<PAGE>   1



                                  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, 2001

                                       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 of Incorporation)              (IRS Employer
                                               Identification Number)

              ONE WILLIAMS CENTER                     74172
                TULSA, OKLAHOMA                     (Zip Code)
    (Address of principal executive offices)

                  Registrant's Telephone Number: (918) 573-6000

                                    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, 2001
         Common Stock, $0.01 par value             490,668,352 Shares



<PAGE>   2



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

   ITEM 1. FINANCIAL STATEMENTS
        Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000......     2
        Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000................................     3
        Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000................     4
        Notes to Consolidated Financial Statements...........................................................     5
   ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.............................................................................................    18
   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................    32

PART II. OTHER INFORMATION

   ITEM 1. LEGAL PROCEEDINGS.................................................................................    32
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................    33
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................    34
</Table>




                                       1
<PAGE>   3


                       WILLIAMS COMMUNICATIONS GROUP, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<Table>
<Caption>
                                                             THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                  JUNE 30,                       JUNE 30,
                                                       ----------------------------    ----------------------------
                                                           2001            2000            2001            2000
                                                       ------------    ------------    ------------    ------------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>             <C>             <C>             <C>

Revenues                                               $    281,338    $    179,353    $    557,402    $    342,727

Operating expenses:
    Cost of sales                                           246,739         183,808         501,597         364,812
    Selling, general and administrative                      76,171          66,055         151,186         120,110
    Provision for doubtful accounts                           5,774             652           8,436             982
    Depreciation and amortization                           107,418          37,175         192,631          70,442
    Other                                                    (7,969)         (1,284)         (8,022)         (1,331)
                                                       ------------    ------------    ------------    ------------
       Total operating expenses                             428,133         286,406         845,828         555,015
                                                       ------------    ------------    ------------    ------------
Loss from operations                                       (146,795)       (107,053)       (288,426)       (212,288)
Interest accrued                                           (140,233)        (80,541)       (256,735)       (160,368)
Interest capitalized                                         21,643          36,297          55,662          64,741
Investing income (loss):
    Interest and other                                       18,490          12,896          21,212          39,557
    Equity losses                                            (3,307)         (4,088)         (9,208)         (7,155)
    Income (loss) from investments                            7,132         251,326         (31,405)        303,048
Minority interest in loss of consolidated
    subsidiaries                                              6,583             502          13,191           5,002
Other income, net                                                25              39             143              47
                                                       ------------    ------------    ------------    ------------
Income (loss) before income taxes                          (236,462)        109,378        (495,566)         32,584
Provision for income taxes                                   (9,278)        (94,916)        (52,348)       (104,280)
                                                       ------------    ------------    ------------    ------------
Income (loss) from continuing operations                   (245,740)         14,462        (547,914)        (71,696)
Loss from discontinued operations                                --         (18,373)             --         (53,831)
                                                       ------------    ------------    ------------    ------------
Net loss                                                   (245,740)         (3,911)       (547,914)       (125,527)
Preferred stock dividends and amortization of
   preferred stock issuance costs                            (4,349)             --          (8,765)             --
                                                       ------------    ------------    ------------    ------------
Net loss attributable to common stockholders           $   (250,089)   $     (3,911)   $   (556,679)   $   (125,527)
                                                       ============    ============    ============    ============

Basic and diluted earnings (loss) per share:
    Income (loss) from continuing operations
      attributable to common stockholders              $       (.51)   $        .03    $      (1.16)   $       (.15)
    Loss from discontinued operations                            --            (.04)             --            (.12)
                                                       ------------    ------------    ------------    ------------
    Net loss attributable to common stockholders       $       (.51)   $       (.01)   $      (1.16)   $       (.27)
                                                       ============    ============    ============    ============

    Basic weighted average shares outstanding               490,136         464,059         481,959         464,019
</Table>


                             See accompanying notes.



                                       2
<PAGE>   4


                       WILLIAMS COMMUNICATIONS GROUP, INC.

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                         JUNE 30,      DECEMBER 31,
                                                                                           2001            2000
                                                                                       ------------    ------------
                                                                                              (IN THOUSANDS)
<S>                                                                                    <C>             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                          $    238,806    $    213,888
    Short-term investments                                                                1,116,655         395,184
    Receivables less allowance of $21,209,000 ($21,501,000 in 2000)                         385,060         291,706
    Net assets of discontinued operations                                                    87,807         288,384
    Net assets held for sale                                                                294,229              --
    Other                                                                                    32,182          17,252
                                                                                       ------------    ------------
Total current assets                                                                      2,154,739       1,206,414
Investments                                                                                 115,451         619,852
Property, plant and equipment, net                                                        5,821,605       5,138,984
Goodwill and other intangibles, net                                                          89,653         103,231
Other assets and deferred charges                                                           456,319         340,804
                                                                                       ------------    ------------
Total assets                                                                           $  8,637,767    $  7,409,285
                                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                   $    332,849    $    419,863
    Deferred income                                                                         137,765         107,931
    Accrued liabilities                                                                     375,836         401,858
    Long-term debt due within one year                                                          638              --
                                                                                       ------------    ------------
Total current liabilities                                                                   847,088         929,652
Long-term debt:
    The Williams Companies, Inc.                                                                 --         975,610
    Other                                                                                 5,413,897       3,551,096
Other liabilities and deferred income                                                       382,565         453,905
Minority interest in consolidated subsidiaries                                               57,055          45,028
Commitments and contingencies                                                                    --              --
6.75% redeemable cumulative convertible preferred stock, $0.01 par value, 500.0
    million shares authorized, 5.0 million shares outstanding in 2001 and 2000,
    respectively; aggregate liquidation preference of $250,000,000
                                                                                            242,005         240,722
Stockholders' equity:
    Class A common stock, $0.01 par value, 1 billion shares authorized, 488.9
       million shares and 68.2 million shares outstanding in 2001 and 2000,
       respectively                                                                           4,889             682
    Class B common stock, $0.01 par value, 500 million shares
       authorized, 395.4 million shares outstanding in 2000                                      --           3,954
    Capital in excess of par value                                                        3,814,566       2,659,136
    Accumulated deficit                                                                  (2,042,463)     (1,494,549)
    Accumulated other comprehensive income (loss)                                           (81,835)         44,049
                                                                                       ------------    ------------
Total stockholders' equity                                                                1,695,157       1,213,272
                                                                                       ------------    ------------
Total liabilities and stockholders' equity                                             $  8,637,767    $  7,409,285
                                                                                       ============    ============
</Table>

                             See accompanying notes.



                                       3
<PAGE>   5


                       WILLIAMS COMMUNICATIONS GROUP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                   SIX MONTHS ENDED JUNE 30,
                                                                 ----------------------------
                                                                     2001            2000
                                                                 ------------    ------------
                                                                        (IN THOUSANDS)
<S>                                                              <C>             <C>
OPERATING ACTIVITIES
Loss from continuing operations                                  $   (547,914)   $    (71,696)
Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Depreciation and amortization                                     192,631          70,442
    Provision for deferred income taxes                                52,322         103,450
    Provision for loss on investments                                  93,741              --
    Provision for doubtful accounts                                     8,436             982
    Equity losses                                                       9,208           7,155
    Gain on sales of investments                                      (62,336)        (84,617)
    Gain on conversion of common stock investment                          --        (214,732)
    Minority interest in loss of consolidated subsidiaries            (13,191)         (5,002)
    Cash provided by (used in) changes in:
       Receivables                                                    (54,112)          6,737
       Other current assets                                           (14,930)         (3,316)
       Accounts payable                                               (72,722)         25,782
       Current deferred income                                         33,334          25,240
       Accrued liabilities                                             82,795        (119,322)
       Long-term deferred income                                       88,543         102,750
       Other                                                              329          (2,431)
                                                                 ------------    ------------
Net cash used in operating activities                                (203,866)       (158,578)

FINANCING ACTIVITIES
Proceeds from long-term debt                                        2,157,977              --
Payments on long-term debt                                           (325,354)           (393)
Proceeds from issuance of common stock, net of expenses                 2,773           2,973
Debt issue costs                                                      (39,624)           (977)
Contribution to subsidiary from minority interest
    shareholders                                                       31,694              --
                                                                 ------------    ------------
Net cash provided by financing activities                           1,827,466           1,603

INVESTING ACTIVITIES
Property, plant and equipment:
    Capital expenditures                                             (870,399)     (1,427,931)
    Proceeds from sales                                                20,852          17,140
Purchase of investments                                            (1,452,443)       (279,472)
Proceeds from sales of investments                                    502,368       1,671,271
Other                                                                     363           7,886
                                                                 ------------    ------------
Net cash used in investing activities                              (1,799,259)        (11,106)

DISCONTINUED OPERATIONS
Net cash provided by (used in) operating activities                    66,985         (11,948)
Net cash provided by (used in) investing activities                   133,592         (16,166)
                                                                 ------------    ------------
Net cash provided by (used in) discontinued operations                200,577         (28,114)
                                                                 ------------    ------------

Increase (decrease) in cash and cash equivalents                       24,918        (196,195)
Cash and cash equivalents at beginning of period                      213,888         483,853
                                                                 ------------    ------------
Cash and cash equivalents at end of period                       $    238,806    $    287,658
                                                                 ============    ============
</Table>

                             See accompanying notes.




                                       4
<PAGE>   6


                       WILLIAMS COMMUNICATIONS GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. GENERAL

     The accompanying interim consolidated financial statements of Williams
Communications Group, Inc. (WCG) 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 WCG's Annual Report on Form 10-K/A.
The accompanying financial statements have not been audited by independent
auditors but include all normal recurring adjustments, which, in the opinion of
WCG's management, are necessary to present fairly its financial position as of
June 30, 2001, results of operations for the three and six months ended June 30,
2001 and 2000 and cash flows for the six months ended June 30, 2001 and 2000.


2. DISCONTINUED OPERATIONS

     On January 25, 2001, WCG's board of directors authorized a plan for its
management to divest the Solutions segment. Accordingly, the Solutions segment
has been accounted for as a disposal of a business segment with the associated
operating results segregated and reported as discontinued operations. On January
29, 2001, WCG signed an agreement to sell the domestic, Mexican and Canadian
professional services operations of the Solutions segment to Platinum Equity
LLC. This sale closed on March 31, 2001 for approximately $100 million in cash
and an interest-bearing $75 million promissory note payable over 18 months. WCG
has also entered into a collection agreement as of March 31, 2001 in which
Platinum Equity LLC will pursue the collection of certain identified retained
accounts receivables totaling approximately $200 million. Subject to a
collection fee, Platinum Equity LLC will remit the proceeds collected to WCG
while WCG retains the collection risk.

