for binding resolution.

    Revenue recognition

    The Company recognizes capacity revenues monthly as services are provided or
as revenues are earned. As a result of accounting rules that became effective in
June 1999, revenues from the Company's dark fiber IRU transactions are accounted
for as operating leases and recognized over the life of the agreement. The
Company has recognized one-time dark fiber IRU revenues only to the extent that
title was transferred or to the extent that the fulfillment of the order was
pursuant to an obligation that existed prior to June 1999.



                                       36
<PAGE>

    As part of the Company's strategy to be the low cost provider, the Company
has entered into transactions such as buying, selling, swapping and/or
exchanging capacity, conduit and fiber to complete and compliment its network.
The Company has not recognized or recorded any one-time capacity or service
revenues from these transactions. Depending upon the terms of the agreement,
certain transactions are accounted for as pure asset swaps with no revenue and
no cost recognition while certain transactions are accounted for as both revenue
and cost over the corresponding length of time for each agreement.

    The Company recognizes revenues when collectibility is reasonably assured.
In the current distressed telecom environment, significant judgment and
assumptions are required in order to determine whether or not collectibility is
reasonably assured. These judgements include assessing the likelihood of
customers meeting covenants or obtaining financing. In addition, the company
must be able to assess, in some cases, the likelihood of customers filing for
chapter 11 and predicting the outcome of bankruptcy filings once they occur. The
Company believes it has the appropriate reserves recorded for any exposures
resulting from these uncertainties. Subsequent to June 30, 2002, WorldCom
commenced a chapter 11 case. As disclosed in the Company's 2001 10-K, the
Company's revenues from WorldCom, including Intermedia and UUNet, accounted for
11 percent of Network's 2001 revenues. The Company is uncertain at this time to
what extent WorldCom's bankruptcy filing will impact, if at all, the recognition
of revenues in the future and will continue to monitor the progress of the
bankruptcy filing.

TRANSACTIONS WITH SBC

    SBC is the Company's largest customer and was a related party due to the
membership of an officer of SBC on the Company's board of directors. In first
quarter 2002, the officer of SBC resigned his membership on the Company's board
of directors. SBC purchases domestic voice and data long-distance and local
transport services from the Company. Revenues from SBC for the three months
ended June 30, 2002 and 2001 were approximately $133 million and $93 million,
respectively, and for the six months ended June 30, 2002 and 2001 were
approximately $255 million and $182 million, respectively. The Company purchases
local transport services, platform services such as toll-free, operator, calling
card and directory assistance services and international services such as
transport and switched-voice services from SBC. These purchases from SBC were
$47.7 million and $33.7 million for the three months ended June 30, 2002 and
2001, respectively, and $83.9 million and $67.8 million for the six months ended
June 30, 2002 and 2001, respectively.

    SBC may terminate the provider agreements if any of the following occurs:

    o   The Company begins to offer retail long distance voice transport or
        local exchange services on its network except in limited circumstances;

    o   The Company materially breaches its agreements with SBC causing a
        material adverse effect on the commercial value of the relationship to
        SBC; or

    o   The Company has a change of control without SBC's consent (regarding
        which, SBC has notified the Company that it reserves its right to claim
        that the spin-off of the Company from TWC constituted a change of
        control).

        The Company is currently seeking an agreement with SBC to resolve the
        change in control issue; however the Company cannot provide assurance
        that an agreement will be reached in a timely fashion. If a timely
        agreement cannot be reached, the Company may seek judicial resolution.

    The Company may terminate the provider agreements if any of the following
occurs:

    o   SBC has a change of control

    o   There is a material breach by SBC of the agreements, causing a material
        adverse effect on the commercial value of the relationship to the
        Company.

    Either party may terminate a particular provider agreement if the action or
failure to act of any regulatory authority materially frustrates or hinders the
purpose of that agreement. There is no monetary remedy for such a termination.
In the event of termination due to its actions, the Company could be required to
pay SBC's transition costs of up to $200 million. Similarly, in the event of
termination due to SBC's actions, SBC could be required to pay the Company's
transition costs of up to $200 million, even though the Company's costs may be
higher.



                                       37
<PAGE>

RESULTS OF OPERATIONS

    The table below summarizes the Company's consolidated results of operations:

<Table>
<Caption>
                                                 THREE MONTHS ENDED               SIX MONTHS ENDED
                                                       JUNE 30,                        JUNE 30,
                                              --------------------------      --------------------------
                                                 2002            2001            2002            2001
                                              ----------      ----------      ----------      ----------
                                                                    (IN THOUSANDS)
<S>                                           <C>             <C>             <C>             <C>
Revenues:
   Network                                    $  266,512      $  255,095      $  537,351      $  503,918
   Emerging Markets                               36,942          39,894          75,851          80,317
   Other                                              --              --              --              --
   Eliminations                                  (10,343)        (13,651)        (21,498)        (26,833)
                                              ----------      ----------      ----------      ----------
     Total revenues                              293,111         281,338         591,704         557,402
Operating expenses:
   Cost of sales                                 258,220         246,739         517,621         501,597
   Selling, general and administrative            52,836          76,171         121,097         151,186
   Provision for doubtful accounts                 3,976           5,774          11,523           8,436
   Depreciation and amortization                 145,153         107,418         285,299         192,631
   Restructuring charges                           2,172              --          13,333              --
   Other expense (income), net                    31,646          (7,969)          9,736          (8,022)
                                              ----------      ----------      ----------      ----------
     Total operating expenses                    494,003         428,133         958,609         845,828
                                              ----------      ----------      ----------      ----------
Loss from operations                            (200,892)       (146,795)       (366,905)       (288,426)
Net interest expense                             (47,946)       (118,590)       (171,739)       (201,073)
Investing income (loss):
   Interest and other                              8,869          18,490          18,077          21,212
   Equity losses                                    (543)         (3,307)         (1,712)         (9,208)
   Income (loss) from investments                    557           7,132           1,517         (31,405)
Minority interest in loss of consolidated
   subsidiary                                      3,903           6,583           8,587          13,191
Other income, net                                    200              25             256             143
Reorganization items, net                        (56,306)             --         (63,599)             --
                                              ----------      ----------      ----------      ----------
Loss before income taxes                        (292,158)       (236,462)       (575,518)       (495,566)
Provision for income taxes                          (922)         (9,278)           (863)        (52,348)
                                              ----------      ----------      ----------      ----------
Net loss                                      $ (293,080)     $ (245,740)     $ (576,381)     $ (547,914)
                                              ==========      ==========      ==========      ==========
</Table>


THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

CONSOLIDATED RESULTS

    The Company's net loss increased $47.4 million primarily due to
reorganization items of $56.3 million, an increase in loss from operations of
$54.1 million and a decrease in investing income of $13.4 million, partially
offset by a decrease in net interest expense of $70.7 million and a decrease
related to the tax provision of $8.4 million.

    Network and Emerging Markets accounted for $42.6 million and $12.9 million
of the increase in loss from operations, respectively. Other loss from
operations decreased $1.4 million.



                                       38
<PAGE>

NETWORK

    The table below summarizes Network's results from operations:

<Table>
<Caption>
                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                    JUNE 30,                       JUNE 30,
                                           --------------------------      --------------------------
                                              2002            2001            2002            2001
                                           ----------      ----------      ----------      ----------
                                                              (IN THOUSANDS)
<S>                                        <C>             <C>             <C>             <C>
Revenues:
   Dark fiber                              $       --      $    1,250      $       --      $    9,101
   Capacity and other                         256,207         240,298         515,955         468,183
   Intercompany                                10,305          13,547          21,396          26,634
                                           ----------      ----------      ----------      ----------
     Total revenues                           266,512         255,095         537,351         503,918
Operating expenses:
   Cost of sales                              232,513         223,441         464,438         453,431
   Selling, general and administrative         40,526          64,086          94,221         128,333
   Provision for doubtful accounts              3,654           5,567          10,762           7,572
   Depreciation and amortization              128,265          99,217         256,131         177,002
   Restructuring charges                        1,514              --          10,094              --
   Other expense (income), net                 31,823          (7,969)          9,941          (8,022)
                                           ----------      ----------      ----------      ----------
     Total operating expenses                 438,295         384,342         845,587         758,316
                                           ----------      ----------      ----------      ----------
Loss from operations                       $ (171,783)     $ (129,247)     $ (308,236)     $ (254,398)
                                           ==========      ==========      ==========      ==========
</Table>

    Network's revenues increased $11.4 million, or 4%, primarily attributable to
data and voice services provided to SBC of approximately $133 million for the
three months ended June 30, 2002 compared to approximately $93 million for the
three months ended June 30, 2001 and an increase of $44.2 million attributable
to the acquisition of Ameritech Global Gateway Services ("AGGS") on September
28, 2001, of which $15.4 million relates to SBC and is included in the SBC
revenues amount above. These increases were offset by contractual price re-rates
and customer disconnects, $3.2 million of lower revenues from Emerging Markets
and $2.5 million of lower revenues from vendor assignments.

    Network's gross margin increased to $34.0 million for the three months ended
June 30, 2002 from $31.7 million for the three months ended June 30, 2001. Gross
margin increased to 13% for the three months ended June 30, 2002 from 12% for
the three months ended June 30, 2001. The improvement in Network's gross margin
is primarily a result of $9.6 million lower lease expense from the absence of
lease costs associated with the ADP (see Note 2 to the condensed consolidated
financial statements) which have been replaced with interest expense in 2002
until the filing of the Company's Chapter 11 Case, $3.3 million lower ad valorem
taxes as a result of changes in fair values of the associated assets and a $1.7
million increase attributable to the acquisition of AGGS. These improvements are
partially offset by lower revenues from customer disconnects and $3.2 million of
lower margins from Emerging Markets.

    Network's selling, general and administrative expenses decreased $23.6
million, or 37%, due primarily to lower payroll related expenses from workforce
reductions that occurred in conjunction with the restructuring of its balance
sheet and the absence of costs associated with the spin-off from TWC in April
2001 in addition to certain corporate costs from TWC. Network's selling, general
and administrative expenses as a percentage of revenues decreased to 15% for the
three months ended June 30, 2002 from 25% for the three months ended June 30,
2001.

    Network's provision for doubtful accounts decreased $1.9 million, or 34%,
primarily due to timing of receivable collections, partially offset by an
increase in provisions associated with general market conditions in the
telecommunications industry.



                                       39
<PAGE>

    Network's depreciation and amortization increased $29.1 million, or 29%,
primarily as a result of assets placed in service since June 30, 2001 and the
addition of $750 million of assets associated with the ADP, partially offset by
the impairment of long-lived assets recorded in fourth quarter 2001.

    Network's restructuring charges for the three months ended June 30, 2002
primarily represents restructuring charges incurred in second quarter 2002 due
to workforce reductions and expenses relating to an executive's restructuring
retention bonus of $0.9 million (see Note 16).

    Network's other expense increased $39.8 million primarily due to a $35
million accrual for contingent liabilities recorded in second quarter 2002.