     On March 27, 2001, WCG signed an agreement to sell its remaining Canadian
operations of the Solutions segment to Telus Corporation. The sale closed in
second quarter 2001 for approximately $38 million in cash.

     The net assets of discontinued operations as of June 30, 2001 consist
primarily of certain identified retained accounts receivables, net of allowance
for doubtful accounts, partially offset by accruals for costs of disposal of
discontinued operations.


3. SEGMENT REVENUES AND PROFIT (LOSS)

     WCG evaluates performance based upon segment profit or loss from operations
which includes revenues from external and internal customers, equity earnings or
losses, operating costs and expenses, depreciation and amortization, and income
or loss from investments and excludes allocated charges from The Williams
Companies, Inc. (TWC). Intercompany sales are generally accounted for as if the
sales were to unaffiliated third parties, that is, at current market prices.



                                       5
<PAGE>   7


                       WILLIAMS COMMUNICATIONS GROUP, INC.

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

<Table>
<Caption>
                                                            BROADBAND        STRATEGIC
                                             NETWORK          MEDIA         INVESTMENTS    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
                                           ============    ============    ============    ============    ============

Segment loss:
    Loss from operations                   $   (129,247)   $    (16,096)   $     (1,452)   $         --    $   (146,795)
    Equity earnings (losses)                        561            (244)         (3,624)             --          (3,307)
    Income from investments                       7,132              --              --              --           7,132
    Add back - allocated charges from
       TWC                                          917              78               1              --             996
                                           ------------    ------------    ------------    ------------    ------------
Total segment loss                         $   (120,637)   $    (16,262)   $     (5,075)   $         --    $   (141,974)
                                           ============    ============    ============    ============    ============
Depreciation and amortization              $     99,217    $      8,076    $        125    $         --    $    107,418
</Table>






                                       6
<PAGE>   8
                       WILLIAMS COMMUNICATIONS GROUP, INC.

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

<Table>
<Caption>
                                                             BROADBAND      STRATEGIC
                                             NETWORK           MEDIA        INVESTMENTS    ELIMINATIONS        TOTAL
                                           ------------    ------------    ------------    ------------    ------------
                                                                          (IN THOUSANDS)
<S>                                        <C>             <C>             <C>             <C>             <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues:
    External customers:
       Dark fiber                          $     12,294    $         --    $         --    $         --    $     12,294
       Capacity and other                       125,313          41,746              --              --         167,059
                                           ------------    ------------    ------------    ------------    ------------
    Total external customers                    137,607          41,746              --              --         179,353
    Intercompany                                  8,025              54              --          (8,079)             --
                                           ------------    ------------    ------------    ------------    ------------
Total segment revenues                     $    145,632    $     41,800    $         --    $     (8,079)   $    179,353
                                           ============    ============    ============    ============    ============
Costs of sales:
    Dark fiber                             $      4,645    $         --    $         --    $         --    $      4,645
    Capacity and other                          155,603          23,553               7              --         179,163
    Intercompany                                     54           8,025              --          (8,079)             --
                                           ------------    ------------    ------------    ------------    ------------
Total cost of sales                        $    160,302    $     31,578    $          7    $     (8,079)   $    183,808
                                           ============    ============    ============    ============    ============

Segment profit (loss):
    Loss from operations                   $    (97,882)   $     (7,056)   $     (2,115)   $         --    $   (107,053)
    Equity earnings (losses)                        675          (2,887)         (1,876)             --          (4,088)
    Income from investments                     251,292              --              34              --         251,326
    Add back - allocated charges from
       TWC                                        1,539             359             127              --           2,025
                                           ------------    ------------    ------------    ------------    ------------
Total segment profit (loss)                $    155,624    $     (9,584)   $     (3,830)   $         --    $    142,210
                                           ============    ============    ============    ============    ============
Depreciation and amortization              $     29,916    $      7,144    $        115    $         --    $     37,175
</Table>







                                       7
<PAGE>   9


                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


<Table>
<Caption>

                                                             BROADBAND       STRATEGIC
                                              NETWORK          MEDIA        INVESTMENTS    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
                                           ============    ============    ============    ============    ============

Segment loss:
    Loss from operations                   $   (254,398)   $    (31,587)   $     (2,441)   $         --    $   (288,426)
    Equity earnings (losses)                      1,121            (130)        (10,199)             --          (9,208)
    Loss from investments                       (31,405)             --              --              --         (31,405)
    Add back - allocated charges from
       TWC                                        3,786             330              83              --           4,199
                                           ------------    ------------    ------------    ------------    ------------
Total segment loss                         $   (280,896)   $    (31,387)   $    (12,557)   $         --    $   (324,840)
                                           ============    ============    ============    ============    ============
Depreciation and amortization              $    177,002    $     15,406    $        223    $         --    $    192,631
</Table>




                                       8
<PAGE>   10

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


<Table>
<Caption>
                                                             BROADBAND       STRATEGIC
                                             NETWORK           MEDIA        INVESTMENTS    ELIMINATIONS        TOTAL
                                           ------------    ------------    ------------    ------------    ------------
                                                                          (IN THOUSANDS)
<S>                                        <C>             <C>             <C>             <C>             <C>
SIX MONTHS ENDED JUNE 30, 2000
Revenues:
    External customers:
       Dark fiber                          $     31,425    $         --    $         --    $         --    $     31,425
       Capacity and other                       228,726          82,576              --              --         311,302
                                           ------------    ------------    ------------    ------------    ------------
    Total external customers                    260,151          82,576              --              --         342,727
    Intercompany                                 15,758             102              --         (15,860)             --
                                           ------------    ------------    ------------    ------------    ------------
Total segment revenues                     $    275,909    $     82,678    $         --    $    (15,860)   $    342,727
                                           ============    ============    ============    ============    ============
Costs of sales:
    Dark fiber                             $     18,031    $         --    $         --    $         --    $     18,031
    Capacity and other                          298,768          48,002              11              --         346,781
    Intercompany                                    102          15,758              --         (15,860)             --
                                           ------------    ------------    ------------    ------------    ------------
Total cost of sales                        $    316,901    $     63,760    $         11    $    (15,860)   $    364,812
                                           ============    ============    ============    ============    ============

Segment profit (loss):
    Loss from operations                   $   (194,755)   $    (13,818)   $     (3,715)   $         --    $   (212,288)
    Equity earnings (losses)                      1,035          (3,547)         (4,643)             --          (7,155)
    Income from investments                     282,815              --          20,233              --         303,048
    Add back - allocated charges from
       TWC                                        3,311             772             274              --           4,357
                                           ------------    ------------    ------------    ------------    ------------
Total segment profit (loss)                $     92,406    $    (16,593)   $     12,149    $         --    $     87,962
                                           ============    ============    ============    ============    ============
Depreciation and amortization              $     55,963    $     14,242    $        237    $         --    $     70,442
</Table>

<Table>
<Caption>
                                         TOTAL ASSETS
                                 ---------------------------
                                   JUNE 30,     DECEMBER 31,
                                     2001           2000
                                 ------------   ------------
                                       (IN THOUSANDS)
<S>                              <C>            <C>

Network                          $  6,466,737   $  6,025,728
Broadband Media                       234,892        210,840
Strategic Investments                 356,904        506,813
Corporate                           1,491,427        377,520
Discontinued Operations                87,807        288,384
                                 ------------   ------------

   Total                         $  8,637,767   $  7,409,285
                                 ============   ============
</Table>





                                       9
<PAGE>   11

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


4. ASSETS HELD FOR SALE

     WCG entered into an agreement with America Movil, S.A. de C.V. in second
quarter 2001 to sell its remaining economic interest in Algar Telecom Leste,
S.A. (ATL). The proposed transaction is subject to the receipt of necessary
regulatory, third party, legal and other approvals, and is expected to close
during third quarter 2001. Under the terms of the agreement, America Movil,
S.A. de C.V. has exercised an option to purchase WCG's remaining interest in ATL
for $300 million at closing with an additional $100 million to be paid on May
15, 2002. Upon closing, WCG expects to record a financial net gain, which will
be quantified once all factors relative to its basis are finalized.

     WCG has classified its investment in ATL and the associated deferred gain
(see Note 5) as net assets held for sale as of June 30, 2001.


5. INCOME (LOSS) FROM INVESTMENTS

     WCG 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. Gross realized gains were $36.6 million and $68.1
million for the three and six months ended June 30, 2000, respectively.

     WCG 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.

     WCG 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 the market
value of cashless collars on certain marketable equity securities in accordance
with Statement of Financial Accounting Standards (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. WCG has no cashless collars in place as of June 30,
2001.

     In second quarter 2000, WCG recognized a gain of $214.7 million (before a
deferred tax provision impact of $82.1 million) from the conversion of WCG's
shares of common stock of Concentric Network Corporation into shares of common
stock of XO Communications, Inc. pursuant to a merger of those companies
completed in June 2000.

     In a series of transactions in first quarter 2000, WCG recognized a $16.5
million gain related to the partial sale of WCG's interest in ATL to an entity
jointly owned by SBC Communications, Inc. (SBC) and Telefonos de Mexico S.A. de
C.V. The sale of the investment in ATL, which had a carrying value of $30
million, yielded proceeds of approximately $168 million. WCG recognized a gain
on the sale of $16.5 million and deferred a gain of approximately $121 million
associated with $150 million of the proceeds which were subsequently advanced to
ATL.

     WCG recognized a $3.7 million gain for the three months ended March 31,
2000 related to dividends received from certain cost-based investments.



                                       10
<PAGE>   12

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


6. PROVISION FOR INCOME TAXES

   The provision for income taxes includes:

<Table>
<Caption>
                                    THREE MONTHS ENDED              SIX MONTHS ENDED
                                         JUNE 30,                       JUNE 30,
                               ----------------------------    ----------------------------
                                   2001            2000            2001            2000
                               ------------    ------------    ------------    ------------
                                                      (IN THOUSANDS)
<S>                            <C>             <C>             <C>             <C>
Current:
    Federal                    $         --    $         --    $         --    $       (758)
    State                                 3             (54)            (26)            (72)
    Foreign                              --              --              --              --
                               ------------    ------------    ------------    ------------
                                          3             (54)            (26)           (830)
Deferred:
    Federal                          (7,531)        (85,745)        (43,832)        (93,658)
    State                            (1,754)        (14,807)         (8,494)        (16,687)
    Foreign                               4           5,690               4           6,895
                               ------------    ------------    ------------    ------------
                                     (9,281)        (94,862)        (52,322)       (103,450)
                               ------------    ------------    ------------    ------------
       Total provision         $     (9,278)   $    (94,916)   $    (52,348)   $   (104,280)
                               ============    ============    ============    ============
</Table>

     The tax provision for the three and six months ended June 30, 2001 is
significantly less than the benefit expected from applying the federal statutory
rate to pre-tax losses primarily due to a valuation allowance established for
WCG's net deferred tax assets. The valuation allowance fully reserves WCG's net
deferred tax assets, primarily resulting from net operating loss carryforwards,
as WCG does not believe it is more likely than not that the net deferred tax
assets will be realized. During the three and six months ended June 30, 2001,
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.

     The tax provisions for the three and six months ended June 30, 2000 are
significantly more than the provisions expected from applying the federal
statutory rate to the pre-tax income primarily due to a valuation allowance
established for uncertainties arising from application of the tax sharing
agreement with TWC that may affect the utilization of loss carryforwards as well
as state income taxes and the impact of net foreign losses not deductible for
U.S. tax purposes. In addition, for the six months ended June 30, 2000, the tax
provision is partially offset by a tax benefit from the permanent basis
differences on certain assets sold during first quarter 2000.

     Effective with the spin-off of WCG from TWC, 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.





                                       11
<PAGE>   13

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


7. EARNINGS (LOSS) PER SHARE

     For the periods presented, diluted earnings (loss) per common share is the
same as the basic calculation. The inclusion of any stock options and
convertible preferred stock would be antidilutive for the three and six months
ended June 30, 2001 and for the six months ended June 30, 2000 as WCG reported a
loss from continuing operations for these periods. Stock options and convertible
preferred stock of 15.6 million shares and 12.2 million shares for the three and
six months ended June 30, 2001, respectively, and 2.0 million shares for the six
months ended June 30, 2000 have been excluded from the computation of diluted
loss per common share.

     The following table is a reconciliation of basic weighted average shares to
diluted weighted average shares for the three months ended June 30, 2000 as WCG
reported income from continuing operations for this period.

<Table>
<Caption>
                                                     THREE MONTHS
                                                         ENDED
                                                     JUNE 30, 2000
                                                    (IN THOUSANDS)
                                                    --------------
<S>                                                 <C>

Basic weighted average shares outstanding                  464,059
Dilutive effect of stock options                             1,859
                                                    --------------
Diluted weighted average shares outstanding                465,918
                                                    ==============
</Table>


8. DEBT AND OTHER FINANCING ARRANGEMENTS

     TWC

     In February 2001, TWC and WCG entered into an agreement that, among other
things, resulted in the exchange of the TWC note for WCG's equity (see Note 9).

     As of June 30, 2001, WCG owes TWC approximately $100 million for various
normal course services which is included in accounts payable. WCG elected to
defer payment of these payables until March 15, 2002 at an interest rate of
8.25%.

     THIRD PARTIES

     Long-term debt (excluding amounts due to TWC) consists of the following:

<Table>
<Caption>
                                                       JUNE 30,      DECEMBER 31,
                                                         2001            2000
                                                     ------------    ------------
                                                          (IN THOUSANDS)
<S>                                                  <C>             <C>
Senior redeemable notes, 10.70% - 11.875%, due
   2007 - 2010                                       $  2,987,043    $  2,986,598
8.25% senior secured notes due 2004                     1,400,000              --
Credit facility                                           975,000         525,000
Other debt, including capital leases                       52,492          39,498
                                                     ------------    ------------
                                                        5,414,535       3,551,096
Less current maturities                                      (638)             --
                                                     ------------    ------------
Long-term debt                                       $  5,413,897    $  3,551,096
                                                     ============    ============
</Table>




                                       12
<PAGE>   14


                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


     8.25% senior secured notes

     In March 2001, WCG Note Trust, which is wholly-owned by Williams
Communications, LLC (WCL), which is a wholly-owned subsidiary of WCG, issued
approximately $1.4 billion of 8.25% senior secured notes in a private placement.
The notes are due March 15, 2004 with the principal payment due in full at
maturity and interest payments due semi-annually in arrears on March 15 and
September 15 of each year beginning September 15, 2001. The notes may be repaid
at varying redemption premiums or make-whole prices, as defined.

     The senior secured notes are backed by a $1.5 billion note issued by WCG to
WCG Note Trust which is eliminated in consolidation. The note issued by WCG
ranks equal to all of WCG's existing and future senior unsecured debt, will be
senior to all of WCG's subordinated debt and junior to any secured debt WCG may
incur as to the assets securing such debt. The note issued by WCG will mature on
March 31, 2008, and will bear interest at an annual rate of 8.25% until
September 15, 2003, at which time the interest rate will be reset in accordance
with the terms of such note. Interest on this note is payable semiannually one
business day prior to the interest payment dates with respect to the senior
secured notes. Under the terms of the note issued by WCG to WCG Note Trust,
principal payments under the senior secured notes will be met by remarketing to
the public the note issued by WCG to WCG Note Trust to enable a sale at a price
which will generate proceeds sufficient to redeem the senior secured notes.


     TWC provided indirect credit support for the senior secured notes through a
commitment to issue its preferred stock in the event of a default under the
senior secured notes.

     Long-term credit facility

     The $1.05 billion credit facility consists of a $525 million seven-year
senior multi-draw amortizing term loan facility and a $525 million six-year
senior reducing revolving credit facility. WCG borrowed the $525 million term
loan under the credit facility in September 2000. Outstanding borrowings under
the credit facility bear interest based on WCG's credit ratings. As of June 30,
2001, the interest rate under this facility was based on variable rate LIBOR
plus 2.75% which WCG had a six month locked in rate of 7.00%.

     In April 2001, WCG closed and borrowed a $450 million add-on to its credit
facility funded by various investment groups. The add-on to the credit facility
bears interest based on WCG's credit ratings which as of June 30, 2001 was based
on variable rate LIBOR plus 2.75%. As of June 30, 2001, WCG had a six month
locked in rate of 7.06%. In connection with the add-on to the credit facility,
WCG was required to grant to the lenders a security interest in substantially
all of the domestic assets of WCL except for certain assets such as any land or
interest in land and any Broadband Media related assets. WCG also received a
commitment, subject to various conditions, to further increase its credit
facility by $300 million which would bring the total size of the credit facility
to $1.8 billion.

     The credit facility contains certain covenants which require WCG to
generate cash of at least $700 million from the sales of the Solutions segment
and ATL by September 30, 2001 and complete certain other transactions resulting
in net cash proceeds in an aggregate amount of at least $500 million by December
31, 2001, of which at least $150 million must be in the form of additional
equity. The credit facility also contains another covenant which requires WCG to
meet a defined minimum threshold from the combination of operating results, as
defined, and cash generated from capacity transactions, as defined, for the
periods ending on September 30, 2001, and December 31, 2001.

     On July 19, 2001, Moody's Investor Service announced that it lowered
various credit ratings of WCG. The announcement stated that contributing to this
change is the recent tax-free spin-off from TWC and the potential impact the
current economic slowdown could have on both the telecommunications industry and
WCG's



                                       13
<PAGE>   15

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


operating results. This downgrade will increase the borrowing rate on WCG's
credit facility from LIBOR plus 2.75% to LIBOR plus 3.00% and potentially limit
or increase the cost of public or private financings. In addition, the downgrade
allows the credit facility lenders to request liens on WCG's assets that were
not previously secured under the credit facility.

     Other

     In first quarter 2001, PowerTel paid off its 70 million Australian dollar
bridge financing facility agreement with a portion of the proceeds received from
the completion of a 110 million Australian dollar equity rights offering. In
first quarter 2001, PowerTel also entered into a 150 million Australian dollar
bank facility agreement due March 2006 with a variable interest rate as defined
in the agreement. As of June 30, 2001, PowerTel borrowed 45 million Australian
dollars (or approximately $22.9 million) under the bank facility agreement at an
interest rate of 7.7%.

     WCG has $29.3 million in total indebtedness related to a capital lease as
of June 30, 2001, of which $28.7 million is considered long-term.


9. STOCKHOLDERS' EQUITY

     In February 2001, TWC and WCG entered into an agreement that, among other
things, resulted in the transfer of ownership of a building under construction
and other assets from TWC to WCG, the conversion of the TWC note into paid in
capital and the issuance of 24.3 million shares of WCG Class A common stock.
WCG's total equity increased by approximately $1.1 billion as a result of this
transaction.

     In March 2001, TWC's board of directors approved a tax-free spin-off of WCG
to TWC's shareholders. TWC owned 24,265,892 of WCG Class A common stock shares
outstanding and 395,434,965 of Class B common stock shares outstanding which it
converted to Class A shares prior to the spin-off. After the close of the market
on April 23, 2001, TWC distributed 398,500,000 shares, or approximately 95% of
the WCG common stock it currently owned, to holders of TWC common shares on a
pro rata basis by distributing approximately 0.822399 of a share of WCG Class A
common stock as a dividend on each share of TWC common stock outstanding on the
record date. Following the distribution, TWC retained 21,200,857 shares of WCG
Class A common stock which TWC has committed to the Internal Revenue Service
(IRS) to sell within five years of the tax-free spin-off. However, under a
separation agreement between TWC and WCG, subject to the receipt of a favorable
letter ruling from the IRS which has been requested, TWC has agreed not to sell
any shares before April 23, 2004.




                                       14
<PAGE>   16

                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


10. COMPREHENSIVE LOSS

     Comprehensive loss is as follows:

<Table>
<Caption>
                                                             THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                   JUNE 30,                        JUNE 30,
                                                         ----------------------------    ----------------------------
                                                             2001            2000            2001            2000
                                                         ------------    ------------    ------------    ------------
                                                                               (IN THOUSANDS)
<S>                                                      <C>             <C>             <C>             <C>

Net loss                                                 $   (245,740)   $     (3,911)   $   (547,914)   $   (125,527)
    Other comprehensive income (loss):
        Unrealized gain (loss) on securities                  (10,914)        199,289        (125,216)        339,864
        Less:  reclassification adjustment for net
          gains realized in net loss                          (25,040)       (251,292)        (21,431)       (282,815)
                                                         ------------    ------------    ------------    ------------
        Net unrealized gain (loss)                            (35,954)        (52,003)       (146,647)         57,049
        Foreign currency translation adjustments              (15,180)         (9,564)        (34,541)        (14,899)
                                                         ------------    ------------    ------------    ------------
    Other comprehensive income (loss) before
        taxes
                                                              (51,134)        (61,567)       (181,188)         42,150
    Income tax benefit (provision) on other
        comprehensive income (loss)                            12,383          20,186          55,304         (22,235)
                                                         ------------    ------------    ------------    ------------
Comprehensive loss                                       $   (284,491)   $    (45,292)   $   (673,798)   $   (105,612)
                                                         ============    ============    ============    ============
</Table>


11. COMMITMENTS AND CONTINGENCIES

      Commitments

      On April 18, 2001, Winstar Communications, Inc. (Winstar), announced it
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. This
announcement followed a series of announcements by Winstar including that it
would reduce its workforce by approximately 44% and halt the expansion of its
network.