EMERGING MARKETS

    The table below summarizes Emerging Markets results from operations:

<Table>
<Caption>
                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                    JUNE 30,                        JUNE 30,
                                           --------------------------      --------------------------
                                              2002            2001            2002            2001
                                           ----------      ----------      ----------      ----------
                                                                (IN THOUSANDS)
<S>                                        <C>             <C>             <C>             <C>
Revenues                                   $   36,942      $   39,894      $   75,851      $   80,317
Operating expenses:
   Cost of sales                               36,050          36,949          74,681          74,999
   Selling, general and administrative         12,231          10,758          26,819          20,635
   Provision for doubtful accounts                322             207             761             864
   Depreciation and amortization               16,888           8,076          29,168          15,406
   Restructuring charges                          606              --           2,810              --
   Other income, net                             (177)             --            (205)             --
                                           ----------      ----------      ----------      ----------
     Total operating expenses                  65,920          55,990         134,034         111,904
                                           ----------      ----------      ----------      ----------
Loss from operations                       $  (28,978)     $  (16,096)     $  (58,183)     $  (31,587)
                                           ==========      ==========      ==========      ==========
</Table>

    Emerging Markets' revenues decreased $3.0 million, or 8%, primarily due to a
decrease in satellite business and the transmission of broadcast sports and news
events, partially offset by higher ad revenues and media services as a result of
the iBEAM acquisition in December 2001.

    Emerging Markets' gross margin decreased to $0.9 million for the three
months ended June 30, 2002 from $2.9 million for the three months ended June 30,
2001. Gross margin decreased to 2% for the three months ended June 30, 2002 from
7% for the three months ended June 30, 2001. The decrease in gross margin is
primarily due to costs associated with the development and support of media
services, partially offset by an increase in revenues as a result of the iBEAM
acquisition.

    Emerging Markets' selling, general and administrative expenses increased
$1.4 million, or 13%, due primarily to payroll related and integration costs
associated with the acquisition of iBEAM, partially offset by lower payroll
related expenses as a result of workforce reductions.

    Emerging Markets' depreciation and amortization expense increased $8.8
million due primarily to assets placed in service since June 30, 2001 relating
to media services and as a result of the acquisition of iBEAM, partially offset
by $1.3 million lower amortization expense as the Company fully impaired its
goodwill and other intangibles as of December 31, 2001.

    Emerging Markets' restructuring charges for the three months ended June 30,
2002 represent restructuring charges incurred in second quarter 2002 due to
workforce reductions.



                                       40
<PAGE>

CONSOLIDATED NON-OPERATING ITEMS

    The Company's net interest expense decreased $70.7 million primarily due to
ceasing the accrual of interest expense on liabilities subject to compromise as
of the Petition Date as discussed in Note 2, partially offset by a decrease in
capitalized interest of $20.5 million due to a substantial decrease in assets
under construction.

    The Company's interest and other investing income decreased $9.6 million
primarily due to lower average short-term investment balances for the three
months ended June 30, 2002 compared to the three months ended June 30, 2001 and
a reduction in short-term interest rates.

    The Company's equity losses decreased $2.8 million primarily due to the sale
of its remaining economic interest in ATL in July 2001.

    The Company's income from investments for the three months ended June 30,
2002 of $0.6 million represents gains from sales of certain marketable equity
securities. The Company's loss from investments for the three months ended June
30, 2001 of $7.1 million included net gains of $25.0 million from sales of
certain marketable equity securities and gains of $16.6 million from the change
in market value of cashless collars on certain marketable equity securities in
accordance with SFAS No. 133, as amended, since the cashless collars did not
qualify as a hedge. These gains were largely offset by a loss of $34.5 million
related to write-downs of certain investments resulting from management's
determination that the decline in the value of these investments was other than
temporary.

    The Company's reorganization items for the three months ended June 30, 2002
of $56.3 million represents the write-off of unamortized debt and preferred
stock issuance costs and debt discount of $102.4 million and professional fees
and other items of $23.6 million, partially offset by a gain of $69.8 million
recognized from the forgiveness of interest related to the Trust Notes (see Note
8).

    The Company's tax provision decreased $8.4 million primarily due to the 2002
absence of changes in the valuation allowance established for deferred tax
assets and liabilities created by changes in the value of marketable equity
securities in 2001. The Company's tax provision reflects fully reserving,
through a valuation allowance, its net deferred tax assets. Reductions to the
fair value of marketable equity securities reduced the associated deferred tax
liabilities creating net deferred tax assets for which the utilization has not
yet been demonstrated. The valuation allowance represents a reserve against the
Company's net deferred tax assets, primarily resulting from net operating loss
carryforwards which may not be utilized.


SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

CONSOLIDATED RESULTS

    The Company's net loss increased $28.5 million primarily due to an increase
in loss from operations of $78.5 million and reorganization items of $63.6
million, partially offset by a decrease related to the tax provision of $51.4
million, an increase in investing income of $37.3 million and a decrease in net
interest expense of $29.4 million.

    Network and Emerging Markets accounted for $53.8 million and $26.6 million
of the increase in loss from operations, respectively. Other loss from
operations decreased $1.9 million.



                                       41
<PAGE>

NETWORK

    Network's revenues increased $33.5 million, or 7%, primarily attributable to
data and voice services provided to SBC of approximately $255 million for the
six months ended June 30, 2002 compared to approximately $182 million for the
six months ended June 30, 2001 and an increase of $87.7 million attributable to
the acquisition of AGGS, of which $29.8 million relates to SBC and is included
in the SBC revenues amount above. The increase in revenues is substantially
offset by contractual price re-rates and customer disconnects, $11.4 million of
lower revenues from vendor assignments, $9.1 million lower revenues from dark
fiber transactions entered into prior to June 30, 1999 and accordingly accounted
for as sales type leases and $5.2 million of lower revenues from Emerging
Markets.

    Network's gross margin increased to $72.9 million for the six months ended
June 30, 2002 from $50.5 million for the six months ended June 30, 2001. Gross
margin increased to 14% for the six months ended June 30, 2002 from 10% for the
six months ended June 30, 2001. The improvement in Network's gross margin is
primarily a result of $21.5 million lower lease expense from the absence of
lease costs associated with the ADP (see Note 2 to the condensed consolidated
financial statements) which have been replaced with interest expense in 2002
until the date of the Company's Chapter 11 Case filing, $8.5 million lower ad
valorem taxes as a result of changes in fair values of the associated assets and
a $4.5 million increase attributable to the acquisition of AGGS. These
improvements are partially offset by lower revenues from customer disconnects,
$5.6 million of lower margins from dark fiber transactions and $5.1 million of
lower margins from Emerging Markets.

    Network's selling, general and administrative expenses decreased $34.1
million, or 27%, due primarily to lower payroll related expenses as a result of
workforce reductions and the absence of costs associated with the spin-off from
TWC in April 2001 in addition to certain corporate costs from TWC. Network's
selling, general and administrative expenses as a percentage of revenues
decreased to 18% for the six months ended June 30, 2002 from 25% for the six
months ended June 30, 2001.

    Network's provision for doubtful accounts increased $3.2 million, or 42%,
primarily due to general market conditions in the telecommunications industry.

    Network's depreciation and amortization increased $79.1 million, or 45%,
primarily as a result of assets placed in service since June 30, 2001 and the
addition of $750 million of assets associated with the ADP, partially offset by
the impairment of long-lived assets recorded in fourth quarter 2001.

    Network's restructuring charges for the six months ended June 30, 2002
primarily represents restructuring charges incurred in 2002 due to workforce
reductions.

    Network's other expense increased $17.9 million primarily due to a $35
million accrual for contingent liabilities recorded in second quarter 2002,
partially offset by settlement gains related to various agreements.

EMERGING MARKETS

    Emerging Markets' revenues decreased $4.4 million, or 5%, primarily due to a
decrease in satellite business and the transmission of broadcast sports and news
events, partially offset by higher ad revenues and media services as a result of
the iBEAM acquisition in December 2001.

    Emerging Markets' gross margin decreased to $1.2 million for the six months
ended June 30, 2002 from $5.3 million for the six months ended June 30, 2001.
Gross margin decreased to 2% for the six months ended June 30, 2002 from 7% for
the six months ended June 30, 2001. The decrease in gross margin is primarily
due to costs associated with the development and support of media services,
partially offset by an increase in revenues as a result of the iBEAM
acquisition.



                                       42
<PAGE>

    Emerging Markets' selling, general and administrative expenses increased
$6.2 million, or 30%, due primarily to payroll related and integration costs
associated with the acquisition of iBEAM, partially offset by lower payroll
related expenses as a result of workforce reductions.

    Emerging Markets' depreciation and amortization expense increased $13.8
million, or 90%, due primarily to assets placed in service since June 30, 2001
relating to media services and as a result of the acquisition of iBEAM,
partially offset by $2.6 million lower amortization expense as the Company fully
impaired its goodwill and other intangibles as of December 31, 2001.

    Emerging Markets' restructuring charges for the six months ended June 30,
2002 represent restructuring charges incurred in 2002 due to workforce
reductions.

CONSOLIDATED NON-OPERATING ITEMS

    The Company's net interest expense decreased $29.4 million primarily due to
ceasing the accrual of interest expense on liabilities subject to compromise as
of the Petition Date as discussed in Note 2, partially offset by a decrease in
capitalized interest of $52.1 million due to a substantial decrease in assets
under construction.

    The Company's interest and other investing income decreased $3.1 million
primarily due to lower short-term interest rates for the six months ended June
30, 2002 compared to the six months ended June 30, 2001.

    The Company's equity losses decreased $7.5 million primarily due to the sale
of its remaining economic interest in ATL in July 2001.

    The Company's income from investments for the six months ended June 30, 2002
of $1.5 million included a $0.9 million gain related to dividends received from
a cost-based investment and gains from sales of certain marketable equity
securities. Loss from investments for the six months ended June 30, 2001 of
$31.4 million included a loss of $93.7 million related to write-downs of certain
investments resulting from management's determination that the decline in the
value of these investments was other than temporary. This loss was partially
offset by gains of $40.9 million from the change in market value of cashless
collars on certain marketable equity securities in accordance with SFAS No. 133
as amended since the cashless collars did not qualify as a hedge and net gains
of $21.4 million from sales of certain marketable equity securities.

    The Company's reorganization items for the six months ended June 30, 2002 of
$63.6 million represents the write-off of unamortized debt and preferred stock
issuance costs and debt discount of $102.4 million and professional fees and
other items of $30.9 million, partially offset by a gain of $69.8 million
recognized from the forgiveness of interest related to the Trust Notes (see Note
8).

    The Company's tax provision decreased $51.4 million primarily due to the
2002 absence of changes in the valuation allowance established for deferred tax
assets and liabilities created by changes in the value of marketable equity
securities in 2001. The Company's tax provision reflects fully reserving,
through a valuation allowance, its net deferred tax assets. Reductions to the
fair value of marketable equity securities reduced the associated deferred tax
liabilities creating net deferred tax assets for which the utilization has not
yet been demonstrated. The valuation allowance represents a reserve against the
Company's net deferred tax assets, primarily resulting from net operating loss
carryforwards which may not be utilized.



                                       43
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

2002 AND 2003

Financing plan

    For a discussion of the Company's current plans regarding a comprehensive
balance sheet restructuring, see Notes 2 and 12 to the condensed consolidated
financial statements. The provisions contemplated in these plans are
incorporated in the liquidity discussion below.