      In 1998, WCG entered into an agreement with Winstar for a 25-year
indefeasible right to use (IRU) of approximately 2% of the wireless local
capacity of Winstar. Per the agreement, Winstar is to construct 270 hubs by the
end of 2001, and WCG is to have the ability to use all of these hubs for a
25-year period. As of June 30, 2001, Winstar has delivered and WCG has paid for
200 hubs, or antenna sites, for WCG to use. WCG has paid approximately $300
million for the 200 hubs and had previously estimated that it would pay an
additional $100 million for the delivery and acceptance of the remaining 70 hubs
Winstar is committed to deliver. WCG is not required to pay the additional $100
million if the remaining 70 hubs are not delivered and accepted. WCG cannot
determine at this time what financial impact, if any, the Winstar bankruptcy
filing and the recently announced workforce reductions and halt in network
expansion will have on the utilization of the delivered hubs, on the
recoverability of WCG's expenditures for the delivered hubs, or on WCG's
commitment on the remaining 70 hubs. Developments in the bankruptcy proceedings
could impair WCG's ability to realize or recover its investment in the wireless
hub capacity, leading to a non-recurring impairment charge against earnings
representing a write-off or write-down of all or a portion of the $300 million
already paid and any portion of the $100 million that WCG may be required to pay
related to the wireless hubs. Because WCG has not yet fully integrated this
wireless capacity into its fiber service offerings, if WCG's use of the capacity
is impaired, it does not expect that any such impairment would impact its
marketing business plan or product offerings in 2001. WCG will adjust its
product offering plans for subsequent years if in fact bankruptcy proceedings
result in the loss of or diminished use of the wireless capacity to compensate
for the loss of these wireless assets.


                                       15

<PAGE>   17


                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


     On April 11 and 16, 2001, WCG notified Winstar that it was in default under
its IRU agreement for long haul capacity with WCG dated December 17, 1998, as
subsequently modified, as a result of past due receivables, and terminated the
agreement in accordance with its terms. WCG offered and provided transition
services to Winstar with respect to capacity services at agreed-upon rates,
under standard terms and conditions. On May 8, 2001, Winstar signed a standstill
agreement, effective on April 18, 2001, utilizing debtor-in-possession financing
to prepay for transition services utilized. As of June 30, 2001, Winstar is
still seeking additional debtor-in-possession financing.

     Litigation

     WCG and WCL are named as defendants in putative class actions purporting to
cover landowners in a state and, in some cases, in the nation, on whose property
WCG installed fiber-optic cable without the permission of the adjacent
landowner. It is likely that additional actions will be filed. WCG believes that
the installation of fiber-optic cable along pipeline, highway and railroad
rights-of-way and other routes it utilizes, does not infringe on the property
rights of adjacent landowners. WCG also believes that class actions are not the
proper legal means to resolve the disputes. While WCG cannot quantify the
financial impact of such claims at this time, if these claims are allowed by the
courts to proceed as class actions and class members prevail on some or all of
their claims, the result could have a material adverse impact upon WCG's
financial position, results of operations and cash flows.

     WCG is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, 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 WCG's
future financial position, results of operations or cash flows.

     Other

     WCG recorded other operating income of $8 million in second quarter 2001
relating to a settlement of a claim.

     In second quarter 2001, WCG began undertaking a company-wide effort to
analyze its operating costs and capital spending to ensure these costs are
consistent with its business plan goals. As part of this analysis, WCG reviewed
its workforce requirements and identified approximately 400 positions that were
eliminated in July 2001. In addition, WCG is in the process of prioritizing its
capital expenditures program and expects to suspend certain capital projects
which could result in expensing any amounts previously capitalized. WCG expects
to recognize expenses of less than $30 million related to the severance and
suspended capital projects in third quarter 2001.


12. RECENT ACCOUNTING STANDARDS

     SFAS No. 133 as amended establishes accounting and reporting standards for
derivative financial instruments. The standard requires that all derivative
financial instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives will be recorded each period in earnings if
the derivative is not a hedge. If a derivative is a hedge, changes in the fair
value of the derivative will either be recognized in earnings offset against the
change in fair value of the hedged asset, liability or firm commitment also
recognized in earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be recognized immediately in earnings. WCG completed
its implementation efforts and adopted these standards effective January 1,
2001. The derivatives identified in the implementation process consisted of a
cashless collar on certain marketable equity securities as


                                       16
<PAGE>   18


                       WILLIAMS COMMUNICATIONS GROUP, INC.

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


well as an interest rate swap and foreign currency hedge held by an equity
investee. The cashless collar did not qualify as a hedge under SFAS No. 133 as
amended. Therefore, changes in the market value of the cashless collar are
realized in the income statement while changes in the market value of the
underlying security are reflected in accumulated other comprehensive income. The
initial impact of these standards on WCG's results of operations and financial
position was not material.

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." These Statements change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. SFAS
No. 141 further clarifies the criteria to recognize intangible assets separately
from goodwill. The requirements of SFAS No. 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001. WCG does not expect the initial adoption of this standard to have any
impact on its results of operations or statement of position.

     Under SFAS No. 142, 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 applies 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. During the six months ended June 30, 2001, WCG recorded amortization
of goodwill and other intangible assets of approximately $4 million. WCG does
not expect the initial adoption of this standard to have a material impact on
its statement of position and, based on its results through June 30, 2001,
anticipates that it will have less than an $8 million impact on its annual
amortization expense.






                                       17
<PAGE>   19


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


FORWARD-LOOKING INFORMATION

     Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss WCG's expected
future results based on current and pending business operations. WCG 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 WCG 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 WCG's actual
results to differ materially from those projected. In addition to risk factors
set forth in WCG's filings with the Securities and Exchange Commission, the
following important factors could cause actual results to differ materially from
any results projected, forecasted, estimated, or budgeted:

     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.

     o    Conditions of the capital markets that WCG utilizes to access capital
          to finance operations.

     o    The ability in a cost-effective way to raise capital and manage cash
          to sustain operating cash flow, make capital expenditures, and meet
          debt obligations.

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

     o    The ability of WCG to meet its debt covenant requirements under its
          debt obligations.

     o    The successful collection of the proceeds from the assets retained in
          connection with the sale of the Solutions segment.

     o    The successful completion of the sale of WCG's remaining economic
          interest in ATL and the collection of proceeds from the sale.

     o    The successful completion of the sale/leaseback of the Williams
          Communications' Technology Center and other ancillary assets.

     o    The successful completion of the issuance of additional equity.

     o    The ability to manage operating costs and capital spending without
          limiting revenue growth.

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

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

     o    Termination of the 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.


                                       18
<PAGE>   20


     o    Loss of a high volume Network customer.

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

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

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

     o    The ability of Network to timely turn up service requests and minimize
          service interruptions.

     o    The ability to obtain additional capacity for the WCG network from
          other providers.

     o    The ability to expand the WCG network and to deploy the MediaXtranet
          strategy as needed to remain competitive and to maintain leading-edge
          technology.

     o    The ability to successfully market capacity on the WCG 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 ability to develop the "Williams Communications" brand.

     o    The ability, in a cost-effective way, to obtain and maintain necessary
          rights of way for the WCG 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 for Network.

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

     o    The effect of changes in accounting policies.

     o    The ability to attract and retain qualified employees.

     o    The cost and effects of legal and administrative claims and
          proceedings against WCG or its subsidiaries.

     o    The ability to develop financial, management, and operating controls
          to manage costs and rapid growth.

     o    The ability to successfully integrate any newly acquired businesses.



                                       19
<PAGE>   21



RECENT DEVELOPMENTS

     Discontinued operations

     On January 25, 2001, WCG's board of directors authorized a plan for its
management to divest the Solutions segment which provides professional
communications services and sells and installs communications equipment.
Accordingly, the Solutions segment has been accounted for as a disposal of a
business segment with the associated operating results segregated and reported
as discontinued operations. On January 29, 2001, WCG signed an agreement to sell
the domestic, Mexican and Canadian professional services operations of the
Solutions segment to Platinum Equity LLC. This sale closed on March 31, 2001 for
approximately $100 million in cash and an interest-bearing $75 million
promissory note payable over 18 months. WCG has also entered into a collection
agreement as of March 31, 2001 in which Platinum Equity LLC will pursue the
collection of certain identified retained accounts receivables totaling
approximately $200 million. Subject to a collection fee, Platinum Equity LLC
will remit the proceeds collected to WCG while WCG retains the collection risk.

     On March 27, 2001, WCG signed an agreement to sell its remaining Canadian
operations of the Solutions segment to Telus Corporation. The sale closed in
second quarter 2001 for approximately $38 million in cash.

     Tax-free spin-off from Williams

     On March 30, 2001, TWC's board of directors approved a tax-free spin-off of
WCG to TWC's shareholders. On April 23, 2001, TWC distributed approximately 95%
of the WCG common stock held by TWC, to holders of TWC common shares on a pro
rata basis as a dividend distribution. Following the distribution, TWC retained
approximately 5% of WCG's Class A common stock which TWC has committed to the
IRS to sell within five years of the tax-free spin-off. However, under a
separation agreement between TWC and WCG, subject to the receipt of a favorable
letter ruling from the IRS which has been requested, TWC has agreed not to sell
any shares before April 23, 2004.

     Prior to the spin-off of WCG from TWC, WCG received charges from TWC for
certain corporate administrative expenses which were either directly
identifiable or allocable under various methodologies. In conjunction with the
spin-off, WCG has either hired employees to perform these functions or has
entered into service level agreements with TWC for the continuation of services
with initial terms primarily through December 31, 2001. WCG believes that the
combined costs of the additional employees and the costs incurred under the
service level agreements will be approximately the same or slightly less than
the amounts incurred prior to the spin-off. For the six months ended June 30,
2001, WCG incurred charges related to the spin-off of $6.7 million.

     Effective with the spin-off of WCG from TWC, 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.