Cash requirements

    The Company's expected cash requirements for 2002 and 2003 total
approximately $750 million consisting of the following:

o   capital expenditures of approximately $320 million;

o   debt service obligations (including interest) of approximately $660 million;

o   cash payments pursuant to an 18 month note for the purchase of the
    Headquarters Building of approximately $50 million;

o   partially offset by a new equity investment of $150 million;

o   partially offset by cash expected to be generated from its operating and
    investing activities of approximately $130 million including cash from asset
    sales, dark fiber transactions and other capacity sales.

    The Interim Amendment to the Credit Agreement eliminated substantially all
financial covenants except for the requirement that WCL maintain a minimum cash
balance, including amounts classified as short-term investments, in accounts
controlled by the lenders of $350 million until June 30, 2002 and $200 million
thereafter, and meet certain targets, including EBITDA results, as defined. The
Company is currently negotiating an amendment to the Credit Agreement to become
effective upon emergence from chapter 11 of which the terms are expected to
reduce the total size of the facility available to the outstanding amount as of
emergence from chapter 11 of $525 million, issue cash-collaterized letters of
credit of up to $45 million and establish new financial covenants.

Cash sources

    As of June 30, 2002, the Company had approximately $650.3 million of cash,
cash equivalents and short-term investments.

    As of June 30, 2002, PowerTel had 71 million Australian dollars (or $40.0
million) outstanding under its bank facility agreement. As of December 31, 2001,
PowerTel was in violation of two covenant requirements and was in the process of
negotiating a restructuring plan with its bank group. In February 2002, the
Company advanced PowerTel 16 million Australian dollars (or $8.3 million) in the
form of a subordinated loan in order to satisfy certain conditions of the
restructuring plan with its bank group due to PowerTel's violation of two
covenant requirements for the three months ending December 31, 2001. In March
2002, as part of an approved restructuring plan with its bank group, PowerTel
received waivers from its bank group related to the covenant violations. Under
the approved restructuring plan, PowerTel will have access to its remaining bank
facility, subject to meeting certain covenants with its lenders, beginning
September 1, 2002, which has been reduced by 50 million Australian dollars
leaving a remaining balance of approximately 29 million Australian dollars.

    In February 2002, America Movil, S.A. de C.V. prepaid its non-interest
bearing note of $90.0 million from the sale of ATL by paying a discounted amount
of $88.8 million.



                                       44
<PAGE>

    In April 2002, Platinum Equity LLC paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. The remaining balance of $54 million in principal
and approximately $3 million in interest is due in September 2002.

    Pursuant to the terms of the Restructuring Agreement and the Interim
Amendment to the Credit Agreement, the Company must raise additional debt or
equity in the amount of $150 million on or before the record date set for voting
on the Plan. As discussed in Note 2, in July 2002, Leucadia and WCG entered into
an investment agreement providing for a commitment by Leucadia, subject to
certain conditions, to make the New Investment of $150 million.

    The Company expects to receive cash from asset sales, dark fiber
transactions and other capacity sales in addition to results from operations,
net of depreciation, of approximately $245 million in 2003.

Cash uses

    Cash used in operating activities was $76.5 million for the six months ended
June 30, 2002, which includes interest payments of approximately $89 million.
Cash to be used in operating activities is expected to be approximately $135
million for 2002 including interest payments of approximately $120 million and
restructuring fees and payments of approximately $75 million. Cash to be
provided by operating activities is expected to be $120 million for 2003.
Included in 2002 and 2003 operating activities are retention and restructuring
awards of approximately $13 million to be paid out in varying stages upon
emergence from chapter 11.

    The Company currently estimates it will spend approximately $125 million and
$195 million for capital expenditures for 2002 and 2003, respectively, primarily
to enhance and expand products and service offerings for both carrier and media
services and continued extension of the network in major metro markets.
Projected capital expenditures may be impacted if the actual level of asset
sales and business requirements vary from those currently considered in the
projections above or if there are unfavorable outcomes associated with
contingent liabilities or disputes not currently factored in its projections.
Capital expenditures were $39.7 million for the six months ended June 30, 2002.

    As of June 30, 2002, the Company had debt obligations of approximately $5.7
billion. The Company anticipates that approximately $4.6 billion in debt will be
discharged if the Plan contemplated by the Restructuring Agreement is
consummated, comprised of approximately $2.4 billion principal on its Senior
Redeemable Notes, approximately $1.4 billion principal amount under the Trust
Notes, and approximately $754 million related to the ADP Claims. The Company
anticipates interest relief with these obligations, which on an annual basis
amounts to approximately $420 million. Pursuant to the terms of the Interim
Amendment to the Credit Agreement, the Company will prepay $450 million of
upcoming maturities under the Credit Agreement prior to emergence from chapter
11, leaving $525 million outstanding. The Company has paid $200 million in April
2002 and $50 million in July 2002 and anticipates making the remaining $200
million payment upon emergence from chapter 11. After making the $450 million
principal reductions, scheduled principal reductions begin in fourth quarter
2004.

    As disclosed in Note 2, pursuant to the Settlement Agreement, the Company
plans to purchase the Headquarters Building and certain related real and
personal property currently subject to the sale and subsequent leaseback
transaction from TWC for an aggregate amount of $150 million. The purchase price
consists of approximately $50 million to be paid pursuant to an 18 month note
with the remaining $100 million financed through a promissory note payable over
90 months.