     Reduction of operating costs and capital expenditures program

     In second quarter 2001, WCG began undertaking a company-wide effort to
analyze its operating costs and capital spending to ensure these costs are
consistent with its business plan goals. As part of this analysis, WCG reviewed
its workforce requirements and identified approximately 400 positions that were
eliminated in July 2001. In addition, WCG is in the process of prioritizing its
capital expenditures program and expects to suspend certain capital projects
which could result in expensing any amounts previously capitalized. WCG expects
to recognize expenses of less than $30 million related to the severance and
suspended capital projects in third quarter 2001.


                                       20
<PAGE>   22
     Credit Ratings

     On July 19, 2001, Moody's Investor Service announced that it lowered
various credit ratings of WCG. The announcement stated that contributing to this
change is the recent tax-free spin-off from TWC and the potential impact the
current economic slowdown could have on both the telecommunications industry and
WCG's operating results. This downgrade will increase the borrowing rate on
WCG's credit facility from LIBOR plus 2.75% to LIBOR plus 3.00% and potentially
limit or increase the cost of public or private financings. In addition, the
downgrade allows the credit facility lenders to request liens on WCG's assets
that were not previously secured under the credit facility.

NETWORK

     Winstar Communications, Inc.

     On April 18, 2001, Winstar announced it filed for protection under Chapter
11 of the U.S. Bankruptcy Code. This announcement followed a series of
announcements by Winstar including that it would reduce its workforce by
approximately 44% and halt the expansion of its network.

     In 1998, WCG entered into an agreement with Winstar for a 25-year IRU of
approximately 2% of the wireless local capacity of Winstar. Per the agreement,
Winstar is to construct 270 hubs by the end of 2001, and WCG is to have the
ability to use all of these hubs for a 25-year period. As of June 30, 2001,
Winstar has delivered and WCG has paid for 200 hubs, or antenna sites, for WCG
to use. WCG has paid approximately $300 million for the 200 hubs and had
previously estimated that it would pay an additional $100 million for the
delivery and acceptance of the remaining 70 hubs Winstar is committed to
deliver. WCG is not required to pay the additional $100 million if the remaining
70 hubs are not delivered and accepted. WCG cannot determine at this time what
financial impact, if any, the Winstar bankruptcy filing and the recently
announced workforce reductions and halt in network expansion will have on the
utilization of the delivered hubs, on the recoverability of WCG's expenditures
for the delivered hubs, or on WCG's commitment on the remaining 70 hubs.
Developments in the bankruptcy proceedings could impair WCG's ability to realize
or recover its investment in the wireless hub capacity, leading to a
non-recurring impairment charge against earnings representing a write-off or
write-down of all or a portion of the $300 million already paid and any portion
of the $100 million that WCG may be required to pay related to the wireless
hubs. Because WCG has not yet fully integrated this wireless capacity into its
fiber service offerings, if WCG's use of the capacity is impaired, it does not
expect that any such impairment would impact its marketing business plan or
product offerings in 2001. WCG will adjust its product offering plans for
subsequent years if in fact bankruptcy proceedings result in the loss of or
diminished use of the wireless capacity to compensate for the loss of these
wireless assets.

     On April 11 and 16, 2001, WCG notified Winstar that it was in default under
its IRU agreement for long haul capacity with WCG dated December 17, 1998, as
subsequently modified, as a result of past due receivables, and terminated the
agreement in accordance with its terms. WCG offered and provided transition
services to Winstar with respect to capacity services at agreed-upon rates,
under standard terms and conditions. On May 8, 2001, Winstar signed a standstill
agreement, effective on April 18, 2001, utilizing debtor-in-possession financing
to prepay for transition services utilized. As of June 30, 2001, Winstar is
still seeking additional debtor-in-possession financing.

     Although a number of uncertainties exist in any bankruptcy and the rights
and obligations of Winstar and its creditors will be determined over time in the
bankruptcy court, WCG currently believes that its transactions with Winstar as
outlined above-, when taken as a whole, will not have a significant cash impact
in 2001. Other than the potential write-down of the wireless hubs as discussed
above, WCG does not expect that the bankruptcy filing by Winstar will have a
significant impact on its operating results.



                                       21
<PAGE>   23
Products and services

     WCG implemented a new service referred to as Williams Network Managed
Services (NMS), which offers a comprehensive array of systems integration
solutions encompassing every major aspect of program management, design,
engineering, implementation, and network operations for carrier based networks.

     Within the NMS service is Fiber and Construction Services (F&CS) and
Network Professional Services (NPS). F&CS provides for all aspects of long haul
and local loop construction including managing route selection, right of way
acquisition, permitting, environmental review, engineering, materials, points of
presence and other facilities construction, power HVAC and overall project
management. NPS provides design, engineering, rack set up, system lighting and
testing (SLAT), optronics procurement and installation, and network management.

BROADBAND MEDIA

     WCG is in the process of evaluating its options for maximizing the total
return from its investment in the Broadband Media segment. These options are
focused on, but not necessarily limited to, increasing revenues in areas
believed to be more profitable, reducing costs or eliminating unprofitable
product lines or markets, creating alliances or combinations with other
providers of communications products or services, or other alternatives
including a restructuring of certain lines of business within the Broadband
Media segment.

     As part of this evaluation process, WCG is implementing an application
infrastructure called MediaXtranet(SM) that will provide services to facilitate
the transmission and storage of media content for business-to-business and
business-to-consumer applications, including hosting and navigation services.
WCG expects that MediaXtranet would enable the collection, gathering, hosting,
management, transacting and edge distribution of media content, regardless of
its format or source. WCG expects that the continued implementation of
MediaXtranet, if undertaken, would likely require success based capital
expenditures, which are currently not accounted for in its business plan.

     If undertaken in full, WCG would intend to utilize MediaXtranet to
capitalize on its broadband media experience, connectivity, and existing
customer relationships to expand its products and services to include the
following:

     o    media and entertainment content logging, storage and portal-type
          access and distribution
     o    media streaming for both audio and video services
     o    optical distribution of cinematic and television broadcast and
          advertisements
     o    media and entertainment eCommerce transactional activities
     o    Internet-based distribution of advertisements

     In addition, on June 25, 2001, WCG announced its intention to enter into a
strategic partnership agreement with iBEAM Broadcasting Corp. (iBEAM), a leading
provider of streaming communications solutions. Under the terms of the
agreement, which closed in third quarter 2001, WCG invested $20 million in cash
and agreed to provide $10 million of future services to iBEAM in exchange for
iBEAM's convertible preferred stock representing approximately a 49% ownership
of the company. WCG will account for the iBEAM investment under the equity
method of accounting. The alliance will leverage WCG's broadband media services
infrastructure and customer relationships with top-tier media and entertainment
companies.

STRATEGIC INVESTMENTS

     WCG entered into an agreement with America Movil, S.A. de C.V. in second
quarter 2001 to sell its remaining economic interest in ATL. The proposed
transaction is subject to the receipt of necessary regulatory, third party,
legal and other approvals, and is expected to close during third quarter 2001.



                                       22
<PAGE>   24


RESULTS OF OPERATIONS

     The table below summarizes WCG's consolidated results from operations:

<Table>
<Caption>
                                                      THREE MONTHS ENDED             SIX MONTHS ENDED
                                                          JUNE 30,                        JUNE 30,
                                                ----------------------------    ----------------------------
                                                    2001            2000            2001            2000
                                                ------------    ------------    ------------    ------------
                                                                      (IN THOUSANDS)
<S>                                             <C>             <C>             <C>             <C>
Revenues:
    Network                                     $    255,095    $    145,632    $    503,918    $    275,909
    Broadband Media                                   39,894          41,800          80,317          82,678
    Strategic Investments                                 --              --              --              --
    Eliminations                                     (13,651)         (8,079)        (26,833)        (15,860)
                                                ------------    ------------    ------------    ------------
       Total revenues                                281,338         179,353         557,402         342,727
Operating expenses:
    Cost of sales                                    246,739         183,808         501,597         364,812
    Selling, general and administrative               76,171          66,055         151,186         120,110
    Provision for doubtful accounts                    5,774             652           8,436             982
    Depreciation and amortization                    107,418          37,175         192,631          70,442
    Other                                             (7,969)         (1,284)         (8,022)         (1,331)
                                                ------------    ------------    ------------    ------------
       Total operating expenses                      428,133         286,406         845,828         555,015
                                                ------------    ------------    ------------    ------------
Loss from operations                                (146,795)       (107,053)       (288,426)       (212,288)
Net interest expense                                (118,590)        (44,244)       (201,073)        (95,627)
Investing income (loss):
   Interest and other                                 18,490          12,896          21,212          39,557
   Equity losses                                      (3,307)         (4,088)         (9,208)         (7,155)
   Income (loss) from investments                      7,132         251,326         (31,405)        303,048
Minority interest in loss of consolidated
   subsidiaries
                                                       6,583             502          13,191           5,002
Other income, net                                         25              39             143              47
                                                ------------    ------------    ------------    ------------
Income (loss) before income taxes                   (236,462)        109,378        (495,566)         32,584
Provision for income taxes                            (9,278)        (94,916)        (52,348)       (104,280)
                                                ------------    ------------    ------------    ------------
Income (loss) from continuing operations        $   (245,740)   $     14,462    $   (547,914)   $    (71,696)
                                                ============    ============    ============    ============
</Table>


THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000

CONSOLIDATED RESULTS

     WCG's loss from continuing operations increased $260.2 million due to a
decrease in investing income of $237.8 million, an increase in net interest
expense of $74.4 million and an increase in loss from operations of $39.7
million. These items were partially offset by a decrease of $85.6 million
related to the tax provision.

     Network and Broadband Media accounted for $31.3 million and $9.0 million of
the increase in loss from operations, respectively. Strategic Investments' loss
from operations decreased $0.6 million.


                                       23
<PAGE>   25


NETWORK

     The table below summarizes Network's results from operations:

<Table>
<Caption>
                                                   THREE MONTHS ENDED               SIX MONTHS ENDED
                                                        JUNE 30,                        JUNE 30,
                                              ----------------------------    ----------------------------
                                                  2001            2000            2001            2000
                                              ------------    ------------    ------------    ------------
                                                                    (IN THOUSANDS)
<S>                                           <C>             <C>             <C>             <C>
Revenues:
    Dark fiber                                $      1,250    $     12,294    $      9,101    $     31,425
    Capacity and other                             240,298         125,313         468,183         228,726
    Intercompany                                    13,547           8,025          26,634          15,758
                                              ------------    ------------    ------------    ------------
       Total revenues                              255,095         145,632         503,918         275,909
Operating expenses:
    Cost of sales                                  223,441         160,302         453,431         316,901
    Selling, general and administrative             64,086          54,098         128,333          98,311
    Provision for doubtful accounts                  5,567             457           7,572             781
    Depreciation and amortization                   99,217          29,916         177,002          55,963
    Other                                           (7,969)         (1,259)         (8,022)         (1,292)
                                              ------------    ------------    ------------    ------------
       Total operating expenses                    384,342         243,514         758,316         470,664
                                              ------------    ------------    ------------    ------------
Loss from operations                          $   (129,247)   $    (97,882)   $   (254,398)   $   (194,755)
                                              ============    ============    ============    ============
Equity earnings                               $        561    $        675    $      1,121    $      1,035
                                              ============    ============    ============    ============
Income (loss) from investments                $      7,132    $    251,292    $    (31,405)   $    282,815
                                              ============    ============    ============    ============
</Table>

     Network revenues increased $109.5 million, or 75%, primarily attributable
to data and voice services provided to SBC of approximately $90 million for the
three months ended June 30, 2001 compared to approximately $20 million for the
three months ended June 30, 2000. The remaining increase is attributable to
sales to new customers as well as expanded sales to existing customers, both
domestic and international, partially offset by contractual price re-rates,
customer disconnects and $10.5 million lower revenues from dark fiber
transactions entered into prior to June 30, 1999 and accordingly accounted for
as sales type leases.

     Network had a gross profit of $31.7 million for the three months ended June
30, 2001 while Network's costs of sales exceeded revenues by $14.7 million for
the three months ended June 30, 2000. The continued improvement in Network's
gross profit is primarily a result of revenue growth described above, greater
on-net utilization and strong expense control.

     Network's selling, general and administrative expenses increased $10.0
million, or 18%, due primarily to adding resources and infrastructure to support
the growth in its customer base. Network's provision for doubtful accounts
increased $5.1 million primarily due to the growth in its customer base and
general market conditions in the telecommunications industry. Network's selling
general and administrative expenses and provision for doubtful accounts as a
percentage of revenues decreased to 27% for the three months ended June 30, 2001
from 37% for the three months ended June 30, 2000.

     Network's depreciation and amortization increased $69.3 million primarily
as a result of placing additional route miles of fiber and related network
assets in operation since June 30, 2000.

     Network's income from investments for the three months ended June 30, 2001
of $7.1 million includes 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.

     Network's income from investments for the three months ended June 30, 2000
includes a gain of $214.7 million from the conversion of WCG's shares of common
stock of Concentric Network Corporation into shares of


                                       24
<PAGE>   26


common stock of XO Communications, Inc. pursuant to a merger of those companies
completed in June 2000 and gains of $36.6 million related to the sale of certain
marketable equity securities.

BROADBAND MEDIA

     The table below summarizes Broadband Media's results from operations:

<Table>
<Caption>
                                                  THREE MONTHS ENDED                SIX MONTHS ENDED
                                                        JUNE 30,                        JUNE 30,
                                              ----------------------------    ----------------------------
                                                  2001            2000            2001            2000
                                              ------------    ------------    ------------    ------------
                                                                     (IN THOUSANDS)
<S>                                           <C>             <C>             <C>             <C>

Revenues                                      $     39,894    $     41,800    $     80,317    $     82,678
Operating expenses:
    Cost of sales                                   36,949          31,578          74,999          63,760
    Selling, general and administrative             10,758           9,961          20,635          18,329
    Provision for doubtful accounts                    207             195             864             201
    Depreciation and amortization                    8,076           7,144          15,406          14,242
    Other                                               --             (22)             --             (36)
                                              ------------    ------------    ------------    ------------
       Total operating expenses                     55,990          48,856         111,904          96,496
                                              ------------    ------------    ------------    ------------
Loss from operations                          $    (16,096)   $     (7,056)   $    (31,587)   $    (13,818)
                                              ============    ============    ============    ============
Equity losses                                 $       (244)   $     (2,887)   $       (130)   $     (3,547)
                                              ============    ============    ============    ============
</Table>

     Broadband Media's gross profit decreased to $3.0 million for the three
months ended June 30, 2001 from $10.2 million for the three months ended June
30, 2000. Gross margin decreased to 7% for the three months ended June 30, 2001
from 24% for the three months ended June 30, 2000. Cost of sales increased $5.3
million, or 17%, primarily due to costs associated with the development of
MediaXtranet.

     In fourth quarter 2000, Broadband Media's share of the cumulative losses
attributable to its equity method investment exceeded its investment balance. As
a result, WCG has suspended recording equity losses related to this investment
with the exception of any additional financing activity.

STRATEGIC INVESTMENTS

     The table below summarizes Strategic Investments' results from operations:

<Table>
<Caption>
                                                 THREE MONTHS ENDED           SIX MONTHS ENDED
                                                      JUNE 30,                    JUNE 30,
                                              ------------------------    ------------------------
                                                 2001          2000          2001          2000
                                              ----------    ----------    ----------    ----------
                                                                (IN THOUSANDS)
<S>                                           <C>           <C>           <C>           <C>

Revenues                                      $       --    $       --    $       --    $       --
Operating expenses:
    Cost of sales                                     --             7            --            11
    Selling, general and administrative            1,327         1,996         2,218         3,470
    Provision for doubtful accounts                   --            --            --            --
    Depreciation and amortization                    125           115           223           237
    Other                                             --            (3)           --            (3)
                                              ----------    ----------    ----------    ----------
       Total operating expenses                    1,452         2,115         2,441         3,715
                                              ----------    ----------    ----------    ----------
Loss from operations                          $   (1,452)   $   (2,115)   $   (2,441)   $   (3,715)
                                              ==========    ==========    ==========    ==========
ATL and other equity losses                   $   (3,624)   $   (1,876)   $  (10,199)   $   (4,643)
                                              ==========    ==========    ==========    ==========
Income from investments                       $       --    $       34    $       --    $   20,233
                                              ==========    ==========    ==========    ==========
</Table>

     Strategic Investments' results represent costs associated with managing
WCG's equity and cost-based investments in this business segment.



                                       25
<PAGE>   27


     Strategic Investments' equity losses increased $1.7 million, or 93%,
primarily due to higher losses from ATL's operations. WCG entered into an
agreement with America Movil, S.A. de C.V. in second quarter 2001 to sell its
remaining economic interest in ATL. The proposed transaction is subject to the
receipt of necessary regulatory, third party, legal and other approvals and is
expected to close during third quarter 2001. As of June 30, 2001, WCG has
classified its investment in ATL as net assets held for sale.

CONSOLIDATED NON-OPERATING ITEMS

     WCG's net interest expense increased $74.4 million as a result of increased
borrowings including some at higher interest rates to finance operations and
capital expenditures and decreased interest capitalized primarily due to fewer
assets under construction. WCG's total debt has increased $2.4 billion from June
30, 2000 to June 30, 2001, which primarily reflects $1.0 billion principal
amount of senior redeemable notes issued in August 2000, borrowing of the $525.0
million term loan under the credit facility in September 2000, $1.4 billion
principal amount of senior secured notes issued in March 2001 and borrowing of
the $450 million add-on to its credit facility in April 2001 partially offset by
the exchange of the $975.6 million TWC note for WCG's equity in February 2001.

     WCG's interest and other investing income increased $5.6 million primarily
due to increased interest earned on short-term investments for the three months
ended June 30, 2001 partially offset by a reduction in short-term interest
rates. During the three months ended June 30, 2000, the average investment
balance was approximately $400 million compared to the average short-term
investment balance during the three months ended June 30, 2001 of approximately
$1.2 billion.

     WCG's tax provision for the three months ended June 30, 2001 reflects fully
reserving, through a valuation allowance, WCG's 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 WCG's net deferred tax assets, primarily resulting
from net operating loss carryforwards which may not be utilized. WCG's tax
provision for the three months ended June 30, 2001 decreased $85.6 million
primarily due to a deferred tax provision of $82.1 million for the three months
ended June 30, 2000 relating to the gain recognized on the conversion of WCG's
shares of common stock of Concentric Network Corporation into shares of common
stock of XO Communications, Inc. pursuant to a merger of those companies
completed in June 2000.


SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

CONSOLIDATED RESULTS

     WCG's loss from continuing operations increased $476.2 million due to a
decrease in investing income (loss) of $354.9 million, an increase in net
interest expense of $105.5 million and an increase in loss from operations of
$76.1 million partially offset by a decrease of $52.0 million related to the tax
provision.

     Network and Broadband Media accounted for $59.6 million and $17.8 million
of the increase in loss from operations, respectively. Strategic Investments'
loss from operations decreased $1.3 million.

NETWORK

     Network revenues increased $228.0 million, or 83%, primarily attributable
to data and voice services provided to SBC of approximately $180 million for the
six months ended June 30, 2001 compared to approximately $40 million for the six
months ended June 30, 2000. The remaining increase is attributable to sales to
new customers as well as expanded sales to existing customers, both domestic and
international, partially offset by contractual price re-rates, customer
disconnects and $22.3 million lower revenues from dark fiber transactions
entered into prior to June 30, 1999 and accordingly accounted for as sales type
leases.


                                       26
<PAGE>   28


     Network had a gross profit of $50.5 million for the six months ended June
30, 2001 while Network's costs of sales exceeded revenues by $41.0 million for
the six months ended June 30, 2000. The continued improvement in Network's gross
profit is primarily a result of revenue growth described above, greater on-net
utilization and strong expense control.

     Network's selling, general and administrative expenses increased $30.0
million, or 31%, due primarily to adding resources and infrastructure to support
the growth in its customer base. Network's provision for doubtful accounts
increased $6.8 million primarily due to the growth in its customer base and
general market conditions. Network's selling general and administrative expenses
and provision for doubtful accounts as a percentage of revenues decreased to 27%
for the six months ended June 30, 2001 from 36% for the six months ended June
30, 2000.

     Network's depreciation and amortization increased $121.0 million primarily
as a result of placing additional route miles of fiber and related network
assets in operation since June 30, 2000.

     Network's loss from investments for the six months ended June 30, 2001 of
$31.4 million includes 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.

     Network's income from investments for the six months ended June 30, 2000
includes a gain of $214.7 million from the conversion of WCG's shares of common
stock of Concentric Network Corporation into shares of common stock of XO
Communications, Inc. pursuant to a merger of those companies completed in June
2000 and gains of $68.1 million related to the sale of certain marketable equity
securities.

BROADBAND MEDIA

     Broadband Media's gross profit decreased to $5.3 million for the six months
June 30, 2001 from $18.9 million for the six months ended June 30, 2000. Gross
margin decreased to 7% for the six months ended June 30, 2001 from 23% for the
six months ended June 30, 2000. Cost of sales increased $11.2 million, or 18%,
primarily due to costs associated with the development of MediaXtranet.