    In April 2001, TWC and the Company entered into an agreement in which the
Company owes TWC approximately $100 million for various normal course services
which previously was included in accounts payable. By agreement with TWC, the
Company elected to defer payment of these payables and related interest at a
rate of 8.25% until September 15, 2002. This item was included as a general
unsecured claim in the Chapter



                                       45
<PAGE>

11 Case and is now classified as subject to compromise. Accordingly, the Company
anticipates not having to pay this obligation.

    Factors which could impact the Company's ability to have sufficient
liquidity to execute on its business plan are the successful implementation of
its balance sheet restructuring efforts, its ability to generate sufficient
sales to customers during the restructuring efforts, the effects of
contingencies, such as litigation or disputes discussed in Note 14, changes in
the competitive environment of the markets that it serves and changes in
technology. Any variation could impact the Company's future cash requirements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

    The Company's interest rate exposure associated with short-term investments
decreased since December 31, 2001 as short-term investments excluding marketable
equity securities total $466.2 million as of June 30, 2002 compared to $893.9
million as of December 31, 2001.

    The Company's proposed balance sheet restructuring, if implemented, would
have a significant impact on reducing the Company's interest rate risk relating
to its debt portfolio.


                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    The Company is subject to various types of litigation in connection with its
business and operations.

    Williams' Securities Litigation

    On January 29, 2002, the first of numerous putative federal securities class
actions was filed in the U.S. District Court for the Northern District of
Oklahoma, against WCG, TWC, Keith Bailey, the former Chairman of TWC, Howard
Janzen, the Chairman, President, and CEO of WCG, and Scott Schubert, the CFO of
WCG. The putative class members in all of the cases are purchasers of the common
stock of TWC and/or the WCG Class A common stock between July 24, 2000, and
January 29, 2002. The complaints allege that the defendants violated federal
securities acts by issuing a series of misrepresentations to the market between
July 24, 2000, and January 29, 2002. WCG believes that the allegations are
without merit.

    Recently, the Court entered an order bifurcating the case into two groups of
plaintiffs. The first group consists of owners of WCG securities against WCG,
Howard Janzen, and Scott Schubert. The second group consists of owners of TWC
securities against TWC and Keith Bailey. Alex Meruelo has been named the lead
plaintiff in the WCG case and is represented by Milberg, Weiss, Bershad, Hynes &
Lerach, LLP and other firms as lead counsel. HGK Asset Management has been named
the lead plaintiff in the TWC case and is represented by Schoengold & Sporn and
other firms as lead counsel. The action against WCG has been stayed due to WCG's
bankruptcy filing.

    Both TWC and WCG have asserted indemnification rights to each other with
respect to these lawsuits and other similar claims and causes of actions.

    Right of Way Class Action Litigation

    A number of suits attempting to achieve class action status seek damages and
other relief from the Company based on allegations that the Company installed
portions of its fiber-optic cable without all necessary landowner consents.
These allegations relate to use of rights of way licensed by railroads, state
departments of transportation and others controlling pre-existing right-of-way
corridors. The putative members of the class in each suit are those owning the
land underlying or adjoining the right-of-way corridors. Similar actions have
been filed against all major carriers with fiber-optic networks. It is likely
that additional actions will be filed. The Company



                                       46
<PAGE>

believes it obtained sufficient rights to install its cable. It also believes
that the class action suits are subject to challenge on procedural grounds. TWC
is also a defendant or a related party in certain of these lawsuits. The TWC
Entities have asserted that they are entitled to indemnity or contribution from
WCG, with respect to each of the above lawsuits and any other similar claims or
causes of action.

    The Company and other major carriers are seeking to settle the class action
claims referenced above relating to the railroad rights of way through an agreed
class action styled Zografos et. al. vs. Qwest Communications Corp., et. al.,
filed in the U.S. District Court for the District of Oregon on January 31, 2002.
On that same day, the plaintiffs and defendants jointly asked the Court to
approve a settlement. The settlement would have settled the majority of the
claims in the putative nationwide and statewide class actions referenced above.
However, the case was dismissed on July 12, 2002, creating significant
uncertainty regarding the ultimate resolution of this matter.

    Platinum Equity Dispute

    On August 28, 2001, Platinum Equity LLC sent formal notice that it believes
the Company owes it approximately $47 million arising from a recalculation of
the net working capital of the domestic, Mexican, and Canadian professional
services operations of the Solutions segment sold to Platinum. Pursuant to the
provisions of the sale agreement, the parties submitted the dispute to binding
arbitration before an independent public accounting firm.

    Thoroughbred Technology and Telecommunications, Inc. vs. WCL

    On July 24, 2001, TTTI filed suit against WCL in the U.S. District Court for
the Northern District of Georgia for claims that include breach of contract with
respect to a fiber-optic fiber installation project that TTTI was constructing
for itself and others, including WCL. TTTI seeks specific performance that
includes payment of in excess of $36 million in damages plus pre-judgment
interest and to require WCL to take title to a three (3) conduit system
constructed between Cleveland, Ohio and Boyce, Virginia. WCL alleges various
defenses, including significant warranty and breach of contract claims on the
part of TTTI. On May 9, 2002, the Court granted TTTI's motion for partial
summary judgment on the issue of WCL's liability, finding that WCL did not have
the right to terminate the contract. WCL's warranty and breach of contract
claims remain pending. The Court's order stated the amount of damages would not
be established until a ruling is made regarding the remaining claims of both
parties. However, recently TTTI filed a motion with the Court seeking to require
WCL to close on the Cleveland to Boyce transaction and to enter judgment in
TTTI's favor for in excess of $38 million. WCL has objected to the motion and
the issue remains pending with the Court. Should the Court grant TTTI's motion
and require WCL to close on the Cleveland to Boyce conduit segment and enter
judgment in favor of TTTI, it is likely that WCL will be unable to post a bond
or other security in which case WCL would be required to pay the amount within
30 days or risk a default under WCL's existing credit agreements. WCL remains
confident of the validity of its counterclaims and that such claims, if proven,
will reduce the amount of any potential judgment that TTTI may obtain. Moreover,
WCL believes the Court erred in granting TTTI's motion for partial summary
judgment and WCL has sought reconsideration of the order with the Court. Should
the Court not reconsider its ruling, then WCL believes the order granting
partial summary judgment to TTTI is likely to be overturned on appeal. However,
should TTTI prevail in this litigation, there is a possibility that WCL's
counterclaims would not reduce the amount of TTTI's claims to a level which is
below certain monetary triggers in WCL's existing credit agreements, thus
creating a default by WCL, which would, in turn, terminate the Restructuring
Agreement. In recent correspondence, TTTI has indicated its intention to raise
additional claims in the litigation against WCL in the stated amount of as much
as $43 million. WCL has reviewed these potential claims based upon the limited
information available to date and believes they are without merit.