     In fourth quarter 2000, Broadband Media's share of the cumulative losses
attributable to its equity method investment exceeded its investment balance. As
a result, WCG has suspended recording equity losses related to this investment
with the exception of any additional financing activity.

STRATEGIC INVESTMENTS

     Strategic Investments' results represent costs associated with managing
WCG's equity and cost-based investments in this business segment.

     Strategic Investments' equity losses increased $5.6 million primarily due
to $2.4 million losses associated with two equity investments made in second
quarter 2000 and higher losses from ATL's operations. WCG entered into an
agreement with America Movil, S.A. de C.V. in second quarter 2001 to sell its
remaining economic interest in ATL. The proposed transaction is subject to the
receipt of necessary regulatory, third party, legal and other approvals and is
expected to close during third quarter 2001. As of June 30, 2001, WCG has
classified its investment in ATL as net assets held for sale.

     Income from investments for the six months ended June 30, 2000 represents a
$16.5 million gain related to the partial sale of WCG's interest in ATL and
receipt of a $3.7 million dividend from a cost-based investment. The ATL gain
resulted from a series of transactions in first quarter 2000 in which WCG sold a
portion of its


                                       27
<PAGE>   29


investment in ATL, which had a carrying value of $30 million, for approximately
$168 million in cash. WCG recognized a gain on the sale of $16.5 million and
deferred a gain of approximately $121 million associated with $150 million of
the proceeds which were subsequently advanced to ATL.

CONSOLIDATED NON-OPERATING ITEMS

     WCG's net interest expense increased $105.5 million as a result of
increased borrowings including some at higher interest rates to finance
operations and capital expenditures and decreased interest capitalized primarily
due to fewer assets under construction. WCG's total debt has increased $2.4
billion from June 30, 2000 to June 30, 2001, which primarily reflects $1.0
billion principal amount of senior redeemable notes issued in August 2000,
borrowing of the $525.0 million term loan under the credit facility in September
2000, $1.4 billion principal amount of senior secured notes issued in March 2001
and borrowing of the $450 million add-on to its credit facility in April 2001
partially offset by the exchange of the $975.6 million TWC note for WCG's equity
in February 2001.

     WCG's interest and other investing income decreased $18.4 million primarily
due to reduced interest earned on short-term investments for the six months
ended June 30, 2001 and a reduction in short-term interest rates. During the six
months ended June 30, 2000, the average investment balance was approximately
$900 million compared to the average short-term investment balance during the
six months ended June 30, 2001 of approximately $600 million.

     WCG's tax provision for the six months ended June 30, 2001 reflects fully
reserving, through a valuation allowance, WCG's 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 WCG's net deferred tax assets, primarily resulting
from net operating loss carryforwards which may not be utilized. WCG's tax
provision for the six months ended June 30, 2001 decreased $52.0 million
primarily due to a deferred tax provision of $82.1 million for the six months
ended June 30, 2000 relating to the gain recognized on the conversion of WCG's
shares of common stock of Concentric Network Corporation into shares of common
stock of XO Communications, Inc. pursuant to a merger of those companies
completed in June 2000.




                                       28
<PAGE>   30


LIQUIDITY AND CAPITAL RESOURCES

2001 AND 2002

Financing plan

     As of December 31, 2000, WCG had liquidity of approximately $1.1 billion
consisting of cash and cash equivalents of approximately $214 million,
short-term investments of approximately $395 million and the revolver portion of
WCG's credit facility of approximately $525 million. Since the year ended
December 31, 2000, WCG has executed or is in the process of executing the
following to raise cash of $3.5 billion.

o    closed the private placement of $1.4 billion senior secured notes in first
     quarter 2001;
o    upsized its credit facility by $450 million in second quarter
     2001;
o    closed the sale of the domestic, Mexican and Canadian professional
     services operations of the Solutions segment to Platinum Equity LLC and
     the sale of its remaining Canadian operations of the Solutions segment to
     Telus Corporation in first and second quarter 2001, respectively, and
     expects to close the sale of ATL to America Movil, S.A. de C.V. in third
     quarter 2001;
o    obtained commitments to further upsize its credit facility by $300 million
     which can be accessed through the end of first quarter 2002. These
     commitments are subject to various conditions that have not yet all been
     satisfied. Because of the additional liquidity created by reductions in
     operating expense and capital expenditures, asset sales and other executed
     financings, WCG has determined that it will not access this commitment
     unless market conditions improve; and
o    expects to enter into an asset sale/leaseback of its 15-story,
     750,000-square-foot Technology Center in downtown Tulsa and other
     ancillary assets in third quarter 2001 and issue additional equity prior
     to December 31, 2001. These items are expected to approximate at least
     $500 million.

Taken together, WCG's total liquidity for 2001 and 2002 is expected to be
approximately $4.6 billion.

     WCG has various debt covenants relating to its credit facility of which
three relate to WCG's financing plan. One of the covenants requires WCG to
generate cash of at least $700 million by September 30, 2001 from the sales of
the Solutions segment and ATL. WCG expects to generate enough cash from these
transactions in order to meet the covenant requirement. However, the cash
proceeds generated from these sales are dependent upon WCG's success in
collecting certain identified accounts receivables retained from the sale of the
Solutions segment and completing the sale of ATL by September 30, 2001. The
second covenant requires WCG to consummate transactions resulting in net cash
proceeds in an aggregate amount of at least $500 million by December 31, 2001,
of which at least $150 million must be in the form of additional equity. WCG
expects to be in compliance with this covenant by entering into the asset
sale/leaseback transaction and issuing additional equity as discussed above. The
third covenant requires meeting a defined minimum threshold from the combination
of operating results, as defined, and cash generated from capacity transactions,
as defined, for the periods ending on September 30, 2001, and December 31, 2001.
As a result of various planned transactions, WCG anticipates that it will be in
full compliance with this requirement.


Cash requirements

     WCG's expected cash requirements for 2001 and 2002 total approximately $2.7
billion consisting of the following:

o    capital expenditures of approximately $2.0 billion, which is a reduction
     from its previous estimate of approximately $3.2 billion resulting from the
     redeployment of warehouse equipment, better-than-expected equipment pricing
     and greater capacity realization from deployed technology;
o    debt service obligations of approximately $1.2 billion;


                                       29
<PAGE>   31


o    partially offset by cash expected to be generated from its operations of
     approximately $500 million including cash from dark fiber transactions and
     other capacity sales.

     WCG's current financing plan is expected to fund the cash requirements
under its current business plan into 2004, consistent with its business
objectives of becoming free cash flow positive by year-end 2003. In addition,
WCG believes that its business plan provides a path for compliance with its
covenant requirements throughout this period as well.


2001

Cash sources

     As of June 30, 2001, WCG has $1.4 billion of cash and short-term
investments. Included in the short-term investments portfolio are marketable
equity securities classified as available for sale with a market value of $15.3
million as of June 30, 2001.

     In March 2001, a note trust, wholly-owned by WCL, issued approximately $1.4
billion of 8.25% senior secured notes in a private placement. The notes are due
March 15, 2004 with the principal payment due in full at maturity and interest
payments due semi-annually in arrears on March 15 and September 15 of each year
beginning September 15, 2001.

     In first quarter 2001, WCG announced that it had reduced the previously
announced commitment to increase its credit facility from $950 million to $750
million which would bring the total size of its credit facility to $1.8 billion.
In April 2001, WCG has borrowed $450 million of the credit facility add-on. The
remaining $300 million commitment can be accessed through the end of first
quarter 2002. However, WCG has determined it will not access this commitment
unless market conditions improve. WCG also has available as of June 30, 2001,
the $525 million revolving portion of its credit facility which it may borrow
throughout its six-year term.

     In first quarter 2001, PowerTel completed a 1 for 4, 110 million Australian
dollar equity rights offering which allowed each PowerTel shareholder to
purchase one new share at 0.54 Australian dollars per share for each four shares
held. PowerTel paid off its existing 70 million Australian dollar bridge
financing facility with the proceeds received from the equity rights offering.
In first quarter 2001, PowerTel also entered into a 150 million Australian
dollar bank facility agreement due March 2006. In second quarter 2001, 45
million Australian dollars have been borrowed under the bank facility agreement
(or approximately $23 million as of June 30, 2001). The bank facility and equity
rights offering are expected to fully fund PowerTel for the foreseeable future.

     In first quarter 2001, TWC and WCG entered into an agreement that, among
other things, resulted in the transfer of ownership of a building under
construction and other assets from TWC to WCG, the conversion of the $975.6
million TWC note into paid in capital and the issuance of 24.3 million shares of
WCG common stock. After the transaction was completed, WCG's total equity
increased by approximately $1.1 billion.

     WCG completed the sale of its interest in the domestic, Mexican and
Canadian professional services operations of the Solutions segment to Platinum
Equity LLC on March 31, 2001. In April 2001, WCG received proceeds of $100
million from the sale in addition to an interest-bearing $75 million promissory
note payable over 18 months. WCG has also entered into a collection agreement as
of March 31, 2001 in which Platinum Equity LLC will pursue the collection of
certain identified retained accounts receivables totaling approximately $200
million. Subject to a collection fee, Platinum Equity LLC will remit the
proceeds collected to WCG while WCG retains the collection risk. On March 27,
2001, WCG signed an agreement to sell its remaining Canadian operations of the
Solutions segment to Telus Corporation. The sale closed in second quarter 2001.

     In first quarter 2001, WCG granted an option to Telecom Americas, Ltd., a
joint venture between SBC, America Movil S.A. de C.V. and Bell Canada
International, Inc., to purchase WCG's interest in ATL for an



                                       30
<PAGE>   32

agreed to price. The option was granted in exchange for Telecom Americas, Ltd.
funding WCG's share of capital contributions to ATL. The option expired at the
end of first quarter 2001. WCG entered into an agreement with America Movil,
S.A. de C.V. in second quarter 2001 to sell its remaining economic interest in
ATL. The proposed transaction is subject to the receipt of necessary regulatory,
third party, legal and other approvals, and is expected to close during third
quarter 2001. Upon closing, WCG expects to record a financial net gain, which
will be quantified once all factors relative to its basis are finalized. WCG
classified this investment and the associated deferred gain as net assets held
for sale as of June 30, 2001.

     Overall, WCG expects it should realize approximately $900 million over time
from the sale of the Solutions segment, excluding disposition costs, the sale of
ATL and not having to fund its share of required capital contributions of ATL
during 2001. The ultimate cash proceeds are dependent upon WCG's success in
collecting certain identified accounts receivables retained from the sale of the
Solutions segment and completing the sale of ATL.

Cash uses

     Cash used in operating activities was $203.9 million for the six months
ended June 30, 2001 which includes cash received from dark fiber transactions of
$83.4 million. WCG anticipates its operating activities will result in negative
cash flow at least through the end of 2001 as WCG expands and enhances its
network.

     WCG currently estimates to spend approximately $1.5 billion for capital
expenditures in 2001 primarily to enhance the capacity and functionality of the
intercity network, provide local access services, expand its domestic network
and provide connectivity for overseas customers to its domestic network. For the
six months ended June 30, 2001, WCG has spent $870.4 million on capital
expenditures.

     Under its asset defeasance program, WCG is obligated to make annual lease
payments of approximately $40 million during 2001, of which approximately $23.6
million has been paid as of June 30, 2001.

     As of June 30, 2001, WCG's outstanding long-term debt consisted of $3.0
billion principal amount of its 10.70% to 11.875% senior redeemable notes due
2007 to 2010, $1.4 billion principal amount under the 8.25% senior secured notes
due 2004 and the $975 million term loan under its credit facility due 2006. As
discussed above, in first quarter 2001, the TWC note was exchanged for WCG's
equity.

     Scheduled interest payment obligations under the senior secured note,
senior redeemable notes, credit facility and the TWC note total approximately
$450 million in 2001 of which $193.1 million has been paid for the six months
ended June 30, 2001. No principal payment obligations are scheduled to occur in
2001.

     As discussed further in the Recent Developments section, Winstar, a
customer of WCG, announced in April 2001 that it has filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Although a number of uncertainties exist
in any bankruptcy and the rights and obligations of Winstar and its creditors
will be determined over time in the bankruptcy court, WCG currently believes
that its transactions with Winstar as outlined in the Recent Developments
section, when taken as a whole, will not have a significant cash impact in 2001.

     The cost of expanding and enhancing WCG's fiber-optic network, as well as
operating its business, is subject to a variety of factors. Actual costs may
vary from expected amounts, and variances could be material. Factors which could
cause a variance include WCG's ability to generate sufficient sales to
customers, changes in the competitive environment of the markets that it serves
and changes in technology. Any variation could impact WCG's future cash
requirements. In addition, WCG will look for opportunities to increase cash
through the addition of new business and the development of revenue generating
activities such as the recently announced Williams Network Managed Services
business. WCG will then continue to analyze means to conserve cash, reduce
future interest obligations, and improve its balance sheet within the
requirements of its existing debt covenants through means that may include the
issuance of equity, the purchase of WCG's debt in the public market or private
transactions, and rationalization of its cost structure.



                                       31
<PAGE>   33



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

     WCG's interest rate exposure associated with short-term investments
increased since December 31, 2000 as short-term investments excluding marketable
equity securities total $1.1 billion as of June 30, 2001 compared to $83.4
million as of December 31, 2000. The increase is a result of the $1.4 billion
net proceeds received from the sale of senior secured notes in March 2001 and
the proceeds received from the $450 million credit facility add-on in April
2001, which were primarily invested in money market instruments and commercial
paper.

     Interest rate risk exposure, as it relates to the debt portfolio, was
impacted since December 31, 2001 by the exchange of the TWC note for WCG's
equity, the sale of $1.4 billion senior secured notes and the borrowing of the
$450 million credit facility add-on in April 2001. The interest on the TWC note
was based upon LIBOR plus 2.25%, the senior secured notes bear a fixed-rate of
8.25% due March 14, 2004 and credit facility add-on has a variable rate of LIBOR
plus 2.75%. On July 19, 2001, Moody's Investor Service announced that it lowered
various credit ratings of WCG. The announcement stated that contributing to this
change is the recent tax-free spin-off from TWC and the potential impact the
current economic slowdown could have on both the telecommunications industry and
WCG's operating results. This downgrade will increase the borrowing rate on
WCG's credit facility from LIBOR plus 2.75% to LIBOR plus 3.00% and potentially
limit or increase the cost of public or private financings.

EQUITY PRICE RISK

     WCG's equity price risk primarily arises from investments in publicly
traded telecommunications-related companies. WCG's equity price risk has
decreased from December 31, 2000 due to the further monetization of its
marketable equity securities portfolio. The carrying value of marketable equity
securities is less than 1% of WCG's total assets as of June 30, 2001 compared to
approximately 4% of its total assets as of December 31, 2000. In addition, WCG
has terminated its derivative instruments on its marketable equity securities as
of June 30, 2001 due to the further monetization of its marketable equity
securities portfolio.


                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     WCG is subject to various types of litigation in connection with its
business and operations. However, with the possible exception of the landowner
lawsuits described below, WCG does not believe that any pending litigation is
material to its business or operations.

     WCG and WCL, a wholly owned subsidiary of WCG, are named as defendants in
putative class actions purporting to cover landowners in a state and, in some
cases, in the nation, on whose property WCG installed fiber-optic cable without
the permission of the adjacent landowner. It is likely that additional actions
will be filed. WCG believes that the installation of fiber-optic cable along
pipeline, highway and railroad rights-of-way and other routes it utilizes, does
not infringe on the property rights of adjacent landowners. WCG also believes
that class actions are not the proper legal means to resolve the disputes. While
WCG cannot quantify the financial impact of such claims at this time, if these
claims are allowed by the courts to proceed as class actions and class members
prevail on some or all of their claims, the result could have a material adverse
impact upon WCG's financial position, results of operations and cash flows.

     On December 20, 2000, the Women's Cooperative Trust Union filed a
derivative shareholder action in the U.S. District Court in Oklahoma City
against TWC, WCG and certain directors and officers alleging that a former


                                       32
<PAGE>   34


director of the Company, an officer and a former officer purchased at a reduced
price stock of corporations which sold telecommunication equipment to WCG. The
allegations include breach of fiduciary duty, waste of corporate assets and
usurpation of corporate opportunities as well as negligence by the directors.
Plaintiff seeks compensatory damages, rescission of all transactions between the
named individual officers and directors and the two corporations, including
disgorgement of any profits, punitive damages, and attorneys' fees and costs.
Subsequently, the plaintiff amended its complaint to recharacterize the stock
purchases as kickbacks.

     The defendants, including the Company, have denied that the transactions
were kickbacks or that they violated company policies or fiduciary duties . The
Company and the directors filed motions to dismiss the action based upon the
failure of the plaintiff to comply with applicable legal standards in its
complaint. The decision by the court on the motion is pending. A motion
requesting a transfer from the Oklahoma City to the federal court in Tulsa is
also pending.

     For information regarding other legal proceedings, see WCG's Annual Report
on Form 10-K/A for the year ended December 31, 2000.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The 2001 Annual Meeting of Stockholders was held on June 14, 2001. At the
Annual Meeting, six individuals were elected as directors of WCG and one
individual continued to serve as director pursuant to his prior election. In
addition, amendments to the Williams Communications Group 1999 Stock Plan were
approved and the appointment of Ernst & Young LLP as the independent auditor of
WCG for 2001 was ratified.

     A tabulation of the voting at the Annual Meeting with respect to the
matters indicated is as follows:

Election of Directors

<Table>
<Caption>
                                                            Against or
     Name                              For                   Withheld
     ----                              ---                  ----------
<S>                                <C>                    <C>

     John A. (Ian) Craig            410,910,446              5,354,284
     Julius W. Erving, II           400,992,929             15,271,801
     Ross K. Ireland                408,813,327              7,451,403
     Robert W. Lawless              410,819,283              5,445,447
     Morgan E. O'Brien              401,564,663             14,700,067
     H. Brian Thompson              410,884,196              5,380,534
</Table>

Amendments to the Williams Communications Group, Inc. 1999 Stock Plan

<Table>
<Caption>
                      Against or                           Broker
     For               Withheld           Abstain         Non-Votes
     ---              ----------          -------         ---------
<S>                 <C>               <C>              <C>
     292,570,446      17,039,818        1,689,014        104,965,452
</Table>

Ratification of Appointment of Independent Auditor

<Table>
<Caption>
                          Against or
     For                   Withheld               Abstain
     ---                  ----------              -------
<S>                      <C>                    <C>

     413,055,262          2,675,136               534,332
</Table>



                                       33
<PAGE>   35


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

         10.78 Sale and Purchase Agreement dated as of March 26, 2001, by and
               among WCS, Inc., Williams Communications, LLC, and TELUS
               Communications Inc.

         10.79 Option Agreement dated as of February 12, 2001 by and among
               Williams Communications, LLC, Williams International Telecom
               Limited, and Telecom Americas, Ltd.

         10.80 Agreement dated as of May 23, 2001 by and among Telecom Americas,
               Ltd. Williams International Telecom Limited, Williams
               Communications, LLC and America Movil, S.A.

         10.81 Stock Purchase Agreement dated as of June 24, 2001 by and among
               iBEAM Broadcasting Corporation, Williams Communications, LLC,
               Allen & Company Incorporated, and Lunn iBEAM, LLC.

         10.82 Stockholders Agreement dated as of July 10, 2001 by and among
               Williams Communications, LLC, iBEAM Broadcasting Corporation, the
               other stockholders iBEAM Broadcasting Corporation and certain
               other parties.

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


     (b) During second quarter 2001, WCG filed a Form 8-K on April 4, 2001;
         April 19, 2001; May 3, 2001; May 30, 2001; June 1, 2001; and June 27,
         2001 which reported significant events under Item 5 of the Form and
         included the exhibits required by Item 7 of the Form.




                                       34
<PAGE>   36



                                    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 9, 2001



<PAGE>   37


                                INDEX TO EXHIBITS


<Table>
<Caption>
EXHIBIT
NO.           DESCRIPTION
-------       -----------
<S>           <C>

    10.78     Sale and Purchase Agreement dated as of March 26, 2001, by and
              among WCS, Inc., Williams Communications, LLC, and TELUS
              Communications Inc.

    10.79     Option Agreement dated as of February 12, 2001 by and among
              Williams Communications, LLC, Williams International Telecom
              Limited, and Telecom Americas, Ltd.

    10.80     Agreement dated as of May 23, 2001 by and among Telecom Americas,
              Ltd. Williams International Telecom Limited, Williams
              Communications, LLC and America Movil, S.A.

    10.81     Stock Purchase Agreement dated as of June 24, 2001 by and among
              iBEAM Broadcasting Corporation, Williams Communications, LLC,
              Allen & Company Incorporated, and Lunn iBEAM, LLC.

    10.82     Stockholders Agreement dated as of July 10, 2001 by and among
              Williams Communications, LLC, iBEAM Broadcasting Corporation, the
              other stockholders iBEAM Broadcasting Corporation and certain
              other parties.

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