    Oklahoma Department of Securities Investigation

    On April 26, 2002, the Department issued an Order of Investigation to both
WCG and TWC. In that order, the Department expressed its intention to
investigate unspecified allegations that WCG and TWC may have violated the
Oklahoma Securities Act. The Company is cooperating fully with the Department.
At this time, neither the scope of the Department's investigation nor the likely
outcome of any such investigation can be determined. The



                                       47
<PAGE>

Company believes that all of its actions and disclosures have been in full
compliance with the Oklahoma Securities Act.

    Summary

    The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Except for the material claims
listed above, in the opinion of management upon advice from legal counsel, the
ultimate resolution of all claims, legal actions and complaints after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements is not expected to have a materially adverse effect upon the
Company's future financial position, results of operations or cash flows.

    For information regarding other legal proceedings, see the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    On April 1, 2002, WCG did not make interest payments totaling approximately
$91 million due under the terms of one of the Senior Redeemable Notes
indentures. The failure to make that payment within the 30-day grace period
resulted in a default under that indenture. In addition, the filing of WCG's
voluntary petition under chapter 11 resulted in a default under each of the
indentures governing the Senior Redeemable Notes. The Senior Redeemable Notes
include:

<Table>
<Caption>
                                                                            Aggregate Principal Amount
         Issue                                                             (as of February 11, 2002)(1)
         -----                                                             ----------------------------
<S>                                                                        <C>
         10.70% Senior Redeemable Notes due 2007                                 $  500,000,000
         10.875% Senior Redeemable Notes due 2009                                $1,500,000,000
         11.70% Senior Redeemable Notes due 2008                                 $  575,000,000
         11.875% Senior Redeemable Notes due 2010                                $  425,000,000
</Table>

(1) $551 million in face amount of the Senior Redeemable Notes are held by CG
    Investments, Inc., a wholly-owned subsidiary of WCG.

    All actions with respect to enforcement of rights under the Senior
Redeemable Notes are stayed by virtue of the commencement of the Chapter 11
Case.

    The Company has paid its preferred stock dividends through January 2002. As
of the commencement of the Chapter 11 Case, the Company ceased accruing
dividends on its preferred stock. Because of the priority requirements of the
Bankruptcy Code, if the Plan is consummated as discussed above, the holders of
the preferred stock will receive no distribution under the Plan and the
preferred stock will be cancelled.

    See Note 3 to the condensed consolidated financial statements above and
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for additional information regarding these defaults. Such
information is incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) The exhibits listed below are filed as part of this report

            10.108    Settlement Agreement among the Registrant, CG Austria,
                      Inc., the Official Committee of Unsecured Creditors, The
                      Williams Companies, Inc., and Leucadia National
                      Corporation dated July 26, 2002, filed with the Bankruptcy
                      Court as Exhibit A to the Joint Motion (filed as Exhibit
                      99.2 to the Current Report on Form 8-K dated July 31,
                      2002, (the "July 31, 2002, 8-K"))



                                       48
<PAGE>

            10.109    First Amended Joint Chapter 11 Plan of Reorganization of
                      WCG and CG Austria, filed with the Bankruptcy Court as
                      Exhibit 1 to the Settlement Agreement (filed as Exhibit
                      99.3 to the July 31, 2002 8-K)

            10.110    Investment Agreement between the Registrant and Leucadia
                      National Corporation dated July 26, 2002, filed with the
                      Bankruptcy Court as Exhibit 2 to the Settlement Agreement
                      (filed as Exhibit 99.4 to the July 31, 2002 8-K)

            10.111    Purchase and Sale Agreement between Leucadia National
                      Corporation and The Williams Companies, Inc., dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 3 to
                      the Settlement Agreement (filed as Exhibit 99.5 to the
                      July 31, 2002 8-K)

            10.112    Real Property Purchase and Sale Agreement among the
                      Registrant, Williams Headquarters Building Company,
                      Williams Technology Center, LLC, Williams Communications,
                      LLC, and Williams Aircraft Leasing, LLC, dated July 26,
                      2002, filed with the Bankruptcy Court as Exhibit 4 to the
                      Settlement Agreement (filed as Exhibit 99.6 to the July
                      31, 2002 8-K)

            10.113    List of TWC Continuing Contracts, filed with the
                      Bankruptcy Court as Exhibit 5 to the Settlement Agreement
                      (filed as Exhibit 99.7 to the July 31, 2002 8-K)

            10.114    Agreement for the Resolution of Continuing Contract
                      Disputes among the Registrant, Williams Communications,
                      LLC, and The Williams Companies, Inc., dated July 26,
                      2002, filed with the Bankruptcy Court as Exhibit 6 to the
                      Settlement Agreement (filed as Exhibit 99.8 to the July
                      31, 2002 8-K)

            10.115    Tax Cooperation Agreement between the Registrant and The
                      Williams Companies, Inc., dated July 26, 2002, filed with
                      the Bankruptcy Court as Exhibit 7 to the Settlement
                      Agreement (filed as Exhibit 99.9 to the July 31, 2002 8-K)

            10.116    Amendment to Trademark License Agreement between the
                      Registrant and The Williams Companies, Inc., dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 8 to
                      the Settlement Agreement (filed as Exhibit 99.10 to the
                      July 31, 2002 8-K)

            10.117    Assignment of Rights between Williams Information Services
                      Corporation and Williams Communications, LLC, dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 9 to
                      the Settlement Agreement (filed as Exhibit 99.11 to the
                      July 31, 2002 8-K)

            10.118    Guaranty Indemnification Agreement between the Registrant
                      and The Williams Companies, Inc., dated July 26, 2002,
                      filed with the Bankruptcy Court as Exhibit 10 to the
                      Settlement Agreement (filed as Exhibit 99.12 to the July
                      31, 2002 8-K)

            12        Computations of Ratio of Earnings to Fixed Charges and
                      Ratio of Earnings to Combined Fixed Charges and Preferred
                      Stock Dividend Requirements

        (b) During the second quarter 2002, WCG filed a Form 8-K on April 4,
            2002, which reported a significant event under Item 5 of the Form
            and included the exhibits required by Item 7 of the Form, and on May
            2, 2002, which reported a significant event under Item 3 of the Form
            and included the exhibits required by Item 7 of the Form.



                                       49
<PAGE>

                                    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 thereunto duly authorized.


                                       WILLIAMS COMMUNICATIONS GROUP, INC.
                                       -----------------------------------------
                                       (Registrant)




                                       /s/ Ken Kinnear
                                       -----------------------------------------
                                       Ken Kinnear
                                       Controller
                                       (Duly Authorized Officer and
                                       Principal Accounting Officer)

August 13, 2002



<PAGE>

                                INDEX TO EXHIBITS

<Table>
<Caption>
            EXHIBIT
            NUMBER                        DESCRIPTION
            ------                        -----------
<S>                   <C>
            10.108    Settlement Agreement among the Registrant, CG Austria,
                      Inc., the Official Committee of Unsecured Creditors, The
                      Williams Companies, Inc., and Leucadia National
                      Corporation dated July 26, 2002, filed with the Bankruptcy
                      Court as Exhibit A to the Joint Motion (filed as Exhibit
                      99.2 to the Current Report on Form 8-K dated July 31,
                      2002, (the "July 31, 2002, 8-K"))

            10.109    First Amended Joint Chapter 11 Plan of Reorganization of
                      WCG and CG Austria, filed with the Bankruptcy Court as
                      Exhibit 1 to the Settlement Agreement (filed as Exhibit
                      99.3 to the July 31, 2002 8-K)

            10.110    Investment Agreement between the Registrant and Leucadia
                      National Corporation dated July 26, 2002, filed with the
                      Bankruptcy Court as Exhibit 2 to the Settlement Agreement
                      (filed as Exhibit 99.4 to the July 31, 2002 8-K)

            10.111    Purchase and Sale Agreement between Leucadia National
                      Corporation and The Williams Companies, Inc., dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 3 to
                      the Settlement Agreement (filed as Exhibit 99.5 to the
                      July 31, 2002 8-K)

            10.112    Real Property Purchase and Sale Agreement among the
                      Registrant, Williams Headquarters Building Company,
                      Williams Technology Center, LLC, Williams Communications,
                      LLC, and Williams Aircraft Leasing, LLC, dated July 26,
                      2002, filed with the Bankruptcy Court as Exhibit 4 to the
                      Settlement Agreement (filed as Exhibit 99.6 to the July
                      31, 2002 8-K)

            10.113    List of TWC Continuing Contracts, filed with the
                      Bankruptcy Court as Exhibit 5 to the Settlement Agreement
                      (filed as Exhibit 99.7 to the July 31, 2002 8-K)

            10.114    Agreement for the Resolution of Continuing Contract
                      Disputes among the Registrant, Williams Communications,
                      LLC, and The Williams Companies, Inc., dated July 26,
                      2002, filed with the Bankruptcy Court as Exhibit 6 to the
                      Settlement Agreement (filed as Exhibit 99.8 to the July
                      31, 2002 8-K)

            10.115    Tax Cooperation Agreement between the Registrant and The
                      Williams Companies, Inc., dated July 26, 2002, filed with
                      the Bankruptcy Court as Exhibit 7 to the Settlement
                      Agreement (filed as Exhibit 99.9 to the July 31, 2002 8-K)

            10.116    Amendment to Trademark License Agreement between the
                      Registrant and The Williams Companies, Inc., dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 8 to
                      the Settlement Agreement (filed as Exhibit 99.10 to the
                      July 31, 2002 8-K)

            10.117    Assignment of Rights between Williams Information Services
                      Corporation and Williams Communications, LLC, dated July
                      26, 2002, filed with the Bankruptcy Court as Exhibit 9 to
                      the Settlement Agreement (filed as Exhibit 99.11 to the
                      July 31, 2002 8-K)

            10.118    Guaranty Indemnification Agreement between the Registrant
                      and The Williams Companies, Inc., dated July 26, 2002,
                      filed with the Bankruptcy Court as Exhibit 10 to the
                      Settlement Agreement (filed as Exhibit 99.12 to the July
                      31, 2002 8-K)

            12        Computations of Ratio of Earnings to Fixed Charges and
                      Ratio of Earnings to Combined Fixed Charges and Preferred
                      Stock Dividend Requirements
</Table>